Edgar Filing: ENOVA SYSTEMS INC

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of the
Securities and Exchange Act of 1934

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

For the fiscal year ended December 31, 2005

Commission File No. 0-25184

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

California 95-3056150
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

19850 South Magellan Drive, Torrance, California 90502
(Address of principal executive offices, including zip code)

(310) 527-2800
(Registrant's telephone number, including area code)

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

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

Common Stock, no par value
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2005 (the last business day of
the registrant's more recently completed second quarter) was $15,568,662. For
purposes of this calculation only, (i) shares of Series A and Series B Preferred
Stock have been included in the calculation, (ii) shares of Common Stock and
Series A Preferred Stock are deemed to have a market value of $2.03 per share,
and the Series B Preferred Stock is deemed to have a market value of $4.05 per
share, based on the closing price of the Common Stock on June 30, 2005, and
(iii) each of the executive officers, directors and persons holding 5% or more
of the outstanding Common Stock (including Series A and B Preferred Stock on an
as-converted basis) is deemed to be an affiliate.

The number of shares of Common Stock outstanding as of March 22, 2006 was
14,786,000.

ENOVA SYSTEMS, INC.

2004 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

Item 1 Business.................................................................................... 4

Item 2. Properties..................................................................................16

Item 3. Legal Proceedings...........................................................................16

Item 4. Submission of Matters to a Vote of Security Holders.........................................16

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ...........................................................16

Item 6 Selected Financial Data.....................................................................18

Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......19

Item 7A Quantitative and Qualitative Disclosures about Market Risk..................................25

Item 8 Financial Statements and Supplementary Data.................................................25

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........

Item 9A Controls and Procedures.....................................................................26

PART III

Item 10. Directors and Executive Officers of the Registrant.........................................28

Item 11. Executive Compensation.....................................................................29

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters .............................................................

Item 13. Certain Relationships and Related Transactions.............................................35

Item 14. Principal Accountant Fees and Services.....................................................35

PART IV

Item 15. Exhibits and Financial Statement Schedules................................................36

SIGNATURES...........................................................................................39

Disclosure Regarding Forward-Looking Statements
-----------------------------------------------

This annual report on Form 10-K, including the documents that we
incorporate by reference, contains statements indicating expectations about
future performance and other forward-looking statements that involve risks and
uncertainties. We usually use words such as "may," "will," "should," "expect,"
"plan," "anticipate," "believe," "estimate," "predict," "future," "intend,"
"potential," or "continue" or the negative of these terms or similar expressions
to identify forward-looking statements. These statements appear throughout the
Form 10-K and are statements regarding our current intent, belief, or
expectation, primarily with respect to our operations and related industry
developments. Examples of these statements include, but are not limited to,
statements regarding the following: our expansion plans, our future operating
expenses, our future losses, our future expenditures for research and
development and the sufficiency of our cash resources. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this annual report. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us and described in the section of Item 1A.
entitled "Risk Factors," and elsewhere in this annual report. Any
forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.

Enova Systems is a trademark of Enova Systems, Inc . All other brand names
or trademarks appearing in this annual report are the property of their
respective holders.

PART I

The matters addressed in this report on Form 10-K, with the exception of
the historical information presented, may contain certain forward-looking
statements involving risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the heading "Certain
Factors That May Affect Future Results" in the Management's Discussion and
Analysis section and elsewhere in this report.

Item 1. Business

General

In July 2000, we changed our name to Enova Systems, Inc. Our company,
previously known as U.S. Electricar, Inc., a California corporation (the
"Company"), was incorporated on July 30, 1976.

Enova believes it is a leader in the development and production of
proprietary, commercial digital power management systems for transportation
vehicles and stationary power generation systems. Power management systems
control and monitor electric power in an automotive or commercial application
such as an automobile or a stand-alone power generator. Drive systems are
comprised of an electric motor, an electronics control unit and a gear unit
which power an electric vehicle. Hybrid systems, which are similar to pure
electric drive systems, contain an internal combustion engine in addition to the
electric motor, eliminating external recharging of the battery system. A
hydrogen fuel cell based system is similar to a hybrid system, except that
instead of an internal combustion engine, a fuel cell is utilized as the power
source. A fuel cell is a system which combines hydrogen and oxygen in a chemical
process to produce electricity. Stationary power systems utilize similar
components to those which are in a mobile drive system in addition to other
elements. These stationary systems are effective as power-assist or back-up
systems, alternative power, for residential, commercial and industrial
applications.

A fundamental element of Enova's strategy is to develop and produce
advanced proprietary software, firmware and hardware for applications in these
alternative power markets. Our focus is digital power conversion, power
management, and system integration, for two broad market applications - vehicle
power generation and stationary power generation.

Specifically, we develop, design and produce drive systems and related
components for electric, hybrid-electric, fuel cell and microturbine-powered
vehicles. We also develop, design and produce power management and power
conversion components for stationary distributed power generation systems. These
stationary applications can employ hydrogen fuel cells, microturbines, or
advanced batteries for power storage and generation. Additionally, we perform
research and development to augment and support others' and our own related
product development efforts.

Our product development strategy is to design and introduce to market
successively advanced products, each based on our core technical competencies.
In each of our product / market segments, we provide products and services to
leverage our core competencies in digital power management, power conversion and
system integration. We believe that the underlying technical requirements shared
among the market segments will allow us to more quickly transition from one
emerging market to the next, with the goal of capturing early market share.

Enova's primary market focus centers on both series and parallel heavy-duty
drive systems for multiple vehicle and marine applications. We believe
series-hybrid and parallel hybrid medium and heavy-duty drive system sales offer
Enova the greatest return on investment in both the short and long term. We
believe the medium and heavy-duty hybrid market's best chances of significant
growth lie in identifying and pooling the largest possible numbers of early
adopters in high-volume applications. Enova will attempt to utilize its
competitive advantages, including customer alliances, to gain greater market
share. By aligning ourselves with key customers in our target market(s), Enova
believes that the alliance will result in the latest technology being
implemented and customer requirements being met, with a minimal level of
additional time or expense. Additionally, Enova management believes that this
area will see significant growth over the next several years. As the Company
penetrates more market areas, we are continually refining and optimizing both
our market strategy and our product line to maintain our leading edge in power
management and conversion systems for mobile applications.

Our website, www.enovasystems.com, contains up-to-date information on the
Company, its products, programs and current events. Enova is implementing an
aggressive strategy to utilize its website and the internet as a prime focal
point for current and prospective customers, investors and other affiliated
parties seeking data on the Company.

During 2005, our recapitalization initiatives were successful. We entered
into an agreement with a placement agent relating to the sale of 5,300,000 new
shares of our common stock, after the 1 for 45 reverse stock split described in
Item 5 below. We received approximately $18,000,000 of net proceeds from the
offering. The Company believes that we have the operating resources to continue
our market penetration efforts.

The reorganization of senior management continued in 2005. During the
fourth quarter of 2005, both our Chief Financial Officer, Larry Lombard, and our
Chief Operating Officer, Edward Moore, resigned to seek other opportunities.
Their resignations were not the results of any disagreements with the Company.
In the first quarter of 2006, we appointed John Dexter as our new Director of
Operations and Planning. In the absence of a financial executive at the end of
2005, and to facilitate the year end financial reporting process, we have relied
on increased involvement from Edwin Riddell, Chief Executive Officer, as well as
the services of qualified Certified Public Accountants as management
consultants.

During 2005, the Company experienced an increase in production revenues. We
believe our development and market penetration initiatives are proving
successful. By defining our market focus, the Company has been able to better
identify potential opportunities.

We continue to pursue privately and governmental funded development
programs. This allows us to increase our revenue base, form new alliances with
major OEMs and participate in the latest trends in alternative fuel
technologies. The increase in R&D revenues for the year ended December 31, 2005
is primarily due to renewed customer requirements after a slow year in 2004.

The Company continues to receive greater recognition from both governmental
and private industry with regards to both commercial and military application of
its hybrid drive systems and fuel cell power management technologies. Although
the Company believes that current negotiations with several parties may result
in development and production contracts during 2006 and beyond, there are no
assurances that such additional agreements will be realized.

During 2005, the Company continued to advance its technologies and products
for greater market penetration for 2006 and beyond. We continue to develop
independently and in conjunction with the Hyundai-Enova Innovative Technology
Center (ITC) progress on several fronts to produce commercially available
heavy-duty, series and parallel hybrid drive systems.

During the year ended December 31, 2005, we continued to develop and
produce electric and hybrid electric drive systems and components for First Auto
Works of China, Ford Motor Company (Ford), Hyundai Motor Car, US Military,
Wright Bus and Eneco of the United Kingdom, and Tomoe of Japan and several other
domestic and international vehicle and bus manufacturers. We also were
successful in introducing our technology to companies such as Concurrent
Technology Corporation (CTC), PUES (Tokyo Research and Development), Volvo/Mack
and Navistar (International Truck and Engine, IC Corporation). The continued
relationships, in addition to our newest customers helped Enova surpass, since
Enova's inception, the manufacturing of its 900th system. Our various electric
and hybrid-electric drive systems, power management and power conversion systems
are being used in applications including Class 8 trucks, train locomotives,
transit buses and industrial vehicles as well as in non-transportation
applications such as fuel-cell management and power management systems,
including the EDO minesweeper. Enova has furthered its development and
production of systems for both mobile and stationary fuel cell powered systems
with major companies such as Ford and Hydrogenics, a fuel cell developer in
Canada.

For the year ended December 31, 2005, the following customers each
accounted for more than ten percent (10%) of the Company's total revenues:

Customer Percent
-------------------------------------------------------
Tomoe Electro Mechanical Engineering & Mfg. 49.3%
Hyundai Motor Company 12.5%

Medium and Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other Industrial
Vehicle Applications

Enova's primary market focus centers on both series and parallel medium and
heavy-duty drive systems for multiple vehicle and marine applications. We
believe series-hybrid and parallel hybrid medium and heavy-duty drive system
sales offer Enova the greatest return on investment in both the short and long
term. Although this market sector has developed more slowly than anticipated,
management believes that this area will see significant growth over the next
several years. As the Company penetrates more market areas, we are continually
refining and optimizing both our market strategy and our product line to
maintain our leading edge in power management and conversion systems for mobile
applications.

In Japan, Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. has
entered into a development and production contract with Enova for eight
battery-electric locomotives for the Singapore Land Transport Authority (LTA)
for service vehicles for the Seoul Mass Rapid Transit (SMRT) Circle Line system
for maintenance, repair, shunting and recovery of passenger trains. Over the
last several years, Enova successfully integrated its HybridPowerTM drive
systems into Tomoe's heavy-duty Isuzu dump truck application, three passenger
trams and a mine tunnel crawler. The hybrid drive train components were
delivered in late 2005 at Tomoe's Japan-based facilities. Enova anticipates the
total contract to exceed US$3 million over the life of the contract. This latest
market penetration in Asia enhances not only Enova's alliances with both Tomoe
and HHI, but also advances Enova's hybrid-electric technologies in high voltage
power management components. As part of this contract, Enova will develop a high
voltage charging system to enable the locomotive to receive a direct battery
charge from the high voltage rail. Tomoe and Enova continue to develop other
commercial and industrial applications for our drive systems including potential
light rail applications. During the first quarter of 2005, Tomoe issued a
purchase order for three post transmission parallel hybrid drive systems for
another train project in South Korea.

In 2005, Enova Systems delivered a Post Transmission 80Kw Hybrid Drive 4200
series truck to International Truck and Engine (International). This is in
addition to the delivery of the , as represented by IC Corporation, Hation's 1st
functional Hybrid Drive school bus that was delivered to International in
January of 2006. Both the truck and bus are currently being evaluated at
International's Fort Wayne Technical Center. International and IC Corporation
claims to be a leading manufacturer of medium duty trucks and school buses, with
approximately 40% of the medium duty truck build and approximately 60% of the
school bus build in North America.

Additionally in 2005, Enova's Post Transmission system was also integrated
into a US Air Force "refueler" vehicle built by Volvo/Mack Truck Corporation.
Enova, via Concurrent Technologies Corporation (CTC), also supplied its 120kW
hybrid drive system to the US Air Force for a Fuel Cell Hybrid "TUG" vehicle In
2005, First Auto Works (FAW) of China ordered an additional five HybridPower
120kW drive systems. These units have been delivered. Additionally, FAW
introduced its Hybrid City Bus, which is powered by Enova's 80kW Parallel Hybrid
Drive System. FAW is China's largest vehicle manufacturer, producing in excess
of 900,000 vehicles annually.

In 2005, we continued our work with Tsinghua University of China, and their fuel
cell bus development program. China intends to use hybrid-electric buses to
shuttle athletes and guests at the 2008 Beijing Summer Olympics and the 2010
World's Expo in Shanghai. China is seeking up to 1,000 full-size hybrid-electric
buses to support these global events.

WrightBus, one of the largest low-floor bus manufacturers in the United
Kingdom, continues to purchase our diesel genset-powered, series hybrid drive
systems for their medium and large bus applications. WrightBus ordered two
additional 120kW drive systems in 2005. Six of Enova's systems provided to
Wrightbus, have been integrated into six Hybrid Buses, which are currently being
evaluated in London's public bus fleet.

Eneco of the United Kingdom, a vehicle integrator which utilizes Enova's
HybridPower 120kW drive systems in its hybrid bus applications, purchased 21
120kW systems in 2005.

EcoPower Technology of Italy continues to purchase components for its
hybrid electric drive systems during 2005 for service and maintenance parts for
its fleet of buses powered by HybridPowerTM 120kw drive systems. Since our
teaming with EcoPower, we have sold 47 drive systems forming one of the largest
fleets of hybrid buses in the world. EcoPower is one of the largest integrators
of medium size transit buses for the European shuttle bus market, with key
customers in five Italian cities namely Turin, Genoa, Brescia, Ferrara and
Vicenza.

MTrans of Malaysia has integrated two of our standard HybridPower 120kW
drive system into a hybrid 10-meter bus with a Capstone microturbine as its
power source. This drive system is currently on demonstration in Hong Kong, PRC.

Additionally, we are in discussions with other bus manufacturers and
industrial, commercial and military vehicle manufacturers regarding the purchase
of our heavy-duty, high performance, 120kW and 240kW drive systems in 2005.
There are no assurances, however, that these discussions will result in any
sales of the HyrbidPower 240kW or 120kW drive systems.

Light-Duty Drive Systems and Fuel Cell Technologies - Automobiles and Delivery
vehicles

The High Voltage Energy Converter (HVEC) development program with Ford
Motor Company for their fuel cell vehicle was essentially completed in 2003.
This converter is a key component in Ford's Focus Fuel Cell Vehicle (FCV) which
utilizes the Ballard fuel cell system. It converts high voltage power from the
fuel cell into a lower voltage for use by the drive system and electronic
accessories. Ford currently is evaluating thirty vehicles utilizing Enova's
technology, throughout the United States, Canada, and Germany. Enova's fuel cell
enabling components continue to be part of the proposed fleets of fuel cell
vehicles being utilized by both Ford Motor Company - the Ford Focus FCV- and
Hyundai Motor Company - the Hyundai Tucson fuel cell hybrid electric vehicle -
in response to the U.S. Department of Energy's solicitation, entitled
"Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation
Project." This government-funded project will last over five years, evaluating
the economic and performance feasibility of fuel cell vehicles and
infrastructure across the U.S. In 2005, we delivered sixteen additional
converters to Hyundai. Furthermore, an additional 16 units are scheduled for
delivery in 2006.

The Company will continue to explore new applications for this versatile
technology in both mobile and stationary systems.

Research and Development Programs
---------------------------------

We continue to aggressively pursue government and commercially sponsored
development programs for both ground and marine heavy-duty drive system
applications.

Our development contract with EDO Corporation of New York for the design
and fabrication of a high voltage DC-DC power conversion system utilizing a
Capstone microturbine as the primary power source for the U.S. Navy unmanned
minesweeper project also continues to progress during 2005. The electronics
package will include Enova's advanced power components including a new, enhanced
50V, 700A DC-DC power converter, our Battery Care Unit and Hybrid Control Unit
which will power the minesweeper's electromagnetic detection system. Our power
management and conversion system will be used to provide on-board power to other
accessories on the platform.

The all-electric Hyundai Santa Fe SUV demonstration project in Honolulu
Hawaii was completed in 2005. Fast-charging capabilities and performance will be
the primary focus of this continued evaluation. This is a continuation of the
State of Hawaii and Hyundai Motor Company's program for pure electric vehicle
performance.

In the fourth quarter of 2004, Enova completed the design and integration
of its 120kw drive system with a Capstone microturbine into a MB4 tow tractor
for the U.S. Air Force through a contract with the Volpe National Transportation
Systems Center. The objectives of this program include the integration of
microturbine technology into the hybrid electric tow tractor, field testing and
evaluation of the benefits of microturbine technology in a hybrid electric
vehicle, integration of grid-charging technology, DC-DC converter, and a data
acquisition system into an electric tow tractor, and validation of the
technology effect on the original system and performance. During 2004, the
program generated $165,000 in revenues for Enova. There is a potential for other
upgrades of this type and we anticipate entering into more of these contracts in
2005 with the U.S. Air Force. There can be no assurances at this time, however,
that such contracts will be realized.

We also commenced a program with Hydrogenics to integrate a HybridPower
120kW hybrid drive system into a step-van for Purolator as a hydrogen fuel cell
hybrid vehicle. In integrating this new system, we utilized several new power
management systems including our dual 8kW inverter and our Mobile Fuel Cell
Generator that utilizes our High Voltage Converters. This fuel cell vehicle
application utilized a Hydrogenics 20kW fuel cell power generation module
underscoring our technologies ability to optimize fuel cell performance across a
range of fuel cell products. The program is in its final stage of evaluation. As
a result of this program, we have also commenced a similar fuel cell step van
conversion program for HCATT and the U.S. Air Force.

In 2005, we commenced integration of a fuel cell powered step-van similar
to the aforementioned Hydrogenics program for HCATT and the U.S. Air Force.

We intend to establish new development programs with the Hawaii Center for
Advanced Transportation Technologies in mobile and marine applications as well
as other state and federal government agencies as funding becomes available.

Environmental Initiatives and Legislation

Because vehicles powered by internal combustion engines cause pollution,
there has been significant public pressure in Europe and Asia, and enacted or
pending legislation in the United States at the federal level and in certain
states, to promote or mandate the use of vehicles with no tailpipe emissions
("zero emission vehicles") or reduced tailpipe emissions ("low emission
vehicles"). We believe legislation requiring or promoting zero or low emission
vehicles is necessary to create a significant market for electric vehicles. The
California Air Resources Board (CARB) is continually modifying its limits for
low emission vehicles. Recently, CARB proposed additional amendments to the
regulations. Furthermore, several car manufacturers have challenged these
mandates in court and have obtained injunctions to delay these mandates. There

can be no assurance that further legislation will be enacted or that current
legislation or state mandates will not be repealed or amended, or that a
different form of zero emission or low emission vehicle will not be invented,
developed and produced, and achieve greater market acceptance than electric
vehicles. Extensions, modifications or reductions of current federal and state
legislation, mandates and potential tax incentives could adversely affect the
Company's business prospects if implemented.

Our products are subject to federal, state, local and foreign laws and
regulations, governing, among other things, emissions as well as laws relating
to occupational health and safety. Regulatory agencies may impose special
requirements for implementation and operation of our products or may
significantly impact or even eliminate some of our target markets. We may incur
material costs or liabilities in complying with government regulations. In
addition, potentially significant expenditures could be required in order to
comply with evolving environmental and health and safety laws, regulations and
requirements that may be adopted or imposed in the future.

Strategic Alliances, Partnering and Technology Developments

Our continuing strategy is to adapt ourselves to the ever-changing
environment of alternative power markets for both stationary and mobile
applications. Originally focusing on pure electric drive systems, we believe we
are now positioned as a global supplier of drive systems for electric, hybrid
and fuel cell applications. Enova is now entering stationary power markets with
its power management systems and intends to develop other systems to monitor and
control the complex fuel cell and ancillary device systems being developed for
distributed generation and mobile applications.

Enova continues to seek and establish alliances with major players in the
automotive, stationary power and fuel cell fields. 2005 allowed Enova to further
its penetration into the European and Asian markets, as well as allow them to
begin relationships with significant North American companies. We believe the
medium and heavy-duty hybrid market's best chances of significant growth lie in
identifying and pooling the largest possible numbers of early adopters in
high-volume applications. Enova will utilize its competitive advantages,
including customer alliances, to gain greater market share. By aligning
ourselves with key customers in our target market(s), Enova believes that the
alliance will result in the latest technology being implemented and customer
requirements being met, with a minimal level of additional time or expense.

Enova's alliances with other major OEMs in the automotive, transit,
commercial and energy sectors continue to expand. In 2005, Enova continued our
endeavors related to the Chinese hybrid vehicle market, and with alliances with
First Auto Works and Tsinghua University for heavy-duty hybrid drive systems and
technologies. Additionally, we expanded on our alliances with, Tomoe, Hyundai
Motor Company (HMC), MTrans of Malaysia, Eneco, Hydrogenics of Canada, the
Southwest Research Institute, the U.S. Air Force and other commercial and
industrial intermediaries and OEMs to find new markets and applications for our
products and technologies. We continue our strategy as a "systems integrator" by
establishing relationships to utilize other independently developed technologies
such as those provided by HHI, UTC Fuel Cells, Hydrogenics and national
universities. We have implemented our plans to outsource manufacturing of our
components to companies such as HHI, Ricardo, and other Asian manufacturers. We
believe that one of our competitive advantages is our ability to identify,
attract and integrate the latest technology available to produce state of the
art products at competitive prices.

Our joint venture alliance with Hyundai Heavy Industries (HHI) is a prime
example of our partnering strategy to maximize the utilization of Enova's
knowledge and expertise in power management and control. Teaming with HHI may
lead to other additive technologies and products which Enova can market to
current and prospective customers. The joint venture corporation, Hyundai-Enova
Innovative Technology Center (ITC), commenced operations in the second quarter
of 2003. The advanced technology center focuses on leading-edge technologies in
power management and power conversion for industrial, commercial, residential
and vehicle applications. The ITC has been instrumental in bringing our diesel
genset system into commercialization. Other projects slated for development for
the ITC include commercial inverters and other power management systems which
build on Enova's and HHI's technology base. It is our intent to utilize the
resources provided through the ITC to optimize Enova's current product line for
greater performance and production cost efficiencies, while we continue new
research and development for the next generation of digital power management
systems for mobile and stationary applications. For instance, the Hyundai Group
of Korea and Enova are partnering in the development of advanced hybrid and
hydrogen fuel cell drive-train technology and related systems.

Products

Enova's focus is digital power management, power conversion, and system
integration. Our proprietary software, firmware and hardware manage and control
the power that drives a vehicle or device. They convert the power into the
appropriate forms required by the vehicle or device, whether DC to AC, AC to DC
or DC to DC, and they manage the flow of this energy to protect the battery, the
vehicle or device, and the driver or operator. Enova's systems work "from drive
train to drive wheel" for both vehicle and stationary applications.

The latest state-of-the-art technologies, such as hybrid vehicles, fuel
cell and micro turbine based systems, and stationary power generation, all
require some type of power management and conversion mechanism. Enova, utilizing
our enabling technologies, supplies these essential components. We believe our
drive train systems will work with any kind of fuel/power source, from electric
to hybrid to fuel cell to turbine. They are essential components for any
vehicle, system or device that uses power.

Enova is moving to expand its product base into new markets outside of the
traditional electric and hybrid-electric automotive fields. Key areas which
Enova has begun to penetrate include energy management in distributed generation
in the utility industry, and stand-by/backup power generation in the commercial
electronics industry. Both of these markets can be served with our existing
energy management and power control products. Enova has entered into agreements,

or commenced negotiations, with various alternative power generation
manufacturers such as Hydrogenics, Capstone Turbine and Ballard Power as well as
others. We believe our enabling technologies will prove beneficial to these
types of companies in their strategies to bring these new power systems to
commercialization.

Enova has embraced fuel cell technology and has begun to develop various
power management and control systems to enable fuel cell manufacturers and their
ancillary industries to achieve greater efficiencies from their systems. These
systems are also designed to provide added reliability and safety by monitoring,
adjusting and reporting on operation of the unit.

HybridPowerTM Electric and Hybrid-Electric Drive Systems

Enova's HybridPower drive system family, along with its drive system
accessories are designed to provide our customers with a complete solution to
their drive system needs for both light-duty through heavy-duty vehicle markets.
Enova's HybridPower hybrid electric drive system provides all the functionality
one would find under the hood of an internal combustion engine powered vehicle.
The HybridPower system consists of an enhanced electric motor and the electronic
controls that regulate the flow of electricity to and from the batteries at
various voltages and power to propel the vehicle. In addition to the motor and
controller, the system includes a gear reduction/differential unit which ensures
the desired propulsion and performance. The system is designed to be installed
as a "drop in," fully integrated turnkey fashion, or on a modular, "as-needed"
basis. Regardless of power source (battery, fuel cell, diesel generator or
turbine) the HybridPower electric motor is designed to meet the customer's drive
cycle requirements.

The HybridPower drive system family is targeted to meet the demands of
light-duty through heavy-duty vehicle markets. Enova's family of light-duty
drive systems includes:

o 30kW, 60kW, 90kW all-electric drives
o 90kW series-hybrid drive
o combinations of these systems based on customer requirements.

Our family of heavy-duty electric drive systems includes:

o 120kW all-electric drive o 120/60kW peak series hybrid system
o 240/60kW peak series hybrid system
o 90kW peak mild, pre-transmission parallel hybrid system
o 100kW peak post-transmission parallel hybrid systems
o 100kW peak pre-transmission parallel hybrid system.

Enova's drive systems, in conjunction with, internal combustion engines,
microturbines, fuel cells, flywheels, and generators sets provide state of the
art hybrid-electric propulsion systems.

Hybrid vehicles are those that utilize an electric motor and batteries in
conjunction with an internal combustion engine (ICE), whether piston or turbine.
With a hybrid system, a small piston or turbine engine - fueled by gasoline or
diesel, CNG, methane, etc., in a tank - supplements the electric motor and
battery. These systems are self-charging, in that the operating ICE recharges
the battery.

There are two types of hybrid systems: series and parallel. A series hybrid
system is one where only the electric motor connects to the drive shaft; a
parallel hybrid system is one where both the internal combustion engine and the
electric motor are connected to the drive shaft. In a series hybrid system, the
ICE turns the generator, which charges the battery, which -- through a control
unit - powers the electric motor, which turns the wheels. In a parallel hybrid
system, both the electric motor and the ICE can operate simultaneously to drive
the wheels. (See diagrams below.) In both hybrid systems and in pure electric
systems, regenerative braking occurs, which assists in the charging of the
batteries.

The parallel hybrid system is ideally suited for conditions where most of
the driving is done at constant speed cruising, with a smaller amount of the
driving involving random acceleration, such as "up hill" or with "stop and go"

conditions. For acceleration, the controller causes the electric motor to kick
in to assist the ICE, both running simultaneously. When speed is steady or the
ground is flat, only the ICE runs. Additionally, when the batteries are low, the
controller causes the ICE and motor to charge the batteries. As a result, the
series hybrid system is best suited for starts and stops, and is ideal for
applications such as urban transit buses and urban garbage trucks. The design of
the series hybrid system is based on a driving cycle with a high percentage of
random acceleration conditions.

---------------------------- -------------------------- ----------------------------------------- ------------------------
System Applications Advantages Disadvantages
---------------------------- -------------------------- ----------------------------------------- ------------------------

Series Driving with high Optimally-sized IC engine Full size electric
Hybrid percentage stop and go Advanced engine/turbine may be used drive system required
and/or hilly terrain Simplified transmission Generator and
Independent control converter required
---------------------------- -------------------------- ----------------------------------------- ------------------------
Parallel Driving with high No generator and converter needed Complex transmission
Hybrid percentage constant The drive system may be smaller and clutch system
speed cruising Complex control
Limited to low speed
engines
---------------------------- -------------------------- ----------------------------------------- ------------------------

Hybrid Drive Configurations

Enova has identified three primary configurations based upon how well they
meet market needs economic requirements. The company has developed all of the
relevant technology required to produce these drive systems and is currently
introducing the Hybrid Power product line worldwide. All of our innovative
hybrid drive systems are compatible with wide range of fuel sources and engine
configurations.

Hybrid Drive Motors

The electric drive unit is essentially an electric motor with additional
features and functionality. The motor is liquid-cooled, environmentally sealed,
designed to handle automotive shock and vibration, and includes parking pawl,
which stops the vehicle when the driver parks the car. It also permits
regenerative braking to provide power recovery, in which the mechanical energy
of momentum is converted into electrical energy as the motor slows during
braking or deceleration. The optional gear reduction unit takes the electric
motor's high rpm and gears it down to the lower rpm required by the vehicle's
conventional drive shaft. As the revolutions per minute (rpm) go down, the
torque of the electric motor increases.

The HybridPower drive systems exclusively utilize induction AC motors for
their high performance, power density, and low cost. The AC drive system is
scaleable and can be customized for different applications. Due to the large
operating range that these propulsion systems offer, all parameters can be
optimized; the user will not have to choose between acceleration, torque or
vehicle speed.

Hybrid Motor Controllers

The controller houses all the components necessary to control the powering
of a vehicle, in one easy-to-install package. Our main component is an inverter,
which converts DC electricity to AC electricity. Enova also offers optional
controllers for the air conditioning, power steering and heat pump, 12VDC/24VDC
DC-to-DC converter for vehicle auxiliary loads such as cell phones, radio,
lights, and a 6.6kW AC-to-DC on-board conductive charger which allows for direct
110 VAC or 220 VAC battery charging. These are located in the same housing as
the controller, thus extra interconnects are not required. This approach
simplifies the vehicle wiring harness and increases system reliability.

Using our proprietary Windows based software package, vehicle interfaces
and control parameters can be programmed in-vehicle. Real-time vehicle
performance parameters can be monitored and collected.

Hybrid Drive Systems

The Enova hybrid drive family currently includes a 120/60kW peak series
hybrid system, a 240/60kW peak series hybrid system, a 90kW peak mild,
pre-transmission parallel hybrid system, a 100kW peak post-transmission parallel
hybrid systems and our 100kW peak pre-transmission parallel hybrid system to be
introduced later this year.

The Enova HybridPower hybrid-electric drive systems are based on the
component building blocks of the electric drive family, including the motor,
controller and optional components. As an example, the 120/60 kW series hybrid
system uses the 120kW electric drive components to propel the vehicle, and uses
a 60kW diesel generator (genset)to generate power while the vehicle is in
operation. This synergy of design reduces the development cost of the Company's
hybrid systems by taking advantage of existing designs. The diesel genset has
been designed to take advantage of many different models of internal combustion
engines for greater penetration into the burgeoning heavy-duty hybrid vehicle
markets. Enova's genset will accept any engine with an industry standard bell
housing and flywheel. Enova's control protocols are designed to easily interface
with any standard engine controller with analog throttle inputs. Accessories for
these drives include battery management, chargers and 12-volt power supplies.

The Company's hybrid systems are designed to work with a variety of hybrid
power generation technologies. In the Company's 120/60kW hybrid system, an
internal combustion engine connected to a motor and motor controller performs
the power generation. Other power options include liquid fueled turbines, such

as the Capstone system, fuel cells, such as the Hydrogenics or Ballard system,
or many others. In all of these examples, Enova's battery management system
provides the power management to allow for proper power control.

Drive System Accessories

Enova's drive system accessories range from battery management systems to
hybrid controllers, to rapid charging systems. These critical components are
designed to complement the HybridPower drive system family by providing the
elements necessary to create a complete technical solution for alternative
energy drive systems.

Enova's drive system accessories are not only integral, but are also the
perfect complement to our drive systems and are designed to provide our
customers with a complete solution to their drive system needs.

Battery Care Unit

Enova's Battery Care Unit (BCU) monitors, manages, protects, and reports on
the condition of the vehicles battery pack. It controls and manages battery
performance, temperature, voltage and current to avoid harm to the batteries, to
the entire system, and to the driver, operator and passengers. It also allows
for monitoring for service to the battery and drive system. The BCU reports
state-of-charge, amp hours and kilowatt-hours.

The BCU monitors the battery pack voltage and 28 additional individual
voltages with a range of 0 to 18vDC. Optional expansion modules allow 28
additional inputs per module, with up to 16 modules permitted. The BCU has eight
user-programmable outputs and four user-programmable inputs to allow full
integration into the vehicle. These can be used to customize input and output
parameters, and to provide for other custom monitoring and battery pack control.
The device is approximately 7.1 inches by 4.3 inches by 1.6 inches.

The BCU directly interfaces with the HybridPower and other drive systems,
and controls the Safety Disconnect Unit (SDU). It is capable of supporting any
battery technology, and provides each type with optimized charging and
protection algorithms. An internal real-time clock allows the BCU to wake up at
user-specified times to initiate battery charging or pack monitoring. A
precision shunt allows it to offer a wide dynamic range for monitoring charging
and motoring current, without the errors commonly associated with other types of
sensors.

The non-volatile RAM allows the BCU to update, store and report key battery
pack parameters such as amp hours, kilowatt-hours and state of change. Using
Enova's proprietary Windows -based diagnostic software, the BCU control
parameters can be programmed "live" in-vehicle. Additionally, battery
performance can be monitored in real-time. Reports can be output to a laptop
computer for precise results and "customer friendly" usage.

Hybrid Control Unit

Enova's Hybrid Control Unit (HCU) continuously monitors the condition of
the battery pack through communications with the BCU, monitors the driver
commands through communications with the motor controller, and the state of the
hybrid generator. Based upon the data received, the HCU provides continuous
updates to the hybrid generator with instructions on mode of operation and power
level. This innovative control loop ensures that the entire system is optimized
to provide quick response to driver commands while providing the best possible
system efficiency.

Safety Disconnect Unit

The Safety Disconnect Unit (SDU) is under the control of the BCU, and
allows vehicle systems to easily connect and disconnect from the battery pack,
when necessary, to prevent damage or harm. It also disconnects the battery pack
during charging, protects it from surges, and constantly verifies that the
battery pack is isolated from the vehicle chassis. In the event a ground
isolation fault is detected, the BCU commands the SDU to break the battery
connection, thus ensuring a safe environment for the vehicle and operator. The
SDU is available in two configurations to match the requirements of the drive
systems.

High Voltage Disconnect Unit

The High Voltage Disconnect Unit (HVDU) is a reduced feature version of the
Safety Disconnect Unit. The pre-charge board has been eliminated in order to
provide a lower cost method of safely switching high voltage systems on the
vehicle that do not require the soft start feature.

Wiring Harness Connector Kits

Enova provides complete mating connector kits to help the vehicle OEM with
their production process. By using the Enova supplied kit the vehicle
manufacturer is ensuring that they will have all of the necessary connectors to
complete the vehicle build.

Distributed Power Generation for Industrial / Commercial / Residential
Applications

Enova's distributed generation products are virtually identical in system
configuration to that of a series hybrid vehicle, including a controller and
battery management. For this market segment, we intend to provide DC-DC and
DC-AC power conversion components to convert power supplied by batteries, fuel
cells, generators and turbines to AC power that will be used by the end
customer. Additionally, our BCU will provide power management functions to
control the entire system. The main difference is that the 3-phase AC power
typically supplied to the motor for propulsion power is, in this case, sent to
the customer to supply power for their household or business.

20kW bi-directional Fuel Cell Power Conditioning System

Enova's 20kW bi-directional Fuel Cell Power Conditioning System, originally
designed to meet the demands of an automotive Fuel Cell propulsion system, is
now being applied to the stationary market for distributed generation
applications.

This unique unit, not much larger than a conventional briefcase, provides a
transparent interface between the Fuel Cell or Turbine, the battery pack,
accessory loads, and the output load. Fast response time allows the output load
to be serviced without interruption while the Fuel Cell or Turbine ramps up.

This unit is designed to interface directly with the Master Controller of
the Stationary Generation System over a CAN bus. Other communications protocols
supported are SAE J-1850, RS-232, and RS-485. Our proprietary package diagnostic
software allows all key parameters of the Power Conditioner to be monitored and
control boundaries to be adjusted.

Fuel Cell Management Unit

Enova has reconfigured its Battery Management Unit to perform the functions
required to monitor, manage, and report on the status of a Fuel Cell Stack. The
FCU monitors the fuel cell voltage and 28 additional individual voltages with a
range of 0 to 18vDC. Optional expansion modules allow 28 additional inputs per
module, with up to 16 modules permitted. The FCU has eight (8) user-programmable
outputs and four (4) user-programmable inputs to allow full integration into the
distributed generation system. These can be used to customize input and output
parameters, and to provide for other custom monitoring and battery pack control.

Research and Development Strategy

Enova maintains a strategy of continual enhancement of its current product
line and development of more efficient and reliable products for the
ever-changing alternative energy sectors. Management believes R&D must be
continued in order to remain competitive, minimize production cost and meet our
customers' specifications. Because microprocessors and other components continue
to advance in speed, miniaturization and reduction of cost, Enova must
re-examine its designs to take advantage of such developments. Enova endeavors
to fund its R&D through customer contracts where applicable, however it will
provide internal funding where technology developed is critical to its future.

Enova's commitment to advancing technological superiority is evidenced by its
internal efforts as well as its joint venture with HHI for future technologies.

Manufacturing Strategy

Our products are "production-engineered," meaning they are designed so they
can be commercially produced without additional development. All formats and
files are designed with manufacturability in mind from the start. For the
automotive market, Enova designs its products to ISO 900X manufacturing and
quality standards. We believe that our redundancy of systems, robustness of
design, and rigorous quality standards result in higher performance and reduced
risk. For every component and piece of hardware, there are detailed performance
specifications. Each piece is tested and evaluated against these specifications,
which enhances the value of the systems to OEM customers.

We have developed a multi-tiered manufacturing strategy that allows the
company to meet the market's demand for high quality production goods while
optimizing cost of goods sold across the spectrum of low to high volumes. At the
core of this strategy is a strong reliance on pre-selected highly qualified
outside manufacturing houses that specialize in various aspects of the
manufacturing process. It is through this closely managed outsourcing strategy
that Enova is able to achieve improved gross margins while minimizing fixed
costs within the organization.

All tiers of manufacturing of electronic components begin with a complete
engineering design package that includes a drawing tree, bill of material,
electrical and mechanical drawings, and control software where appropriate. The

control software and the design package are internally reviewed, validated, and
released through our configuration management process.

For low volume manufacturing, where volumes are less than 10 to 20 units,
the process is similar to that for prototyping. Low volume manufacturing and
testing is performed in-house.

For higher volume manufacturing, Enova has established strategic alliances
with ISO-900X certified manufacturers that can take on all aspects of the
process from component sourcing, to circuit card assembly, to component
assembly, to final unit assembly and test. These completed components and units
are shipped to our facility where complete drive systems that meet the
customer's unique requirements are packaged and shipped.

As our market continues to grow and individual customers begin to order
higher quantities of fixed drive system configurations, we will transition to a
system where the final assembly is drop shipped directly to the end customer.
This critical concept has already been discussed with our strategic
manufacturing partners.

Competitive Conditions

Competition within the mobile and stationary hybrid power sector is still
somewhat fragmented, although there are indications of some consolidation at
this time. The market is still divided into very large players such as Allison,
Siemens, BAE and Eaton; or smaller competitors such as ISE Research, Azure
Dynamics/Solectria; PEI, Unique Mobility and others. The larger companies tend
to still focus on single solutions but maintain the capital and wherewithal to
aggressively market such. The smaller competitors offer a more diversified
product line, but do not have the market presence to generate significant
penetration at this juncture.

Our research and experience has indicated that our target market segments
certainly focus on price, but would buy based on reliability, performance and
quality support when presented the life-cycle business model for hybrid
technologies for their application. Enova has good indications that many would
pay a 10-20% premium for hybrids from a secure vendor providing warrantied
performance, quality service and support.

The competition to develop and market electric, hybrid and fuel cell
powered vehicles has increased during the last year and we expect this trend to
continue. The competition consists of development stage companies as well as
major U.S. and international companies. Our future prospects are highly
dependent upon the successful development and introduction of new products that
are responsive to market needs and can be manufactured and sold at a profit.
There can be no assurance that we will be able to successfully develop or market
any such products.

The development of hybrid-electric and alternative fuel vehicles, such as
compressed natural gas, fuel cells and hybrid cars poses a competitive threat to
our markets for low emission vehicles or LEVs but not in markets where
government mandates call for zero emission vehicles or ZEVs. Enova is involved
in the development of hybrid vehicles and fuel cell systems in order to meet
future requirements and applications.

Various providers of electric vehicles have proposed products or offer
products for sale in this emerging market. These products encompass a wide
variety of technologies aimed at both consumer and commercial markets. The
critical role of technology in this market is demonstrated through several
product offerings. As the industry matures, key technologies and capabilities
are expected to play critical competitive roles. Our goal is to position
ourselves as a long term competitor in this industry by focusing on electric,
hybrid and fuel cell powered drive systems and related sub systems, component
integration, technology application and strategic alliances. The addition of new
strategies to penetrate stationary power markets with current technologies will
assist in creating a more diversified product mix. We believe that this strategy
will enhance our position as a power management and conversion components
supplier to both the mobile and stationary power markets.

Research and Development

Enova believes that timely development and introduction of new technology
and products are essential to maintaining a competitive advantage. We are
currently focusing our development efforts primarily in the following areas:

*Power Control and Drive Systems and related technologies for vehicle
applications;
*Stationary Power Management and Conversion and related technologies;
*Heavy Duty Drive System development for Buses; Trucks, Industrial,
Military and Marine applications
*Fuel Cell Generation system power management and process control
*Systems Integration of these technologies;
*Technical and product development under DOE/DOT/DOD and Hyundai Group
Contracts
*OEM Technical and Product development.

For the years ended December 31, 2005, 2004, 2003 and 2002, we spent
$804,000, $925,000, $799,000, and $1,152,000, respectively, on internal research
and development activities. Enova is continually evaluating and updating the

technology and equipment used in developing each of its products. The power
management and conversion industry utilizes rapidly changing technology and we
will endeavor to modernize our current products as well as continue to develop
new leading edge technologies to maintain our competitive edge in the market.

Intellectual Property

Enova currently holds four U.S. patents and has one patent pending,
relating to power management and control, with an additional patent relating to
crash management safety, which was originally issued in 1997. We also have
trademarks or service marks in the United States and have been filing for
international patents as well. We continually review and append our protection
of proprietary technology. We continue to place emphasis on the development and
acquisition of patentable technology, however, a majority of our intellectual
property is contained within our software which we believe is best protected
under trade secret provision of U.S. patent law. Under such provisions, Enova
does not have to publish its proprietary code in order to maintain protection.

We maintain an internal review and compensation process to encourage our
employees to create new patentable technologies. The status of patents involves
complex legal and factual questions, and the breadth of claims allowed is
uncertain. Accordingly, there can be no assurance that patent applications filed
by us will result in patents being issued. Moreover, there can be no assurance
that third parties will not assert claims against us with respect to existing
and future products. Although we intend to vigorously protect our rights, there
can be no assurance that these measures will be successful. In the event of
litigation to determine the validity of any third party claims, such litigation
could result in significant expense to Enova. Additionally, the laws of certain
countries in which our products are or may be developed, manufactured or sold
may not protect our products and intellectual property rights to the same extent
as the laws of the United States.

Enova's success depends in part on its ability to protect its proprietary
technologies. Enova's pending or future patent applications may not be approved
and the claims covered by such applications may be reduced. If allowed, patents
may not be of sufficient scope or strength, others may independently develop
similar technologies or products, duplicate any of Enova's products or design
around its patents, and the patents may not provide Enova with competitive
advantages. Further, patents held by third parties may prevent the
commercialization of products incorporating Enova's technologies or third
parties may challenge or seek to narrow, invalidate or circumvent any of Enova's
pending or future patents. Enova also believes that foreign patents, if
obtained, and the protection afforded by such foreign patents and foreign
intellectual property laws, may be more limited than that provided under United
States patents and intellectual property laws. Litigation, which could result in
substantial costs and diversion of effort by Enova, may also be necessary to
enforce any patents issued or licensed to Enova or to determine the scope and
validity of third-party proprietary rights. Any such litigation, regardless of
outcome, could be expensive and time-consuming, and adverse determinations in
any such litigation could seriously harm Enova's business.

Enova relies on unpatented trade secrets and know-how and proprietary
technological innovation and expertise which are protected in part by
confidentiality and invention assignment agreements with its employees, advisors
and consultants and non-disclosure agreements with certain of its suppliers and
distributors. These agreements may be breached, Enova may not have adequate
remedies for any breach or Enova's unpatented proprietary intellectual property
may otherwise become known or independently discovered by competitors. Further,
the laws of certain foreign countries may not protect Enova's products or
intellectual property rights to the same extent as do the laws of the United
States.

Employees

As of December 31, 2005, we had 29 full time employees. Additionally, we
employ 4 individuals as independent contractors, engaged on an hourly basis, one
of whom is domiciled in South Korea. The departmental breakdown of these
individuals includes 4 in administration, 1 in sales, 12 in engineering and
research and development, and 12 in production.

Available Information

Our website address is www.enovasystems.com; however, information found on,
or that can be accessed through, our website is not incorporated by reference
into this annual report. We file electronically with the SEC our annual report,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. We make available free of charge on or through
our website copies of these reports as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The SEC
maintains an internet site that contains reports, proxy and information
statements and other information regarding our filings at www.sec.gov. You may
also read and copy any of our materials filed with the SEC at the SEC's Public
Reference Room at 100 F Street, NE, Washington, DC 20549. Information regarding
the operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.

Item 1A. Risk Factors

This Form 10-K contains forward looking statements concerning our existing
and future products, markets, expenses, revenues, liquidity, performance and
cash needs as well as our plans and strategies. These forward-looking statements
involve risks and uncertainties and are based on current management's
expectations and we are not obligated to update this information. Many factors
could cause actual results and events to differ significantly from the results
anticipated by us and described in these forward looking statements including,
but not limited to, the following risk factors. You should carefully consider
these risk factors as each of these risks could adversely affect our business,
operating results and financial condition. In those cases, the trading of our
common stock could decline and you may lose all or a part of your investment.

We may not have net operating losses in the future against which to offset our
future profits, if any.

We have experienced recurring losses from operations and had an accumulated
deficit of $102,586,000 at December 31, 2005. There is no assurance, however,
that any net operating losses will be available to us in the future as an offset
against future profits, if any, for income tax purposes.

We have experienced continued losses and may never become profitable.

For the years ended December 31, 2005, 2004, 2003 and 2002, we had net losses of
$2,127,000, $3,382,000, $3,186,000, and $3,598,000, respectively, on sales of
$6,084,000, $2,554,000, $4,310,000, and $4,455,000, respectively. We may never
become profitable, which may cause the market price of our common stock to drop.

The nature of our industry is dependent on technological advancement and highly
competitive.

The mobile and stationary power markets, including electric vehicle and hybrid
electric vehicles, continue to be subject to rapid technological change. Most of
the major domestic and foreign automobile manufacturers: (1) have already
produced electric and hybrid vehicles, and/or (2) have developed improved
electric storage, propulsion and control systems, and/or (3) are now entering or
have entered into production, while continuing to improve technology or
incorporate newer technology. Various companies are also developing improved
electric storage, propulsion and control systems. In addition, the stationary
power market is still in its infancy. A number of established energy companies
are developing new technologies. Cost-effective methods to reduce price per
kilowatt have yet to be established and the stationary power market is not yet
viable.

Our current products are designed for use with, and are dependent upon, existing
technology. As technologies change, and subject to our limited available
resources, we plan to upgrade or adapt our products in order to continue to
provide products with the latest technology. We cannot assure you, however, that
we will be able to avoid technological obsolescence, that the market for our
products will not ultimately be dominated by technologies other than ours, or
that we will be able to adapt to changes in or create "leading-edge" technology.
In addition, further proprietary technological development by others could
prohibit us from using our own technology.

Our industry is affected by political and legislative changes.

In recent years there has been significant public pressure to enact legislation
in the United States and abroad to reduce or eliminate automobile pollution.
Although states such as California have enacted such legislation, we cannot
assure you that there will not be further legislation enacted changing current
requirements or that current legislation or state mandates will not be repealed
or amended, or that a different form of zero emission or low emission vehicle
will not be invented, developed and produced, and achieve greater market
acceptance than electric or hybrid electric vehicles. Extensions, modifications
or reductions of current federal and state legislation, mandates and potential
tax incentives could also adversely affect our business prospects if
implemented.

We are subject to increasing emission regulations in a changing legislative
climate.

Because vehicles powered by internal combustion engines cause pollution, there
has been significant public pressure in Europe and Asia, and enacted or pending
legislation in the United States at the federal level and in certain states, to
promote or mandate the use of vehicles with no tailpipe emissions ("zero
emission vehicles") or reduced tailpipe emissions ("low emission vehicles").
Legislation requiring or promoting zero or low emission vehicles is necessary to
create a significant market for electric vehicles. The California Air Resources
Board (CARB) is continuing to modify its regulations regarding its mandatory
limits for zero emission and low emission vehicles. Furthermore, several car
manufacturers have challenged these mandates in court and have obtained
injunctions to delay these mandates.

There are substantial risks involved in the development of unproven products.

In order to remain competitive, we must adapt existing products as well as
develop new products and technologies. In fiscal years 2005, 2004 and 2003, we
spent collectively in excess of $2.5 million on research and development of new
products and technology. Despite our best efforts a new product or technology
may prove to be unworkable, not cost effective, or otherwise unmarketable. We

cannot assure you that any new product or technology we may develop will be
successful or that an adequate market for such product or technology will ever
develop.

We may be unable to effectively compete with other companies who have
significantly greater resources than we have.

Many of our competitors, in the automotive, electronic and other industries, are
larger, more established companies that have substantially greater financial,
personnel, and other resources than we do. These companies may be actively
engaged in the research and development of power management and conversion
systems. Because of their greater resources, some of our competitors may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sales of their
products than we can. We believe that developing and maintaining a competitive
advantage will require continued investment in product development,
manufacturing capability and sales and marketing. We cannot assure you however
that we will have sufficient resources to make the necessary investments to do
so. In addition, current and potential competitors may establish collaborative
relationships among themselves or with third parties, including third parties
with whom we have relationships. Accordingly, new competitors or alliances may
emerge and rapidly acquire significant market share.

Future equity financings may dilute your holdings in our Company.

We may need to obtain additional funding through public or private equity or
debt financing, collaborative agreements or from other sources. If we raise
additional funds by issuing equity securities, current shareholders may
experience significant dilution of their holdings. We may be unable to obtain
adequate financing on acceptable terms, if at all. If we are unable to obtain
adequate funds, we may be required to reduce significantly our spending and
delay, scale back or eliminate research, development or marketing programs, or
cease operations altogether.

Potential intellectual property, shareholder or other litigation could adversely
impact our business.

Because of the nature of our business, we may face litigation relating to
intellectual property matters, labor matters, product liability or shareholder
disputes. Any litigation could be costly, divert management attention or result
in increased costs of doing business. Although we intend to vigorously defend
any future lawsuits, we cannot assure you that we would ultimately prevail in
these efforts. An adverse judgment could negatively impact the price of our
common stock and our ability to obtain future financing on favorable terms or at
all.

We may be exposed to product liability or tort claims if our products fail,
which could adversely impact our results of operations.

A malfunction or the inadequate design of our products could result in product
liability or other tort claims. Accidents involving our products could lead to
personal injury or physical damage. Any liability for damages resulting from
malfunctions could be substantial and could materially adversely affect our
business and results of operations. In addition, a well-publicized actual or
perceived problem could adversely affect the market's perception of our
products. This could result in a decline in demand for our products, which would
materially adversely affect our financial condition and results of operations.
We are highly subject to general economic conditions.

The financial success of our company is sensitive to adverse changes in general
economic conditions, such as inflation, unemployment, and consumer demand for
our products. These changes could cause the cost of supplies, labor, and other
expenses to rise faster than we can raise prices. Such changing conditions also
could significantly reduce demand in the marketplace for our products. We have
no control over any of these changes.

We are an early growth stage company.

Although our Company was originally founded in 1976, many aspects of our
business are still in the early growth stage development, and our proposed
operations are subject to all of the risks inherent in a start-up or growing
business enterprise, including the likelihood of continued operating losses.
Enova is relatively new in focusing its efforts on electric systems, hybrid
systems and fuel cell management systems. The likelihood of our success must be
considered in light of the problems, expenses, difficulties, complications, and
delays frequently encountered in connection with the growth of an existing
business, the development of new products and channels of distribution, and
current and future development in several key technical fields, as well as the
competitive and regulatory environment in which we operate.

We operate in a highly regulated business environment and changes in regulation
could impose costs on us or make our products less economical.

We are highly dependent on a few key personnel and will need to retain and
attract such personnel in a labor competitive market.

Our success is largely dependent on the performance of our key management and
technical personnel, including Edwin Riddell, our Chief Executive Officer and
Acting Chief Financial Officer and Don Kang, our Vice President of Engineering,
the loss of one or more of whom could adversely affect our business.
Additionally, in order to successfully implement our anticipated growth, we will
be dependent on our ability to hire additional qualified personnel. There can be
no assurance that we will be able to retain or hire other necessary personnel.
We do not maintain key man life insurance on any of our key personnel. We
believe that our future success will depend in part upon our continued ability
to attract, retain, and motivate additional highly skilled personnel in an
increasingly competitive market.

There are minimal barriers to entry in our market.

We presently license or own only certain proprietary technology and, therefore,
have created little or no barrier to entry for competitors other than the time
and significant expense required to assemble and develop similar production and
design capabilities. Our competitors may enter into exclusive arrangements with
our current or potential suppliers, thereby giving them a competitive edge which
we may not be able to overcome, and which may exclude us from similar
relationships.

We extend credit to our customers, which exposes us to credit risk.

Most of our outstanding accounts receivable are from a limited number of large
customers. At December 31, 2005, the five highest outstanding accounts
receivable balances totaled $2.3 million, representing 99% of our gross accounts
receivable, with one customer accounting for $1.8 million, representing 77% of
our gross accounts receivable. If we fail to monitor and manage effectively the
resulting credit risk and a material portion of our accounts receivable is not
paid in a timely manner or becomes uncollectible, our business would be
significantly harmed, and we could incur a significant loss associated with any
outstanding accounts receivable.

We are exposed to risks relating to evaluations of our internal controls.

In connection with the audit of our financial statements for the year ended
December 31, 2005, Singer Lewak Greenbaum & Goldstein LLP, our independent
registered public accounting firm, notified our management and audit committee
of the existence of "significant deficiencies in internal controls," which is an
accounting term for internal controls deficiencies that, in the judgment of our
independent registered public accounting firm, are significant and which could
adversely affect our ability to record, process, summarize and report financial
information.

Singer Lewak Greenbaum & Goldstein LLP concluded that these significant
deficiencies constituted a "material weakness" in our internal controls.
Auditing literature defines "material weakness" as a particularly serious
reportable condition where the internal control does not reduce to a relatively
low level the risk that misstatements caused by error or fraud may occur in
amounts that would be material in relation to the financial statements and the
risk that such misstatements would not be detected within a timely period by
employees in the normal course of performing their assigned functions. A
"material weakness" is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.

As of December 31, 2005, we did not maintain effective controls over the
inventory pricing, tracking, and the reserve analysis process. This control
deficiency resulted in an audit adjustment to our 2005 financial statements and
could result in a misstatement to cost of sales that would result in a material
misstatement to the annual and interim financial statements that would not be
prevented or detected. Furthermore, our management has determined that, as of
December 31, 2005, we do not have sufficient segregation of duties in relation
to the accounting function. This deficiency could result in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Accordingly, our management has
determined that these deficiencies constitute a material weakness. Because of
these material weaknesses, our management has concluded that we did not maintain
effective internal control over financial reporting as of December 31, 2005.

Under the current SEC rules and regulations as we understand them, for the year
ending on or after July 15, 2007, our management will be required to assess, and
our independent registered public accounting firm will be required to attest as
to our assessment regarding, the effectiveness of our internal controls in order
to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and the
related SEC rules. While we intend to address these material weaknesses and have
begun efforts to remediate these material weaknesses, including, subsequent to
the filing of this annual report on Form 10-K, the hiring of a Chief Financial
Officer and a Controller to oversee the remedial process, there is no assurance
that this will be accomplished. These efforts may necessitate significant time
and attention of our management and additional resources. If we fail to
satisfactorily strengthen the effectiveness of our internal controls, neither we
nor our independent registered public accounting firm may be able to conclude on
an ongoing basis that we have effective internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

Item 2. Properties

Enova's corporate offices are located in Torrance, California, in leased
office space of approximately 20,000 square feet. This facility houses our
various departments, including engineering, operations, executive, finance,
planning, purchasing, investor relations and human resources. This lease
terminates in February 2008. The monthly lease expense is approximately $14,000.
Enova also has a leased office in Hawaii which is rented on a month-to-month
basis at $1,500 per month, and a sales office in Michigan that it leases on a
month-to-month basis at $500 per month.

Item 3. Legal Proceedings

We may from time to time become a party to various legal proceedings
arising in the ordinary course of business. At December 31, 2005, the Company
had no known material current, pending or threatened litigation.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2005.

PART II

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities

held by such holder that would otherwise have been exchanged for such fractional
share interest.. As such, the number of issued and outstanding shares of common
stock as of December 31, 2005 reflects the effects of the reverse-split. The
number of shares of common stock authorized remains at 750,000,000. These are
reflected in the financial statements as of December 31, 2005.

The shares of the Company's Common stock are traded on the NASDAQ
Over-the-Counter Bulletin Board System under the trading symbol "ENOV" and on
the London Stock Exchange AIM Market under the symbol "ENVS.L" or "ENV.L". The
following table sets forth the high and low bid prices of the Common Stock as
reported on the NASD Bulletin Board by the National Quote Bureau for the fiscal
quarters indicated. The following over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
necessarily represent actual transactions. Quotations have been restated to
reflect the 1-45 reverse stock split, effective July 20, 2005.

Common Stock Average Daily
High Price Low Price Volume
---------- --------- ------
Calendar 2004
First Quarter . . . . . . . . . . . . . $ 9.45 $ 4.05 22,237
Second Quarter . . . . . . . . . . . . $ 8.55 $ 4.05 10,663
Third Quarter. . . . . .. . . . . . . . .$ 6.75 $ 5.40 6,529
Fourth Quarter. . . . . . . . . . . . . $ 6.75 $ 4.05 6,847

Calendar 2005
First Quarter . . . . . . . . . . . . . $ 5.40 $ 4.05 5,285
Second Quarter . . . . . . . . . . . . $ 5.18 $ 3.38 4,164
Third Quarter. . . . . .. . . . . . . . .$ 5.90 $ 2.50 6,461
Fourth Quarter. . . . . . . . . . . . . $ 4.50 $ 3.25 7,976

On March 28, 2006, the last reported high bid price of the Common Stock was
$5.05 and the last reported low bid price was $5.05. As of March 28, 2006, there
were approximately 1,489 holders of record of our Common Stock. As of March 28,
2005, approximately 106 shareholders, many of who are also Common Stock
shareholders, held our Series A Preferred Stock. Approximately 34 shareholders
as of March 28, 2006 held our Series B Preferred Stock. The number of holders of
record excludes beneficial holders whose shares are held in the name of nominees
or trustees.

Stock Issuances

On July 19, 2005, we entered into an agreement with a placement agent
relating to the sale of up to 5,350,000 new shares of our common stock, after
the reverse 1-45 stock split as described above. Pursuant to the agreement, we
sold all such shares of common stock at a price of $3.78 per share to certain
eligible investors located outside the United States pursuant to the
requirements of Regulation S under the Securities Act of 1933, as amended. The
gross proceeds from the sale are approximately $20,000,000, before fees to
Investec Bank, which served as our nominated advisor and broker, and other costs
associated with the listing and placement of approximately $2,000,000. We
received approximately $18,000,000 of net proceeds from the offering.

We listed our common stock for trading on the AIM Market of the London
Stock Exchange on July 25, 2005.

Dividend Policy

To date, we have neither declared nor paid any cash dividends on shares of
our Common Stock or Series A or B Preferred Stock. We presently intend to retain
all future earnings for our business and do not anticipate paying cash dividends
on our Common Stock or Series A or B Preferred Stock in the foreseeable future.
We are required to pay dividends on our Series A and B Preferred Stock before
dividends may be paid on any shares of Common Stock. At December 31, 2005, Enova
had an accumulated deficit of approximately $102,586,000 and, until this deficit
is eliminated, will be prohibited from paying dividends on any class of stock
except out of net profits, unless it meets certain asset and other tests under
Section 500 et. seq. of the California Corporations Code.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

Item 6. Selected Financial Data

The following selected financial data tables set forth selected financial
data for the years ended December 31, 2005, 2004, 2003, 2002 and 2001. The
statement of operations data and balance sheet data for and as of the end of the
years ended December 31, 2005, 2004, 2003, 2002 and 2001 are derived from the
audited financial statements of Enova. The following selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
including the notes thereto, appearing elsewhere in this Form 10K.

As of and for the year ended December 31
(in thousands, except per share data),
--------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------

Net revenues $ 6,084 $ 2,554 $ 4,310 $ 4,455 $ 3,780
Cost of revenues 6,001 2,239 3,304 3,784 2,783
-------- -------- -------- -------- --------
Gross margin 83 315 1,006 671 997
-------- -------- -------- -------- --------
Operating expenses
Research and development 804 925 799 1,152 879
Asset impairment 200
Selling, general and administrative 2,870 2,325 2,919 2,837 2,894
-------- -------- -------- -------- --------
Total operating expense 3,674 3,250 3,918 3,989 3,773

Other income and expense
Interest and financing income and 13 (255) (234) (199) (113)
(fees)
Equity in losses (118) (192) (40) -- --
Legal settlements -- -- -- (81) (900)
Gain on debt restructuring 1,569 -- -- -- 354
-------- -------- -------- -------- --------
Total other income and (expense) 1,464 (447) (274) (280) (652)
-------- -------- -------- -------- --------
Net loss $ (2,127) $ (3,382) $ (3,186) $ (3,598) $ (3,428)
======== ======== ======== ======== ========
Per common share:
-------- -------- -------- -------- --------
Net loss per common share $ (0.18) $ (0.38) $ (0.43) $ (0.49) $ (0.56)
======== ======== ======== ======== ========
Weighted average number common shares 11,644 8,832 7,441 7,253 6,115
outstanding
======== ======== ======== ======== ========
Total assets $ 21,973 $ 5,888 $ 4,870 $ 6,224 $ 4,340
======== ======== ======== ======== ========
Long-term debt $ 2,321 $ 3,341 $ 3,347 $ 3,332 $ 3,332
======== ======== ======== ======== ========
Shareholders' equity (deficit) $ 16,604 $ 103 $ (864) $ 287 $ (232)
======== ======== ======== ======== ========

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with our 2005 Financial
Statements and Notes thereto. The matters addressed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, may
contain certain forward-looking statements involving risks and uncertainties.
Our actual results, levels of activity, performance, achievements and events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under the
heading "Risk Factors" and elsewhere in this report.

These forward-looking statements are made as of the date of this Form 10-K, and,
except as required under applicable securities law, we assume no obligation to
update them or to explain the reasons why actual results may differ.

OVERVIEW

Enova Systems believes it is a leading supplier of efficient,
environmentally-friendly digital power components and systems products in
conjunction with our associated engineering services. Our core competencies are
focused on the development and commercialization of power management and
conversion systems for mobile and stationary applications. Enova applies unique
`enabling technologies' in the areas of alternative energy propulsion systems
for light and heavy-duty vehicles as well as power conditioning and management
systems for distributed generation systems. The Company's products can be found
in a variety of OEM vehicles including those from Hyundai Motor Company and Ford
Motor Company, trucks and buses for First Auto Works of China, Mack Truck,
WrightBus of the U.K. and the U.S. Military, as well as digital power systems
for EDO, Hydrogenics and UTC Fuel Cells, a division of United Technologies.

Enova's product focus is digital power management and power conversion
systems. Its software, firmware, and hardware manage and control the power that
drives either a vehicle or stationary device(s). They convert the power into the
appropriate forms required by the vehicle or device and manage the flow of this
energy to optimize efficiency and provide protection for both the system and its
users. Our products and systems are the enabling technologies for power systems.

The latest state-of-the-art technologies, such as hybrid vehicles, fuel
cell and micro turbine based systems, and stationary power generation, all
require some type of power management and conversion mechanism. Enova Systems
supplies these essential components. Enova drive systems are 'fuel-neutral,'
meaning that they have the ability to utilize any type of fuel, including
diesel, liquid natural gas (LNG) or bio-diesel fuels. We also develop, design
and produce power management and power conversion components for stationary
power generation - both on-site distributed power and on-site telecommunications
back-up power applications. These stationary applications also employ fuel
cells, microturbines and advanced batteries for power storage and generation.
Additionally, Enova performs significant research and development to augment and
support others' and our internal related product development efforts.

Our products are "production-engineered." This means they are designed so
they can be commercially produced (i.e., all formats and files are designed with
manufacturability in mind, from the start). For the automotive market, Enova
designs its products to ISO 9000X manufacturing and quality standards. We
believe Enova's redundancy of systems and rigorous quality standards result in
high performance and reduced risk. For every component and piece of hardware,
there are detailed performance specifications. Each piece is tested and
evaluated against these specifications, which enhances and confirms the value of
the systems to OEM customers. The Company's engineering services focus on system
integration support for product sales and custom product design.

The financial statements present the financial position of Enova Systems,
Inc. as of December 31, 2005 and 2004 and the results of operations and cash
flows for the years ended December 31, 2005, 2004 and 2003.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the notes to the financial statements includes a
summary of the significant accounting policies and methods used in the
preparation of our financial statements. The following is a brief discussion of
the more significant accounting policies and methods that we use.

Our discussion and analysis of our financial condition and result of
operations are based on our financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Our preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. We based our estimates on historical experience

and on various other assumptions that we believe to be reasonable under the
circumstances. The most significant estimates and assumptions relate to revenue
recognition and potential allowances for doubtful accounts. Actual amounts may
differ from such estimates under different assumptions or conditions. The
following summarizes our critical accounting policies and significant estimates
used in preparing our financial statements:

o The first-in, first-out (FIFO) method to value our inventories;

o The intrinsic value method, or APB Opinion No. 25, to account for our
stock options;

o Review of customers' receivables to determine the need for an
allowance for credit losses based on estimates of customers' ability
to pay. If the financial condition of our customers were to
deteriorate, an additional allowance may be required.

o Revenue recognition - The Company is required to make judgments based
on historical experience and future expectations, as to the
reliability of shipments made to its customers. These judgments are
required to assess the propriety of the recognition of revenue based
on Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition,"
and related guidance. The Company makes these assessments based on the
following factors: i) customer-specific information, ii) return
policies, and iii) historical experience for issues not yet
identified. Under FAS Concepts No. 5, revenues are not recognized
until earned. The percentage-of-completion method can be used to
recognize revenues when estimates of costs to complete and the extent
of progress toward completion of contracts are reasonably dependable.
If reasonably dependable estimates are not available, the
percentage-of-completion method should not be used.

These accounting policies are applied consistently for all years presented.
Our operating results would be affected if other alternatives were used.
Information about the impact on our operating results is included in the
footnotes to our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced cash flow shortages due to operating losses primarily
attributable to research, development, marketing and other costs associated with
our strategic plan as an international developer and supplier of electric
propulsion and power management systems and components. Cash flows from
operations have not been sufficient to meet our obligations. Therefore, we have
had to raise funds through several financing transactions. At least until we
reach breakeven volume in sales and develop and/or acquire the capability to
manufacture and sell our products profitably, we will need to continue to rely
on cash from external financing sources.

Our operations during the year ended December 31, 2005 were financed by
development contracts and product sales, as well as from working capital
reserves.

During the year ended December 31, 2005, our operations required $2,997,000
more in cash than was generated, versus $2,157,000 in 2004 and $2,319,000 in
2003. Enova continues to increase marketing and development spending as well as
administrative expenses necessary for expansion to meet customer demand.
Accounts receivable increased by $1,651,000 from $522,000, or approximately 318%
from the balance at December 31, 2004 (net of write-offs). The decrease is due
to a continued delay in acquiring new business in the third and fourth quarters
of 2004. We are beginning to observe an increase in sales activity for our drive
systems, components and development services which commenced in the fourth
quarter of 2004, which we anticipate will increase receivables in future
quarters.

Inventory decreased slightly by $20,000 from $1,036,000 or 2% from the December
31, 2004 balance. The decrease was due to utilization of inventory stock for
sales as well as write-offs for obsolete and slow-moving inventory. We charged
off approximately $376,000 of this reduction of our inventory relating to
obsolete and slow moving raw materials. We believe that the relatively slight
fluctuation in the inventory balances compared to the increased sales volume (as
noted in the "Results of Operations" below), illustrates Enova's continuing
efforts to monitor and control inventory utilization.

Prepaid expenses and other current assets decreased by net $122,000 during
2005 from the December 31, 2004 balance of $304,000 or almost 40%. In 2005 we
realized approximately $220,000 in deposits that Enova had made to Hyundai Heavy
Industries to assist in the production of hybrid motors for the Tomoe
Engineering contract. These deposits were recognized as cost of sales as the
final drives were delivered to Tomoe. Furthermore, unbilled revenue associated
with the Hyundai Motor Corporation fuel cell bus project, which is accounted for
using the percentage of completion milestone method, increased by $91,000 in
2005.

Gross fixed assets increased by $247,000 or 14%, for the year ended
December 31, 2005 from the prior year balance of $1,754,000 primarily due to the
purchase of additional production tooling, machinery, and equipment associated
with production. Additionally, purchased test machines that allow us to test
load limits and stresses on the drives. These machines will be integral in
supporting Enova's quality control initiatives as well as ISO 9000X
requirements.

Investments decreased by $118,000 during 2005, net of our pro-rata share of
losses attributable to the investment, which reflects our forty percent (40%)
interest in the Hyundai-Enova Innovative Technology Center (ITC) as noted
elsewhere in this Form 10-K. For the year ended December 31, 2005, the ITC
generated a net loss of approximately $296,000, resulting in a charge to Enova
of $118,000 utilizing the equity method of accounting for our interest in the
ITC. Based on contractual obligations of our Joint Venture Agreement with
Hyundai Heavy Industries Co., we made an additional investment of $1,000,000 in
2004 which was funded by HHI through a stock purchase in September 2004 as noted
in the Hyundai-Enova Innovative Technology Center description later in this Form
10-K.

Other assets decreased by $106,000 during 2005 from $296,000 in 2004 as we
continued to amortize the asset relating to the Ford Value Participation
Agreement. Intellectual property assets, including patents and trademarks
increased $1,000 to $93,000 at December 31, 2005.

Accounts payable increased in 2005 by over 2,000% from $66,000 at December
31, 2004 to $1,396,000 at December 31, 2005. At December 31, 2005, Enova has an
outstanding trade payable to Hyundai Heavy Industries for approximately
$1,250,000, associated with their assistance in the production of hybrid motors
for the Tomoe Engineering contract.

Accrued interest decreased by $265,000 for the year ended December 31,
2005, a decrease of 19%. The decrease is associated with the net effect of
interest accrued on the Note due the Credit Managers Association of California
(CMAC) for $3.2 million per the terms of the Note, combined with the settlement
and forgiveness of certain portions of the CMAC note. See additional explanation
in the RESULTS OF OPERATIONS section below.

Other accrued expenses and payables increased by $289,000 during 2005 from
$13,000 at December 31, 2004. The increase is attributable to additional
warranty exposures of $116,000 in 2005. Additionally, there are received but
un-invoiced parts for which the company owes Hyundai Heavy Industries of
approximately $70,000 associated with their production assistance on the Tomoe
Engineering contract. Finally, we accrued an additional $18,000 associated with
telephone and network equipment purchased and delivered in the fourth quarter of
2005, but invoiced in January 2006.

The future unavailability or inadequacy of financing to meet future needs
could force us to delay, modify, suspend or cease some or all aspects of our
planned operations.

RESULTS OF OPERATIONS

Years Ended December 31, 2005 and 2004

Net sales of $6,084,000 for the twelve months ended December 31, 2005
increased by $3,530,000 or 138% from $2,554,000 during the same period in 2004.
The increase in sales was a result of Enova's expanding research and development
initiatives with Hyundai Motor Company (HMC) as well as the production
associated with the Tomoe Machinery contract. In 2005, sales attributable to the
Tomoe production contract were about $3,000,000. Additionally, sales related to
the HMC development project were approximately $758,000.

Cost of sales consists of component and material costs, direct labor costs,
integration costs and overhead related to manufacturing our products. Product
development costs incurred in the performance of engineering development
contracts for the U.S. Government and private companies are charged to cost of
sales for this contract revenue. During 2005, our trend of establishing new
customers and strengthening current alliances with customers, such as Tomoe and
MTrans in the heavy-duty drive system market continued. Our new customers
continue to require additional integration and support services to customize,
integrate and evaluate our products. We believe these costs to be initial,
one-time costs for these customers and anticipate similar costs to be incurred
with respect to new customers as we gain additional market share. Customers who
have been using our products over one year do not incur these same type of
initial costs. Cost of sales for the year ended December 31, 2005 increased
3,762,000, or 168%, from $2,239,000 for the year ended December 31, 2004. This
increase is primarily attributable to the increase in sales for the year and the
scrapping of $376,000 of raw materials that were no longer usable.

Research and development expenses consist primarily of personnel,
facilities, equipment and supplies for our research and development activities.
Non-funded development costs are reported as research and development expense.
Research and development expense decreased in 2005 to $804,000 from $925,000 for
the same period in 2004, a decrease of $121,000 or 13%. During 2005, externally
funded research and development from partners such as FAW, Mack/Volvo, Hyundai,
and the U.S. Government offset the costs of development for new products in the
areas of mobile and stationary power management and conversion thereby reducing
the need for internal funding. We believe that this trend is continuing.
Programs included our new parallel hybrid drive systems, our diesel generation
engine/motor system for our heavy-duty drive systems, and upgrades and
improvements to our current power conversion and management components.
Additionally, we continued to enhance our technologies to be more universally
adaptable to the requirements of our current and prospective customers. By
modifying our software and firmware, we believe we should be able to provide a
more comprehensive, adaptive and effective solution to a larger base of
customers and applications. We will continue to research and develop new
technologies and products, both internally and in conjunction with our alliance
partners and other manufacturers as we deem beneficial to our global growth
strategy.

Selling, general and administrative expenses consist primarily of personnel
and related costs of sales and marketing employees, consulting fees and expenses
for travel, trade shows and promotional activities and personnel and related
costs for general corporate functions, including finance, accounting, strategic
and business development, human resources and legal. Selling, general and
administrative expenses increased by $545,000 at 2005 from 2004 levels due to
increased headcount and the associated increases in wages, health and workers
compensation insurance, and taxes of approximately $279,000 and from a $266,000
increase in the allowance for doubtful accounts. For the year ended December 31,
2005, these expenses totaled $2,870,000 up from $2,325,000 for the similar
period in 2004. This represents an 23 % increase in these expenses. We are
continually reviewing operations to control overhead costs and increase
operational efficiencies

For the year ended December 31, 2005, interest and financing fees shifted
to a net other income of $13,000 from a net expense of $255,000. The change is a
result of the Company's comparatively higher cash balance at 2005 and the
associated interest revenue as well as a $50,000 gain on a foreign currency
transaction in the United Kingdom. The comparatively higher cash balance was the
result of the equity offering that occurred in the third quarter of 2005.

In 2005, we charged off approximately $376,000 of our inventory relating to
obsolete and slow moving raw materials. We believe that the relatively slight
fluctuation in the inventory balances compared to the increased sales volume
illustrates Enova's continuing efforts to monitor and control inventory
utilization.

In December 2005, the Company was informed by the Credit Managers
Association of California that $1,011,000 of principal and $447,000 accrued
interest under the secured note payable had been disclaimed and extinguished by
the beneficiaries of such principal amount. The extinguishment result from the
resolution of a substantially aged negotiation regarding consideration paid in
settlement of the principal amount. The company has recognized a gain on the
extinguishment of the principal and associated accrued interest. The Company
evaluated this transaction under the guidance set forth in SFAS 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" and noted that the extinguishment of these liabilities were
consistent with the guidance.

In October 2005, the Company agreed to a settlement on the unsecured 10%
note payable. In exchange for immediate payment of the full principal balance of
$120,000, the beneficiary of the note agreed to forgive the entire accrued
interest balance of $111,000. The company has recognized a gain on the
extinguishment of the associated accrued interest. The Company evaluated this
transaction under the guidance set forth in SFAS 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" and noted
that the extinguishment of these liabilities were consistent with the guidance.

Years Ended December 31, 2004 and 2003

Net sales of $2,554,000 for the twelve months ended December 31, 2004
decreased $1,756,000 or 41% from $4,310,000 during the same period in 2003.
During 2004, we experienced a slowdown in sales due to a number of internal and
external developments, including personnel changes, and customer delays in
ordering caused by continued evaluation or awaiting orders for their products.

Our sources of revenue for 2004 came relatively equally from product sales
and development contracts. Product sales as a percentage of total revenues of
57% in 2004 were consistent with the 2003 product sales to total revenues
percentage of 56%. Sales of our HybridPower 120kW drive systems accounted for a
majority of our product sales in 2004. We believe this trend will continue over
the next several years. However we continue to seek out and contract for new
development programs with both our current partners such as Ford, Mack/Volvo,
FAW, Tomoe, Hyundai and our other U.S., Asian and European alliance partners, as
well as with new alliances with other vehicle manufacturers and energy
companies.

Cost of sales consists of component and material costs, direct labor costs,
integration costs and overhead related to manufacturing our products. Product
development costs incurred in the performance of engineering development
contracts for the U.S. Government and private companies are charged to cost of
sales for this contract revenue. During 2004, our trend of establishing new
customers and strengthening current alliances with customers, such as Tomoe and
MTrans in the heavy-duty drive system market continued. Our new customers
continue to require additional integration and support services to customize,
integrate and evaluate our products. We believe these costs to be initial,
one-time costs for these customers and anticipate similar costs to be incurred
with respect to new customers as we gain additional market share. Customers who
have been using our products over one year do not incur these same type of
initial costs. Cost of sales for the year ended December 31, 2004 decreased
$1,065,000, or 32%, from $3,304,000 for the year ended December 31, 2003. This
decrease is primarily attributable to the decrease in sales for the year,
although we are experiencing a reduction in integration support costs. We
anticipate there may be an increase in cost of sales for products in 2005 due to
foreign exchange rate fluctuations of the U.S. dollar versus those currencies of
our primary manufacturers. We anticipate this to be offset by a reduction in
costs associated with manufacturing these products should as quantities rise,
improving our gross margins.

Research and development expenses consist primarily of personnel,
facilities, equipment and supplies for our research and development activities.
Non-funded development costs are reported as research and development expense.
Research and development expense increased in 2004 to $925,000 from $799,000 for
the same period in 2003, an increase of $126,000, or 16%. During 2004,
externally funded research and development from partners such as FAW,
Mack/Volvo, Hyundai, and the U.S. Government offset the costs of development for
new products in the areas of mobile and stationary power management and
conversion, thereby reducing the need for internal funding. Programs included
our new parallel hybrid drive systems, our diesel generation engine/motor system
for our heavy-duty drive systems, and upgrades and improvements to our current
power conversion and management components. Additionally, we continued to
enhance our technologies to be more universally adaptable to the requirements of
our current and prospective customers. By modifying our software and firmware,
we believe we should be able to provide a more comprehensive, adaptive and
effective solution to a larger base of customers and applications. We will
continue to research and develop new technologies and products, both internally
and in conjunction with our alliance partners and other manufacturers as we deem
beneficial to our global growth strategy.

Selling, general and administrative expenses consist primarily of personnel
and related costs of sales and marketing employees, consulting fees and expenses
for travel, trade shows and promotional activities and personnel and related
costs for general corporate functions, including finance, accounting, strategic
and business development, human resources and legal. Selling, general and
administrative expenses increased 2004 from 2003 levels due to increased
consulting, legal, and accounting costs and expenses related to the annual
shareholders meeting and fund raising activities. For the year ended December
31, 2004, these expenses totaled $2,325,000 from $2,919,000 for the similar
period in 2003. This represents a $594,000 decrease, or 20%, in these expenses.
We are continually reviewing operations to lower overhead costs and increase
operational efficiencies

For the year ended December 31, 2004, interest and financing fees increased
by $21,000 to $255,000, an increase of 8%. The increase was due solely to an
increase in 2004 in the interest rate on the note due the Credit Managers
Association of California for $3.2 million per the terms of the note.

In 2004, we charged off approximately $275,000 in obsolete and slow moving
inventory from our books. Approximately half of this consisted of raw materials
associated with the Ford Th!nk city program which was terminated in 2003. We do
not anticipate further write downs of our inventory.

Our $3,382,000 net loss for the year ended December 31, 2004 is $196,000
more than the loss incurred in 2003 of $3,186,000, an increase of 6%. The
increase is due primarily to write-offs on obsolete and slow-moving inventory
during the year and costs associated with the annual meeting and other
regulatory compliance. Management will continue to seek operational efficiencies
and methods to reduce manufacturing and overhead costs as well as increase
revenues to enhance our achieve this goal of profitability.

Hyundai-Enova Innovative Technology Center
------------------------------------------

In September 2003, Enova and Hyundai Heavy Industries, Co. Ltd. (HHI)
funded the Hyundai-Enova Innovative Technology Center (HEITC) to be located at
Enova's Torrance headquarters. In connection with the Joint Venture Agreement
entered into between the two parties in March 2003, HHI purchased $1,500,000 of
common stock of Enova Systems, Inc. HHI purchased 23,076,923, shares
representing a 6.2% ownership in Enova. Of this amount, Enova invested
$1,000,000 in the HEITC for a forty percent (40%) ownership interest. HHI
invested an additional $1,500,000 for a sixty percent (60%) ownership interest
in the HEITC. In September 2004, HHI invested an additional $1,500,000 in Enova
and $1,500,000 in the HEITC under the same terms as the initial investment. In
this second tranche, HHI purchased 11,335,315 restricted shares of common stock
in accordance with the Joint Venture Agreement increasing HHI's ownership to
8.0% in Enova. The joint venture company officially opened in November 2003 to
pursue advanced research and development in hybrid automotive and stationary
applications for fuel cell technologies. Share amounts do not include the effect
of the July 2005 1 for 45 reverse stock split executed by the Company.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

Contractual Obligations
-----------------------

As of December 31, 2005, our contractual obligations for the next five
years, and thereafter, were as follows (in thousands):

Payments Due by Period
----------------------------------------------
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Long-Term Debt Obligations $2,363 $ 42 $ -- $ -- $2,321
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations 362 166 196 -- --
Purchase Obligations -- -- -- -- --
Accrued Interest 1,113 -- -- -- 1,113
------ ------ ------ ----- ------
Total $3,833 $ 208 $ 196 $ -- $3,434
====== ====== ====== ===== ======

Recent Accounting Pronouncements
--------------------------------

In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact, if any, on the Company's financial
position or results of operations.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions". SFAS No. 153 eliminates certain differences in the guidance in
Opinion No. 29 as compared to the guidance contained in standards issued by the
International Accounting Standards Board. The amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect adoption
of SFAS No. 153 to have a material impact, if any, on the Company's financial
position or results of operations.

In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment".
SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based Compensation", and
APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No.123(R)
requires that the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements. SFAS No.
123(R) applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by
incurring liabilities (1) in amounts based (even in part) on the price of the
company's shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of a company's shares or other equity
instruments. In April 2005, the Securities and Exchange Commission (SEC)
deferred the effective date of SFAS 123R for SEC registrants to the first fiscal
year beginning after December 15, 2005. Accordingly, we expect to implement the
revised standard in the first quarter of 2006. Currently, we account for
stock-based employee awards issued after December 31, 2002, using the fair value
method preferred by SFAS 123. We expect that the adoption of SFAS 123R will have
a material effect on the financial statements.

In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations - an Interpretation of FASB Statement No. 143, Accounting
for Asset Retirement Obligations." This interpretation addresses the timing of
liability recognition for legal obligations associated with the retirement of a
tangible long-lived asset when the timing and/or method of settlement of the
obligation are conditional on a future event. The interpretation requires an
entity to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability's fair value can be
reasonably estimated. The adoption of this interpretation did not have any
impact on our financial statements.

accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. APB No. 20 required that most voluntary
changes in accounting principle be recognized by including in net income of the
period of the change the cumulative effect of changing to the new accounting
principle. This statement requires retrospective application to prior period
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. The provisions of SFAS 154 are effective for fiscal years
beginning after December 15, 2005. As such we are required to adopt SFAS 154
starting January 1, 2006. We do not expect the adoption of this statement to
have a material impact on our Financial Statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140
("SFAS 155"). This statement amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), and SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities and resolves issues addressed in SFAS 133 Implementation Issue No.
D1, Application of Statement 133 to Beneficial Interest in Securitized Financial
Assets. The Company is required to apply SFAS 155 to all financial instruments
acquired, issued or subject to a remeasurement event beginning January 1, 2007,
although early adoption is permitted as of the beginning of an entity's fiscal
year. The provisions of SFAS 155 are not expected to have an impact recorded at
adoption.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

None.

Item 8. Financial Statements and Supplementary Data

All information required by this Item is included on pages F-1 to F-18 in Item
15 of Part IV of this annual report on form 10-K and is incorporated into this
Item by reference. See Item 15.

Item 9A. Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation
of our "disclosure controls and procedures" (Disclosure Controls) as of the end
of the period covered by this Annual Report. The controls evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Acting Chief Financial Officer (CFO).

Attached as exhibits to this Annual Report are certifications of the CEO
and CFO, which are required in accordance with Rule 13a-15(e) of the Exchange
Act. This Controls and Procedures section includes the information concerning
the controls evaluation referred to in the certifications and it should be read
in conjunction with the certifications for a more complete understanding of the
topics presented.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to reasonably
assure that information required to be disclosed in our reports filed under the
Exchange Act, such as this Annual Report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Our
Disclosure Controls include components of our internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US generally accepted
accounting principles. To the extent that components of our internal control
over financial reporting are included within our Disclosure Controls, they are
included in the scope of our periodic controls evaluation.

Limitations on the Effectiveness of Controls

The Company's management, including the CEO and CFO, does not expect that
our Disclosure Controls or our internal control over financial reporting will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of a simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

Scope of the Controls Evaluation

The evaluation of our Disclosure Controls included a review of the
controls' objectives and design, the Company's implementation of the controls
and the effect of the controls on the information generated for use in this
Annual Report. In the course of the controls evaluation, we sought to identify
data errors, controls problems or acts of fraud and confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation is performed on a quarterly basis so that the conclusions of
management, including the CEO and CFO, concerning controls effectiveness can be
reported in our Quarterly Reports on Form 10-Q and in our Annual Report on Form
10-K. Many of the components of our Disclosure Controls are also evaluated on an
ongoing basis by personnel in our Finance organization, as well as our
independent auditors who evaluate them in connection with determining their
auditing procedures related to their report on our annual financial statements
and not to provide assurance on our controls. The overall goals of these various
evaluation activities are to monitor our Disclosure Controls, and to modify them
as necessary.

Among other matters, we also considered whether our evaluation identified
any "significant deficiencies" or "material weaknesses" in our internal control
over financial reporting, and whether the Company had identified any acts of
fraud involving personnel with a significant role in our internal control over
financial reporting. This information was important both for the controls
evaluation generally, and because item 5 in the certifications of the CEO and
CFO require that the CEO and CFO disclose that information to our Board's Audit
Committee and to our independent auditors. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions," which are deficiencies in the design or operation of controls that
could adversely affect our ability to record, process, summarize and report
financial data in the financial statements. Auditing literature defines
"material weakness" as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and the risk that such
misstatements would not be detected within a timely period by employees in the
normal course of performing their assigned functions.

Conclusions

A "material weakness" is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.

Furthermore, Management has determined that, as of December 31, 2005, we did not
have sufficient segregation of duties in relation to the accounting function.
This deficiency could result in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.

Accordingly, Management has determined that these deficiencies constitute a
material weakness. Because of these material weaknesses, Management has
concluded that we did not maintain effective internal control over financial
reporting as of December 31, 2005. In 2006, the Company plans to hire a Chief
Financial Officer who will oversee the implementation of controls and procedures
designed to remediate the Company's internal control deficiencies.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

PART III

Item 10. Directors and Executive Officers of the Registrant

The following table sets forth certain information with respect to the
current Directors and executive officers of Enova:

Name Age Position
---- --- --------

Anthony N. Rawlinson 49 Chairman of the Board

Edwin O. Riddell 62 Chief Executive Officer,
President and Director

Bjorn Ahlstrom (1) (2) 70 Director

Dr. Malcolm Currie (1) 77 Director

Donald H. Dreyer (2) 68 Director

John Wallace (2) (3) 56 Director

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Financial Expert on Audit Committee.

Anthony Rawlinson, Chairman of the Board. Mr. Rawlinson was appointed
Chairman of the Board in July 1999. He is Managing Director of The Global Value
Investment Portfolio Management Pte. Ltd., a Singapore-based international fund
management company, managing discretionary equity portfolios for institutions,
pension funds and clients globally since 1996. Mr. Rawlinson is also Chairman of
Cardsoft Inc., a privately-held company based in San Mateo California since
2001. Cardsoft develops and markets embedded Java software solutions that
provide security and interoperability for applications running on disparate
fixed and wireless payment devices.

Edwin O. Riddell, President, CEO and Director. Mr. Riddell was appointed
President and Chief Executive Officer on August 20, 2004. Mr. Riddell has been a
Director of the Company since 1995. Since 1999, Mr. Riddell has been President
of CR Transportation Services, a consultant to the electric vehicle industry.
From 1992 to 1999, Mr. Riddell was Product Line Manager of the Transportation
Business Unit at the Electric Power Research Institute, and from 1985 until
1992, he served with the Transportation Group, Inc. as Vice President,
Engineering, working on electric public transportation systems. From 1979 to
1985, he was Vice President, General Manager and COO of Lift-U, Inc., the
leading manufacturer of handicapped wheelchair lifts for the transit industry.
Mr. Riddell has also worked with Ford, Chrysler, and General Motors in the area
of auto design, and has worked as a member of senior management for a number of
public transit vehicle manufacturers. Mr. Riddell has been a member of the
American Public Transportation Association's (APTA) Member Board of Governors
for over 15 years, and has served on APTA's Board of Directors. Mr. Riddell was
also Managing Partner of the U.S. Advanced Battery Consortium.

Bjorn Ahlstrom, Director. Mr. Ahlstrom was elected to the Board of
Directors in June 2004. Mr. Ahlstrom currently is a consultant in the heavy-duty
vehicle industry. Mr. Ahlstrom retired as Chairman of Volvo Group North America,
Inc. on April 1, 2004. Prior to that, Mr. Ahlstrom was President and Chief
Executive Officer of Volvo North America Corporation from 1971 until 1994.
During this term, Volvo North America Corporation owned and operated Volvo's
businesses in the United States and Canada. Under Mr. Ahlstrom's leadership,
VNAC grew from a $50 million car importer in the early 1970s to a $6 billion
company with manufacturing and marketing operations for cars, trucks, marine
engines, and financial services. In 1981, Mr. Ahlstrom received the Royal Order
of the North Star from King Carl XVI Gustaf of Sweden. The United States
Government awarded him the Medal of Peace and Commerce in 1983. He received the
Ellis Island Medal of Honor in 1990. Mr. Ahlstrom has been awarded honorary
Doctor of Law degree from St John's University, NY, and Ramapo College of New
Jersey.

Malcolm R. Currie, Ph.D, Director. Dr. Currie was re-elected to the Board
of Directors in 1999. Dr. Currie had served as a Director of the Company from
1995 through 1997. From 1986 until 1992, Dr. Currie served as Chairman and Chief
Executive Officer of Hughes Aircraft Co., and from 1985 until 1988, he was the
Chief Executive Officer of Delco Electronics. His career in electronics and
management has included research with many patents and papers in microwave and
millimeter wave electronics, laser, space systems, and related fields. He has
led major programs in radar, commercial satellites, communication systems, and
defense electronics. He served as Undersecretary of Defense for Research and
Engineering, the Defense Science Board, and currently serves on the Boards of
Directors of LSI Logic, Inamed Corp., Innovative Micro Technology, Regal One,
and Currie Technologies. He is past president of the American Institute of
Aeronautics and Astronautics, and is a Member of the Board of Trustees of the
University of Southern California.

John R. Wallace, Director. Mr. Wallace was elected as a Director of the
Company in 2002. Since November of 2005, he has held the position of CEO,
Xantrex Technology, Inc. in Burnaby, B.C., Canada. From 2002 to 2005, he worked
independently as a consultant in the alternative energy sector. Mr. Wallace
retired from the Ford Motor Company in 2002. Prior to his retirement, he was
executive director of TH!NK Group. He has been active in Ford Motor Company's
alternative fuel vehicle programs since 1990, serving first as: Director,
Technology Development Programs; then as Director, Electric Vehicle Programs;
Director, Alternative Fuel Vehicles and finally Director, Environmental
Vehicles. He is past Chairman of the Board of Directors of TH!NK Nordic; he is
past chairman of the United States Advanced Battery Consortium; Co-Chairman of
the Electric Vehicle Association of the Americas, and past Chairman of the
California Fuel Cell Partnership. He served as Director of Ford's Electronic
Systems Research Laboratory, Research Staff, from 1988 through 1990. Prior to
joining Ford Research Staff, he was president of Ford Microelectronics, Inc., in
Colorado Springs. His other experience includes work as program manager with
Intel Corporation. He also served as Director, Western Development Center, for
Perkin-Elmer Corporation and as President of Precision Microdesign, Inc.

Donald H. Dreyer, Director. Mr. Dreyer was elected a Director of the
Company in January 1997. Mr. Dreyer is President and CEO of Dreyer & Company,
Inc., a consultancy in credit, accounts receivable and insolvency services,
which he founded in 1990. Mr. Dreyer has served as Chairman of the Board of
Credit Managers Association of California during the 1994 to 1995 term and
remains a current member. Mr. Dreyer is also a member of the American Bankruptcy
Institute and the National Advisory Committee of Dun & Bradstreet, Inc.

Relationships Among Directors or Executive Officers

There are no family relationships among any of the Directors or executive
officers of Enova.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act requires our Directors,
executive officers and persons who own more than 10% of our Common Stock
(collectively, "Reporting Persons") to file reports of ownership and changes in
ownership of our Common Stock to the Securities and Exchange Commission ("SEC").
Copies of these reports are also required to be delivered to Enova.

We believe, based solely on our review of the copies of such reports
received or written representations from certain Reporting Persons, that each of
Messrs. Rawlinson, Riddell, Currie, Micek, Wallace and Dreyer, each of whom is a
Director of Enova, failed to file on a timely basis one Form 4, each of which
Form 4 reported one transaction, namely the issuance of shares of Common Stock
in partial payment of directors' fees for August 2004.

Code of Ethics

Enova has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller
and all persons performing similar functions, if any. We will provide to any
person without charge, upon request, a copy of such code of ethics. Requests
should be made in writing to:

Enova Systems, Inc.
Edwin O. Riddell, Chief Executive Officer and Acting Chief Financial
Officer
19850 S. Magellan Drive
Torrance, CA 90502

Item 11. Executive Compensation

Summary Compensation Table

The following table sets forth all compensation earned by our Chief
Executive Officer and each of the other most highly compensated executive
officers of Enova whose annual salary and bonus exceeded $100,000 for the years
ended December 31, 2005, 2004 and 2003 (collectively, the "Named Executive
Officers"). Mr. Carl D. Perry was the sole executive officer of Enova whose
salary currently exceeded $100,000 prior to December 31, 2003.

Name and Principal Position
---------------------------

SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------------------------------------
Year Salary Bonus
---- ------ -----

Edwin O. Riddell (1) 2005 $204,000 $43,500 (10,000 000 Common shares)
Chief Executive Officer and President 2004 -- --
2003 -- --

Larry B. Lombard (2) 2005 $148,812 $21,750 (5,000 Common shares)
Chief Financial Officer 2004 $126,825 --
2003 --

Edward M. Moore (3) 2005 $154,943 $ 21,750 (5,000 Common shares) $30,000
Chief Operating Officer 2004 $146,635 (earned in 2003)
2003 --

Carl D. Perry (4) 2005 $ 78,232 --
Former Chief Executive Officer and 2004 $120,000 --
President 2003 $139,615 $30,000 (earned in 2000)

(1) Mr. Riddell was elected Chief Executive Officer and president in August
2004. Mr. Riddell commenced employment as a full-time employee in January 2005
at a salary of $208,000 per year. For the period from August 2004 to December
2004, Mr. Riddell was compensated for services on a contractual basis at the
rate of $4,000 per week.

(2) Mr. Lombard was elected Chief Financial Officer in March 2004. Mr. Lombard's
annual salary was $145,000 per year. On December 9, 2005 Mr. Lombard resigned
from the Company. Prior to 2004, Mr. Lombard was not an officer of the Company.

(3) Mr. Moore was elected Chief Operating Officer in March 2004. Mr. Moore's
annual salary was $150,000 per year. On December 9, 2005 Mr. Moore resigned from
the Company. Prior to 2004, Mr. Moore was not an officer of the Company.

(4) Mr. Perry was elected Chief Executive Officer and president in November 1997
and resigned those positions in August 2004. Mr. Perry's salary was $120,000 per
year which terminated per agreement at December 31, 2004. Compensation earned in
2005 consisted of $2,308 of regular earnings and $75,924 of severance. Mr. Perry
served as Acting Chief Financial Officer during the periods reflected in the
above chart through March 6, 2004.

Option/SAR Grants

The following grants of stock options or stock appreciation rights ("SARs")
were made during 2005 to the Named Executive Officers.

Option Grants During Fiscal 2005

Number of Potential Realizable Value of
Securities Percentage of Total Assumed Annual Rates of Stock
Underlying Options Granted to Exercise Price
Name of Individual Options Employee in Price Expiration Appreciation for the Option
and Position Granted Fiscal 2005 Per Share Date Term (1)
------------ ------- ----------- --------- ---- ---------
5% 10%
-- ---

Edwin Riddell, 60,000 19% 4.35 9-12-15 $185,399 $483,663
Chief Executive Officer

Larry B. Lombard, Chief 46,000 15% 4.35 9-12-15 $139,049 $362,748
Financial Officer

Edward M. Moore, Chief 46,000 15% 4.35 9-12-15 $139,049 $ 362,748
Operating Officer

(1) Calculated on the basis of $4.35 representing the average of the high bid
and low ask prices of the Common Stock on December 31, 2005

Option Exercises and Option Values

The following table sets forth information concerning option exercises
during 2005, and the aggregate value of unexercised options as of December 31,
2005, held by each of the Named Executive Officers:

Aggregated Option/SAR Exercises in 2005
and Option Values at December 31, 2005
---------------------------- ------------------------------ ----------------------------- -----------------------------
Number of Securities
Aggregate Underlying Unexercised Value of Unexercised
Option Options at In-the-Money Options at
Exercises in 2005 December 31, 2005 (#) December 31, 2005 ($) (1)
----------------- --------------------- -------------------------
Shares
Acquired on Value
Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---- ---- ----------- ------------- ----------- -------------

Edwin O. Riddell -- -- -- -- --(1) N/A

Larry B. Lombard -- -- -- -- --(1) N/A

Edward M. Moore -- -- -- -- --(1) N/A

(1) Calculated on the basis of $0.00 representing the average of the high bid
and low ask prices of the Common Stock on December 31, 2005 of $3.65 per
share, minus the exercise price.

Compensation of Directors

During 2005, we issued, or accrued for issuance, an aggregate of 81,000
shares of common stock to the non-executive board directors in accordance with
the September 1999 Board of Directors compensation package for outside
directors, as amended to date. Prior to September, 2005, for each meeting
attended in person, each outside director received $2,000 in cash and $4,000 of
stock valued on the date of the meeting at the average of the closing ask and
bid prices; for each telephonic Board meeting, each outside director received
$500 in cash and $500 of stock valued on the date of the meeting at the average
of the closing ask and bid prices; and for each meeting of a Board committee
attended in person, a committee member received $1,000 in cash and $1,000 of
stock valued on the date of the meeting at the average of the closing ask and
bid prices. In September, 2005, the compensation structure for Directors was
changed. Effective in the fourth quarter of 2005, Directors receive quarterly
compensation at a flat rate of $4,000 in cash and $6,000 in stock valued on the
date of the meeting at the average of the closing ask and bid prices. The flat
rate is not dependent on the amount or type of services performed by the
Directors. All Directors are also reimbursed for out-of-pocket expenses incurred
in connection with attending Board and committee meetings.

We relied on Rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933, as amended, for the exemption from registration of the sale of such
shares.

Edwin O. Riddell

In 2004, the Company entered into a consulting agreement with Edwin Riddell
doing business as CR Transportation Services wherein the Company compensated CR
Transportation at the rate of $4,000 per week plus reasonable expenses for
consulting services rendered. Upon Mr. Riddell becoming an employee of Enova in
January 2005, this agreement was terminated. Mr. Riddell was not compensated per
this agreement when acting in the capacity of a director of the Company. During
2004, the Company paid Mr. Riddell $99,000 in cash for consulting services and
expenses and $15,000 for directors fees (which latter amount includes the cash
paid and the value of the stock issued to him pursuant to the outside directors'
compensation package described above).

Donald Dreyer

In 2004, the Company utilized the consulting service of Donald Dreyer
wherein the Company compensated Mr. Dreyer at the rate of $150 per hour plus
reasonable expenses for consulting services rendered. Mr. Dreyer is not
compensated when acting in the capacity of a director of the Company other than
the fees noted above. During 2004, the Company paid Mr. Dreyer $2,000 in cash
for consulting services and expenses and $29,000 for directors fees (which
latter amount includes the cash paid and the value of the stock issued to him
pursuant to the outside directors' compensation package described above).

Audit Committee

The Audit Committee held three meetings in the year ended December 31,
2005. As of February 2006 the Audit Committee consists of Mr. Bjorn Ahlstrom,
Mr. John Wallace, and Mr. Don Dreyer. Mr. Wallace is the committee's designated
financial expert and Mr. Dreyer serves as the committee's chairman.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee held two meetings in the year ended December 31,
2005. The Compensation Committee currently consists of Mr. Bjorn Ahlstrom and
Dr. Malcolm Currie, neither of who have been officers of the Company. Prior to
August 2004, Mr. Edwin Riddell was a member of the Compensation Committee. Mr.
Riddell resigned from the committee upon his appointment as Chief Executive
Officer. The Compensation Committee's functions are to establish and apply the
Company's compensation policies with respect to the Company's Executive
Officers, and to administer the Company's stock option plans.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of December 31,
2005, by (i) each shareholder known to the Company to own beneficially more than
5% of the Company's Common Stock; (ii) each of the Company's Directors; (iii)
the Named Executive Officer; and (iv) all Executive Officers and Directors as a
group. Except as indicated in the footnotes to this table and subject to
applicable community property laws, the persons named in the table, based on
information provided by such persons, have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.

Shares Percentage of Shares Voting
Name Beneficially Owned (1) Beneficially Owned (2) Percentage (3)
---- ---------------------- ---------------------- --------------

Jagen, Pty., Ltd. 3,222,222 21.16% 21.64%
9 Oxford Street, South Ybarra 3141
Melbourne, Victoria Australia

Hyundai Heavy Industries, Co. 764,716 5.02% 5.14%
1 Cheona-Dong, Dong-Ku
Ulsan, Korea

Citibank N.A. 619,676 4.07% 4.16%
111 Wall Street, 8th Floor
New York, NY 10043

Anthony N. Rawlinson 572,665 3.76% 3.85%
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502

Edwin O. Riddell 108,047(4) * *
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502

Carl D. Perry 208,476 1.37% 1.40%

John J. Micek III 17,872(5) * *

Bjorn Ahlstrom 7,873 * *

Dr. Malcolm Currie 20,555 * *

Donald H. Dreyer 19,242 * *

John R. Wallace 6,144 * *

Delphi Delco Electronics 28,406(6) * *

Jean Schulz 77,062(7) * *

Larry B. Lombard 113,221(8) * *

Edward M. Moore 79,333(9) * *

All directors and executive officers 1,153,429(10) 7.57% 6.05%
as a group (10 persons)

* Indicates less than 1%

(1) Number of Common Stock shares includes Series A Preferred Stock,
Series B Preferred Stock and Common Stock shares issuable pursuant to
stock options, warrants and other securities convertible into Common
Stock beneficially held by the person or class in question which may
be exercised or converted within 60 days after December, 31 2005.

(2) The percentages are based on the number of shares of Common Stock,
Series A Preferred Stock and Series B Preferred Stock owned by the
shareholder divided by the sum of: (i) the total Common Stock
outstanding, (ii) the Series A Preferred Stock owned by such
shareholder; (iii) the Series B Preferred Stock owned by such
shareholder; and (iv) Common Stock issuable pursuant to warrants,
options and other convertible securities exercisable or convertible by
such shareholder within sixty (60) days after December 31, 2005.

(3) The percentages are based on the number of shares of Common Stock,
Series A Preferred Stock and/or Series B Preferred Stock owned by the
shareholder divided by the sum of: (i) the total Common Stock
outstanding, (ii) the total Series A Preferred Stock outstanding and
(iii) the total Series B Preferred Stock outstanding. This percentage
calculation has been included to show more accurately the actual
voting power of each of the shareholders, since the calculation takes
into account the fact that the outstanding Series A Preferred Stock
and Series B Preferred Stock are entitled to vote together with the
Common Stock as a single class on certain matters to be voted upon by
the shareholders.

(4) Includes 82,222 (post reverse split) shares of Common Stock issuable
pursuant to stock options exercisable at a price of $4.35 to $5.18

(5) Includes 22,222 (post reverse split) shares of Common Stock issued to
Silicon Prairie Partners, LP, a limited partnership in which John J.
Micek III is the general partner.

(6) The number of shares shown represents the ownership of 639,360 shares
of Series B Preferred Stock, each of which is convertible into two
shares of Common Stock. These 639,360 shares represent more than 5% of
the outstanding shares of Series B Preferred Stock.

(7) The number of shares shown represents the ownership of 1,329,111
shares of Series A Preferred Stock, each of which is convertible into
one share of Common Stock. These 1,329,111 shares represent more than
5% of the outstanding shares of Series A Preferred Stock.

(8) Includes 90,000 (post reverse split) shares of Common Stock issuable
pursuant to stock options exercisable at a price from $4.35 to $5.18.

(9) Includes 90,000 (post reverse split) shares of Common Stock issuable
pursuant to stock options exercisable at prices from $4.35 to $5.18.

(10) Includes 111,111 (post reverse split) shares of Common Stock issuable
pursuant to stock options exercisable at prices from $5.18 to $9 per
share and 22,222 (post reverse split) shares of Common Stock issued to
Silicon Prairie Partners, LP, a limited partnership in which John J.
Micek III is the general partner.

Equity Compensation Plan Information

The following table provides information regarding our equity compensation plans
as of December 31, 2005:

Equity Compensation Plan Information
Number of securities
remaining available
for
future issuance under
equity compensation
Number of securities to Weighted-average plans (excluding
be issued upon exercise exercise price of securities reflected
of outstanding options, utstanding options, in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
------------- ----------------------- ------------------- --------------------

Equity compensation plans approved
by security holders 436,000 $4.46 64,,564,000

Equity compensation plans not
approved by security holders -- -- --
Total 436,000 $4.46 64,564,000

Our board of directors adopted the 1996 Employee and Consultant Stock
Option Plan in October 1996 which was subsequently approved by our shareholders
in May 1997. A total of 15,000,000 shares were reserved for issuance under the
1996 Plan. Options granted under the 1996 Plan may be either incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, or
nonstatutory stock options. The 1996 Plan provides that options may be granted
to employees (including officers and directors who are also employees),

directors and consultants. Incentive stock options may only be granted to
employees. In 1999, our board of directors and shareholders approved an
amendment to the 1996 Plan to increase the number of shares of common stock
reserved for issuance thereunder by 30,000,000 shares and in 2004, our board of
directors and shareholders approved an amendment to the 1996 Plan to increase
the number of shares of common stock reserved for issuance thereunder by
20,000,000 shares, bringing the total number of shares issuable under the 1996
Plan to 65,000,000. The share increases to the 1996 Plan assured that a
sufficient reserve of common stock are available to provide us with the
continuing opportunity to utilize equity incentives to attract and retain the
services of employees essential to our long-term growth and financial success. A
copy of the actual 1996 Plan document was previously filed with the Securities
and Exchange Commission.

Options granted under the amended 1996 Plan will vest over such periods as
may be determined by the board of directors and will generally have an exercise
price equal to the closing price for our stock on the NASDAQ OTC Bulletin Board
on the last trading day immediately prior to the date of grant. Options to
purchase 2,55,000 shares of Enova common stock were granted to employees in
2005.

Item 13. Certain Relationships and Related Transactions

The following are certain transactions entered into between Enova and its
officers, directors and principal shareholders and their affiliates since
January 1, 2004.

During 2004, Hyundai Heavy Industries, Co. (HHI) purchased 11,076,923
(before the effects of the reverse stock split) shares increasing their
ownership in Enova Systems, Inc. to 7.98%. Additionally, during 2005, we
purchased from HHI approximately $2,516,000 in components, materials and
services for manufacture of our drive systems and power management systems.
These purchases were made on terms and conditions equal to or better than our
standard commercial terms with other vendors. At the year ended December 31,
2005, our outstanding payables balance due HHI was approximately $1,317,000.

Item 14. Principal Accountant Fees and Services

Singer Lewak Greenbaum & Goldstein LLP were engaged on November 22, 2005 to
audit our financial statements for the fiscal year ended December 31, 2005,
having previously been engaged to audit our financial statements for the years
ended December 31, 2004 and 2003.

Audit Fees
----------

The aggregate fees billed during the last two fiscal years for professional
services rendered by Singer Lewak Greenbaum & Goldstein LLP for the audit of
Enova's financial statements for the fiscal year ended December 31, 2005 and for
its review of financial statements included in Enova's Forms 10Q during the last
two fiscal years and other services that are normally provided by an accountant
in connection with statutory and regulatory filings or engagements during such
fiscal years were $143,000 for fiscal 2005 and $73,970 for fiscal 2004.

Audit-Related Fees
------------------

Singer Lewak Greenbaum & Goldstein LLP did not perform for Enova any
assurance and related services that were reasonably related to the performance
of the audit of our financial statements for the fiscal year ended December 31,
2005.

Tax Fees
--------

Singer Lewak Greenbaum & Goldstein LLP did not perform for Enova any tax
compliance, tax advice and tax planning services in fiscal 2004 or fiscal 2005.

All Other Fees
--------------

Neither Singer Lewak Greenbaum & Goldstein LLP nor Moss Adams, LLP
performed any other services for fees other than audit fees in fiscal 2005 or
2004.

The Audit Committee's policy is to pre-approve the annual engagement of the
independent auditors to render services to the company. These services may
include audit services, audit-related services, tax services, and other
services.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)1. Financial Statements

The financial statements filed as a part of this report are identified in
the Index to Financial Statements on page F-1.

(a)2. Financial Statement Schedule

No financial statement schedules are filed as a part of this report.

(a)3. Exhibits

See Item 15 (c) for Index of Exhibits.

(b) Reports on Form 8-K

On February 2, 2005, Registrant filed a Form 8-K, with date of earliest
event reported of September 20, 2004, reporting under items 1 and 3.

Exhibit Number Description
-------------- -----------

3.1 Amended and Restated Articles of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Registrant's Annual Report on Form 10K for the
year ended December 31, 2000 filed on March 30, 2001 and incorporated
herein by reference).

3.2 Bylaws of Registrant (filed as Exhibit 3.12 to the Registration
Statement on Form 10 filed on November 29, 1994, and incorporated
herein by reference).

4.1 Cashless Exercise Warrants dated October 25, 1996 issued to Fontal
International, Ltd. (filed as Exhibit 4.1 to the Registrant's Annual
Report on Form 10-K for the year ended July 31, 1996, as filed on
November 12, 1996, and incorporated herein by reference).

10.1 Form of Stock Option Agreement under 1993 Employee and Consultant Stock
Plan (filed as Exhibit 10.15 to the Registration Statement on Form 10
filed on November 29, 1994, and incorporated herein by reference).

10.2 Form of Solar Electric Engineering, Inc. 1993 Employee and Consultant
Stock Plan (filed as Exhibit 10.16 to the Registration Statement on
Form 10 filed on November 29, 1994, and incorporated herein by
reference).

10.3 Form of Confidential Private Placement Memorandum and Debt
Restructuring Disclosure Statement of U.S. Electricar, Inc., dated
January 2, 1996, delivered by Enova to certain of its unsecured trade
creditors, including exhibits (filed as Exhibit 10.91 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1996, as filed on March 18, 1996, and incorporated herein
by reference).

10.4 Form of Stock Purchase, Note and Debt Exchange Agreement dated January
2, 1996 between Enova and certain unsecured trade creditors (filed as
Exhibit 10.92 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1996, as filed on March 18, 1996, and
incorporated herein by reference).

10.5 Form of Indemnification Agreement (filed as Exhibit 10.63 to the
Registration Statement on Form 10 filed on November 29, 1994, and
incorporated herein by reference).

10.6 Form of Security Agreement made as of May 31, 1995, between Enova and
Credit Managers Association of California, Trustee (filed as Exhibit
10.85 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1996, as filed on June 14, 1996, and incorporated
herein by reference).

10.7 Amended 1996 Employee and Consultant Stock Option Plan (filed as
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for fiscal
year ended July 31, 1999, as filed on October 29, 1999, and
incorporated herein by reference).

10.8 Stock Purchase Agreement and Technology License Agreement dated
February 27, 1997, by and between Enova and Hyundai Motor Company and
Hyundai Electronics Industries Co., Ltd. (filed as Exhibit 10.98 to the
Registrant's Quarterly Report on Form 10-Q for fiscal quarter ended
January 31, 1997, as filed on March 14, 1997, and incorporated herein
by reference).

10.9 Letter of Intent between Registrant and a domestic supplier, dated
December 9, 1999, to design, develop and manufacture low voltage
electric drive system components (filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for fiscal year ended December
31, 2000 and incorporated herein by reference).

10.10 Put/Call Option to sell Itochu shares between Registrant and Carl D.
Perry dated September 1, 1999 (filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for fiscal year ended December
31, 2000 and incorporated herein by reference).

10.11 Agreement (redacted) between the Registrant and a customer dated June
14, 2001, to develop and produce power management systems. (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for Six
Months ended June 30, 2001 and incorporated herein by reference).

10.12 Agreement (redacted) between the Registrant and Eco Power Technology,
dated June 12, 2001, to produce and sell power drive systems (filed as
Exhibit 10.19 to Amendment No. 6 to the Registrant's Registration
Statement on Form S-1, No. 333-85308, and incorporated herein by
reference).

10.13 Agreement (redacted) between the Registrant and Tomoe
Electro-Mechanical Engineering and Manufacturing, Inc., dated November
19, 2001, to produce and sell power drive systems (filed as Exhibit
10.20 to Amendment No. 6 to the Registrants Registration Statement on
Form S-1, No. 333-85308, and incorporated herein by reference).

10.14 Agreement (redacted) between the Registrant and Moriah Corporation,
dated January 22, 2002, to produce and sell power drive systems (filed
as Exhibit 10.21 to Amendment No. 6 to the Registrant's Registration
Statement on Form S-1, No. 333-85308, and incorporated herein by
reference).

10.15 Form of Stock Purchase Agreement dated June 7, 2002 between Registrant
and each of the selling shareholders listed in a Prospectus dated July
26, 2002 (filed as Exhibit 10.22 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, No. 333-96829, and incorporated
herein by reference).

10.16 Form of Registration Rights Agreement dated June 7, 2002 between
Registrant and each of the selling shareholders listed in a Prospectus
dated July 26, 2002 (filed as Exhibit 10.23 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1, No. 333-96829, and
incorporated herein by reference).

10.17 Joint Venture Agreement (redacted**) to form advanced research and
development corporation, dated as of March 18, 2003, by and between the
Registrant and Hyundai Heavy Industries Co. Ltd. (filed as Exhibit
10.24 to the Registrant's Quarterly Report on Form 10-Q for Three
Months ended March 31, 2003 and incorporated herein by reference).

10.18 Securities Purchase Agreement dated as of March 18, 2003, by and
between the Registrant and Hyundai Heavy Industries Co. Ltd. (filed as
Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q for
Three Months ended March 31, 2003 and incorporated herein by
reference).

10.19 Form of Stock Purchase Agreement dated March 30, 2004 between
Registrant and various investors. (filed as Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for Three Months ended March
31, 2004 and incorporated herein by reference).

10.20 Form of Registration Rights Agreement dated March 30, 2004 between
Registrant and various investors. (filed as Exhibit 10.20 to the
Registrant's Quarterly Report on Form 10-Q for Three Months ended March
31, 2004 and incorporated herein by reference).

10.21 Form of Finder's Fee agreement dated April 1, 2004 between Registrant
and The Global Value Investment Portfolio Management Pte Ltd as
disclosed in our Form 10-Q for the quarter ended March 31, 2004. (filed
as Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for
Six Months ended June 30, 2004 and incorporated herein by reference).

23.1 Consent of Independent Registered Public Accounting Firm

24* Power of Attorney (included on signature page)

31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act Of 2002

31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

32* Certification Pursuant to 18 U.S.C. Section 1350

----------------------
* Filed herewith.

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.

ENOVA SYSTEMS, INC.

By: /s/ Edwin O. Riddell
--------------------------------
Edwin O. Riddell, Chief Executive Officer, President and Acting Chief
Financial Officer

Dated: March 31, 2006

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Edwin O. Riddell, with full power to act alone,
his true and lawful attorney-in-fact and agent, with full power of substitution
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to the annual report on Form 10-K, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated. Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the date
indicated.

Signature Title Date
--------- ----- ----

/s/ Edwin O. Riddell Acting Chief Financial Officer
---------------------------------------- (Principal Financial Officer) March 31, 2006
Edwin O. Riddell

/s/ Edwin O. Riddell Chief Executive Officer March 31, 2006
------------------------------------------ and Director
Edwin O. Riddell (Principal Executive Officer)

/s/ Anthony N. Rawlinson Chairman March 31, 2006
------------------------------------
Anthony N. Rawlinson

/s/ Malcolm Currie Director March 31, 2006
----------------------------------------
Malcolm Currie

/s/ Bjorn Ahlstrom Director March 31, 2006
-----------------------------------------
Bjorn Ahlstrom

/s/ Donald H. Dreyer Director March 31, 2006
-----------------------------------------
Donald H. Dreyer

/s/ John R. Wallace Director March 31, 2006
------------------------------------------
John R. Wallace

ENOVA SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

ENOVA SYSTEMS, INC.
CONTENTS
December 31, 2005
--------------------------------------------------------------------------------

Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1

FINANCIAL STATEMENTS

Balance Sheets 2-4

Statements of Operations 5

Statements of Stockholders' Equity 6

Statements of Cash Flows 7-8

Notes to Financial Statements 9-26

SELECTED QUARTERLY DATA (Unaudited) 27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Enova Systems, Inc.
Torrance, California

We have audited the balance sheets of Enova Systems, Inc. as of December 31,
2005 and 2004, and the related statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enova Systems, Inc. as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 9, 2006

F-1

ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31, 2005 and 2004
--------------------------------------------------------------------------------

ASSETS

2005 2004
----------- -----------
Current assets
Cash and cash equivalents $16,187,000 $ 1,575,000
Accounts receivable, net 2,173,000 522,000
Inventories and supplies, net 1,016,000 1,036,000
Prepaid expenses and other current assets 182,000 304,000
----------- -----------

Total current assets 19,558,000 3,437,000

Property and equipment, net 576,000 387,000
Equity method investment 1,649,000 1,768,000
Other assets 190,000 296,000
----------- -----------
Total assets $21,973,000 $ 5,888,000
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-2

ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31, 2005 and 2004
--------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

2005 2004
---------- ----------

Current liabilities
Accounts payable $1,396,000 $ 66,000
Deferred revenues -- 392,000
Line of credit -- 229,000
Accrued payroll and related expense 195,000 194,000
Other accrued expenses 302,000 13,000
Current portion of notes payable 42,000 166,000
Current portion of capital lease obligations -- 6,000
---------- ----------

Total current liabilities 1,935,000 1,066,000

Accrued interest payable 1,113,000 1,378,000

Notes payable, net of current portion 2,321,000 3,341,000
---------- ----------

Total liabilities $5,369,000 $5,785,000
---------- ----------

The accompanying notes are an integral part of these financial statements.

F-3

ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31, 2005 and 2004
--------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (continued)

2005 2004
------------- -------------

Stockholders' equity
Series A convertible preferred stock - no par value
30,000,000 shares authorized
2,674,000 and 2,748,000 shares issued and
outstanding
Liquidating preference at $0.60 per share, aggregating
$1,604,000 and $1,649,000 $ 1,679,000 $ 1,774,000
Series B convertible preferred stock - no par value
5,000,000 shares authorized
1,217,000 and 1,217,000 shares issued and outstanding
Liquidating preference at $2 per share 2,434,000 2,434,000
Common Stock, no par value
750,000,000 shares authorized
14,783,000 and 9,228,000 shares issued and
outstanding 109,323,000 90,465,000
Common stock subscribed 30,000 165,000
Stock notes receivable (1,176,000) (1,176,000)
Additional paid-in capital 6,900,000 6,900,000
Accumulated deficit (102,586,000) (100,459,000)
------------- -------------
Total stockholders' equity 16,604,000 103,000
------------- -------------
Total liabilities and stockholders' equity $ 21,973,000 $ 5,888,000
============= =============

The accompanying notes are an integral part of these financial statements.

F-4

ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005, 2004, and 2003
-----------------------------------------------------------------------------------------------------------

2005 2004 2003
------------ ------------ ------------

Net revenues
Research and development contracts $ 1,555,000 $ 1,070,000 $ 1,889,000
Production 4,529,000 1,484,000 2,421,000
------------ ------------ ------------
Total net revenues 6,084,000 2,554,000 4,310,000
------------ ------------ ------------

Cost of revenues
Research and development contracts 1,188,000 499,000 1,326,000
Production 4,813,000 1,627,000 1,978,000
Writedown Ford Think program inventory -- 113,000 --
------------ ------------ ------------
Total cost of revenues 6,001,000 2,239,000 3,304,000
------------ ------------ ------------
Gross profit 83,000 315,000 1,006,000
------------ ------------ ------------

Operating expenses
Research and development 804,000 925,000 799,000
Asset impairment -- -- 200,000
Selling, general & administrative 2,870,000 2,325,000 2,919,000
------------ ------------ ------------
Total operating expenses 3,674,000 3,250,000 3,918,000
------------ ------------ ------------
Other income and (expense)
Interest and financing fees, net 13,000 (255,000) (234,000)
Equity in losses of equity method investee (118,000) (192,000) (40,000)
Debt extinguishment 1,011,000 -- --
Interest extinguishment 558,000 -- --
------------ ------------ ------------
Total other income and (expense) 1,464,000 (447,000) (274,000)
------------ ------------ ------------
Loss from operations (2,127,000) (3,382,000) (3,186,000)

Net loss $ (2,127,000) $ (3,382,000) $ (3,186,000)
============ ============ ============

Basic loss and diluted loss per share $ (0.18) $ (0.38) $ (0.43)
============ ============ ============

Weighted-average number of shares outstanding 11,664,320 8,831,893 7,440,882
============ ============ ============

The accompanying notes are an integral part of these financial statements.

F-5

ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock
Series A Series B Common Stock
-------- -------- ------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------

Balance, December 31, 2002 2,824,000 $ 1,842,000 1,217,000 $ 2,434,000 7,671,000 $ 84,026,000
Conversion of Series
A preferred stock (4,000) (5,000) -- 5,000
Issuance of common
stock for
Cash 513,000 1,500,000
Issuance of subscribed
common stock 22,000 100,000
Exercise of options 193,000 389,000
Stock option
Services 8,000 34,000
Net loss
--------- ---------- --------- ---------- ---------- ------------
Balance, December 31, 2003 2,820,000 $1,837,000 1,217,000 $2,434,000 8,407,000 $ 86,054,000
========= ========== ========= ========== ========== ============
Conversion of Series
A preferred stock (73,000) (63,000) 2,000 63,000
Issuance of common
stock for
Cash 613,000 3,450,000
Issuance of subscribed
common stock 8,000 60,000
Exercise of options 188,000 783,000
Stock option conversions 7,000 39,000
Services 3,000 16,000
Net loss
--------- ---------- --------- ---------- ---------- ------------
Balance, December 31, 2004 2,747,000 $1,774,000 1,217,000 $2,434,000 9,228,000 $ 90,465,000
========= ========== ========= ========== ========== ============

Conversion of Series
A preferred stock (73,000) (95,000) 1,000 95,000
Issuance of common
stock for
Cash 5,473,000 18,361,000
Issuance of common stock
for director services 56,000 293,000
Director bonus 25,000 109,000
Subscribed Common Stock
Net loss
--------- ---------- --------- ---------- ---------- ------------
Balance, December 31, 2005 2,674,000 $1,679,000 1,217,000 $2,434,000 14,783,000 $109,323,000
========= ========== ========= ========== ========== ============

Common Stock Stock Additional
Subscribed Notes Paid-In Accumulated
Shares Amount Receivable Capital Deficit Total
------ ------ ---------- ------- ------- -----

Balance, December 31, 2002 30,000 $ 130,000 $ (1,203,000) $6,949,000 $ (93,891,000) $ 287,000
Conversion of Series
A preferred stock --
Issuance of common stock for
Cash 1,500,000
Issuance of subscribed
common stock (22,000) (100,000) --
Exercise of options 389,000
Stock option 82,000 82,000
Services 17,000 30,000 64,000
Net loss (3,186,000) (3,186,000)
------ --------- ----------- ---------- ------------- -----------
Balance, December 31, 2003 25,000 $ 60,000 $ (1,203,000) $7,031,000 $ (97,077,000) $ (864,000)
====== ========= =========== ========== ============= ===========
Conversion of Series
A preferred stock --
Issuance of common
stock for
Cash 27,000 3,477,000
Issuance of subscribed
common stock (25,000) (60,000) --
Exercise of options 783,000
Stock option conversions (39,000) --
Services 27,000 165,000 (92,000) 89,000
Net loss (3,382,000) (3,382,000)
------ --------- ----------- ---------- ------------- -----------
Balance, December 31, 2004 27,000 $ 165,000 $(1,176,000) $6,900,000 $(100,459,000) $ 103,000
====== ========= =========== ========== ============= ===========

Conversion of Series --
A preferred stock --
Issuance of common stock for --
Cash 18,361,000
Issuance of common stock --
for director services (27,000) (165,000) 128,000
Director bonus 109,000
Subscribed Common Stock 8,000 30,000 30,000
Net loss (2,127,000) (2,127,000)
------ --------- ----------- ---------- ------------- -----------
Balance, December 31, 2005 8,000 $ 30,000 $(1,176,000) $6,900,000 $(102,586,000) $16,604,000
====== ========= =========== ========== ============= ===========

The accompanying notes are an integral part of these financial statements.

F-6

ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004, and 2003
-----------------------------------------------------------------------------------------------
2005 2004 2003
------------ ------------ ------------

Cash flows from operating activites
Net loss $(2,127,000) $(3,382,000) $(3,186,000)
Adjustments to reconcile net loss
to net cash used by operating activities
Debt extinguishment (1,011,000) -- --
Interest extinguishment (558,000) -- --
Depreciation and amortization 304,000 376,000 351,000
Provision for asset impairment -- -- 200,000
Equity in losses of equity method investee 118,000 192,000 40,000
Issuance of common stock for services 158,000 89,000 34,000
Issuance of common stock for bonuses 109,000 -- --
(Increase) decrease in
Accounts receivable (1,651,000) 281,000 457,000
Inventory and supplies 20,000 570,000 48,000
Note receivable - related party -- 8,000 24,000
Prepaid expenses and other current assets 122,000 (226,000) 29,000
Other assets (2,000) -- (14,000)
Increase (decrease) in
Accounts payable 1,330,000 (702,000) (424,000)
Accrued expenses 290,000 (11,000) (112,000)
Deferred revenues (392,000) 392,000 --
Accrued interest payable 293,000 256,000 234,000
----------- ----------- -----------
Net cash used by operating activities (2,997,000) (2,157,000) (2,319,000)
----------- ----------- -----------

Cash flows from investing activites
Purchases of property and equipment $ (384,000) $ (174,000) $ (113,000)
----------- ----------- -----------
Net cash used in investing activities (384,000) (174,000) (113,000)
----------- ----------- -----------

Cash flows from financing activites
Net increase from line of credit $ -- $ 109,000 $ 106,000
Payment on notes payable and
capital lease obligations (368,000) (33,000) (1,000)
Proceeds from notes payable -- 40,000 --
Net Proceeds from sales of common stock 18,361,000 2,450,000 600,000
Proceeds from exercise of stock options -- 783,000 389,000
Payments on stock notes receivable -- 27,000 --
----------- ----------- -----------
Net cash provided by financing activities 17,993,000 3,376,000 1,094,000
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 14,612,000 1,045,000 (1,338,000)
=========== =========== ===========

Cash and cash equivalents,
beginning of year 1,575,000 530,000 1,868,000
----------- ----------- -----------
Cash and cash equivalents,
end of year $16,187,000 $1,575,000 $ 530,000
=========== =========== ===========

The accompanying notes are an integral part of these financial statements.

F-7

2005 2004 2003
----------- ----------- ----------

Interest paid $ 2,000 $ 10,000 $ 9,000
=========== =========== ===========
Income taxes paid $ -- $ -- $ --
=========== =========== ===========
Conversion of preferred stock to common stock $ 94,000 $ 63,000 $ (5,000)
=========== =========== ===========
Acquired investment under common stock purchase $ -- $ 1,000,000 $ 1,000,000
=========== =========== ===========
Offering costs on common stock purchases $ -- $ 93,000 $ --
=========== =========== ===========
Common Stock issued for purchase of options $ -- $ 39,000 $ --
=========== =========== ===========

The accompanying notes are an integral part of these financial statements.

F-8

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 1 - Organization and Line of Business

General
-------
Enova Systems, Inc. (the "Company") is a California corporation that
develops drive trains and related components for electric, hybrid electric,
and fuel cell systems for mobile and stationary applications. The Company
retains development and manufacturing rights to many of the technologies
created, whether such research and development is internally or externally
funded. The Company develops and sells components in the United States and
Asia, and sells components in Europe.

Liquidity
---------
At December 31, 2005, the Company had a net working capital of
approximately $17,623,000 as compared to $2,371,000 at December 31, 2004,
representing an increase of $15,252,000. This increase is due primarily to
capital raised in the third quarter of 2005, as described in Note 10.

Stock Purchase Agreement
------------------------
The Company has entered into a joint venture agreement (the Agreement) with
Hyundai Heavy Industries of Korea ("HHI") to create a joint venture
corporation, Hyundai-Enova Innovative Technology Center (the "ITC") to be
domiciled in Torrance, California. In conjunction with this Agreement, HHI
and the Company entered into a stock purchase agreement in which HHI agreed
to make a $3 million investment in the Company through the purchase of
shares of the Company's authorized and unissued common stock pursuant to
Regulation D of the Securities Act of 1933. This investment was made in two
installments of $1.5 million each. The first installment was made in June
2003 upon incorporation of the ITC and in consideration for the issuance to
HHI by the Company of 23,076,923 shares of common stock at $0.065 per
share. Share amounts are reported before the effects of the reverse stock
split, as described in Note 10.

The second installment was made in September 2004 in consideration for the
issuance to HHI by the Company of 11,335,315 shares of common stock at
$0.1323 per share. Share amounts are reported before the effects of the
reverse stock split, as described in Note 10.

The Company invested $1 million of each installment into the ITC in
consideration for the issuance to the Company of a 40% equity interest in
the ITC (the balance of the installments, in the amount of $500,000 each,
is to be retained by the Company). HHI acquired a 60% equity interest in
ITC by investing $3 million in the ITC in two installments of $1.5 million
each, to be made concurrently with the two installment payments to be paid
by HHI for the Company's common stock. HHI and the Company have invested an
aggregate of $5 million in the ITC.

F-9

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 2- Summary of Significant Accounting Policies

Contract Services Revenue and Cost Recognition
----------------------------------------------
The Company manufactures proprietary products and other products based on
design specifications provided by its customers. Revenue from sales of
products are generally recognized at the time title to the goods and the
benefits and risks of ownership passes to the customer which is typically
when products are shipped based on the terms of the customer purchase
agreement.

Revenue relating to long-term fixed price contracts is recognized using the
percentage of completion method. Under the percentage of completion method,
contract revenues and related costs are recognized based on the percentage
that costs incurred to date bear to total estimated costs.

Changes in job performance, estimated profitability and final contract
settlements may result in revisions to cost and revenue, and are recognized
in the period in which the revisions are determined.

Contract costs include all direct materials, subcontract and labor costs
and other indirect costs. General and administrative costs are charged to
expense as incurred. At the time a loss on a contract becomes known, the
entire amount of the estimated loss is accrued. The aggregate of costs
incurred and estimated earnings recognized on uncompleted contracts in
excess of related billings is shown as a current asset, and billings on
uncompleted contracts in excess of costs incurred and estimated earnings is
shown as a current liability.

Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all changes
in equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in the
Company's financial statements since the Company did not have any changes
in equity from non-owner sources.

Cash and Cash Equivalents
-------------------------
Highly liquid investments with an original maturity of three months or less
are considered cash equivalents.

Accounts Receivable
-------------------
Receivables are reported at net realizable value and are considered past
due when payments have not been received for 90 days. In general,
receivables are charged off as uncollectible upon exhausting all avenues of
collection. Receivables older than 90 days totaled $209,000.

F-10

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 2- Summary of Significant Accounting Polices (Continued)

Allowance for Doubtful Accounts
-------------------------------
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of accounts receivable including the current credit-worthiness
of each customer. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. As of December 31, 2005,
the Company maintained a reserve for $266,000 of potentially doubtful
accounts receivable. Bad debt expense totaled $267,000, $98,000, and
$596,000 for the years ended December 31, 2005, 2004, and 2003
respectively.

Inventories and Supplies
------------------------
Inventories and supplies are comprised of materials used in the design and
development of electric, hybrid electric, and fuel cell drive systems, and
other power and ongoing management and control components for production
and ongoing development contracts, and is stated at the lower of cost
(first-in, first-out) or market. In 2005, the Company charged off $376,000
for obsolete or slow moving inventory.

Property and Equipment
----------------------
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from three to seven years. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the sum of
expected cash flows from use of the asset is less than its carrying value.
Long-lived assets that management commits to sell or abandon are reported
at the lower of carrying amount or fair value less cost to sell.

Equity Method Investment
------------------------
Investment in joint venture (see Note 1) is accounted for by the equity
method.

Fair Value of Financial Instruments
-----------------------------------
The carrying amount of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
approximate fair value due to the short maturity of these instruments. The
carrying value of all other financial instruments is representative of
their fair values. The Company's short and long term debt may be
substantially less than the carrying value since there is no readily
ascertainable market for the debt given the financial position of the
Company.

Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined as
of the date of grant and is recognized over the periods in which the

F-11

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 2- Summary of Significant Accounting Polices (Continued)

Stock Based Compensation (Continued)
------------------------------------
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation.

SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and
Disclosure" amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.

The Company has elected to use the intrinsic value based method and has
disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation. The Company has adopted only the
disclosure provisions of SFAS No. 123. It applies APB Opinion No. 25 and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options issued to outside third parties.

For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period.

If the Company had elected to recognize compensation expense based upon the
fair value at the grant date for awards under this plan consistent with the
methodology prescribed by SFAS No. 123, the Company's net loss and loss per
share would be reduced to the pro forma amounts indicated below for the
years ended December 31, 2005, 2004, and 2003. Per share amounts have been
restated to illustrate the effects of the reverse stock split, as described
in Note 10.

2005 2004 2003
---- ---- ----

Loss applicable to common stockholders $(2,127,000) $(3,382,000) $(3,186,000)

Compensation under APB Opinion 25 -- -- --

Stock-based employee compensation
expense determined under fair value
presentation for all options (222,000) (94,000) (315,000)
----------- ----------- -----------
Pro forma net loss $(2,349,000) $(3,476,000) $(3,501,000)

Basic and diluted loss per
common share
As reported $ (0.18) $ (0.38) $ (0.43)
Pro forma $ (0.20) $ (0.39) $ (0.47)

F-12

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 2- Summary of Significant Accounting Polices (Continued)

Stock Based Compensation (Continued)
------------------------------------
For purposes of computing the pro forma disclosures required by SFAS No.
123, the fair value of each option granted to employees and directors is
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 2005, 2004,
and 2003: dividend yields of 0%, 0%, and 0%, respectively; expected
volatility of 67%, 73%, and 88%, respectively; risk-free interest rates of
4%, 4%, and 4%, respectively; and expected lives of two, one, and three
years, respectively. The weighted-average fair value of options granted
during the year ended December 31, 2005 for which the exercise price equals
the market price on the grant date was $.87, and the weighted-average
exercise price was $4.35.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.

Advertising Expense
-------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the years ended
December 31, 2005, 2004, and 2003 was $9,000, $12,000, and $21,000,
respectively.

Research and Development
------------------------
Costs of researching and developing new technology or significantly
altering existing technology is expensed as incurred.

Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax 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 expected to be
realized.

F-13

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 2- Summary of Significant Accounting Policies (Continued)

Loss Per Share
--------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common stockholders by the
weighted-average number of common shares outstanding. Diluted loss per
share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is anti-dilutive.
The Company's common share equivalents consist of stock options.

Estimates
---------
The preparation of financial statements 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 revenue and
expenses during the reporting period. Actual results could differ from
those estimates.

Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and
accounts receivable. The Company places its cash and cash equivalents with
high credit, quality financial institutions. At times, such cash and cash
equivalents may be in excess of the Federal Deposit Insurance Corporation
insurance limit of $100,000. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents. With respect to accounts receivable, the
Company routinely assesses the financial strength of its customers and, as
a consequence, believes that the receivable credit risk exposure is
limited.

Major Customers
---------------
During the year ended December 31, 2005, the Company conducted business
with five customers whose sales comprised 49%, 13%, 8%, 7% and 4% of total
revenues. As of December 31, 2005, three customers accounted for 77%, 13%,
and 8% of total accounts receivable.

In addition, one of the Company's stockholders accounted for 13%, 10%, and
1% of total revenues during the years ended December 31, 2005, 2004, and
2003, respectively. This stockholder holds less than 5% of the total issued
and outstanding common stock as of December 31, 2005. Demand deposits are
placed with known, creditable financial institutions.

F-14

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 2- Summary of Significant Accounting Policies (Continued)

Recently Issued Pronouncements
------------------------------
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43,
Chapter 4, previously stated that ". . . under some circumstances, items
such as idle facility expense, excessive spoilage,

Recently Issued Pronouncements (Continued)
------------------------------------------
double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires that
those items be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." In addition, this statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities.
This statement is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Management does not expect adoption of
SFAS No. 151 to have a material impact, if any, on the Company's financial
position or results of operations.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions". SFAS No. 153 eliminates certain differences in the guidance
in Opinion No. 29 as compared to the guidance contained in standards issued
by the International Accounting Standards Board. The amendment to Opinion
No. 29 eliminates the fair value exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. Such
an exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in periods
beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December
16, 2004. Management does not expect adoption of SFAS No. 153 to have a
material impact, if any, on the Company's financial position or results of
operations.

In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment".
SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based Compensation",
and APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS
No.123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in
amounts based (even in part) on the price of the company's shares or other
equity instruments, or (2) that require (or may require) settlement by the
issuance of a company's shares or other equity instruments. In April 2005,
the Securities and Exchange Commission (SEC) deferred the effective date of
SFAS 123R for SEC registrants to the first fiscal year beginning after
December 15, 2005. Accordingly, we expect to implement the revised standard
in the first quarter of 2006. Such implementation is prospective and is
expected to have a material effect on the financial statements.

F-15

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 2- Summary of Significant Accounting Policies (Continued)

Recently Issued Pronouncements (Continued)
------------------------------------------
The interpretation requires an entity to recognize a liability for the fair
value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. The adoption of this
interpretation did not have any impact on our financial statements.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3"
(SFAS 154). This statement changes the requirements for the accounting for
and reporting of a change in accounting principle and applies to all
voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. APB No. 20
required that most voluntary changes in accounting principle be recognized
by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This statement requires
retrospective application to prior period financial statements of changes
in accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The
provisions of SFAS 154 are effective for fiscal years beginning after
December 15, 2005. As such we are required to adopt SFAS 154 starting
January 1, 2006. We do not expect the adoption of this statement to have a
material impact on our financial statements.

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and
140" ("SFAS 155"). This statement amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), and SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and resolves issues addressed in SFAS 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interest in Securitized Financial Assets". The Company is required to apply
SFAS 155 to all financial instruments acquired, issued or subject to a
remeasurement event beginning January 1, 2007, although early adoption is
permitted as of the beginning of an entity's fiscal year. The provisions of
SFAS 155 are not expected to have an impact on the financial statements at
adoption.

F-16

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 3- Property and Equipment

Property and equipment at December 31, 2005 and 2004 consisted of the
following:

2005 2004
---- ----
Computers $ 296,000 $ 229,000
Machinery and equipment 975,000 709,000
Furniture and office equipment 242,000 192,000
Demonstration vehicles and buses 324,000 461,000
Equipment under capital lease obligations 94,000 94,000
Leasehold improvements 70,000 68,000
---------- ----------
2,001,000 1,753,000
Less accumulated depreciation and amortization 1,425,000 1,366,000
---------- ----------
Total $ 576,000 $ 387,000
========== ==========

Depreciation and amortization expense was $304,000, $376,000, and $351,000
for the years ended December 31, 2005, 2004, and 2003, respectively.

NOTE 4 - Equity Method Investment

During the year ended December 31, 2004, the Company invested $1,000,000 of
the proceeds received from a sale of common stock to HHI into a joint
venture formed with HHI in 2003 (see Note 1). The Company's share of income
and losses is 40% as stated in the agreement. During the year ended
December 31, 2005, the Company recorded $118,000 as its proportionate share
of losses in the joint venture.

F-17

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

The following is the condensed financial position and results of operations
of ITC, as of and for the year ended December 31, 2005:

Financial position
Current assets $4,105,000
Property and equipment, net 22,000
Liabilities (5,000)
----------
Equity $4,122,000
==========

Operations
Net revenues $ 126,000
Expenses $ 423,000
----------
Net loss $ (297,000)
==========
Company's proportionate share of net loss $ (118,000)
==========

NOTE 5- Other Assets

During the year ended December 31, 2002, the Company incurred legal costs
of $112,000 associated with two patents. These patents have been
capitalized and are being amortized over their estimated useful lives.

In June 2001, a strategic relationship with Ford Motor Company was entered
into to develop and manufacture a high power, high voltage conversion
module for Ford's fuel cell vehicle. Warrants were issued to Ford Motor
Company in exchange for Ford's commitment to enter into a five-year
agreement. The issuance of the warrants was recorded as a non-current asset
(Value Participation Agreement) at its fair market value of $577,000, which
was determined using the Black-Scholes option pricing model, and is being
amortized on a straight-line basis over the life of the contract.

The following table illustrates the types and carrying values of the
Company's other assets:

2005 2004
---- ----

Patents $ 93,000 $ 92,000
Valuation Participation Agreement 577,000 577,000
--------- ---------

670,000 669,000
Less accumulated amortization 481,000 373,000
--------- ---------

Total $ 190,000 $ 296,000
========= =========

F-18

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 6- Line of Credit

The Company had available $250,000 revolving line of credit from a bank
with interest payable monthly at 3.25%. The line of credit was secured by a
$250,000 Certificate of Deposit. During 2005 the line of credit was paid in
full, including all related interest obligations.

NOTE 7- Deferred Revenues - Tomoe LTA Long-Term Contract

The Company has entered into a development and production contract with
Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. for eight
battery-electric locomotives for the Singapore Land Transport Authority for
service vehicles for the Singapore Mass Rapid Transit Circle Line system
for maintenance, repair, shunting and recovery of passenger trains. The
contract commenced in August 2004 and completion of the contract will take
approximately 15-18 months and was valued at approximately $3,022,000. The
Company is recording revenues for this long-term, fixed price contract on
the basis of the percentage-of-completion method. The contract contains
several deliverables over its life and therefore the Company will divide
these deliverables into separate units of accounting based on relative fair
values. Revenue recognition criteria will be assessed separately for each
separate unit of accounting. Revenues recorded for this contract were
$2,928,000 and $68,000 as of December 31, 2005 and 2004, respectively.
There is no deferred revenue relating to this contract as of December 31,
2005.

NOTE 8- Notes Payable

In December 2005, the Company was informed by the Credit Managers
Association of California that $1,011,000 of principal and $447,000 accrued
interest under the secured note payable had been disclaimed and
extinguished by the beneficiaries of such principal amount. The Company has
recognized a gain on the extinguishment of the principal and associated
accrued interest of $1,458,000 in relation to this extinguishment. The
Company evaluated this transaction under the guidance set forth in SFAS 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and noted that the extinguishment of these
liabilities was consistent with the guidance.

In October 2005, the Company agreed to a settlement on an unsecured 10%
note payable. In exchange for immediate payment of the full principal
balance of $120,000, the beneficiary of the note agreed to forgive the
entire accrued interest balance of $111,000. The Company has recognized a

F-19

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 8- Notes Payable (Continued)

gain on the extinguishment of the associated accrued interest. The Company
evaluated this transaction under the guidance set forth in SFAS 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and noted that the extinguishment of these
liabilities was consistent with the guidance.

Notes payable at December 31, consisted of the following:

2005 2004
---- ----

Secured note payable to Credit Managers
Association of California, bearing interest
at prime plus 3% in 2005 and through
maturity. Principal and unpaid interest
due in April 2016. A sinking fund escrow is
required to be funded with 10% of future
equity financing, as defined in the agreement. $2,321,000 $3,332,000

Unsecured note payable, bearing interest at 10%
per annum. -- 120,000

Secured note payable to a Coca Cola Enterprises
in the original amount of $40,000, bearing
interest at 5% per annum. Principal and
unpaid interest due now. 40,000 40,000

Secured note payable to a financial institution
in the original amount of $33,000, bearing
interest at 8% per annum, payable in
36 equal monthly installments. 2,000 15,000
---------- ----------
2,363,000 3,507,000
Less current portion 42,000 166,000
---------- ----------
Long-term portion $2,321,000 $3,341,000
========== ==========

F-20

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

Future minimum principal payments of notes payable at December 31, 2005
consisted of the following:

Year Ending
December 31,
------------
2006 $ 42,000
2007 --
2008 --
2009 --
2010 --
Thereafter 2,321,000
----------
Total $2,363,000
==========

NOTE 9- Commitments and Contingencies

Leases
------
The Company leases its facilities under an operating lease agreement, which
requires monthly payments of $13,700 and expires in February 2008. In
addition, the Company rents manufacturing and office equipment under
various capital lease agreements.

Future minimum lease payments under these non-cancelable operating and
capital lease obligations at December 31, 2005 were as follows:

Year Ending Operating
December 31, Leases
------------ ------
2006 $166,000
2007 168,000
2008 28,000
--------
$362,000
========

Rent expense was $259,000, $140,000, and $150,000 for the years ended
December 31, 2005, 2004, and 2003, respectively.

NOTE 10 - Stockholders' Equity

Common Stock
------------
During the year ended December 31, 2005, the Company issued 5,473,000
shares of common stock for cash proceeds totaling $20,523,000. Total
offering costs related to the issuance were $2,162,000. Of the total shares
issued, 5,350,000 were sold through a placement agent to certain eligible
investors outside the United States. 123,000 shares were issued through a
private placement offering. In addition, the Company issued 81,000 shares
of common stock to directors as compensation totaling $402,000.

F-21

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 10 - Stockholders' Equity (Continued)

During 2005, the Company effected a reverse stock split into a fraction
thereof of 1/45th of a share of our outstanding common stock. In lieu of
any fractional shares to which a holder of common stock would otherwise be
entitled, we paid cash equal to (a) the average of the high-bid and
low-asked per share prices of the common stock as reported on the NASDAQ
electronic "Bulletin Board" on the effective date multiplied by (b) the
number of shares of common stock held by such holder that would otherwise
have been exchanged for such fractional share interest. As such, the number
of issued and outstanding shares of common stock as of December 31, 2005
reflects the effects of the reverse-split. The number of shares of common
stock authorized remains at 750,000,000. These are reflected in the
financial statements as of December 31, 2005.

Common Stock Subscribed
-----------------------
At December 31, 2005, the Company was committed to issue 8,000 shares of
common stock totaling $30,000 as compensation to its directors.

Series A Preferred Stock
------------------------
Series A preferred stock is currently unregistered and convertible into
common stock on a one-to-one basis at the election of the holder or
automatically upon the occurrence of certain events including: sale of
stock in an underwritten public offering; registration of the underlying
conversion stock; or the merger, consolidation, or sale of more than 50% of
the Company. Holders of Series A preferred stock have the same voting
rights as common stockholders. The stock has a liquidation preference of
$0.60 per share plus any accrued and unpaid dividends in the event of
voluntary or involuntary liquidation of the Company. Dividends are
non-cumulative and payable at the annual rate of $0.036 per share if, when,
and as declared by, the Board of Directors. No dividends have been declared
on the Series A preferred stock.

Substantially all of the stock notes receivable stem from a Board of
Directors plan for the sale of shares of Series A preferred stock in 1993
to certain officers and directors (Participants). In general, the
Participants could purchase the preferred stock for a combination of cash,
promissory notes payable to the Company, and conversion of debt and
deferred compensation due to the Participants. All shares issued under this
plan were pledged to the Company as security for the notes. The notes
provided for interest at 8% per annum payable annually, with the full
principal amount and any unpaid interest due on January 31, 1997. The notes
remain outstanding. The likelihood of collecting the interest on these
notes is remote; therefore, accrued interest has not been recorded since
the fiscal year ended July 31, 1997.

Series B Preferred Stock
------------------------
Series B preferred stock is currently unregistered and each share is
convertible into shares of common stock on a two-for-one basis at the
election of the holder or automatically upon the occurrence of certain
events including: sale of stock in an underwritten public offering, if the
offering results in net proceeds of $10,000,000, and the per share price of
common stock is at least $2.00; and the merger, consolidation, or sale of
common stock or sale of substantially all of the Company's assets in which
gross proceeds received are at least $10,000,000.

F-22

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 10 - Stockholders' Equity (Continued)

The Series B preferred stock has certain liquidation and dividend rights
prior and in preference to the rights of the common stock and Series A
preferred stock. The stock has a liquidation preference of $2.00 per share
together with an amount equal to, generally, $0.14 per share compounded
annually at 7% per year from the filing date, less any dividends paid.
Dividends on the Series B preferred stock are non-cumulative and payable at
the annual rate of $0.14 per share if, when, and as declared by, the Board
of Directors. No dividends have been declared on the Series B preferred
stock.

Stock Options and Warrants
--------------------------
During 2004, the stockholders of the Company approved an increase of
20,000,000 shares for the 1996 Stock Option Plan (the "Plan") for incentive
and non-statutory stock options during the period of the Plan, which
expires in 2006. The Plan now reserves 65,000,000 shares under the plan.
Options under the 1996 Plan expire over a period not to exceed ten years.

Stock Options and Warrants (Continued)
--------------------------------------
During the year ended December 31, 2005, the Company did not issue any
shares of common stock from the exercise of options.

During 2005, the Company adopted an executive compensation plan by granting
options to the Company's executives options under our 1996 Stock Option
Plan to purchase a total of 244,000 shares of common stock at an exercise
price of $4.35 per share. These options will vest based on the Company
achieving certain revenue milestones for the years ended December 31, 2005
and 2006. If such milestones are not met, the options with respect to those
milestones will terminate. All of the granted options will remain in effect
for a period of 10 years or until 90 days after the employment of the
optionee terminates. For purposes of adjusted pro forma disclosures, the
estimated fair value of the options is amortized to expense over the
vesting period. As the measurement date for these option issuances have
been deemed the respective vesting dates, the Company evaluated the impact
of these stock option issuances using the grant date in the application of
APB Opinion No. 25. As of the year ended December 31, 2005, the Company's
executives had 122,000 options that have vested.

During 2005 the Board granted other employees options to purchase a total
of 66,000 shares of common stock at an exercise price of $4.35 which will
vest in equal installments over 36 months. All of the granted options will
remain in effect for a period of 10 years or until the employment of the
optionee terminates.

In Accordance with APB Opinion No. 25, there was no change recorded for
these grants as the fair market value of the common stock approximated the
per share exercise price of the respective options granted.

F-23

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 10 - Stockholders' Equity (Continued)

Stock Options and Warrants (Continued)
--------------------------------------
The following summarizes common stock option activity. All prior year
amounts have been restated to reflect the reverse stock split, discussed
above:

1996 Plan 1993 Plan Other
------------------------ --------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----

Outstanding,
December
31, 2002 475,000 $ 4.95 157,000 $ 23.40 33,000 $76.50

Granted 222,000 $ 2.25 -- $ -- -- $ --
Exercised (192,000) $ 2.25 -- $ -- -- $ --
Forfeited (35,000) $ 4.95 (157,000) $ 23.40 (33,000) $76.50
------- -------- -------

Outstanding,
December
31, 2003 470,000 $ 5.40 -- $ -- -- $ --

Granted 44,000 $ 5.40 -- $ -- -- $ --
Exercised (243,000) $ 4.50 -- $ -- -- $ --
Forfeited (107,000) $ 5.40 -- $ -- -- $ --
------- -------- -------
Outstanding,
December
31, 2004 164,000 $ 5.40 -- $ -- -- $ --

Granted 310,000 $ 4.35 -- $ -- -- $ --
Exercised - $ - -- $ -- -- $ --
Forfeited (38,000) $ 7.64 -- $ -- -- $ --
------- -------- -------
Outstanding,
December
31, 2005 436,000 $ 4.46 -- $ -- -- $ --
======= ======== =======
Exercisable,
December
31, 2005 255,000 $ 5.06 -- $ -- -- $ --
======= ====== ======== ======== ======= ======

F-24

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

NOTE 10 - Stockholders' Equity (Continued)

The weighted-average remaining contractual life of the options outstanding
at December 31 2005 was 7 years. The exercise prices of the options
outstanding at December 31, 2005 ranged from $4.35 to $8.10. Options
exercisable were 255,000, 143,000, and 464,000 at December 31, 2005, 2004
and 2003.

Stock Options and Warrants (Continued)
--------------------------------------
In 2005, the Company entered into a warrant agreement in conjunction with
the stock purchase agreement to issue 123,000, post split, shares of common
stock through a private placement offering. The warrant agreement grants
the investor the right to purchase 25,000, post split, shares of our common
stock at a price of $5.40 per share before June 2, 2006.

The agreement with Ford Motor Company (see Note 5) included issuing
warrants to Ford to purchase 4.6% of the fully diluted common stock of the
Company over a 66 month period. The number of shares to be acquired will be
adjusted from time to time for increases in the Company's fully diluted
common stock. The vesting of these warrants is dependent upon Ford meeting
specific purchase requirements.

The fair value of the warrants granted to Ford were estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 102%, risk-free
interest rate of 4.76% and an expected life of the warrants of 66 months.
Warrants issued and vested under this agreement totaled 2,500,000 at an
exercise price of $0.29 per share during the year ended December 31, 2001.
No warrants were vested under this program during 2005 and 2004. As of June
30, 2004, Ford is no longer eligible for further vesting of its warrants
per the terms of the Value Participation Agreement.

NOTE 11 - Income Taxes

Significant components of the Company's deferred tax assets and liabilities

F-25

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
--------------------------------------------------------------------------------

for federal and state income taxes as of December 31, 2005 and 2004
consisted of the following:

2005 2004
---- ----
Deferred tax assets
Federal tax loss carry-forward $33,135,000 $31,542,000
State tax loss carry-forward 1,154,000 893,000
Basis difference 1,610,000 1,610,000
Other, net (648,000) (96,000)
---------- ----------
35,251,000 33,949,000
Less valuation allowance 35,251,000 33,949,000
---------- ----------
Net deferred tax assets $ -- $ --
=========== ===========

As of December 31 2005, the Company had net operating loss carry forwards
for federal and state income tax purposes of approximately $97,455,000 and
$13,059,000, respectively. The net operating loss carry forwards began
expiring in 2003.

NOTE 12 - Related Party Transactions

During 2005, the Company purchased approximately $2,516,000 in components,
materials and services from HHI. The outstanding balance owed to HHI at
December 31, 2005 was approximately $1,317,000

NOTE 13- Employee Benefit Plan

The Company has a 401(k) profit sharing plan covering substantially all
employees. Eligible employees may elect to contribute a percentage of their
annual compensation, as defined, to the plan. The Company may also elect to
make discretionary contributions. For the years ended December 31, 2005,
2004, and 2003 the Company did not make any contributions to the plan.

NOTE 14- Geographic Area Data

The Company operates as a single reportable segment and attributes revenues
to countries based upon the location of the entity originating the sale.
Revenues by geographic area are as follows:

2005 2004 2003
---- ---- ----
United States $ 971,000 $1,465,000 $2,672,000
Italy 152,000 30,000 213,000
Korea 758,000 258,000 297,000
Japan 3,038,000 176,000 146,000
China 234,000 256,000 --
Malaysia 91,000 -- 184,000
Ireland -- 166,000 --
Canada 120,000 -- 738,000
United Kingdom 720,000 203,000 60,000
---------- ---------- ----------
Total $6,084,000 $2,554,000 $4,310,000
========== ========== ==========

F-26

ENOVA SYSTEMS, INC.
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
---------------------------------------------------------------------------------------------------------------
March 31 June 30
2005 2004 2005 2004
---- ---- ---- ----

Net revenues $ 692,000 $1,108,000 $1,322,000 $ 718,000

Cost of revenues 570,000 658,000 1,024,000 519,000
--------- --------- --------- ---------
Gross Profit 122,000 450,000 298,000 199,000
--------- --------- --------- ---------
Operating expenses
Research and development 217,000 128,000 178,000 181,000
Selling, general & administrative 608,000 438,000 550,000 453,000
--------- --------- --------- ---------
Total operating expenses 825,000 566,000 728,000 634,000

Other income and (expense)
Interest and financing fees, net (69,000) (1,000) (72,000) (79,000)
Equity in losses of equity method investee (40,000) (44,000) (26,000) (88,000)
Debt extinguishment -- -- -- --
Interest extinguishment -- -- -- --
--------- --------- --------- ---------
Total other income and (expense) (109,000) (45,000) (98,000) (167,000)
--------- --------- --------- ---------
Net Income / (Loss) $(812,000) $(161,000) $(528,000) $(602,000)
========= ========= ========= =========
Basic loss and diluted loss per share $ (0.09) $ (0.02) $ (0.06) $ (0.07)
========= ========= ========= =========
Restated for effects of reverse stock split-
see note 10

Weighted-average number of
shares outstanding 9,238,000 8,325,000 9,263,000 8,519,000
========= ========= ========= =========

September 30 December 31
2005 2004 2005 2004
---- ---- ---- ----

Net revenues $ 857,000 $ 406,000 $3,213,000 $ 322,000

Cost of revenues 729,000 357,000 3,678,000 705,000
---------- ----------- ---------- -----------
Gross Profit 128,000 49,000 (465,000) (383,000)
---------- ----------- ---------- -----------
Operating expenses
Research and development 197,000 198,000 212,000 418,000
Selling, general & administrative 765,000 844,000 947,000 590,000
---------- ----------- ---------- -----------
Total operating expenses 962,000 1,042,000 1,159,000 1,008,000

Other income and (expense)
Interest and financing fees, net 59,000 (61,000) 95,000 (114,000)
Equity in losses of equity method investee (7,000) (47,000) (45,000) (13,000)
Debt extinguishment -- -- 1,011,000 --
Interest extinguishment -- -- 558,000 --
---------- ----------- ---------- -----------
Total other income and (expense) 52,000 (108,000) 1,619,000 (127,000)
---------- ----------- ---------- -----------
Net Income / (Loss) $ (782,000) $(1,101,000) $ (5,000) $(1,518,000)
========== =========== ========== ===========
Basic loss and diluted loss per share $ (0.06) $ (0.13) $ (0.00) $ (0.17)
========== =========== ========== ===========
Restated for effects of reverse stock split-
see note 10

Weighted-average number of
shares outstanding 13,373,000 8,665,000 11,664,000 8,832,000
========== ========= ========== ===========

F-27