##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ending September 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file no. 1-33001
 ENOVA SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 California
    
    95-3056150(State or other jurisdiction of
    
    (I.R.S. Employerincorporation 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)
 þ o
  o o þ
 o þ




---



##### 



ENOVA SYSTEMS, INC.
 INDEX
 PART
I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)
    
    
    3Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    3Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
    
    
    4Statements of Cash Flows for the Nine Months Ended September 2007 and 2006
    
    
    5Notes to Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    22Item 4. Control and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity and Use of Proceeds
    
    
    24Item 3. Defaults upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25SignaturesEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ENOVA SYSTEMS, INC.
 
 BALANCE SHEETS
(Unaudited)
 September 30, 2007
    
    
    December 31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,685,000
    
    
    $
    5,612,000Short term investment
    
    
    
    
    
    
    5,000,000Accounts receivable, net of allowance for doubtful
accounts of $261,000 and $261,000 as of September
30, 2007 and December 31, 2006, respectively
    
    
    2,763,000
    
    
    
    358,000Inventories and supplies, net
    
    
    4,327,000
    
    
    
    1,704,000Prepaid expenses and other current assets
    
    
    300,000
    
    
    
    708,000Total current assets
    
    
    21,075,000
    
    
    
    13,382,000Property and equipment, net
    
    
    646,000
    
    
    
    627,000Ownership interest in joint venture company
    
    
    1,517,000
    
    
    
    1,647,000Intangible assets
    
    
    71,000
    
    
    
    74,000Total assets
    
    $
    23,309,000
    
    
    $
    15,730,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,630,000
    
    
    $
    382,000Deferred revenues
    
    
    67,000
    
    
    
    399,000Accrued payroll and related expense
    
    
    332,000
    
    
    
    220,000Other accrued expenses
    
    
    1,770,000
    
    
    
    664,000Current portion of notes payable
    
    
    85,000
    
    
    
    71,000Total current liabilities
    
    
    3,884,000
    
    
    
    1,736,000Accrued interest payable
    
    
    837,000
    
    
    
    735,000Notes payable, net of current portion
    
    
    1,291,000
    
    
    
    1,295,000Total liabilities
    
    $
    6,012,000
    
    
    $
    3,766,000Stockholders equity:Series A convertible preferred stock  no par
value 30,000,000 shares authorized 2,652,000
shares issued and outstanding Liquidating
preference at $0.60 per share, aggregating $1,591,000
    
    
    1,679,000
    
    
    
    1,679,000Series B convertible preferred stock  no par
value 5,000,000 shares authorized 1,185,000 shares
issued and outstanding Liquidating preference at
$2 per share, aggregating $2,370,000
    
    
    2,432,000
    
    
    
    2,432,000Common Stock, no par value 750,000,000 shares
authorized 17,115,000 and 14,816,000 shares issued
and outstanding, respectively
    
    
    121,508,000
    
    
    
    109,460,000Common stock issuable
    
    
    36,000
    
    
    
    36,000Stock notes receivable
    
    
    (1,149,000
    )
    
    
    (1,176,000
    )Additional paid-in capital
    
    
    6,082,000
    
    
    
    6,955,000Accumulated deficit
    
    
    (113,291,000
    )
    
    
    (107,422,000
    )Total stockholders equity
    
    
    17,297,000
    
    
    
    11,964,000Total liabilities and stockholders equity
    
    $
    23,309,000
    
    
    $
    15,730,000
  3




---



##### Table of Contents



ENOVA SYSTEMS, INC.
 
 STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenuesResearch and development contracts
    
    $
    
    
    
    $
    19,000
    
    
    $
    
    
    
    $
    439,000Production
    
    
    2,541,000
    
    
    
    293,000
    
    
    
    5,143,000
    
    
    
    634,000Total net revenues
    
    
    2,541,000
    
    
    
    312,000
    
    
    
    5,143,000
    
    
    
    1,073,000Cost of revenuesResearch and development contracts
    
    
    
    
    
    
    211,000
    
    
    
    
    
    
    
    767,000Production
    
    
    2,708,000
    
    
    
    409,000
    
    
    
    5,728,000
    
    
    
    1,228,000Total cost of revenues
    
    
    2,708,000
    
    
    
    620,000
    
    
    
    5,728,000
    
    
    
    1,995,000Gross profit (loss)
    
    
    (167,000
    )
    
    
    (308,000
    )
    
    
    (585,000
    )
    
    
    (922,000
    )Operating expensesResearch and development
    
    
    203,000
    
    
    
    297,000
    
    
    
    815,000
    
    
    
    929,000Selling, general & administrative
    
    
    1,702,000
    
    
    
    1,154,000
    
    
    
    4,573,000
    
    
    
    3,113,000Total operating expenses
    
    
    1,905,000
    
    
    
    1,451,000
    
    
    
    5,388,000
    
    
    
    4,042,000Loss from operations
    
    
    (2,072,000
    )
    
    
    (1,759,000
    )
    
    
    (5,973,000
    )
    
    
    (4,964,000
    )Other income and (expense)Interest and financing fees, net
    
    
    59,000
    
    
    
    118,000
    
    
    
    235,000
    
    
    
    447,000Equity loss  share of joint venture company losses
    
    
    (60,000
    )
    
    
    
    
    
    
    (130,000
    )
    
    
    (42,000
    )Debt extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    920,000Interest extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472,000Total other income and (expense)
    
    
    (1,000
    )
    
    
    118,000
    
    
    
    105,000
    
    
    
    1,797,000Net Income (loss)
    
    $
    (2,073,000
    )
    
    $
    (1,641,000
    )
    
    $
    (5,868,000
    )
    
    $
    (3,167,000
    )Basic and diluted earnings (loss) per share
    
    $
    (.13
    )
    
    $
    (.11
    )
    
    $
    (.38
    )
    
    $
    (.21
    )Weighted-average number of shares outstanding/basic
and diluted
    
    
    16,333,000
    
    
    
    14,800,000
    
    
    
    15,340,000
    
    
    
    14,800,000
  4




---



##### Table of Contents



ENOVA SYSTEMS, INC.
 
 STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activitiesNet loss
    
    $
    (5,868,000
    )
    
    $
    (3,167,000
    )Adjustments to reconcile net loss to net cash used in operating activitiesDebt extinguishment
    
    
    
    
    
    
    (920,000
    )Interest extinguishment
    
    
    
    
    
    
    (472,000
    )Depreciation and amortization
    
    
    224,000
    
    
    
    322,000Loss (gain) on asset disposal
    
    
    40,000
    
    
    
    Equity in losses of equity method investee
    
    
    130,000
    
    
    
    42,000Issuance of common stock for services
    
    
    158,000
    
    
    
    105,000Stock option expense
    
    
    60,000
    
    
    
    42,000(Increase) decrease in:Accounts receivable
    
    
    (2,405,000
    )
    
    
    1,990,000Inventory and supplies
    
    
    (2,623,000
    )
    
    
    (184,000
    )Prepaid expenses and other current assets
    
    
    408,000
    
    
    
    (247,000
    )Increase (decrease) in:Accounts payable
    
    
    1,248,000
    
    
    
    (1,308,000
    )Accrued expenses
    
    
    1,218,000
    
    
    
    299,000Deferred revenues
    
    
    (332,000
    )
    
    
    Accrued interest payable
    
    
    102,000
    
    
    
    59,000Net cash used in operating activities
    
    
    (7,640,000
    )
    
    
    (3,439,000
    )Cash flows from investing activitiesPurchases of short-term securities
    
    $
    
    
    
    $
    (5,000,000
    )Sales of short-term securities
    
    
    5,000,000
    
    
    
    Purchases of property and equipment
    
    
    (246,000
    )
    
    
    (243,000
    )Net cash
provided (used in) investing activities
    
    
    4,754,000
    
    
    
    (5,243,000
    )Cash flows from financing activitiesPayment on notes payable and capital lease obligations
    
    $
    (25,000
    )
    
    $
    Net Proceeds from sales of common stock
    
    
    10,957,000
    
    
    
    Proceeds from stock notes receivable
    
    
    27,000
    
    
    
    Payment to extinguish debt
    
    
    
    
    
    
    (165,000
    )Net cash provided by (used in) financing activities
    
    
    10,959,000
    
    
    
    (165,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    8,073,000
    
    
    
    (8,847,000
    )Cash and cash equivalents, beginning of period
    
    
    5,612,000
    
    
    
    16,187,000Cash and cash equivalents, end of period
    
    $
    13,685,000
    
    
    $
    7,340,000Supplemental disclosure of cash flow informationInterest paid
    
    $
    5,000
    
    
    $
    Income taxes paid
    
    $
    
    
    
    $
    Supplemental schedule of non-cash investing and financing activitiesAssets acquired through financing arrangement
    
    $
    35,000
    
    
    $
    95,000
  5




---



##### Table of Contents



ENOVA SYSTEMS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 Nine months ended September 30, 2007 and 2006
 1. Description of the Company and its Business
  2. Summary of Significant Accounting Policies
 Interim Financial Information
   Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists;
    
    Delivery has occurred or services have been rendered;
    
    The fee for the arrangement is fixed or determinable; and
    
    Collectibility is reasonably assured.
 Persuasive Evidence of an Arrangement
 Delivery Has Occurred or Services Have Been Performed
 The Fee for the Arrangement is Fixed or Determinable
 6




---



##### Table of Contents



Collectibility is Reasonably Assured
   Stock Based Compensation
 Share-Based Payment
  Stock Based Compensation Plans
 7




---



##### Table of Contents



Use of Estimates
  3. Notes Payable, Long-Term Debt and Other Financing
  Nine Months EndedSeptember 30,2007
    
    
    2006Secured note payable to Credit Managers Association of California, bearing interest
at prime plus 3% per annum 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
    
    
    1,238,000
    
    
    
    1,238,000Secured notes payable to a financial
institution in the original amounts totaling
$130,000, bearing interest at 6.21% and
10.45%, payable in monthly installments
    
    
    98,000
    
    
    
    88,000Secured note payable to Coca Cola
Enterprises in the original amount of
$40,000, bearing interest at 10% per annum.
Principal and unpaid interest due now
    
    
    40,000
    
    
    
    40,000Less current maturities
    
    
    (85,000
    )
    
    
    (71,000
    )Long-term portion
    
    
    1,291,000
    
    
    
    1,295,000
  4. Shareholders Equity
     8




---



##### Table of Contents



5. Related Party Transactions
  6. Material Commitments
  7. Subsequent Events
  8. Stock Based Compensations Plans
 Stock Based Compensation Issued to Third Parties
 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling Goods or Services Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendors Products).
 9




---



##### Table of Contents



Stock Option Program Description
   Quarter ended September 30, 2007
   Three
    
    ThreeMonths
    
    Monthsended
    
    ended9-30-2007
    
    9-30-2006Income from continuing operations before income taxes
    
    $
    20,000
    
    
    $
    14,000Income from continuing operations after income taxes
    
    $
    20,000
    
    
    $
    14,000Cash flows from operations
    
    $
    20,000
    
    
    $
    14,000Cash flows from financing activities
    
    $
    
    
    
    $
    Basic and Diluted EPS
    
    $
    
    
    
    $
    
 Nine Months
    
    Nine Monthsended
    
    ended9-30-2007
    
    9-30-2006Income from continuing operations before income taxes
    
    $
    60,000
    
    
    $
    23,000Income from continuing operations after income taxes
    
    $
    60,000
    
    
    $
    23,000Cash flows from operations
    
    $
    60,000
    
    
    $
    23,000Cash flows from financing activities
    
    $
    
    
    
    $
    Basic and Diluted EPS
    
    $
    
    
    
    $
    
   10




---



##### Table of Contents



General Option Information
 1996 Plan
    
    
    Weighted Average
    
    
    Weighted Average
    
    
    AggregateShares
    
    
    Exericse Price
    
    
    Contractual Term
    
    
    Instrinsive ValueOutstanding at December 31, 2006
    
    
    162,000
    
    
    $
    4.43
    
    
    
    7.96
    
    
    $
    44,000Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    (44,000
    )
    
    $
    4.36
    
    
    
    7.85
    
    
    $
    15,000Forfeited
    
    
    (4,000
    )
    
    $
    4.35
    
    
    
    8.25
    
    
    $
    Outstanding at September 30, 2007
    
    
    114,000
    
    
    $
    4.46
    
    
    
    7.34
    
    
    $
    27,000Vested Expected to Vest
    
    
    112,000
    
    
    $
    4.46
    
    
    
    7.35
    
    
    $
    27,000Exercisable at September 30, 2007
    
    
    93,000
    
    
    $
    4.48
    
    
    
    7.34
    
    
    $
    20,000
  9. Recent Accounting Pronouncements
 Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. , Accounting for Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities
 Clarification of the Scope of the Audit and Accounting
Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for
Investments in Investment Companies
   11




---



##### Table of Contents



Accounting Pronouncements Adopted In The Current Year
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report on Form 10-Q 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 this
Quarterly Report on Form 10-Q 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 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 Quarterly Report on Form 10-Q . 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 our Annual Report on Form 10-K for the
year ended December 31, 2006.
 The following discussion and analysis should be read in conjunction with the unaudited interim
financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form
10-Q and with the financial statements and notes thereto and Managements Discussion and Analysis
of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for
the year ended December 31, 2006.
 Overview
   12




---



##### Table of Contents











13




---



##### Table of Contents




    
    On August 28, 2007, Edwin Riddell retired as Chief Executive Officer as
previously announced on June 26, 2007. Mr. Riddell will remain on the board of directors.
    
    Michael Staran was appointed Chief Executive Officer on August 28, 2007. Mr. Staran previously had been appointed President and Chief Operating Officer effective July 1, 2007.
    
    In January 2007, Corinne Bertrand resigned as Chief Financial Officer. In her place,
Jarett Fenton was appointed as Chief Financial Officer.
    
    In February of 2007, John Dexter retired from his position as Director of Operations.
     14




---



##### Table of Contents



Critical Accounting Policies
   Cash and cash equivalents 
 Inventory 
 Inventory reserve 
 Allowance for doubtful accounts 
 Stock-based Compensation  Share-Based Payment Accounting for Stock
Issued to Employees Staff Accounting Bulletin No. 107
  Revenue recognition 
 15




---



##### Table of Contents



16




---



##### Table of Contents



RESULTS OF OPERATIONS
  Third Quarter of Fiscal 2007 vs. Third Quarter of Fiscal 2006
  Three Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006As a % of total net revenuesNet revenuesResearch and development contracts
    
    $
    
    
    
    $
    19,000
    
    
    
    (100
    %)
    
    
    0
    %
    
    
    6
    %Production
    
    
    2,541,000
    
    
    
    293,000
    
    
    
    767
    %
    
    
    100
    %
    
    
    94
    %Total net revenues
    
    
    2,541,000
    
    
    
    312,000
    
    
    
    714
    %
    
    
    100
    %
    
    
    100
    %Cost of revenuesResearch and development contracts
    
    
    
    
    
    
    211,000
    
    
    
    (100
    %)
    
    
    0
    %
    
    
    68
    %Production
    
    
    2,708,000
    
    
    
    409,000
    
    
    
    562
    %
    
    
    107
    %
    
    
    131
    %Total cost of revenues
    
    
    2,708,000
    
    
    
    620,000
    
    
    
    337
    %
    
    
    107
    %
    
    
    199
    %Gross profit (loss)
    
    
    (167,000
    )
    
    
    (308,000
    )
    
    
    47
    %
    
    
    (7
    %)
    
    
    (99
    %)Operating expensesResearch and development
    
    
    203,000
    
    
    
    297,000
    
    
    
    (32
    %)
    
    
    8
    %
    
    
    95
    %Selling, general & administrative
    
    
    1,702,000
    
    
    
    1,154,000
    
    
    
    47
    %
    
    
    67
    %
    
    
    370
    %Total operating expenses
    
    
    1,905,000
    
    
    
    1,451,000
    
    
    
    31
    %
    
    
    75
    %
    
    
    465
    %Loss from operations
    
    
    (2,072,000
    )
    
    
    (1,759,000
    )
    
    
    18
    %
    
    
    (83
    %)
    
    
    (564
    %)Other income and (expense)Interest and financing fees, net
    
    
    59,000
    
    
    
    118,000
    
    
    
    (50
    %)
    
    
    2
    %
    
    
    38
    %Equity loss  share of joint venture company losses
    
    
    (60,000
    )
    
    
    
    
    
    
    100
    %
    
    
    (2
    %)
    
    
    0
    %Debt extinguishment
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Interest extinguishment
    
    
    
    
    
    
    
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total other income and (expense)
    
    
    (1,000
    )
    
    
    118,000
    
    
    
    (101
    %)
    
    
    0
    %
    
    
    38
    %Net Income (loss)
    
    $
    (2,073,000
    )
    
    $
    (1,641,000
    )
    
    
    26
    %
    
    
    (84
    %)
    
    
    (526
    %)
 
 The sum of the amounts and percentages may not equal the totals for the period due to the effects
of rounding. 17




---



##### Table of Contents



First Nine Months of Fiscal 2007 vs. First Nine Months of Fiscal 2006
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006As a % of total net revenuesNet revenuesResearch and development contracts
    
    $
    
    
    
    $
    439,000
    
    
    
    (100
    %)
    
    
    0
    %
    
    
    17
    %Production
    
    
    5,143,000
    
    
    
    634,000
    
    
    
    711
    %
    
    
    202
    %
    
    
    25
    %Total net revenues
    
    
    5,143,000
    
    
    
    1,073,000
    
    
    
    379
    %
    
    
    202
    %
    
    
    42
    %Cost of revenuesResearch and development contracts
    
    
    
    
    
    
    767,000
    
    
    
 (100
    %)
    
    
    0
    %
    
    
    30
    %Production
    
    
    5,728,000
    
    
    
    1,228,000
    
    
    
    366
    %
    
    
    225
    %
    
    
    48
    %Total cost of revenues
    
    
    5,728,000
    
    
    
    1,995,000
    
    
    
    187
    %
    
    
    225
    %
    
    
    79
    %Gross profit (loss)
    
    
    (585,000
    )
    
    
    (922,000
    )
    
    
    37
    %
    
    
    (23
    %)
    
    
    (37
    %)Operating expensesResearch and development
    
    
    815,000
    
    
    
    929,000
    
    
    
    (12
    %)
    
    
    32
    %
    
    
    37
    %Selling, general & administrative
    
    
    4,573,000
    
    
    
    3,113,000
    
    
    
    46
    %
    
    
    180
    %
    
    
    123
    %Total operating expenses
    
    
    5,388,000
    
    
    
    (4,042,000
    )
    
    
    (233
    %)
    
    
    212
    %
    
    
    (163
    %)Loss from operations
    
    
    (5,973,000
    )
    
    
    (4,964,000
    )
    
    
    20
    %
    
    
    (241
    %)
    
    
    (200
    %)Other income and (expense)Interest and financing fees, net
    
    
    235,000
    
    
    
    447,000
    
    
    
    (47
    %)
    
    
    9
    %
    
    
    18
    %Equity loss  share of joint venture company losses
    
    
    (130,000
    )
    
    
    (42,000
    )
    
    
    210
    %
    
    
    (5
    %)
    
    
    (2
    %)Debt extinguishment
    
    
    
    
    
    
    920,000
    
    
    
    (100
    %)
    
    
    0
    %
    
    
    36
    %Interest extinguishment
    
    
    
    
    
    
    472,000
    
    
    
    (100
    %)
    
    
    0
    %
    
    
    19
    %Total other income and (expense)
    
    
    105,000
    
    
    
    1,797,000
    
    
    
    (106
    %)
    
    
    (4
    %)
    
    
    71
    %Net Income (loss)
    
    $
    (5,868,000
    )
    
    $
    (3,167,000
    )
    
    
    85
    %
    
    
    (237
    %)
    
    
    (128
    %)
 
 The sum of the amounts and percentages may not equal the totals for the period due to the effects
of rounding.  Revenue.
 18




---



##### Table of Contents



Cost of Revenue.
 Gross Margin.
 Research and Development.
 Selling, General, and Administrative Expenses (S, G, & A).
 Interest Income.
 Net Loss.
 Comparability of Quarterly Results.
 LIQUIDITY AND CAPITAL RESOURCES
  19




---



##### Table of Contents



20




---



##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. , Accounting for Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities
 Clarification of the Scope of the Audit and Accounting
Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for
Investments in Investment Companies
   Accounting Pronouncements Adopted In The Current Year
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 21




---



##### Table of Contents



Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate and Credit Risk.
 
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   22




---



##### Table of Contents



Remedial Actions and Changes in Internal Control
  
    
    Created a regulatory compliance department in light of efforts for meeting
Section 404 of the Sarbanes-Oxley Act of 2002. The regulatory compliance department, in cooperation
and in conjunction with efforts by the Audit Committee and executive management, is
responsible for ensuring the operating effectiveness of internal controls over financial
reporting at the Company with the objective of appropriately addressing the risk of
material misstatement on the Companys financial statements.
    
    Began to formalize a quantitative first, qualitative additive risk-based approach to assessing control risk or the risk internal controls over financial reporting may
not prevent or timely detect a material misstatement on the Companys financial
statements as defined by the PCOAB and SEC. Our assessment was based on the Internal Control
  Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). As a result of the risk assessment, we
identified key risk business processes, including, but not limited to, the
inventory process.
    
    Hired a full-time Controller to oversee the day-to-day functions of
the accounting and
finance department. The CFO acted in the capacity of the Controller prior to the
filling of the position.
    
    Hired a full-time Inventory Control Manager to summarize and manage
the movement or tracking of inventory throughout the production process. We also hired a full-time
Production Scheduler to manage the production schedule requirements and assist in
monitoring the production process.
    
    Hired a full-time Senior/Cost Accountant to assist in the
evaluation of the inventory accounts and job costing.
    
    Hired a full-time Shop Supervisor to handle the daily operations
of the production process.
    
    Established period end internal controls such as robust account
balance reconciliations, inspection of documents used to support the substance and form of inventory
transactions, including, the summarizing, recording, and processing with warehouse,
engineering, and production personnel, and executive management.
  23




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Compliance with Sarbanes-Oxley Act of 2002.
   
 Item 2. Unregistered Sales of Equity and Use of Proceeds
 US
 24




---



##### Table of Contents



Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 a) Exhibits31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act Of 2002.*31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
 
 *

    Filed herewith 25




---



##### Table of Contents



SIGNATURE
   ENOVA SYSTEMS, INC.
(Registrant)/s/ Jarett FentonBy: Jarett Fenton, Chief Financial Officer
 26




---



##### Table of Contents



Exhibit Index
 EXHIBITS
 31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 200231.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 27