SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                     For the fiscal year ended July 31, 1996
                         Commission File Number 0-25184

                             U. S. ELECTRICAR, INC.
             (Exact name of registrant as specified in its charter)

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

             5 Thomas Mellon Circle, San Francisco, California 94134
          (Address of principal executive offices, including zip code)

                                 (415) 656-2400
              (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. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  as of  November  5,  1996  was  $8,465,402.  For  purposes  of  this
calculation  only, (i) shares of Common Stock and Series A and B Preferred Stock
are deemed to have a market  value of $0.27 per share,  the  average of the high
bid and low ask prices of the Common Stock on November 5, 1996, and (ii) 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  November  5, 1996 was
127,168,477.

Documents Incorporated By Reference:
Part  III  of  this  Report  incorporates  information  by  reference  from  the
definitive Proxy Statement for the  registrant's  annual meeting of shareholders
to be held in February, 1997.

<PAGE>
                              U.S. ELECTRICAR, INC.

                          1996 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I

Item 1.  Business .........................................................    3

Item 2.  Properties .......................................................   12

Item 3.  Legal Proceedings ................................................   12

Item 4.  Submission of Matters to a Vote of Security Holders...............   13

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related
                  Stockholder Matters......................................   13

Item 6.  Selected Financial Data...........................................   14

Item 7.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations................................   15

Item 8.  Financial Statements and Supplementary Data.......................   19

Item 9.  Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure...................   19

                                    PART III

Item 10. Directors and Executive Officers of the Registrant................   20

Item 11. Executive Compensation............................................   20

Item 12. Security Ownership of Certain Beneficial Owners and Management....   20

Item 13. Certain Relationships and Related Transactions....................   20

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..   21


SIGNATURES ................................................................   22


The matters  addressed  in this report on Form 10-K , with the  exception of the
historical  information  presented,   may  incorporate  certain  forward-looking
statements  involving  risks and  uncertainties,  including the risks  discussed
under the  heading  "Certain  Factors  That May Affect  Future  Results"  in the
Management's Discussion and Analysis section and elsewhere in this report.
                               

                                       2
<PAGE>

Item 1.  Business

General

         U.S.  Electricar,  Inc. (the  "Company") was  incorporated  on July 30,
1976, under its original name, "Clover Solar Corporation,  Inc." The name of the
Company was changed in June 1979, to "Solar Electric Engineering, Inc.", and was
subsequently changed to "U.S. Electricar, Inc." in January 1994.

         Beginning in fiscal year 1994, the Company  focused almost  exclusively
on the  development,  manufacture and  distribution of battery powered  electric
vehicles on a large  production  scale.  A significant  portion of the Company's
marketing and sales efforts for on-road electric vehicles  (including sedans and
light  trucks) in fiscal 1994 and 1995 focused  primarily on altering  (commonly
referred to as  "converting" or  "retrofitting")  specific  internal  combustion
vehicles  to run on  electric  battery  power for fleet  operators.  This market
strategy  was  designed  to  avoid  direct  competition  with  major  automobile
manufacturers in the consumer markets. The Company devoted significant attention
toward developing or acquiring  technology necessary for this evolving business.
In addition, through one of the Company's wholly-owned subsidiaries, the Company
manufactured and sold a broad line of off-road  industrial vehicles and produced
and marketed electric powered on-road buses.

         In March 1995, the Company  experienced a severe cash shortage due to a
failure to obtain additional  anticipated  capital funding.  In response to this
lack of funding, the Company initiated steps to restructure its organization and
operations  in an  effort to  stabilize  and  improve  the  Company's  financial
condition. After March 1995, the Company focused its resources on the production
of off-road  industrial  vehicles  and  on-road  buses.  The  Company  continues
re-evaluating all aspects of its business,  including each of its product lines,
in view of its capital constraints as well as competitive market conditions.

         During  1996,  the  Company  restructured  most of its debt and  raised
approximately  $5,300,000 in additional funding. Certain facilities were closed,
operations were  consolidated and major contracts were  terminated.  Despite the
additional funding in 1996, the Company's operations continued to be impacted by
an insufficient  amount of funds to adequately support its planned sales volumes
and product  development  programs.  In the third  quarter of 1996,  the Company
curtailed the manufacture and sale of off-road industrial vehicles. In September
1996, the Company disposed of a substantial portion of the assets and properties
of the Company's wholly-owned subsidiary,  Industrial Electric Vehicles, Inc. In
October  1996,  the Company  acquired  the assets of  Systronix  Corporation,  a
developer of fully  integrated  propulsion  systems and related  components  for
electric vehicles.

Debt Restructuring

         In March 1995,  as a result of the  Company's  insolvency,  the Company
entered into agreements in March and April 1995 with the holders of its Series S
and  Series  I  secured  convertible  Bonds  and  with  Itochu  Corporation,  to
restructure this debt in the aggregate amount of approximately $22 million.  The
Company,  Itochu and the holders of more than 75% of the  outstanding  principal
under the Series S Bonds agreed to add the unpaid  interest to principal,  reset
the maturity  dates of the Series S Bonds and  Itochu's  note to March and April
1996, respectively,  and for most of the debt establish a new conversion rate to
common stock of $0.30 per share.  They also agreed that  conversion  shall occur
upon  (1) a  restructuring/repayment  workout  plan  accepted  by the  Company's
unsecured  creditors holding 80% or more of the Company's  unsecured trade debt,
which plan has been  approved by the Company,  or (2) Itochu's  sole election to
cause conversion of this debt. In March 1996, the maturity dates of the Series S
and Series I bonds were  extended  to March 25,  1997.  In June 1996,  following
satisfaction of the conditions  precedent to such conversion as discussed below,
approximately  $13,000,000  of the Series S Bonds and Itochu  secured notes were
converted into the Company's common stock at $.30 per share.

         In April 1995, an informal  committee of the Company's  unsecured trade
creditors was  established,  and in August 1995, this committee  recommended for
approval a voluntary  restructuring of the Company's  unsecured debt existing as
of March 17, 1995. The terms of the restructuring  plan were presented to all of
the  unsecured  creditors  in the second  quarter  of 1996 for their  review and
acceptance or rejection.  The  shareholders of the Company approved the issuance
of the Company's  Series B Preferred Stock in furtherance of this  restructuring
at the  Company's  annual  shareholders  meeting  held in February  1996.  As of
February,  1996,  the aggregate  amount of the Company's  outstanding  unsecured
debt, including principal and interest, was approximately $14,000,000, and there
were approximately 600 unsecured creditors of the Company.

                                       3
<PAGE>

         The unsecured  debt  restructuring  plan divided the creditors into two
classes.  Creditors  are members of a class based on whether they qualify  under
applicable  securities laws to receive restricted preferred stock of the Company
in a private  placement.  Each  creditor that did not so qualify was entitled to
receive if the creditor so elected at the closing of the  restructuring (i) cash
in the amount of 10% of such creditor's debt, subject to available funds at that
time, and, to the extent funds were not available, a three year promissory note,
and (ii) a promissory  note of the Company in an amount equal to 65% of its debt
(the "Large Note").  This  promissory note is payable over a twenty year period,
and is secured with a "sinking fund" escrow account.  The Company is required to
deposit 10% of the proceeds of all financings during the twenty year period into
the escrow  account,  subject to  investor  approval.  Currently,  approximately
$720,000 has been  deposited by the Company into the escrow  account and paid to
creditors.

         Each  creditor  who was  eligible  under  securities  laws  to  receive
restricted preferred stock was entitled to receive if the creditor so elected at
the closing (i) cash in the amount of 15% of such  creditor's  debt,  subject to
available  funds at that time,  and, to the extent funds were not  available,  a
three year  promissory  note, and (ii) shares of Series B Convertible  Preferred
Stock  ("Series B Preferred  Stock") of the Company  having a value equal to the
balance of its debt,  at a  conversion  price of $2.00 per share.  Each share of
Series B Preferred  Stock is  initially  convertible  into 6.66 shares of Common
Stock (subject to adjustment for stock splits,  combinations,  reclassifications
and the like). 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 Company  will be required to make  accelerated  payments  under the
promissory  notes if it is able to raise  additional  funds from investors,  but
only with the consent of such  investors.  In addition,  the Company will not be
allowed to pay any  dividends on its  outstanding  shares of capital stock or to
repurchase  shares  without the  consent of a majority  of the then  outstanding
principal  held by  creditors  under  the  Large  Note.  The  Company's Series B
Preferred  Stock  shareholders  have  the  right  to elect  two  members  to the
Company's Board of Directors.

         As of October  15th,  1996,  the Company had obtained  settlements  for
approximately $11.7 million of approximately $14 million of unsecured trade debt
obligated  prior to March  18th,  1995.  The  Company  has issued  approximately
$800,000  of three  year and $3.3  million of 20 year  promissory  notes and 1.5
million shares of Series B Preferred Stock valued at $3.2 million. As of October
15th, 1996, approximately 280 creditors representing  approximately $2.5 million
in unsecured trade debt have not participated in the debt restructuring plan.

         TO THE EXTENT  THAT THE  COMPANY IS UNABLE TO  COMPLETE  THE  VOLUNTARY
RESTRUCTURING OR OTHERWISE REFINANCE OR CONVERT SUCH DEBT AND ADDITIONAL FUNDING
IS NOT  AVAILABLE,  THE  COMPANY  WOULD  BE  FORCED  TO  SEEK  PROTECTION  UNDER
APPLICABLE BANKRUPTCY AND INSOLVENCY LAWS. IN ADDITION,  SIGNIFICANT  ADDITIONAL
FUNDING WILL BE NEEDED THROUGHOUT FISCAL 1997 AND BEYOND TO CONTINUE OPERATIONS.


Environmental Initiatives and Legislation

United States

         Following  the state and  federal  elections  in  November,  1994,  the
changed  legislative  climate in the United States  resulted in  extensions  and
modifications  to federal  and state  legislation  which had  defined  the early
market for alternative fuel and zero emission vehicles. Most significantly,  the
state of California decided to amend its timing for the mandated introduction of
zero emission vehicles ("ZEV"). The amendment is defined below:

                                       4
<PAGE>


              California State Mandates for Zero-Emission Vehicles
         Applicable to Large & Intermediate-Volume Vehicle Manufacturers
                  Percentage of Vehicle Sales Which Must be ZEV

================================================================================
Year       Previous Legislation        Current Legislation as Amended
--------------------------------------------------------------------------------
1998                 2%                Provision for ZEV credits toward 2003
1999                 2%                Provision for ZEV credits toward 2003
2000                 2%                Provision for ZEV credits toward 2003
2001                 5%                Provision for ZEV credits toward 2003
2002                 5%                Provision for ZEV credits toward 2003
2003                 10%                                10%
================================================================================

The U.S.  Department Of Energy ("DOE") also modified  their rules  governing how
state  fleets  and  utility  fleets  covered  by the  Energy  Policy Act of 1992
("EPAct") must comply with the EPAct's Alternative Fuel  Transportation  Program
by   making   certain   a   percentage   of   light-duty    vehicle    purchases
alternatively-fueled.  Light-duty,  for the purposes of the EPAct,  is 8,500 lbs
Gross Vehicle Weight Rating before aftermarket  conversion.  The rules went into
effect on April 15, 1996 and the major revisions include:

1.   A one-year shift in the statutory  alternative  fueled vehicle  acquisition
     schedules.
2.   An  automatic  exemption  to allow  time for a State to apply for an obtain
     approval of an Alternative State Plan for State fleets.
3.   A revised definition of the statutory term "substantial portion" that omits
     smaller  refiners  from   acquisition   requirements  and  includes  large,
     integrated producers and importers.
4.   The addition of "neat" biodiesel to the list of "alternative fuels".
5.   A provision for the  allocation of credits to State  government  fleets and
     covered  fuel   providers  for   newly-acquired   medium-  and   heavy-duty
     alternative fueled vehicles (AFV's).

A fleet is covered by the EPAct if the fleet has 50 or more light-duty vehicles,
not counting officially excluded vehicles (a category including such vehicles as
law enforcement, emergency vehicles, and non-road vehicles).

The current revised acquisition formula as follows:

================================================================================
   Model Year          Covered Utility/Fuel               State Government

                          Provider Fleets                 Fleets
--------------------------------------------------------------------------------
1997                            30%                                10%

1998                            50%                                15%

1999                            70%                                25%

2000                            90%                                50%

2001                            90%                                75%
================================================================================


The Company  believes  that  electric  vehicle  technology  continues to offer a
solution to achieve zero emission  performance and to comply with current "clean
air"  legislation   implementation   deadlines.   Electric  vehicle  performance
requirements  that are likely to be established will include vehicle range, load
capacity, speed and acceleration characteristics,  refueling/recharging time and
operating cost per mile.

                                       5
<PAGE>

Relationships of Affiliated Companies

         In July 1993, the Company acquired all of the outstanding capital stock
of Industrial Electric Vehicles,  Inc. ("IEV"). IEV manufactured a broad line of
off-road industrial electric vehicles, including three-wheeled supervisor carts,
small trucks,  inventory  carriers and pickers,  various personnel  carriers and
many other  specialty type  vehicles.  IEV also developed and marketed a line of
on-road  electric  buses.  Effective  as of  September  5th,  1996,  the Company
disposed of  substantially  all of the assets of IEV.  The assets sold  included
inventory, receivables,  work-in-process, parts, furniture, fixtures, machinery,
tools, tooling, supplies, computers, software, sales and marketing material, and
equipment  related to the  industrial  business.  The Company  retained  certain
international  rights to market the  industrial  product line, and all rights to
continue  developing and marketing on-road  electric buses. The sale was made to
Legend  Electric  Vehicles,  Inc., a California  corporation.  The principals of
Legend include several former employees of the Company, including the manager of
IEV.

         The fixed  purchase  price for the assets of IEV was One Million Eighty
Thousand Dollars  ($1,080,000).  An additional,  contingent amount not to exceed
One Hundred Seventeen Thousand Dollars  ($117,000),  which reflects a portion of
receivables collections,  may also be paid. The fixed purchase price payment was
made as follows:

         1. Buyer  assumed,  and was  credited  with,  the  principal  amount of
$1,004,504.00  outstanding  under a Promissory Note ("Note") owed by the Company
to the previous  owners of the  business,  from whom the Company  purchased  the
business.  The previous owners, as holders of the Note,  approved the assignment
and assumption of the Note,  and have released the Company from all  obligations
thereunder.  The Note was  secured  by  substantially  all of the  assets of IEV
included  in the sale  transaction.  The  principal  amount  including  interest
outstanding under the Note was $1,004,504.00 on the date of sale. Since July 31,
1995,  the Company  had been in default on payment of the Note in the  principal
amount of $982,000  which  constituted a portion of the purchase price for IEV's
stock.

         2. Buyer  agreed to assume,  and was  credited  with,  up to $88,000 of
outstanding  warranty  obligations  for a period  of  twelve  months  on  claims
submitted  after the date of closing.  The credit would not be reduced if actual
warranty claims are less.

         Electricar  International  Limited  ("Electricar   International"),   a
wholly-owned  subsidiary of the Company,  operates as the distribution affiliate
for the Company in certain countries, primarily countries in the Pacific Rim and
Middle  East   regions   (the   "International   Countries").   Pursuant  to  an
International  Distribution  Agreement ("IDA"),  the Company had granted certain
rights  in  the  International  Countries  to  one of  the  previous  owners  of
Electricar  International  with respect to the distribution of the Company's and
Electricar International's electric vehicles. On January 19th, 1996, the Company
terminated the IDA based on the insolvency of the distributor,  and based on the
distributor's  prior  material  breaches and defaults which were not cured after
receipt of written notice from the Company.

         Livermore Research and Engineering  Corporation  ("Livermore R & E"), a
wholly-owned subsidiary of the Company based in California,  has been a research
organization   which   has   developed   a   comprehensive    electric   vehicle
crashworthiness simulation capability. Livermore R & E uses DYNA3D, a non-linear
computer generated crashworthiness testing and impact analysis software licensed
to the Company,  in designing computer  generated  analytical models to simulate
physical  crash tests on both metal and  composite  chassis/body  systems on the
Company's vehicles.  The Company has been granted a non-exclusive license to use
and modify the DYNA3D  software.  DYNA3D and any  modifications  to the software
(other than certain  special-purpose  technical features and add-ons designed to
improve its simulation capability for electric vehicle  crashworthiness)  remain
the property of the grantor of the software and may not be redistributed outside
the Company. Due to the Company's financial constraints,  the activities of this
subsidiary have been suspended.

         The two  individuals  from whom the Company  purchased  Livermore R & E
were the lead developers of DYNA3D,  and these  individuals  became employees of
the Company in December 1993 to design the computer generated  analytical models
for the Company's  vehicles.  In June 1995,  these  employees  resigned from the
Company.  The Company has  continued  association  with these  former  employees
through a consulting arrangement on an as-needed basis.



                                       6
<PAGE>

Products

         The Company's electric vehicle products presently include two converted
on-road  vehicles,  a Geo Prism  sedan and a  Chevrolet  S-10  pickup  truck,  a
purpose-built  on-road  electric bus, a purpose-built  light delivery truck, and
specialty  off-road vehicles such as inventory  carriers and pickers and various
personnel carriers.


On-Road Vehicles

         The  Company's  existing  sales  of  on-road  electric  vehicles  arise
primarily from the Company's  past focus on fleet niche  markets.  The Company's
strategy in this business was to select specific,  existing, internal combustion
powered  vehicles for  conversion to electric  power for large fleet users.  The
conversion  first entails a redesign of  significant  components of the vehicle,
including  the power train and battery  pack.  The Company then  converts  these
vehicles into electric  vehicles for sale to fleet users.  The Company  selected
Chevrolet  S-10  trucks and Geo Prizm  sedans for this  program.  As of July 31,
1996, the Company had converted and delivered to its customers approximately 210
on-road vehicles.  The Company is re-evaluating its on-road conversion  business
in order to determine the continued  viability of this product line. The Company
currently  intends,   subject  to  available  financial  resources,   to  finish
converting and selling its existing inventory of on-road vehicles.

         The Company has had discussions with several foreign  manufacturers and
government  entities to develop and manufacture  electric  vehicles  pursuant to
license agreements, including a world light truck delivery vehicle, for specific
worldwide markets and applications. The focus of these potential alliances is to
develop  products  primarily  for "in country"  applications,  whereby the goods
manufactured  would be used in the same  local and  regional  area in which they
were  produced.  The Company  believes that the demand for electric  vehicles in
these markets will be influenced  to a large extent by further  developments  in
electric power infrastructure and government  incentives in these markets. As of
July 31, 1996, no such ventures or products exist.

         Through its IEV  subsidiary,  the  Company  produces  on-road  electric
buses,  including  a 22  passenger  shuttle  bus.  This  bus  uses  light-weight
composite  panels to reduce weight and increase  driving  range.  As of July 31,
1996, 22 of these buses have been sold and are presently operating.


Off-Road Vehicles

         The Company's line of off-road  specialty electric vehicles produced by
IEV include inventory carriers and pickers, various personnel carriers and other
electric  off-road  specialty type vehicles.  The Company is re-evaluating  this
product line in order to determine its continued viability. However, the Company
continues,  subject to financial  resources  to develop a line of  purpose-built
(OEM) vehicles  (such as those used for airline ground  support) for testing and
evaluation  that may lead to a new  product  line of  off-road  vehicles.  As of
October 15, 1996, the Company has converted 6 airport ground support vehicles as
part of a program with  Southwest  Airlines.  In addition,  the Company has also
entered into prototype  production of a 1.5 ton off-road electric delivery truck
with initial marketing activities anticipated to occur in Mexico City.


Strategic Partnering And Technology Developments

         The Company has also made efforts to establish third-party distribution
arrangements and align itself with various technology  development companies and
electric vehicle component  manufacturers to complement its own expertise in the
electric  vehicle  market.  The Company has continued its efforts to implement a
strategy to be a "systems  integrator" by attempting to establish  relationships
to use other independently  developed technology.  The Company believes that its
competitive advantage may be its ability to identify,  attract and integrate the
latest technology  available to produce state of the art products at competitive
prices.  The Company believes this strategy may, if successful,  at least in the
near term,  reduce capital and research and  development  expenses to the extent
other companies or organizations will fund these expenses.

         The Company believes that two of the principal  component  technologies
relevant to a cost effective  electric vehicle are the electric drive system and
the battery/charging system. It is the Company's strategy to continuously review
emerging  technological  developments  and seek alliances with or, if sufficient
additional capital funding can be obtained, complete

                                       7
<PAGE>

acquisitions  with companies that it perceives own the best proven  technologies
for incorporation into its electric vehicles. The Company's progress and current
plans for each system are described below.


Electric Drive System

         The electric drive system  consists of an electric motor and electronic
controls  that  regulate the flow of  electricity  to and from the batteries (at
various  voltages  and  amperages)  to propel  the  vehicle.  Auxiliary  vehicle
functions (e.g.,  radio,  lights,  windshield wipers,  etc.) are also powered by
stored electrical energy similar to that of an internal combustion drive system.
The Company  presently  utilizes drive systems for on-road cars and light trucks
that employ either direct  current  ("DC") or alternating  current  ("AC").  The
Company's buses and industrial vehicles presently use DC-powered drive systems.

         On October 25, 1996, the Company acquired all of the assets and certain
liabilities of Systronix Corporation, located in Torrance, California. Systronix
Corporation is a development  stage company which was incorporated in September,
1994, and began research and development  operations in January,  1995. Its goal
was  to  become  a  leading  developer  of  technologically   advanced  electric
propulsion  systems for electric vehicles.  As a result of the acquisition,  the
Company is now in the process of validating its first propulsion system product,
the Panther(TM) 60 alternating current (AC) drive train for light duty vehicles.
Also under  development is the  Panther(TM)  120 system for buses and heavy duty
vehicles,  and the C20(TM) offboard  charging  system,  the first of an intended
family of rapid  chargers  for all sizes of  electric  vehicles.  The  aggregate
purchase  price for the  Systronix  assets  acquired by the Company  include the
following terms of payment:

         1. The Company was credited with the amount of  $1,020,000  towards the
purchase  price,  which the Company had  previously  delivered to Systronix as a
pre-payment of the purchase price;

         2.  The  Company  delivered  to  Systronix  a  Promissory  Note  in the
principal  amount of  $829,978.39,  secured by the acquired assets pursuant to a
security agreement. The Note bears interest at the rate of six percent (6% ) per
annum and is due and payable (A) on, or before, November 19, 1996 and (B) in the
amount of 45% of any additional  financing received by the Company until paid in
full,  whichever  occurs  first.  IN THE EVENT  SAID NOTE IS NOT PAID IN FULL AS
DISCUSSED  ABOVE,  SYSTRONIX  HAS THE RIGHT TO RESCIND THE  TRANSACTION  THROUGH
FORECLOSURE ON THE ASSETS.

         3. The Company delivered to Systronix a share certificate  representing
2,700,000  shares of the Company's  Common Stock, and to an Escrow Agent for the
benefit  of  Systronix   under  an  escrow   arrangement  a  share   certificate
representing 1,100,000 shares of the Company's Common Stock;

         4. The Company was credited  with  certain  loans,  trade  payables and
other  liabilities  assumed in the approximate  amount of $ 1,150,000,  of which
$500,000 owed to a non-U.S.  person was converted  into common stock pursuant to
Regulation S at $0.30 per share in October, 1996.

         5. The  Company  issued  pursuant  to  Regulation  S as a finder  fee a
"cashless"  exercise warrant for 2,000,000 shares of the Company's Common Stock.
The terms and conditions of this warrant are substantially  similar to the terms
and  conditions of the cashless  exercise  warrants  discussed in Note 10 of the
Notes to the Financial Statements, page F-27, below.

         6. In  conjunction  with this  transaction,  the Company  has  employed
substantially  all of the  then-existing  employees  of  Systronix  Corporation.
Pursuant  to such  employment,  the  Company  has  granted  to  these  employees
qualified and non-qualified  stock options under the Company's 1996 Stock Option
Plan.  The  options  granted in the  aggregate  total  approximately  10,400,000
options  at an  exercise  price of $0.30  cents per  share,  subject  to various
vesting  schedules  with a  substantial  portion of the options  vesting in 6-12
months. The Plan has been approved by the Board of Directors of the Company, and
the Company anticipates presenting the Plan for shareholder approval at its next
annual meeting.


Battery/Charging System

         Pursuant to a United States  Department  of Defense/ ARPA program,  the
Company is working with numerous battery  manufacturers to "beta test" their new
battery  technologies.  The Company  believes  that these new systems will allow
design  advantages  in  battery   placement,   weight   distribution,   and  car
crashworthiness.   Additionally,   the  Company  is  monitoring   other  

                                       8
<PAGE>

battery  innovations  that may extend an electric vehicle driving range by up to
50% and permit a shorter  recharging time. For electric buses, the Company has a
"switch-out battery system" that allows for battery replacement in approximately
ten (10)  minutes,  similar to the battery  replacement  on a cellular  phone or
portable drill.

International Market

         The  Company  believes  that  the  international  market  for  electric
vehicles could become a significant source of revenue. In addition, the Company,
in  conjunction  with  one  of  its  major  international  shareholders,  has in
development,  and in  prototype  production,  a light  delivery  truck  that the
Company  believes  may have  broad  market  applications  worldwide.  Subject to
existing valid and enforceable  agreements,  if any, the Company intends to test
market its light  delivery truck and several  industrial  vehicle lines in these
international  markets to evaluate the  viability of continuing to develop these
product lines.

Warranties/Customer Service Plan

         The  Company  believes  that  customer  service and  technical  support
capabilities  should be  important  competitive  factors for its  business.  The
Company  presently  provides a limited  one-year  parts and labor  warranty as a
basic standard on all electric  vehicle models,  including the Geo Prism sedans.
The Company attempts to obtain warranty coverage from its third-party  suppliers
which it would then be authorized to pass on to its customers.  In addition, the
Company  has  offered an  extended  limited  warranty of up to three years under
certain  sales  contracts  for its  Chevrolet  S-10  trucks.  The Company is now
reviewing this warranty coverage for possible modification. At the present time,
subject to available  capital  resources,  it is also  anticipated  that Company
maintenance  personnel  will continue to be available for field service calls as
part  of  this  warranty  coverage  for  buses  and  conversion  vehicles,  with
dealerships providing warranty service for industrial vehicles.

Market Profile

         The Company believes that the electric vehicle fleet market may offer a
substantial  available market for converted  electric  vehicles.  For example, a
1988 study by the Center for the Biology of Natural  Systems  revealed  that the
average daily mileage of the federal  government's  370,000 cars, vans and light
trucks  ranged  from 25 to 50 miles per day.  About 20% of this  total  fleet is
replaced annually.  In fiscal year 1992, the Federal government  purchased about
80,000 light-duty cars, vans and trucks.

         The Company believes that during the period from 1993 through 1998, the
major California  investor-owned  utilities will spend in excess of $300 million
for electric  vehicle and associated  infrastructure  development.  In addition,
utilities  outside  of  California  as well as many  governmental  entities  are
planning to spend  significant funds for the development of the electric vehicle
business.  The California  Council on Science and Technology in its 1992 Project
California Report estimated that the size of the market in the U.S. for electric
vehicles will grow to $8 billion in 2003 and to $24 billion in 2007.

Competitive Conditions

         The competition to develop and market  electric  vehicles has increased
during the last  fiscal  year and is  expected  to  continue  to  increase.  The
competition  consists of development  stage  companies as well as major U.S. and
international  companies,  including automobile  manufacturers,  utilities,  and
component  and  material  suppliers.  MANY OF THESE  COMPANIES  HAVE  FINANCIAL,
TECHNICAL,  MARKETING,  SALES,  MANUFACTURING,  DISTRIBUTION AND OTHER RESOURCES
VASTLY GREATER THAN THOSE OF THE COMPANY. The Company's future prospects will be
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  the  Company  will  be  able  to
successfully develop or market any such products.

         The development of other  nonconventionally  powered vehicles,  such as
compressed natural gas, poses a competitive threat to the Company in markets for
low emission  vehicles (LEVs) but not in markets where government  mandates call
for zero emission vehicles (ZEVs). Such nonconventionally  powered vehicles have
initial  advantages over electric vehicles primarily in the areas of range, cost
and weight.  These advantages may decline over time as electric  vehicles' costs
decline with  increased  production  and as advances in battery  technology  are
made. An inherent disadvantage of LEVs versus ZEVs is that LEVs emit pollutants,
even though at much lower levels than gasoline/diesel powered vehicles.

                                       9
<PAGE>

         To date,  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 various  markets,  both  consumer  and
commercial.  The  critical  role of  technology  in this market is  demonstrated
through  several product  offerings.  Applied  technologies  range from DC motor
drives to AC induction motor drives,  from conversion  vehicles to purpose-built
(OEM)  vehicles,  from  lead-acid  batteries  to  more  advanced  power  storage
technologies  and  from  traditional  materials  to  more  advanced  "composite"
materials.  As the industry  matures,  key  technologies  and  capabilities  are
expected to play critical  competitive  roles. The Company's goal is to position
the Company as a long term  competitor  in this  industry by focusing on vehicle
component integration, technology application and strategic partnerships.

         There are many entities,  including  governmental,  quasi-governmental,
non-profit  and  private  organizations,  involved  in  advancing  research  and
development  of  electric  vehicle and  low-emission  vehicle  technologies.  In
addition,  several  consortia  have formed to fund research on electric  vehicle
batteries:  the United  States  Advanced  Battery  Consortium,  an  organization
committed to funding a total of $260 million for battery research by 1998, which
is financed by the United States  Department of Energy,  General  Motors,  Ford,
Chrysler,  and the Electric Power  Research  Institute;  the Advanced  Lead-Acid
Battery  Consortium,  funded by North American lead  manufacturers;  and the New
Energy Development  Organization,  a Japanese  consortium funded by the Japanese
government and certain Japanese battery manufacturers.

         The Company now competes in three broad  product  areas of the electric
vehicle industry;  (1) on-road cars and light trucks,  (2) off-road trucks,  (3)
on-road buses and (4) off-road specialty industrial vehicles.

On-Road Cars and Light Trucks

         The Company competes with several other electric  vehicle  companies as
well as the  major  automobile  manufacturers,  most all of whom  have  electric
vehicle development  programs. In addition,  the major automobile  manufacturers
have  resources  vastly  greater than the Company's  and, as a result of various
government  mandates,  are  under  pressure  to  develop  and  produce  electric
vehicles.  As a result,  they pose a significant  competitive  threat as well as
opportunity for the Company.  The Company's approach has been to attempt to work
closely  with  the  major  automobile  manufacturers  so  that  the  Company  is
positioned as an important resource for these major automobile manufacturers. As
a result,  the Company has been  contracted  by an off-shore  OEM to explore the
possibility of developing electric sedans.

         The  conversion  of gasoline  powered cars and light trucks to electric
power allowed the Company to enter the electric vehicle market sooner than if it
had limited itself to  purpose-built  (OEM)  electric  vehicles;  however,  such
conversions  are  expensive.  Two major elements in the Company's plan to reduce
the  cost of its  on-road  electric  vehicles  were (i) to work  with the  major
automobile  manufacturers  to provide the Company factory built vehicles without
engines,  transmissions  and fuel  systems  (gliders),  and (ii) to develop  and
manufacture  light-weight,  purpose-built (OEM) electric vehicles.  To date, the
Company has not been able to solidify the elements of this plan.


Off-Road Trucks

         The Company's customer and industry research in Mexico, the primary and
initial market for the Company's  light trucks,  indicates  there are four prime
factors which are weighed most  prominently  in a new truck  purchase  decision:
speed, payload, range and life-cycle cost. The Company's light truck is believed
to be  competitive,  when compared to the current  electric  truck  offerings of
competitors, including Taylor-Dunn and Cushman.

The Company  believes  that in Mexico,  where the light truck will operate as an
"on-road"  vehicle,  penetration of the  internal-combustion  engine (ICE) truck
market is also feasible.  This is believed to be a 100,000 annual unit market in
Mexico.


                                       10
<PAGE>

On-Road Buses

         The  Company is  presently  aware of over ten  companies  intending  to
produce  electric  buses,  approximately  half of which are currently  producing
vehicles.  CALSTART, a non-profit consortium of manufacturers,  public utilities
and local,  state and  federal  agencies  formed to promote the  manufacture  of
electric  vehicles in  California,  has  contracted  to have APS Systems and Bus
Manufacturing,   Inc.   produce  several  electric  buses.   Specialty   Vehicle
Manufacturing  Crop.  currently offers several electric bus models. In addition,
the Company expects the large bus manufacturers, such as Bluebird, Carpenter and
Gillig, to become competitors.

Off-Road Industrial Vehicles

         The Company  believes that the  industrial  off-road  electric  vehicle
market  is a  mature,  marginally  differentiated  industry  with all of the top
competitors  offering comparable products at comparable prices. As a result, the
Company  divested  its  interests  in  the  industrial  business  as  previously
discussed above. There are four prime U.S. competitors,  the largest of which is
Taylor-Dunn, holding approximately 50% of the market share, followed by Cushman,
with approximately 25% of the market share,  EZ-GO, with approximately 8% of the
market share, and the Company,  which held approximately 5% of the market share.
Following the divesture of the  industrial  business,  the Company  continues to
develop and market a select group of specialty  vehicles including an in-factory
delivery  vehicle for express  delivery  companies,  and airline  ground support
vehicles.

Research and Development

         The Company believes that continued timely development and introduction
of new products are  essential to  establishing  and  maintaining  a competitive
advantage.  The Company is currently  focusing its limited  development  efforts
primarily in the following areas:

        *Technical  proposal and program development under ARPA; 
        *Power Control and Drive Systems and related technology; 
        *Bus development; 
        *Technology safety development/crash worthiness/structural analysis; and
        *Subsystem development (i.e., climate control, power management).

         Company funded research and  development  expense charged to operations
in fiscal years, 1994, 1995 and 1996 were $7,724,000, $6,697,000 and $1,401,000,
respectively.

         The Company is  continually  evaluating and updating the technology and
equipment used in developing each of its products. The electric vehicle industry
has only  recently  come into  existence,  and the  technology  involved  in the
industry is rapidly changing.  There is limited  experience in the operation and
testing of electric  vehicles and  components,  and the  development of electric
vehicle   technology   therefore  involves  inherent  risks.  Due  to  financial
constraints,  there is no assurance  that the Company  shall have the ability to
stay competitive through its research and development efforts.

Department of Commerce Funding Award for Composite Components Development

         The Company was notified in November  1994 that it had been selected to
receive an award of matching funds from the National  Institute of Standards and
Technology  ("NIST") of the United  States  Department of Commerce in connection
with  a  5-year,   $21.8  million   program  to  stimulate   development   of  a
cost-effective  composite  manufacturing  process for use in the  production  of
lightweight,  affordable,  and safe electric vehicles. The Company and the other
companies involved in the program have been unable to negotiate a suitable joint
venture  agreement  as  required  by  NIST.  Due  to  the  Company's   financial
difficulties, the Company withdrew from the NIST program in fiscal 1996.


Licenses, Patents and Trademarks

         The  Company  does not  currently  hold any  patents,  although  it has
submitted  applications  for a patent and several  trademarks or servicemarks in
the United States.  For the foreseeable  future,  the Company  believes that its
success will not rely on its patent and trademark  proprietary  position. As the
Company develops its own technology,  the policy of the Company will be to apply
for  patents or for other  appropriate  statutory  protection  when it  develops
valuable  new or improved  technology.  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 any patent application filed by the
Company  will  result in patents  being  issued.  In  addition,  the laws of 

                                       11
<PAGE>

any foreign  country in which the  Company  elects to conduct  business  may not
protect the  Company's  products and  intellectual  property  rights to the same
extent as the laws of the United States.

Backlog

         As of July 31, 1996, the Company's  backlog of orders was approximately
$1,200,000,  of  which  approximately  $200,000  was  related  to  the  off-road
industrial  electric  vehicle  business,  which  was  sold  by  the  Company  in
September,  1996.  Most of the remaining  backlog  consisted of orders to finish
converting and delivering the Company's  existing inventory of on-road vehicles.
As of  July  31,  1995,  the  Company's  backlog  of  orders  was  approximately
$1,000,000.  Backlog  consists of orders for which  shipments  have not yet been
made and unfilled portions of orders for which partial shipments have been made.

Employees

         As of July 31,  1996,  the Company had 35  employees,  including  15 in
administration, 6 in engineering, research and development, 12 in manufacturing,
and 2 in sales and  service.  This  represents  a  reduction  from a total of 86
employees as of July 31, 1995.

Item 2.   Properties

         The  Company's   corporate   offices  are  located  in  San  Francisco,
California,  in leased  office space of  approximately  6,800  square feet.  The
Company's  administrative  departments  and senior level  operations,  including
executive,  legal,  finance,  planning,  purchasing,  personnel,  and operations
personnel,  are housed in this  location.  These  facilities  are leased through
October 1998 with early termination provisions at the election of the Company in
October, 1997.

         Electricar's  IEV subsidiary  leased a 107,000  square foot  production
facility in Redlands,  California.  Following the Company's divesture of the IEV
industrial business,  this facility's lease, which expired on July 31, 1996, was
assigned to the new owner.  Pursuant to a month-to-month  sublease,  the Company
manufactures  specialty vehicles,  buses and upfit (conversion) vehicles at this
facility utilizing approximately one-fourth of floor space of the facility.

         The  production  capacity of the current  bus  manufacturing  line is 8
buses per month.  The Company is currently  not in  production.  The  conversion
production  line  capacity is  estimated  at 16 units per month.  The Company is
currently   converting   only   vehicles  in  its  existing   inventory  and  is
re-evaluating  its  conversion  business  in order to  determine  the  continued
viability of this product line.

Item 3.  Legal Proceedings

         Nineteen  of the  unsecured  creditors  of  the  Company  have  brought
independent  lawsuits  in  various  courts  in  California,  Connecticut,  North
Carolina  and New York  against the  Company in  connection  with the  Company's
default on its debt  obligations to such creditors,  in the aggregate  amount of
approximately $650,000.  These lawsuits seek damages for the amount of principal
and  interest  due by the Company  under the debt owed to such  creditors,  plus
court costs and  attorneys'  fees.  No individual  creditor's  claims exceed the
amount of $121,700.  Nine of the unsecured  creditors  have  obtained  judgments
against the  Company in the  aggregate  amount of  approximately  $450,000.  The
remaining suits are pending.

         The  Company  is  currently  in  the  process  of   restructuring   its
outstanding  unsecured  antecedent  trade debt. A creditors'  committee has been
established  to represent the  antecedent  unsecured  creditors  (including  the
creditors who have brought suit against the Company and other creditors who have
not yet filed legal claims) in negotiating a settlement with the Company.  It is
intended and hoped that the  restructuring  will result in the  settlement  of a
majority  of the lawsuits filed and judgments  obtained  against  the Company in
connection   with  its   unsecured   debt.   See  "Item  1.   Business  --  Debt
Restructuring."

         The  Company  reported  in its  report  on Form  10-Q  filed  with  the
Commission for the quarterly period ended April 30, 1996 that on May 20, 1996, a
suit was brought in San Francisco Superior Court by a shareholder, alleging that
the  shareholder  was  misled  in the  purchase  of  stock in the  Company.  The
shareholder,  Janet  Poli,  for Janet Poli IRA and for SERP  Janet Poli  Realty,
named in the suit the  Company,  Mr.  Ted  Morgan,  a  previous  officer  of the
Company,  and Mr.  Mark  Neuhaus,  an  individual.  The  suit  alleged  that the
individual  made  fraudulent  and  negligent  misrepresentations  to induce  the
shareholder  to purchase  shares of Company stock for $100,000;  that the former
officer  concealed  material  facts from the  shareholder;  and that  defendants
(including the Company) all breached  fiduciary duties to the  shareholder.  The
complaint  sought  compensatory  damages  in  an  unspecified  amount  allegedly
exceeding  $1,000,000,  punitive  damages,  attorneys fees and costs,  and other
relief. The Company and the previous officer of the Company filed a Demurrer to

                                       12
<PAGE>

the First Amended  Complaint which the Court sustained without leave to amend on
October 15,  1996.  On October 29,  1996,  counsel for the  shareholder  filed a
motion for reconsideration.  The motion is scheduled for hearing on November 26,
1996.  Counsel  for the  shareholder  has also filed a motion to be  relieved as
counsel. The motion is scheduled for hearing on November 27, 1996.

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

         None

Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters

         The Company's Common Stock is presently traded in the  over-the-counter
market and quoted on the  National  Association  of  Securities  Dealers  (NASD)
"Bulletin  Board" under the symbol  "ECAR." The  following  table sets forth the
high and low 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,  mark-down or  commission,  and may not  necessarily  represent  actual
transactions.

                             Common Stock                        Average Daily
Fiscal 1995                  High/Low Bid - High/Low Asking          Volume
-----------                  ------------------------------      -------------
First Quarter . . . . . .    $5.14/$3.53 - $7.48/$5.26                 *
Second Quarter  . . . . .    $3.74/$2.08 - $6.01/$3.81                 *
Third Quarter . . . . . .    $1.43/$0.73 - $3.27/$1.48                 *
Fourth Quarter. . . . . .    $0.25/$0.10 - $1.85/$0.26                 *


                             Common Stock                        Average Daily
Fiscal 1996                  High/Low Bid - High/Low Asking         Volume
-----------                  ------------------------------      -------------
First Quarter . . . . . .    $0.15/$0.19 - $0.81/$0.17                 *
Second Quarter  . . . . .    $0.31/$0.35 - $0.91/$0.32                 *
Third Quarter . . . . . .    $0.29/$0.27 - $0.32/$0.30                 *
Fourth Quarter. . . . . .    $0.39/$0.37 - $0.42/$0.40                 *

*Volume information not available.

         On  November  5, 1996,  the last  reported  high/low  bid prices of the
Common Stock were $0. 23/$0.23 and the last reported high/low asking prices were
$0.27/$0.26.  As of November 5, 1996, there were approximately  1,515 holders of
record of the Common Stock.  In addition,  as of November 5, 1996, the Company's
Series A Preferred Stock was held by  approximately  144  shareholders,  many of
whom are also  Common  Stock  shareholders.  The  number  of  holders  of record
excludes  beneficial  holders  whose  shares are held in the name of nominees or
trustees.

Dividend Policy

         To date,  the Company has neither  declared nor paid any cash dividends
on shares of its Common  Stock or Series A or B  Preferred  Stock.  The  Company
presently  intends to retain all future  earnings  for its business and does not
anticipate  paying cash dividends on its Common Stock or Series A or B Preferred
Stock in the  foreseeable  future.  However,  the  Company  is  required  to pay
dividends on its Series A and B Preferred Stock before  dividends may be paid on
any shares of Common  Stock.  At July 31, 1996,  the Company had an  accumulated
deficit of approximately $77 million 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  assets and other tests under  Section 500 et
seq. of the California Corporations Code.

                                       13
<PAGE>
<TABLE>

Item 6.  Selected Financial Data

As of and for the fiscal year ended July 31, (in thousands, except per share data)

<CAPTION>
                                                  1996       1995        1994        1993        1992
                                                  ----       ----        ----        ----        ----
<S>                                            <C>         <C>         <C>         <C>         <C>     
NET SALES                                      $  4,209    $ 11,625    $  5,787    $    863    $  1,220

COST OF SALES                                     5,370      20,210       6,372         802         848
                                               --------    --------    --------    --------    --------
GROSS MARGIN                                     (1,161)     (8,585)       (585)         61         372
                                               --------    --------    --------    --------    --------
OTHER COSTS AND EXPENSES
        Research and Development                  1,401       6,697       7,724         376          56
        Selling, general and administrative       5,608      13,952      12,638       1,953         791
        Interest and financing fees               1,890       5,732         339         146          80
        Other expense (income)                      740         449          17          24          24
        Market development expense                               77       3,718
        Facility closures and consolidations
        of operations                               701       2,378
                                               --------    --------    --------    --------    --------
        Total other costs and expenses           10,340      29,285      24,436       2,499         951
                                               --------    --------    --------    --------    --------
LOSS FROM CONTINUING OPERATIONS                 (11,501)    (37,870)    (25,021)     (2,438)       (579)
LOSS FROM DISCONTINUED OPERATIONS                                                      (169)       (203)
GAIN ON DEBT RESTRUCTURING                        2,147         305
                                               --------    --------    --------    --------    --------
NET LOSS                                       $ (9,354)   $(37,565)   $(25,021)   $ (2,607)   $   (782)
                                               ========    ========    ========    ========    ========
PER COMMON SHARE:
        Loss from continuing operations        $  (0.17)   $  (1.88)   $  (2.61)   $  (0.54)   $  (0.15)
        Loss from discontinued operations                                             (0.04)      (0.05)
        Gain on debt restructuring                 0.03        0.02
                                               --------    --------    --------    --------    --------
        Net loss per common share              $  (0.14)   $  (1.86)   $  (2.61)   $  (0.58)   $  (0.20)
                                               ========    ========    ========    ========    ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING                               67,906      20,156       9,571       4,487       3,871
                                               ========    ========    ========    ========    ========
        Total Assets                           $  4,363    $ 10,230    $ 21,306    $  5,453    $    372
                                               ========    ========    ========    ========    ========
        Long-term debt                         $  3,987                $  9,980    $  1,020    $     31
                                               ========    ========    ========    ========    ========
        Shareholders' equity (deficit)         $(12,736)   $(24,760)   $  1,605    $  2,421    $   (424)
                                               ========    ========    ========    ========    ========
</TABLE>
                                       14
<PAGE>

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

The matters  addressed below,  with the exception of the historical  information
presented,  may incorporate certain  forward-looking  statements involving risks
and  uncertainties,  including the risks  discussed  under the heading  "Certain
Factors That May Affect Future Results" and elsewhere in this report.

GENERAL

U. S. Electricar, Inc. and Subsidiaries (collectively,  the "Company") develops,
converts,  assembles,  manufactures  and  distributes  battery-powered  electric
vehicles,  including on-road pick-up trucks,  passenger cars, buses and delivery
vehicles  and a variety of  off-road  industrial  and  specialty  vehicles.  The
Company's  product  lines include  converted  vehicles  (originally  built to be
powered by internal combustion engines) and vehicles that are built specifically
to be  battery  powered.  The  Company's  fiscal  year  ends  July 31.  All year
references refer to fiscal years.

During 1994 and the first half of 1995,  the Company's  approach to its business
was intended to establish  manufacturing,  marketing and support  functions of a
large  scale  company so that the  transition  from  development  and  prototype
activities to volume  production of on-road vehicles could be made as quickly as
possible once component parts design, systems integration and assembly processes
were  developed.  The  Company  raised  approximately  $38  million  to fund its
activities  during  this  period.  However,  the Company was not able to achieve
volume  production,  primarily  because  the  development  of such  designs  and
processes was not completed  prior to the Company's  capital  becoming  severely
depleted, which occurred in the second half of 1995. The Company incurred losses
totaling $62,586,000 during 1994 and 1995.

The Company was forced to severely  curtail its operations in the second half of
1995 due to a lack of funds.  Certain  facilities  were  consolidated  and major
contracts were  terminated.  The Company  initiated  programs to restructure its
debt and raise interim funding which continued through 1996.

During 1996,  the Company  restructured  a  significant  portion of its debt and
raised  approximately  $5 million in interim  funding.  However,  its operations
continued  to be  impacted  by an  insufficient  amount  of funds to  adequately
support its planned sales volumes and product development programs.  The Company
curtailed the manufacture and sale of off-road  industrial vehicles in the third
and  fourth  quarters of 1996 and  reduced  the  carrying  values of the  assets
associated  with this  product  line.  In 1996,  the Company  incurred a loss of
$9,354,000.

In September  1996, a substantial  portion of the assets of Industrial  Electric
Vehicles, Inc., (formerly Nordskog Electric Vehicles, Inc. (Nordskog),  prior to
its acquisition in July 1993 by the Company) were sold.  Consideration  for this
sale included the  assumption of, and release of liability for, the note payable
that totaled $1,013,000 at July 31, 1996 to Nordskog.

The company also acquired  substantially all the tangible and intangible assets,
and assumed certain liabilities, of Systronix Corporation (Systronix) on October
25, 1996. For a description  of the  transaction,  see Item 1,  "Electric  Drive
System".

LIQUIDITY AND CAPITAL RESOURCES

The Company has  experienced  significant  recurring  cash flow shortages due to
operating  losses.  Cash flows from operations have been extremely  negative and
have not been  sufficient  for the Company to meet its  obligations as they came
due.  The  Company  has   therefore   had  to  raise  funds   through   numerous
financial transactions and from  various  resources.  At least until the Company
reaches  breakeven  volume in sales and develops  and/or acquires the capability
and  technology   necessary  to  manufacture  and  sell  its  electric  vehicles
profitably,  it will need to continue to rely  extensively on cash from debt and
equity  financing.  The Company  anticipates  that it will  require  substantial
additional outside financing for at least the next two fiscal years.

During 1996,  the Company spent  $4,384,000  in cash on operating  activities to
fund  the  net  loss of  $9,354,000  resulting  from  factors  explained  in the
following section of this discussion and analysis. In addition, during the third
and fourth  quarters of 1996,  the Company used  $1,015,000  for advances on the
purchase of certain  intellectual  property assets.  Inventories declined during
1996 by  approximately  $4.9  million  primarily  as a result  of the  Company's
efforts to reduce its inventory of converted  sedans and light  trucks,  and its
inability to replenish stocks of raw material needed for current  production due
to a chronic shortage of available funds.

                                       15
<PAGE>

The operations of the Company during 1996 were financed  primarily by $1,144,000
received  from the issuance of Series I secured  convertible  bonds,  a matching
$1,144,000  received from Itochu  Corporation  pursuant to a  Supplemental  Loan
Agreement dated April 13, 1995, short term notes totaling  $320,000 from private
parties, and $2.7 million received from sales of unregistered common stock under
Regulation S. In accordance with the Supplemental Loan Agreement,  Itochu agreed
to lend to the Company  amounts under secured  convertible  notes equal to funds
the Company  receives from other outside lenders or investors up to a maximum of
$3,000,000.  Itochu had  previously  loaned the  Company  $1,856,000  under this
Agreement during the preceding fiscal year.

The Company has not paid seven interest  payments due quarterly from January 31,
1995 through July 31, 1996 totaling  approximately  $147,000 causing an event of
default  on  the  convertible   secured  note  issued  in  connection  with  the
acquisition of Industrial  Electric  Vehicles,  Inc. (formerly Nordskog Electric
Vehicles,  Inc.).  In  September  1996,  the Company sold the assets and certain
liabilities of the industrial electric vehicle business to a group consisting of
former employees of the Company. Part of the consideration for this sale was the
assumption  of this note by the buyers and the release of the  Company  from the
principal  amount of the note. The $147,000  accrued interest has been converted
to a new note payable.

During  1995,  the  Company,  the  holders  of its Series S and Series I secured
convertible bonds and Itochu Corporation  entered into agreements to restructure
approximately $22 million of convertible debt.  In July 1995, $8,200,000 of this
debt was converted to common stock at $.30 per share.  Maturity dates of much of
this debt  were set or reset for  either  March 25 or April  17,  1996,  and the
conversion rate to acquire common stock for most of this debt was established at
$.30 per share.  They also agreed that  conversion of the  remaining  debt shall
occur upon (1) the Company's  election after a Debt  Restructuring Plan has been
accepted  by the  Company's  unsecured  creditors  holding  80% or  more  of the
Company's  unsecured  trade  debt,  or  (2)  Itochu's  sole  election  to  cause
conversion of this debt. In March 1996,  the maturity  dates of the Series S and
Series I bonds were  extended  to March 25, 1997 and the  maturity  dates of the
convertible  secured  notes due Itochu were  extended to April 17, 1997. In June
1996,  $13  million  of the  debt  was  converted  to  common  stock,  of  which
approximately $12.5 million was issued pursuant to Regulation S.

During 1995, the Company fell behind  significantly in its payments to suppliers
and other  creditors  due to a  chronic  shortage  of cash.  In March  1995,  an
unofficial  Creditors  Committee  under  the  auspices  of the  Credit  Managers
Association of California ("CMAC") was established to represent the interests of
the unsecured  creditors in structuring a workout of trade debt incurred  before
March 18, 1995 ("Debt  Restructuring  Plan").  In May 1995, the Company  granted
CMAC, as trustee for the  unsecured  creditors of the Company whose claims arose
prior to March 18,  1995,  a  security  interest  in certain  collateral  of the
Company.

At the Annual  Meeting of  Shareholders  held in February  1996,  the  Company's
shareholders gave approval for an increase in the number of authorized shares of
common stock to 300 million and for  authorization  of a new series of preferred
stock needed for its Debt Restructuring Plan.

Through July 1996,  the Company had obtained  settlements  for $11.7  million of
approximately  $14 million of unsecured  trade debt obligated prior to March 18,
1995. In connection with the  settlements,  the Company issued $817,000 of three
year and $3.3  million of 20 year  promissory  notes and 1.6  million  shares of
Series B Preferred Stock valued at $3.2 million.  The company also paid $418,000
to the unsecured  creditors who agreed to accept the 20 year  promissory note as
part of the settlement for their claims.  In addition,  during the twelve months
prior to the initial  closing of the Debt  Restructuring  Plan,  the Company had
paid $284,000 to certain unsecured creditors in full settlement of their claims.

It is  management's  intention  to continue its debt  restructuring  and to seek
additional  financing  through private  placements as well as other means. As of
November  5,  1996,  however,  the Company  had no firm  commitments  to provide
significant additional financing to the Company.

IF THE COMPANY IS UNABLE TO COMPLETE THE VOLUNTARY  RESTRUCTURING OF ITS DEBT OR
OTHERWISE  REFINANCE  OR  CONVERT  SUCH  DEBT,  AND  ADDITIONAL  FUNDING  IS NOT
AVAILABLE, THE COMPANY WOULD BE FORCED TO SEEK PROTECTION UNDER APPLICABLE STATE
AND FEDERAL BANKRUPTCY AND INSOLVENCY LAWS.

IN ADDITION, SIGNIFICANT ADDITIONAL FUNDING WILL BE NEEDED DURING 1997 AND 1998.
AS OF NOVEMBER 5, 1996, THE COMPANY HAD NO FIRM  COMMITMENTS  FROM ANY PERSON OR
ENTITY TO PROVIDE CAPITAL AND THERE CAN BE NO ASSURANCE THAT ADDITIONAL FUNDS

                                       16
<PAGE>

WILL BE AVAILABLE  FROM ANY SOURCE AT THE TIME THE COMPANY WILL NEED SUCH FUNDS.
THE INABILITY OF THE COMPANY TO OBTAIN ADDITIONAL FUNDING ON TERMS ACCEPTABLE TO
THE COMPANY  WILL HAVE A MATERIAL  ADVERSE  EFFECT ON ITS  BUSINESS.  THE FUTURE
UNAVAILABILITY  OR  INADEQUACY OF FINANCING TO MEET FUTURE NEEDS COULD FORCE THE
COMPANY TO DELAY,  MODIFY,  SUSPEND OR CEASE SOME OR ALL  ASPECTS OF ITS PLANNED
OPERATIONS, AND/OR SEEK PROTECTION UNDER APPLICABLE STATE AND FEDERAL BANKRUPTCY
AND INSOLVENCY LAWS.

RESULTS OF OPERATIONS

Net sales of $4,209,000  for the year declined  $7,416,000,  or 63.8% from 1995.
These declines in sales for 1996 were  primarily due to the Company's  inability
to raise the funds  necessary to support its operations at levels  comparable to
the corresponding  periods of 1995. Net sales in 1995 increased  $5,838,000,  or
100.9%, over 1994, and the increase was entirely due to increased sales of light
trucks and sedans, while the sales of buses declined approximately 60%

A decline of $5.8 million in sales of light trucks and sedans accounted for most
of the  decrease  from  1995  sales.  Sales of  industrial  vehicles,  parts and
accessories  declined by $1.3 million from 1995. The  manufacture  and sales for
all product  lines was limited in 1996 by the shortage of available  funds.  The
Company  curtailed the manufacture and sale of off-road  industrial  vehicles in
the third and fourth quarters.

Cost of sales as a percent  of sales  decreased  to 127.6%  for the year of 1996
from  173.8%  for 1995,  after  having  increased  from  110.1%  in 1994.  These
improvements  in cost of sales as a percent of sales for 1996 compared with 1995
were primarily due to lower costs associated with the converted sedans and light
trucks and with  buses.  Most of these  vehicles  sold in 1996 were  produced in
prior periods and placed in inventory at estimated net  realizable  values.  The
manufacturing costs in excess of estimated net realizable value were expensed in
prior periods.  Inventory  write-downs for obsolescence impacted the results for
1995.  In addition to the inventory write-downs  in 1995,  the increase in costs
from 1994 was caused by high unit  costs for raw  materials  due to small  order
quantities  and rush orders and also by higher than normal wastage caused by the
rapid build-up of production and subsequent rapid scaling back of production due
to lack of funds.

Research and development expense of $1,401,000 in 1996 declined  $5,296,000,  or
79.1%  from  1995.  The  decline is the  result of a  substantial  reduction  of
technical  resources  by the  Company.  During the last half of 1995 and through
1996, the Company has reduced its engineering staff and decreased its purchasing
of technical  services due to a severe lack of funds.  Research and  development
expense  declined  approximately  15% in 1995 from 1994, with all of the decline
coming in the  second  half of 1995 in  connection  with the  downsizing  of the
Company as described above.

Selling,  general and  administrative  expense of  $5,608,000  in 1996  declined
$8,344,000,  or  59.8%,  from  1995.  The  decline  was  primarily  a result  of
significant  reductions  in  selling,  marketing  and  administrative  staff and
reductions in the purchasing of various  outside  services and travel due to the
aforementioned  lack of funds.  Selling,  general  and  administrative  expenses
increased $1,314,000 or 10.4%, in 1995 over 1994. This represented a substantial
increase  during  the first  half of 1995 as a result of a  continuation  of the
Company's  expansion efforts and a decline in the second half in connection with
the downsizing of the Company desribed above.

Interest and financing  fees for the year of 1996 were  $1,890,000,  which was a
decline of $3,842,000,  or 67.0% from 1995.  Interest and financing fees in 1995
included   $3,780,000  of  amortized  fees   associated  with  the  issuance  of
$12,000,000 of Series S secured  convertible  bonds in September 1994. There was
no  amortization  of fees associated with these bonds in 1996 as all of the fees
were fully amortized by March 1995, the original maturity date of the bonds.

In 1995,  interest and financing fees increased 17 times over 1994 to $5,732,000
due to  significantly  greater  borrowings  needed  to help  fund the  Company's
aggressive  expansion  programs.  The increase in 1995 was due to a full year of
interest on the $8,980,000  note to Itochu,  interest on $12,000,000 of Series S
bonds  issued  in  September  1994,  and  the  amortization  of  financing  fees
associated with these borrowings.

The Company  adopted FASB No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived  Assets To Be Disposed Of" effective in 1996. In 1996,
the Company  reduced the carrying values of certain  long-lived  assets to their
estimated fair values in connection  with the curtailment of the manufacture and
sale of  off-road  industrial  

                                       17
<PAGE>

vehicles.  The assets  included  were part of the  Industrial  Electric  Vehicle
business which was subsequently sold in September 1996. This reduction  resulted
in a charge to operations of $680,000. .

The results for 1996 included a provision of $701,000,  and the results for 1995
included a provision of  $2,378,000, for  facility  closures,  consolidation  of
operations and contract  terminations  as a result of the Company's  decision to
close many of its facilities  and cancel several  contracts due to a severe lack
of funds.

In connection with the settlement of $11.7 million of unsecured trade debt under
the Company's Debt  Retructuring  Plan,  several  unsecured  creditors agreed to
settle their claims for amounts  less than the original  debt owed to them.  The
reductions from the original amounts owed and the settlement amounts resulted in
a gain on debt restructuring of $2,147,000 in 1996.

As a result of the foregoing  changes in net sales,  cost of sales,  other costs
and expenses and gain on debt restructuring,  the net loss of $9,354,000 for the
year  decreased  $28,211,000  or  74.6%  from  $37,565,000  in 1995,  while  the
Company's net loss increased $12,544,000, or 50.1%, from 1994.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Future trends for the Company's  revenue and  profitability  remain difficult to
predict.  The Company operates in a rapidly changing and developing  market that
involves a number of risks, some of which are beyond the Company's  control.  In
addition,  as previously  disclosed in this Form 10-K,  the Company's  financial
condition  remains extremely  precarious.  The following  discussion  highlights
certain of these risks.

Going  Concern / Net Operating  Losses.  The Company has  experienced  recurring
losses from operations and had an accumulated deficit of $76,990,000 at July 31,
1996.  There is no assurance,  however,  that any net  operating  losses will be
available to the Company in the future as an offset  against  future profits for
income tax purposes.  A substantial  portion of the losses are  attributable  to
product  development  and other  start-up  costs  associated  with the Company's
business  focus  on the  development,  production  and sale of  battery  powered
electric  vehicles.  Cash flows from future  operations may not be sufficient to
enable the Company to achieve profitable  operations.  Market conditions and the
Company's  financial  position  may inhibit  its  ability to achieve  profitable
operations. These factors, as well as others, indicate the Company may be unable
to  continue  as a  going  concern  unless  it is  able  to  obtain  significant
additional  financing and generate sufficient cash flows to meet its obligations
as they come due and sustain its operations. As of November 5, 1996, the Company
had no firm commitments from any person or entity to provide capital,  and there
can be no assurance that  additional  funds will be available from any source at
the time the Company will need such funds.

Continued  Losses.  For the fiscal years ended July 31, 1994, 1995 and 1996, the
Company had substantial  net losses of  $25,021,000,  37,565,000 and $9,354,000,
respectively on sales of $5,787,000, $11,625,000 and $4,209,000, respectively.

Nature of Industry.  The  electric  vehicle  ("EV")  industry is in its infancy.
Although the Company believes that it has manufactured a significant  percentage
of the electric  vehicles sold in the United States based upon its own knowledge
of the  industry,  there are many large and small  companies,  both domestic and
foreign, now in, poised to enter, or entering this industry. This EV industry is
subject to rapid  technological  change.  Most of the major domestic and foreign
automobile  manufacturers (1) have produced  design-concept  electric  vehicles,
and/or (2) have  developed  improved  electric  storage,  propulsion and control
systems,  and/or (3) are now  entering or  planning to enter the field.  Various
non-automotive   companies  are  also  developing   improved  electric  storage,
propulsion  and  control  systems.  Growth of the  present  limited  demand  for
electric vehicles depends upon (a) future regulation and  legislation  requiring
more use of  non-polluting  vehicles,  (b) the  environmental  consciousness  of
customers and (c) the ability of electric vehicles to successfully  compete with
vehicles powered with internal combustion engines on price and performance.

Changed  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 emission
vehicles is necessary  to create a  significant  market for  electric  vehicles.
There can be no assurance,  however, that further legislation will be enacted or
that  current  legislation  or state  imposed  mandates  will not be repealed or
amended 

                                       18
<PAGE>

(as recently occurred in California),  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.




Item 8.   Financial Statements and Supplementary Data

The response to this Item is submitted as a separate  section of this Form 10-K.
See Item 14.

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

None.





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                                       19
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant

   The information  regarding  directors and executive officers required by Item
10 is  incorporated  by  reference  from  the  information  under  the  captions
"Election of Directors" and "Directors and Executive  Officers" in the Company's
definitive  proxy statement for its annual meeting of shareholders to be held in
February 1997.

Item 11. Executive Compensation

   The  information  required by Item 11 is  incorporated  by reference from the
information under the caption "Executive  Compensation and Other Information" in
the Company's  definitive proxy statement for its annual meeting of shareholders
to be held in February 1997.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The  information  required by Item 12 is  incorporated  by reference from the
information under the caption "Security  Ownership of Certain  Beneficial Owners
and  Management"  in the  Company's  definitive  proxy  statement for its annual
meeting of shareholders to be held in February 1997.

Item 13. Certain Relationships and Related Transactions

   The  information  required by Item 13 is  incorporated  by reference from the
information under the caption "Certain  Relationships and Related  Transactions"
in the Company's  definitive proxy statement for its annual meeting shareholders
to be held in February 1997.


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                                       20
<PAGE>


PART IV

Item 14. 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 Consolidated Financial Statements on page 23.

   (a)2. Financial Statement Schedules

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

   (a)3. Exhibits

   The  exhibits  filed  herewith  or  incorporated  by  reference  to  exhibits
previously  filed  with the  Commission  are  identified  in the  Exhibit  Index
attached  hereto on page E-1. The Company shall furnish copies of exhibits for a
reasonable fee (covering the expense of furnishing copies) upon request.

   (b) Reports on Form 8-K

The Company filed a report on Form 8-K with the Commission on September 19, 1996
reporting  the  sale of  substantially  all of the  assets  of its  wholly-owned
subsidiary,  Industrial  Electric  Vehicles,  Inc. The Company filed a report on
Form 8-K with the  Commission  on August 20 1996  reporting  the  execution of a
Memorandum of Understanding  with Systronix  Corporation for the purchase by the
Company of the assets of Systronix. 

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)


                                       21
<PAGE>

                                   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 of the undersigned, thereunto duly authorized, on November 5, 1996.

U.S. ELECTRICAR, INC.

By:      /s/ Roy Kusumoto
         ---------------------------------------------
         Roy Y. Kusumoto, Chief Executive Officer,
         President, and Acting Chief Financial Officer

                                POWER OF ATTORNEY
         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below constitutes and appoints,  severally and not jointly, Roy Kusumoto
and  Carl  D.  Perry,  with  full  power  to act  alone,  his  true  and  lawful
attorneys-in-fact, with full power of substitution, and re-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 file the  same,  with all
exhibits  thereto,  and  other  documents  in  connection  therewith,  with  the
Securities and Exchange Commission,  granting unto said  attorneys-in-fact  full
power and authority to do and perform each and every act and thing requisite and
necessary  to be done as fully to all intents and  purposes as he might or could
do in person,  hereby  ratifying and confirming all that said  attorneys-in-fact
may lawfully do or cause to be done by virtue hereof.

         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/ Roy Y. Kusumoto              President, Chief              November 5, 1996
----------------------------     Executive Officer,        
Roy Y. Kusumoto                  and Director (Principal   
                                 Executive Officer and     
                                 Principal Financial       
                                 and Accounting Officer).  
                                 

/s/ Carl D. Perry                Executive Vice                 November 5, 1996
----------------------------     President and Director
Carl D. Perry                    


/s/ James S. Miller              Director                       November 5, 1996
----------------------------
James S. Miller


/s/ Malcolm R. Currie, Ph.D.     Director                       November 5, 1996
----------------------------
Malcolm R. Currie, Ph.D.


/s/ Edwin O. Riddell             Director                       November 5, 1996
----------------------------
Edwin O. Riddell


/s/ David A. Ishag               Director                       November 5, 1996
----------------------------
David A. Ishag

                                       22

<PAGE>


--------------------------------------------------------------------------------


                    U. S. ELECTRICAR, INC., AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         PAGE

INDEPENDENT AUDITOR'S REPORT..............................................F-1

CONSOLIDATED BALANCE SHEETS - JULY 31, 1996 AND 1995......................F-3

CONSOLIDATED STATEMENTS OF OPERATIONS -
     YEARS ENDED JULY 31, 1996, 1995 AND 1994.............................F-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) -
     YEARS ENDED JULY 31, 1996, 1995 AND 1994.............................F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS -
     YEARS ENDED JULY 31, 1996, 1995 AND 1994.............................F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...............................F-11


--------------------------------------------------------------------------------




                                       23

<PAGE>


INDEPENDENT AUDITOR'S REPORT



To the Stockholders and Board of Directors
U. S. Electricar, Inc., and Subsidiaries


We  have  audited  the  accompanying   consolidated  balance  sheets  of  U.  S.
Electricar,  Inc., and Subsidiaries (Company), as of July 31, 1996 and 1995, and
the related consolidated  statements of operations,  stockholders'  deficit, and
cash  flows  for the  years  then  ended.  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.  The  consolidated
statements  of  operations,  stockholders'  equity,  and cash flows for the year
ended July 31,  1994,  were  audited  by other  auditors  whose  report on those
statements, dated October 17, 1994, included an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as a going concern.

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

In our opinion,  the  consolidated  balance sheets as of July 31, 1996 and 1995,
and the related statements of operations,  stockholders'  deficit and cash flows
for the  years  then  ended,  present  fairly,  in all  material  respects,  the
financial  position of the Company as of July 31, 1996 and 1995, and the results
of its  operations  and its cash flows for the years then ended,  in  conformity
with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
the  Company  will  continue as a going  concern.  As  discussed  in Note 2, the
Company's  recurring  losses  from  operations  and its  inability  to  generate
sufficient  cash flows to sustain  operations and meet its  obligations,  raises
substantial  doubt about the Company's  ability to continue as a going  concern.
The consolidated  financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

                                               /s/ MOSS ADAMS LLP



Santa Rosa, California
October 23, 1996, except for Note 3 which is as of October 29, 1996


                                                                        Page F-1

<PAGE>


PRIOR AUDITOR'S REPORT

The  Company  has been  unable to obtain the  consent of their  prior  auditors,
Deloitte & Touche LLP, to include their auditor's report which was dated October
17, 1994, of the  consolidated  statements of operations,  shareholders'  equity
(deficit) and cash flows for the year ended July 31, 1994.  The original  report
was  included in  Amendment  No. 1 to Form 10 as filed with the  Securities  and
Exchange Commission on January 27, 1995.





                                                                        Page F-2

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS

                             (In thousands, except for share and per share data)

--------------------------------------------------------------------------------

July 31,                                                       1996       1995
--------------------------------------------------------------------------------

                                     ASSETS

CURRENT ASSETS
  Cash and cash equivalents                                   $    13    $   319
  Accounts receivable, net of allowance for
    doubtful accounts of $596 and $503                            856      1,364
  Inventory                                                     2,387      4,832
  Prepaids and other current assets                               184        375
                                                              -------    -------
      Total current assets                                      3,440      6,890

PROPERTY, PLANT AND EQUIPMENT                                     835      3,112

INTANGIBLE ASSETS, net of amortization of $18 in 1995            --           29

OTHER ASSETS                                                       88        199
                                                              -------    -------

      Total assets                                            $ 4,363    $10,230
                                                              =======    =======


The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                        Page F-3

<PAGE>

<TABLE>

                                                                          U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                                           CONSOLIDATED BALANCE SHEETS (Continued)

                                                               (In thousands, except for share and per share data)
-----------------------------------------------------------------------------------------------------------------

<CAPTION>

July 31,                                                                             1996                  1995
-----------------------------------------------------------------------------------------------------------------

<S>                                                                                <C>                   <C>     
CURRENT LIABILITIES
     Accounts payable                                                              $  2,868              $ 11,082
     Accrued payroll and related expenses                                               441                   410
     Accrued warranty reserve                                                         1,156                 1,358
     Reserve for lease terminations                                                     112                   770
     Accrued interest                                                                   208                 1,378
     Other accrued expenses                                                             721                 1,086
     Deferred revenues                                                                  250                  --   
     Customer deposits                                                                   73                   763
     Current maturities of long-term debt                                             7,283                17,370
                                                                                   --------              --------
             Total current liabilities                                               13,112                34,217
                                                                                   --------              --------

LONG-TERM DEBT, less current maturities                                               3,987                  --   
                                                                                   --------              --------
ROYALTIES PAYABLE                                                                      --                     773
                                                                                   --------              --------
STOCKHOLDERS' DEFICIT
     Series A preferred stock - no par value; 30,000,000
         shares authorized; 4,010,000 and 6,275,000 shares
         issued and outstanding in 1996 and 1995, respectively;
         liquidating preference $0.60 per share                                       2,983                 5,148
         aggregating $5,612 and $3,765, respectively
     Series B preferred stock - no par value; 5,000,000 shares
         authorized; 1,587,000 shares issued and outstanding                          3,175                  --   
     Stock notes receivable                                                          (1,061)                 (987)
     Common stock - no par value; 300,000,000 and
         100,000,000 shares authorized in 1996 and 1995,
         respectively; 120,220,000 and 55,223,000 shares
         issued and outstanding in 1996 and 1995                                     59,157                38,715
     Accumulated deficit                                                            (76,990)              (67,636)
                                                                                   --------              --------
             Total stockholders' deficit                                            (12,736)              (24,760)
                                                                                   --------              --------
             Total liabilities and stockholders' deficit                           $  4,363              $ 10,230
                                                                                   ========              ========

<FN>

The accompanying notes are an integral part of these financial statements.
------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
                                                                        Page F-4
<PAGE>

<TABLE>

                                                                      U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                                         CONSOLIDATED STATEMENTS OF OPERATIONS

                                                           (In thousands, except for share and per share data)
--------------------------------------------------------------------------------------------------------------
<CAPTION>

Years Ended July 31,                                       1996                   1995                   1994
                                                                                                 ------------
<S>                                                         <C>                    <C>                    <C>
NET SALES                                          $      4,209           $     11,625           $      5,787

COST OF SALES                                             5,370                 20,210                  6,372
                                                   ------------           ------------           ------------

GROSS MARGIN                                             (1,161)                (8,585)                  (585)
                                                   ------------           ------------           ------------
OTHER COSTS AND EXPENSES
     Research and development                             1,401                  6,697                  7,724
     Selling, general and administrative                  5,608                 13,952                 12,638
     Interest and financing fees                          1,890                  5,732                    339
     Other expense                                          740                    449                     17
     Market development expense                            --                       77                  3,718
     Facility closures and consolidation
         of operations                                      701                  2,378                   --   
                                                   ------------           ------------           ------------

             Total other costs and expenses              10,340                 29,285                 24,436
                                                   ------------           ------------           ------------

LOSS FROM CONTINUING OPERATIONS                         (11,501)               (37,870)               (25,021)

GAIN ON DEBT RESTRUCTURING                                2,147                    305                   --   
                                                   ------------           ------------           ------------

NET LOSS                                           $     (9,354)          $    (37,565)          $    (25,021)
                                                   ============           ============           ============
PER COMMON SHARE
     Loss from continuing operations               $      (0.17)          $      (1.88)          $      (2.61)
     Gain on debt restructuring                            0.03                   0.02                   --   
                                                   ------------           ------------           ------------
             Net loss per common share             $      (0.14)          $      (1.86)          $      (2.61)
                                                   ============           ============           ============

WEIGHTED AVERAGE SHARES
     OUTSTANDING                                     67,905,941             20,156,417              9,571,134
                                                   ============           ============           ============

<FN>

The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>

                                                                        Page F-5

<PAGE>

<TABLE>
                                                                                U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                                                Years Ended July 31, 1996, 1995 and 1994
                                                                                                          (In thousands)
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                   PREFERRED STOCK
                                                            -------------------------------------
                                                                 SERIES A             SERIES B          COMMON STOCK
                                                            ------------------    ---------------     ------------------
                                                            SHARES     AMOUNT     SHARES   AMOUNT     SHARES     AMOUNT
                                                            ------    --------    ------   ------     ------    --------
<S>                                                         <C>       <C>           <C>    <C>         <C>      <C>
BALANCE, JULY 31, 1993                                      7,434    $  4,408       --     $ --        5,839    $  4,063
PREFERRED STOCK TRANSACTIONS                                                     
  Private offerings (net of $291 issuance costs)            2,325       2,615       --       --         --          --  
  Exercise of warrants                                        875         862       --       --         --          --  
  Stock for services                                           34          28       --       --         --          --  
  Conversion of subordinated debentures                        72          42       --       --         --          --  
COMMON STOCK TRANSACTIONS                                                        
  Asset purchase                                             --          --         --       --        1,000       1,250
  Purchase of research company                               --          --         --       --          215         269
  Purchase of co-owner's interest in joint venture           --          --         --       --        1,060       2,968
  Sales under Regulation S Subscription                                          
    Agreement (net of $687 issuance costs)                   --          --         --       --        3,141       8,320
  Sales to ITOCHU Corporation                                                    
    (net of $361 issuance costs)                             --          --         --       --        2,150       5,659
  Exercise of warrants and options                                               
    (net of $27 issuance costs)                              --          --         --       --          632         538
  Conversions of Series A preferred stock                  (1,387)       (837)      --       --        1,387         837
  Stock for Services                                         --          --         --       --           57          82
  Other stock sales for cash, notes receivable                                   
    and conversion of debt                                   --          --         --       --           37          35
COMPENSATION RECOGNIZED FOR STOCK OPTIONS                    --          --         --       --         --         1,551
INTEREST RECOGNIZED FOR STOCK WARRANTS                       --          --         --       --         --            80
INTEREST ON STOCK NOTES RECEIVABLE                           --          --         --       --         --          --  
NET LOSS                                                     --          --         --       --         --          --  
                                                         --------    --------     ------   ------   --------     -------

BALANCE, JULY 31, 1994                                      9,353       7,118       --       --       15,518      25,652

COMMON STOCK TRANSACTIONS
  Excess of fair market value over
    exercise price of warrants                               --          --         --       --         --         1,920
  Sales under Regulation S Subscription 
    Agreement (net of $171 issuance 
     costs) for cash                                         --          --         --       --        9,000         729
  Conversion of note payable (net of
    $151 issuance costs)                                     --          --         --       --       13,667       3,949
  Conversion of Series S Convertible Bonds                   --          --         --       --       13,667       4,100
  Cancellation of Stock Note Receivable 
    (shares held as collateral)                              --          --         --       --         (450)       (180)
  Exercise of warrants and options for
    cash and notes receivable                                --          --         --       --          664         174
  Conversions of Series A preferred stock                (3,078)     (1,970)        --       --        3,078       1,970
  Stock for services                                         --          --         --       --           79         201

COMPENSATION RECOGNIZED FOR STOCK OPTIONS                    --          --         --       --         --           200

INTEREST ON STOCK NOTES RECEIVABLE                           --          --         --       --         --          -- 

NET LOSS                                                     --          --         --       --         --          -- 
                                                       --------    --------       ------   ------   --------     -------
BALANCE, JULY 31, 1995                                    6,275       5,148       --       --        55,223        38,715

<FN>

The accompanying notes are an integral part of these financial statements.
---------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
                                                     
<PAGE>

<TABLE>
                                                                                U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                                                                Years Ended July 31, 1996, 1995 and 1994
                                                                                                          (In thousands)
------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                  STOCK NOTES       ACCUMULATED
                                                                   RECEIVABLE         DEFICIT             TOTAL
                                                                   ----------         ------              -----
<S>                                                                <C>                <C>              <C>
BALANCE, JULY 31, 1993                                             $ (1,000)          $ (5,050)       $  2,421
PREFERRED STOCK TRANSACTIONS
  Private offerings (net of $291 issuance costs)                       --                 --             2,615
  Exercise of warrants                                                 --                 --               862
  Stock for services                                                   --                 --                28
  Conversion of subordinated debentures                                --                 --                42
COMMON STOCK TRANSACTIONS
  Asset purchase                                                       --                 --             1,250
  Purchase of research company                                         --                 --               269
  Purchase of co-owner's interest in joint venture                     --                 --             2,968
  Sales under Regulation S Subscription
    Agreement (net of $687 issuance costs)                             --                 --             8,320
  Sales to ITOCHU Corporation
    (net of $361 issuance costs)                                       --                 --             5,659
  Exercise of warrants and options
    (net of $27 issuance costs)                                        --                 --               538
  Conversions of Series A preferred stock                              --                 --              --   
  Stock for Services                                                   --                 --                82
  Other stock sales for cash, notes receivable
    and conversion of debt                                              (14)              --                21
COMPENSATION RECOGNIZED FOR STOCK OPTIONS                              --                 --             1,551
INTEREST RECOGNIZED FOR STOCK WARRANTS                                 --                 --                80
INTEREST ON STOCK NOTES RECEIVABLE                                      (80)              --               (80)
NET LOSS                                                               --              (25,021)        (25,021)
                                                                   --------           --------        --------

BALANCE, JULY 31, 1994                                               (1,094)           (30,071)          1,605

COMMON STOCK TRANSACTIONS
  Excess of fair market value over
    exercise price of warrants                                         --                 --             1,920
  Sales under Regulation S Subscription
    Agreement (net of $171 issuance
     costs) for cash                                                   --                 --               729
  Conversion of note payable (net of
    $151 issuance costs)                                               --                 --             3,949
  Conversion of Series S Convertible Bonds                             --                 --             4,100
  Cancellation of Stock Note Receivable
    (shares held as collateral)                                        180                --              --  
  Exercise of Warrants and options for
    cash and notes receivable                                          (16)               --               158
  Conversions of Series A preferred stock                              --                 --              --  
  Stock for services                                                   --                 --               201

COMPENSATION RECOGNIZED FOR STOCK OPTIONS                              --                 --               200
                                  
INTEREST ON STOCK NOTES RECEIVABLE                                     (57)               --               (57)
        
NET LOSS                                                               --              (37,565)        (37,565)
                                                                  --------            --------         --------
BALANCE, JULY 31, 1995                                                (987)            (67,636)        (24,760)




<FN>

The accompanying notes are an integral part of these financial statements.
---------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
                                                                        Page F-6

<PAGE>

<TABLE>
                                                                                  U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) (Continued)
                                                                                  Years Ended July 31, 1996, 1995 and 1994
                                                                                                            (In thousands)
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                 PREFERRED STOCK
                                                 ----------------------------------------------
                                                       SERIES A                   SERIES B               COMMON STOCK
                                                 -------------------         -----------------       ---------------------
                                                 SHARES       AMOUNT         SHARES      AMOUNT      SHARES         AMOUNT
                                                 ------       ------         ------      ------      ------         ------
<S>                                               <C>         <C>             <C>        <C>          <C>          <C>    
PREFERRED STOCK TRANSACTION
  Conversion of unsecured debt                     --            --           1,587        3,175         --           -- 

COMMON STOCK TRANSACTIONS
  Sales under Regulation S subscription
    agreement                                      --            --            --           --         10,670        2,701
  Exercise of warrants                             --            --            --           --            220           28
  Conversion of Series S Bonds and
    accrued interest                               --            --            --           --         43,214       12,964
  Conversion of Series I Bonds and
    accrued interest                               --            --            --           --          7,913        2,374
  Conversion of Series A preferred stock         (2,265)       (2,165)         --           --          2,265        2,165
  Conversion of debt                               --            --            --           --            715          210

INTEREST ON STOCK NOTES RECEIVABLE                 --            --            --           --           --           -- 

NET LOSS                                           --            --            --           --           --           -- 
                                                -------       -------       -------      -------      -------      -------

BALANCE, July 31, 1996                            4,010       $ 2,983         1,587      $ 3,175      120,220      $59,157
                                                =======       =======       =======      =======      =======      =======

</TABLE>



                                              STOCK NOTES  ACCUMULATED       
                                              RECEIVABLE     DEFICIT     TOTAL 
                                              ----------     -------     -----
PREFERRED STOCK TRANSACTION
  Conversion of unsecured debt                     --          --         3,175

COMMON STOCK TRANSACTIONS
  Sales under Regulation S subscription
    agreement                                      --          --         2,701
  Exercise of warrants                             --          --            28
  Conversion of Series S Bonds and
    accrued interest                               --          --        12,964
  Conversion of Series I Bonds and
    accrued interest                               --          --         2,374
  Conversion of Series A preferred stock           --          --          --   
  Conversion of debt                               --          --           210

INTEREST ON STOCK NOTES RECEIVABLE                  (74)       --           (74)

NET LOSS                                           --        (9,354)     (9,354)
                                               --------    --------    --------

BALANCE, July 31, 1996                         $ (1,061)   $(76,990)   $(12,736)
                                               ========    ========    ========


The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                        Page F-7

<PAGE>

<TABLE>
                                                                       U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                                          CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                                 (In thousands)
---------------------------------------------------------------------------------------------------------------

<CAPTION>

Years Ended July 31,                                              1996              1995                1994
---------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                   $ (9,354)          $(37,565)          $(25,021)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation and amortization                           968              6,864              1,285
             Provision for facility closures
                and consolidation of operations                      701                770               --   
             Change in allowance for doubtful accounts                93                 44                334
             Gain on debt restructuring                           (2,147)              (305)              --   
             Changes in valuation allowances and
                reserves                                          (1,449)             2,721                448
             Purchase of remaining interest in joint
                venture                                             --                 --                3,718
             Stock issued for services                              --                  201                110
             Stock option compensation                              --                  200              1,551
             Stock warrant interest accretion                       --                 --                   80
             Interest income on stock notes receivable               (74)               (57)               (80)
             Accretion on royalties payable                         --                   65                 73
             Write-off of development costs and
                leasehold improvements                               137                733               --   
             Interest converted to common stock                    1,575               --                 --   
     Change in operating assets and liabilities:
             Accounts receivable                                     415                143             (1,260)
             Inventory                                             4,916               (837)            (6,078)
             Prepaids and other current assets                       302                838               (368)
             Accounts payable and accrued expenses                   (27)             8,153              5,667
             Deferred revenues                                       250               --                 --   
             Customer deposits                                      (690)            (1,006)             1,615
                                                                --------           --------           --------

                Net cash used by operating activities             (4,384)           (19,038)           (17,926)
                                                                --------           --------           --------

CASH FLOWS FROM INVESTING ACTIVITIES
     Advances to Systronix Corporation                            (1,000)              --                 --   
     Purchases of property, plant and equipment                     --                 (568)            (2,385)
     Notes receivable                                               --                 --                 (300)
     Purchase of co-owner's interest in EIL
         joint venture                                              --                 --                 (250)
                                                                --------           --------           --------

                Net cash used by investing activities             (1,000)              (568)            (2,935)
                                                                --------           --------           --------


<FN>

The accompanying notes are an integral part of these financial statements.
---------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
                                                                        Page F-8

<PAGE>

<TABLE>
                                                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

                                                                                                  (In thousands)
----------------------------------------------------------------------------------------------------------------

<CAPTION>

Years Ended July 31,                                               1996                1995               1994
----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>                <C>     
CASH FLOWS FROM FINANCING ACTIVITIES
     Payments on notes payable                                       (259)              (282)            (2,116)
     Borrowings on notes payable                                    2,608              3,853             10,130
     Borrowings on debentures and bonds                              --               12,000                 42
     Notes payable and bonds issuance costs                          --               (1,860)              (500)
     Proceeds from issuance of common stock                         2,701                900             15,048
     Proceeds from issuance of Series A preferred
         stock                                                       --                 --                2,906
     Exercise of options and warrants                                  28                158              1,427
     Stock issuance costs                                            --                 (171)            (1,366)
                                                                 --------           --------           --------

             Net cash provided by financing activities              5,078             14,598             25,571
                                                                 --------           --------           --------

NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS                                                (306)            (5,008)             4,710

CASH AND CASH EQUIVALENTS:
     Beginning of year                                                319              5,327                617
                                                                 --------           --------           --------

     End of year                                                 $     13           $    319           $  5,327
                                                                 ========           ========           ========

<FN>

The accompanying notes are an integral part of these financial statements.
---------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
                                                                        Page F-9

<PAGE>

<TABLE>
                                                                         U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

                                                                                                   (in thousands)
-----------------------------------------------------------------------------------------------------------------

<CAPTION>

Years Ended July 31,                                                 1996               1995              1994
-----------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>                <C>                <C>    
SUPPLEMENTAL CASH-FLOW INFORMATION:
     Cash paid during the year for interest                         $    30            $   106            $    55

NON-CASH INVESTING AND FINANCING
     ACTIVITIES:
     Conversion of debt to common stock                             $   210            $ 8,049            $  -- 
     Conversion of debt to Series A preferred stock                 $  --              $  --              $    42
     Conversion of debt to Series B preferred stock                 $ 3,175            $  --              $  -- 
     Conversion of Series A preferred stock to
         common stock                                               $ 2,165            $ 1,970            $   837
     Notes issued in connection with debt
         restructuring                                              $ 4,148            $  --              $  -- 
     Excess of fair market value over exercise price
         of warrants issued in connection with
         convertible bonds                                          $  --              $ 1,920            $  -- 
     Issuance of common stock for notes receivable                  $  --              $    16            $    14
     Purchase of research company - issuance of
         common stock                                               $  --              $  --              $   269

     Conversion of Series S bonds to common stock                    15,338            $  --              $  -- 

     Asset purchase:
         Issuance of common stock                                   $  --              $  --              $ 1,250
         Minimum royalty liability                                     --                 --                  800
                                                                    -------            -------            -------

     Fair value of assets purchased                                 $  --              $  --              $ 2,050
                                                                    =======            =======            =======

     Purchase of co-owner's interest in EIL joint
         venture:
             Issuance of common stock                               $  --              $  --              $ 2,968
             Issuance of short-term notes payable                      --                 --                  500
             Cash paid                                                 --                 --                  250
                                                                    -------            -------            -------

     Market development expense                                     $  --              $  --              $ 3,718
                                                                    =======            =======            =======

<FN>

The accompanying notes are an integral part of these financial statements.
------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
                                                                       Page F-10


<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------


NOTE  1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization - U. S. Electricar,  Inc.,  previously Solar Electric  Engineering,
Inc., a California  corporation,  was incorporated in 1976. In January 1994, the
Company  changed  its  name to U. S.  Electricar,  Inc.  The  Company  currently
conducts research and development, and produces and sells electric vehicles.

Principles of consolidation - The consolidated  financial statements include the
accounts of U. S.  Electricar,  Inc.,  and its wholly  owned  subsidiaries  (the
"Company"). Intercompany transactions and balances have been eliminated.

Cash and cash equivalents - The Company considers all highly liquid  investments
with a maturity of three months or less to be cash equivalents.

Inventory - Inventory is  comprised  of electric  vehicles,  raw  materials  and
work-in-process. Inventory is stated at market, which is lower than cost.

Property, plant and equipment - Property, plant 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 3 to 7 years.  The Company has adopted
Statement of Financial  Accounting  Standards No. 121 (FAS121),  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
Of." This  Statement  requires  long-lived  assets to be reviewed for impairment
whenever events or changes in  circumstances  indicates the sum of expected cash
flows  from use of the  asset is less  than its  carrying  value.  Additionally,
long-lived  assets that management has committed to sell or abandon are reported
at the lower of carrying amount or fair value less cost to sell.

Intangible  assets - Acquired  deferred  development  and  technology  costs and
goodwill  arising  from  previous  business  combinations  were  amortized  on a
straight-line basis over their expected useful lives of three to five years. The
unamortized  balances  of  these  costs  were  charged  to  expense  when it was
determined there was no future value for the Company's operations.

Warranties - Estimated  electric vehicle warranty costs are provided at the time
of sale. Warranties,  in general, are extended for one year from time of vehicle
sale.

Income taxes - Deferred income taxes are recognized  using enacted tax rates and
reflect the expected future tax  consequences of temporary  differences  between
financial  statement  carrying  amounts  and tax bases of  existing  assets  and
liabilities.

Revenue  recognition - Revenue from the sale of electric  vehicles is recognized
when the vehicle is delivered to the customer.

Net loss per common  share - Net loss per common  share is based on the weighted
average  number of common  shares  outstanding  during  the year.  Common  stock
equivalents  have been excluded  from the weighted  average  shares  outstanding
since the effect of these potentially dilutive securities would be antidilutive.


--------------------------------------------------------------------------------
                                                                       Page F-11

<PAGE>


                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Significant  estimates - The  preparation of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  the Company to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expenses,  and the disclosure of contingent assets and liabilities.
Inventory is reported at market value. The inventory valuation  adjustment is an
estimate based on the subsequent  sale of inventory and the projected  impact of
certain economic,  marketing and business factors. Warranty reserves and certain
accrued  expenses  are based on an  analysis  of  future  costs  expected  to be
incurred in meeting contracted obligations. The amounts estimated for the above,
in addition to other  estimates not  specifically  addressed,  could differ from
actual  results;  and the  difference  could  have a  significant  impact on the
financial statements.

Fair value of financial  instruments - The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. The
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current  transaction  between willing parties.  For certain of
the Company's  financial  instruments,  including cash,  accounts receivable and
accounts  payable,  the carrying amount  approximates  fair value because of the
short maturities.  The carrying amount of the Company's short-term and long-term
debt approximates fair value because interest rates available to the Company for
issuance of similar debt with similar terms and maturities are approximately the
same.

Stock-based  compensation - The Financial  Accounting  Standards  Board recently
issued  Statement  of  Financial   Accounting  Standards  No.  123  (SFAS  123),
"Accounting for Stock-Based  Compensation".  This Standard will become effective
for the year ending July 31, 1997,  although  earlier  application is permitted.
The Company has  determined  that it will  implement  the new  standard in 1997.
Under SFAS 123, a fair value method is used to determine  compensation  cost for
stock options or similar  equity  instruments.  Compensation  is measured at the
grant date and is  recognized  over the  service or  vesting  period.  Under the
current  accounting  standard,  compensation  cost is the excess, if any, of the
quoted market price of the stock at a measurement date over the amount that must
be paid to acquire the stock.

The new standard would allow the Company to continue to account for  stock-based
compensation  under the current  standard,  with disclosure of the effect of the
new standard, or adopt a fair value based method of accounting.  The Company has
not yet decided which method will be utilized, nor has it determined the impact,
if any, that  adoption of the new standard will have on the financial  condition
and results of operations.  However,  management  believes the effect of the new
accounting standard will not be significant.


NOTE  2 - GOING CONCERN

The Company has  experienced  recurring  losses from  operations and use of cash
from operations and had an accumulated  deficit of $76,990,000 at July 31, 1996.
A substantial portion of the losses is attributable to research, development and
other start-up costs associated with the Company's development and production of
electric vehicles, including the conversion of gas-powered cars and light trucks
to electric power.

--------------------------------------------------------------------------------
                                                                       Page F-12

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  2 - GOING CONCERN (Continued)

During the three years ended July 31, 1996, the Company  obtained  approximately
$47 million (net of debt repayments) in cash from financing  activities  through
private placements of common stock and Series A preferred stock, the exercise of
options and warrants, and the issuance of convertible subordinated notes payable
and secured convertible bonds and notes. During 1996, the Company was successful
in  restructuring  $11,700,000 of its trade debt, and converting  $15,300,000 of
its convertible debt to common stock.

It is management's plan to seek additional  financing through private placements
as well as other means. Management believes the additional capital it is seeking
will be  available  in the future and will enable the  Company to achieve  sales
growth and,  ultimately,  profitable  operations.  As of October 23,  1996,  the
Company  had no  commitments  from any  person or entity to  provide  additional
financing to the Company.

The  consolidated  financial  statements  have been  prepared on a going concern
basis,  which  contemplates  the  realization  of  assets  and  satisfaction  of
liabilities in the normal course of business.  Cash flows from future operations
may not be sufficient to enable the Company to meet its obligations,  and market
conditions  and the  Company's  financial  position  may  inhibit its ability to
achieve profitable operations.

These factors,  as well as the future availability or inadequacy of financing to
meet future needs,  could force the Company to delay,  modify,  suspend or cease
some or all aspects of its planned  operations,  and/or  seek  protection  under
applicable bankruptcy and insolvency laws.


NOTE  3 - ACQUISITIONS

Asset  purchase - In October 1993,  the Company  purchased from Mosler Auto Care
Center,  Inc.,  certain assets  including  vehicle molds,  plugs used to produce
molds,  jigs and other  assets for use in the  development  and  manufacture  of
composite  monocoque   integrated  chassis  and  body  systems  for  lightweight
vehicles.  The Company  issued  1,000,000  shares of  unregistered  common stock
valued at $1,250,000 for the assets and agreed to pay royalties  based on one to
three  percent of sales of  products  (cars and vans) in the  United  States and
Canada which use the composite monocoque technology.

The net present  value of the minimum  royalty was recorded as a liability as of
the date of  acquisition.  There was a minimum royalty of $100,000 per year over
fourteen years ($800,000 net present value).

The acquisition of assets was accounted for as a purchase and, accordingly,  the
acquired assets and liabilities  were recorded at their estimated fair values as
of the date of acquisition. Because the assets acquired were expected to be used
in the  research  and  development  of  future  vehicle  lines  or used in other
composite monocoque  applications,  the excess of purchase price over net assets
acquired of $1,466,000 was initially  included in intangible  assets as deferred
development  costs  associated  with  technology  acquired and amortized  over a
three-year  period on a straight-line  basis.  In addition,  the Company entered
into  two-year  lease  agreements  with a minimum  annual rent of  $148,000  for
approximately  33,000 square feet of manufacturing  space and certain  equipment
located in Florida.

In 1995,  the  Company  closed the Florida  facility  and charged to expense the
remaining  balances in deferred  development  costs and certain fixed assets not
relocated to its other facilities.
                                                                      
--------------------------------------------------------------------------------
                                                                       Page F-13
<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  3 - ACQUISITIONS (Continued)

In 1996,  the liability  for future  royalties  was  incorporated  into the debt
restructuring  agreement  established  under the auspices of the Credit Managers
Association of California  (CMAC).  The restructured  agreement consists of a 20
year  note  payable  of  $606,000  and a 3 year note of  $17,000  which are both
included  in the CMAC  notes.  (See  note 6 for the  terms  of the  CMAC  note).
Additionally,  the Company paid $76,000 in cash, and  approximately  $233,000 of
the agreed upon debt was forgiven.

Purchase  of a  research  company  - In  December  1993,  the  Company  acquired
Livermore  Research  and  Engineering  Corporation,  a  company  engaged  in the
development  and  application of computer  programs that simulate the effects of
crash testing vehicles,  for 215,000  unregistered shares of common stock valued
at  $269,000.  The full  purchase  price was  included in  intangible  assets as
software technology  associated with computer generated crash testing simulation
models.  In 1995, the Company  determined  there was no further value associated
with the acquired assets and charged the remaining unamortized costs to expense.

Purchase of co-owner's interest in joint venture - In February 1994, the Company
purchased the 60% interest of its co-owner in Electricar  International  Limited
("EIL"),  a joint  venture  formed in the British West Indies in 1993 to develop
certain international electric vehicle markets for the Company. The Company paid
$250,000 in cash;  issued four $250,000 notes bearing  interest at 8% per annum,
which were payable in four  successive  quarters  beginning May 1994; and issued
1,000,000 unregistered shares of its common stock. In June 1994, the Company and
its  co-owner  entered into a subsequent  agreement  whereby the Company  issued
60,000  unregistered  shares of its common  stock and paid  $500,000  in cash as
payment in full, including interest,  for the four $250,000 notes. The aggregate
1,060,000  unregistered  shares of common stock were valued at  $2,968,000.  The
total  consideration  of  $3,718,000,  after giving  retroactive  effect for the
subsequent  agreement,  was recorded effective  February 1994. In addition,  the
Company issued warrants to purchase  750,000  unregistered  shares of its common
stock at  $3.50  per  share  contingent  upon  successfully  completing  certain
joint-venture  contracts  within a two-year  period.  These warrants  expired in
February 1996.

The  purpose  of EIL  was to  operate  as the  international  manufacturing  and
distribution  affiliate  of  the  Company,  develop  international  markets  for
electric vehicles,  and obtain joint-venture partners with which to research and
develop  electric vehicle  technologies.  No joint ventures have been formed and
EIL has not had any  significant  operations  through  July 31,  1996.  However,
management  believes  certain  segments  of the  international  electric-vehicle
market are ready to be developed.

In  light  of  the  contingent   nature  of  the  potential   ventures  and  the
international market, management recorded the total consideration of $3,718,000,
exclusive of the contingent warrants,  as market development expense in February
1994.

Asset   acquisition   subsequent  to  July  31,  1996  -  The  Company  acquired
substantially  all the  tangible  and  intangible  assets,  and assumed  certain
liabilities, of Systronix Corporation (Systronix) on October 25, 1996. Systronix
was a developer of  technologically  advanced  electric  propulsion  systems for
electric - powered vehicles.

The  purchase  price,  in addition to the assumed  liabilities,  consisted  of a
credit for the $1,020,000 previously advanced to Systronix;  an $830,000 secured
note due within 30 days of closing;  and 3,800,000  shares of restricted  common
stock, with an approximate market value of $0.22 per share at the purchase date.
2,000,000  cashless  exercise  warrants  exercisable at $.30 per share were also
issued pursuant to a finders fee.

--------------------------------------------------------------------------------
                                                                       Page F-14


<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  3 - ACQUISITIONS (Continued)

In conjunction with this transaction, the Company has employed substantially all
of the  then-existing  employees  of  Systronix  Corporation.  Pursuant  to such
employment,   the  Company  has  granted  to  these   employees   qualified  and
non-qualified  stock options under the  Company's  1996 Employee and  Consultant
Stock Option Plan.  The options  granted in the  aggregate  total  approximately
10,400,000  options at an exercise  price of $.30 per share,  subject to various
vesting  schedules with all options vested in no less than five years.  The Plan
has been approved by the Board of Directors of the Company.

The  purchase  of  Systronix  will be  reported  using  the  purchase  method of
accounting and, accordingly,  the purchase price will be allocated to the assets
acquired  and  liabilities  assumed  based  upon the fair  values at the date of
acquisition.  It is  expected  that  assets  resulting  from,  or to be used in,
research  and  development  will  be  allocated  a  significant  portion  of the
acquisition cost. Research and development costs that have no alternative future
use will be expensed.

The preliminary estimates are that approximately  $2,000,000 may be allocated to
research and  development.  At July 31, 1996,  the  $1,015,000  (of the eventual
$1,020,000)  that had been advanced to  Systronix's  throughout the year to help
fund its  operations  was reported as a receivable,  and had been fully reserved
since  collectibility  of the obligation in the event the eventual  purchase was
not consummated was highly questionable.  The Company considers the advance as a
down payment for research and development  that has no future  alternative  use,
and has charged the advance against income at July 31, 1996.


NOTE  4 - INVENTORIES


(in thousands)                                            1996             1995
                                                          ----             ----
Finished goods                                           $1,000           $2,503
Work-in-process                                             710            1,566
Raw materials                                             1,450            4,007
                                                         ------           ------

                                                          3,160            8,076
Less valuation adjustment                                   773            3,244
                                                         ------           ------

                                                         $2,387           $4,832
                                                         ======           ======


--------------------------------------------------------------------------------
                                                                       Page F-15


<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE  5 - PROPERTY, PLANT AND EQUIPMENT

(in thousands)                                                 1996        1995
                                                              ------      ------
Machinery and equipment                                       $2,141      $2,189
Computers                                                      1,186       1,215
Furniture and office equipment                                   409         409
Demonstration vehicles                                           257         578
Leasehold improvements                                           653         790
Automobiles                                                       40          29
                                                              ------      ------

                                                               4,686       5,210

Less accumulated depreciation and amortization                 3,171       2,098
Less adjustment for impairment                                   680        --
                                                              ------      ------

                                                              $  835      $3,112
                                                              ======      ======


Subsequent  to July 31, 1996,  substantially  all of the assets of the Company's
subsidiary,  Industrial  Electrical  Vehicles,  Inc. were sold.  The Company had
previously  committed  to a plan of action to sell the  assets.  The  impairment
adjustment  reflects a reduction in the carrying  value to $195,000 based on the
fair value assigned to the long-lived assets at the time of sale. The impairment
loss is included in facility closures expense in the consolidated  statements of
operations.

The results of operations associated with those assets impaired and subsequently
sold for the year ended July 31, 1996 were as follows (in thousands):


          Revenues                                            $ 2,089
          Cost of sales                                        (2,963)
          Other operating costs and allowances                 (1,616)
          Debt forgiveness                                        233
                                                              -------

          Net loss                                            $(2,257)
                                                              =======


--------------------------------------------------------------------------------
                                                                       Page F-16


<PAGE>

<TABLE>
                                                                            U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                                           NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------------------------------------------

NOTE  6 - LONG-TERM DEBT

<CAPTION>

(in thousands except for shares data)                                                       1996              1995
                                                                                            ----              ----
<S>                                                                                        <C>                <C>   
Series S secured convertible bonds, interest at 10%, principal and
     interest due March 1997, secured by the personal property of
     the parent company; $5,500 was converted to 18,333,000
     shares of common stock                                                                $3,000             $8,500

Convertible subordinated note - ITOCHU Corporation, interest
     at prime rate; converted to 16,267,000 shares of common stock                           --                4,880

Convertible secured notes under a Supplemental Loan Agreement
     with ITOCHU Corporation, interest at 10%, principal and
     interest due April 1997, secured by the personal property of
     the parent company                                                                     3,000              1,856

Series I secured convertible bonds, interest at 10%, converted to
     7,147,000 shares of common stock                                                        --                1,000

Convertible secured note (acquisition of Nordskog); due January
     1997, with interest at 9% payable quarterly, secured by
     certain machinery and equipment of the subsidiary;
     subsequent to July 1996, the assets associated with the
     previous acquisition of Nordskog were sold in exchange for
     the assumption of this note                                                            1,013                982

Secured promissory note - Credit Managers Association of
     California ("CMAC") as exclusive agent for Non-Qualified
     Creditors; interest at 3%, with principal and interest due April
     1999; secured with an interest in a sinking fund escrow
     consisting of 10% of any financing received subsequent to April
     1996; the Board of Directors may waive the sinking fund set
     aside on a case-by-case basis                                                             95               --

Secured subordinated promissory note - CMAC as exclusive agent
     for Qualified Creditors; interest at 3%, with principal and
     interest due April 1999; secured with an interest in a sinking
     fund escrow as noted above                                                               560               --

</TABLE>

--------------------------------------------------------------------------------
                                                                       Page F-17


<PAGE>

<TABLE>
                                                                            U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                                                           NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------------------------------------------


NOTE  6 - LONG-TERM DEBT (Continued)

<CAPTION>
                                                                                            1996              1995
                                                                                            ----              ----

<S>                                                                                        <C>               <C>  
Secured subordinated promissory note - CMAC as exclusive agent
     for Non-Qualified Creditors; interest at 3% for the first 5 years,
     6% for years 6 and 7, and then at prime plus 3% through date of
     maturity; interest payments are made upon payment of principal,
     with principal and interest due no later than April 2016; secured
     with an interest in a sinking fund escrow as noted above;
     payments on this note are subordinated to payment in full on all
     principal and accrued interest owed on the above 3 year non-
     qualified and qualified notes                                                           3,332              --

Convertible secured promissory note, interest at 10%, due November
     1996, convertible into common stock at $0.30 a share                                      100              --

Other                                                                                          170               152
                                                                                           -------           -------

                                                                                            11,270            17,370
Less current maturities                                                                      7,283            17,370
                                                                                           -------           -------

                                                                                           $ 3,987           $  --
                                                                                           =======           =======
</TABLE>


In September 1994, the Company issued 120 units of Series S secured  convertible
bonds, totaling $12,000,000,  and received proceeds of $10,140,000,  net of fees
of  $1,860,000.  Each of the units  consisted  of  $100,000 in  principal  and a
warrant to purchase 10,000 common shares. The bonds, which bear interest at 10%,
were  initially  due in March 1995 and were secured by the personal  property of
the parent company,  excluding  securities of its  subsidiary.  The Company also
issued  additional  warrants to purchase  1,200,000  common shares  representing
additional  issuance fees. The warrants are exercisable  through July 1997 at an
exercise  price of $3.20 per  share.  The excess of  fair-market  value over the
exercise  price of the warrants of $1,920,000,  and the fees of $1,860,000,  was
recorded as debt discount and amortized over the initial period of the bonds. In
March 1995, the Company had neither sufficient funds, nor commitments to receive
sufficient funds, to pay the principal and interest.  Subsequently,  the Company
negotiated an extension of the bonds'  maturity to March 1996; the conversion of
$600,000 of the unpaid interest to principal; and a conversion price for most of
the debt of $0.30 per share. In July 1995, the Company  converted  $4,100,000 of
the Series S bonds to 13,667,000  shares of common stock at $0.30 per share.  In
December  1995,  the  company  converted   $210,000  of  the  Series  S  secured
convertible bonds to 700,000 shares of common stock at $0.30 per share. In March
1996  accrued  unpaid  interest of $71,000 on the bonds was added to  principal.
Also in March 1996,  the Company  converted  $491,000 of the bonds to  1,638,000
shares of common stock at $0.30 per share.  In June 1996, the Company  converted
$4,870,000 of the Series S secured  convertible  bonds to  16,233,000  shares of
common  stock at $0.30  per  share,  and  accrued  interest  of  $1,111,000  was
converted to 3,704,000  shares of common stock at $0.30 per share.  The maturity
date of the remaining Series S secured  convertible  bonds was extended to March
1997.

--------------------------------------------------------------------------------
                                                                       Page F-18

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  6 - LONG-TERM DEBT (Continued)

The convertible  subordinated  note from ITOCHU had an original maturity date of
June 1997, with interest  payments due  semi-annually.  The interest  payment of
$331,000  due  December  1994 was not  paid,  causing  an event of  default.  In
February 1995, the Company made a partial interest payment of $25,000.  In April
1995,  the Company and ITOCHU agreed to  accelerate  the maturity of the note to
April 1996;  and change the conversion  price from $5.00 to $0.30 per share.  In
July 1995,  $4,100,000 of the note was converted to 13,667,000  shares of common
stock at $0.30 per share.  In June 1996,  the company  converted the  $4,880,000
balance of the convertible subordinated note from ITOCHU to 16,267,000 shares of
common stock at $0.30 per share,  and the accrued unpaid  interest of $1,612,000
was converted to 5,372,000 shares of common stock at $0.30 per share.

The Company and ITOCHU Corporation entered into a Supplemental Loan Agreement in
April 1995, whereby ITOCHU agreed to lend the Company amounts equal to funds the
Company receives from other outside lenders or investors,  up to $3,000,000,  at
10% annual  interest.  The notes are  secured by the  personal  property  of the
parent company and are convertible at $0.30 per share into the Company's  common
stock. In July 1995, the Company received $1,856,000 under this agreement,  with
principal and interest due April 1996. The Company received the remaining amount
of ITOCHU's commitment of $1,144,000 in August 1995. In March 1996, the maturity
date of these convertible secured notes was extended to April 1997.

In March  through May 1995,  the Company  issued  $1,000,000 of Series I secured
convertible bonds to investors. Principal and interest were due March 1996, with
the bonds  convertible  into the Company's  common stock at floating  conversion
rates.  In August 1995, the Company issued an additional  $1,144,000 of Series I
convertible  bonds.  In March 1996,  the  maturity  date of the Series I secured
convertible  bonds was  extended to March 25,  1997.  In June 1996,  the Company
converted the total  outstanding  balance of the Series I  convertible  bonds of
$2,144,000 to 7,147,000  shares of common stock at $0.30 per share. In addition,
accrued  unpaid  interest of $230,000 was converted to 766,000  shares of common
stock at $0.30 per share.

ITOCHU and the Series S and Series I bond  holders are  obligated to convert the
notes and bonds they hold once (1) a  restructuring/repayment  workout  plan has
been accepted by the unsecured  creditors holding 80% of the Company's unsecured
debt,  and (2) such plan has been approved by the Company in  consultation  with
ITOCHU  Corporation,  or (3) upon ITOCHU  Corporation's  sole election.  In June
1996,  having  completed  the  initial  phase  of the  debt  restructuring  with
acceptance of the workout plan by over 80% of the Company's unsecured creditors,
and in consultation with ITOCHU Corporation, the Company effected the conversion
of $11,900,000 of principal and $2,900,000 of accrued  interest into  49,489,000
shares of common stock at the rate of $0.30 per share.


--------------------------------------------------------------------------------
                                                                       Page F-19

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  6 - LONG-TERM DEBT (Continued)

In connection with the acquisition of Nordskog Electric Vehicles,  Inc., renamed
Industrial  Electric  Vehicles,  Inc.  (IEV), in July 1993, the Company issued a
$1,000,000  secured  convertible  promissory  note  due in  January  1997,  with
interest  at 9%  annually  and  payable  quarterly.  This  note was  secured  by
machinery and equipment  owned by IEV. During 1995, the Company sold some of the
machinery and equipment used to secure the note and used the proceeds of $18,000
to pay down the  principal.  Quarterly  interest  payments  have not been  paid,
causing  an event  of  default.  The note  holder  did not  exercise  any of its
remedies with respect to the  acceleration of the principal and interest nor the
collateral  securing this note.  The full amount of the note was classified as a
current  liability in 1995, due to the event of default.  In September 1996, the
Company  sold the  assets of IEV to a group  headed by former  employees  of the
Company.  The buyers  assumed  the  liability  for the note and the  Company was
released from this liability.

In December  1994,  the Company  entered into a  manufacturing  agreement with a
vendor whereby the Company agreed to sell to the vendor sufficient  inventory to
complete the  conversion of 84 sedans and pick-up  trucks to electric  power and
then to repurchase the completed  vehicles upon completion of the  manufacturing
process. The selling price was established at a 10% discount from the repurchase
price;  and the terms of the agreement gave the vendor a purchase money interest
in inventory.  Due to the repurchase agreement,  the Company did not account for
this transaction as a sale. The Company initially accrued the difference between
the  selling  price and  repurchase  price as  interest  expense.  However,  the
interest  expense  accrual  was later  reversed by the Company as a result of an
amendment to the agreement in July 1995,  which  eliminated the price difference
and  required  only the  refund to the vendor of the net amount of money paid to
the  Company  under the  agreement.  During  1995,  the vendor  paid the Company
$867,000, and the Company paid the vendor $64,000--for a difference of $803,000,
which was recorded as an account  payable.  Under the July 1995  amendment,  and
separate from the debt restructuring  process, a portion of anticipated proceeds
from future  sales of unsold  vehicles in which the vendor had a purchase  money
interest was to be paid to the vendor; and the vendor was to ratably release its
interest in such vehicles as they were sold until the $803,000 was fully repaid.
At July 31,  1996,  approximately  $364,000  remains  unpaid and is  included in
accounts payable.

In April 1996,  and as amended in July 1996,  the Company  issued two promissory
notes,  due April 1999, for $256,000 and $560,000,  and one promissory  note due
April 2016 for  $3,332,000,  to the Credit  Managers  Association  of California
("CMAC") as the exclusive agent for certain unsecured creditors who settled with
the Company in connection with its Debt Restructuring Plan. Payments of $161,000
have been made on the secured promissory note.


NOTE  7 - LEASE COMMITMENTS

In November 1995, the Company moved its administrative  offices from Santa Rosa,
California  and entered into a three-year  lease,  expiring  October  1998,  for
administrative  offices at its new  location in South San  Francisco.  The lease
provides for an early  termination  by the Company during the period August 1996
to December 1996, and again in October 1997.  Minimum annual lease payments will
be $99,000,  $107,000 and $27,000 for the years ending July 31, 1997,  1998, and
1999, respectively.


--------------------------------------------------------------------------------
                                                                       Page F-20

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  8 - INCOME TAXES

As of July 31, 1996,  the Company has available for  carryforward  approximately
$71 million and $26 million of net operating  losses for federal and  California
income tax purposes, respectively.

The Tax  Reform Act of 1986 and the  California  Conformity  Act of 1987  impose
restrictions  on the  utilization  of net  operating  losses  in the event of an
"ownership  change" as defined by Section 382 of the  Internal  Revenue  Code of
1986.  An  "ownership  change"  occurred  at the time of the  private  placement
memorandums  in 1991 and 1992,  at the time of the  common and  preferred  stock
issuances  in 1993,  and upon  conversion  of certain debt to equity in 1995 and
1996.  This  change  will  limit  future  availability  of  net  operating  loss
carryforwards. The extent of the limitation has not been determined.

The following table summarizes the components of the net deferred tax assets (in
thousands):

                                                           1996           1995
                                                           ----           ----
Deferred tax assets
     Federal tax loss carryforward                        $21,797        $18,708
     State tax loss carryforward                            2,346          2,002
     Basis difference in EIL                                1,610          1,610
     Accumulated depreciation                                 439            113
     Stock option compensation                                595            572
     Reserves and allowances                                   38            262
     Other, net                                               393            462
     Amortization of goodwill                                --                4
                                                          -------        -------

                                                           27,218         23,733
Less valuation allowance                                   27,218         23,733
                                                          -------        -------

Net deferred tax asset                                    $  --          $  --
                                                          =======        =======


A valuation  allowance  is required  for those  deferred tax assets that are not
likely to be realized.  Realization is dependent upon future earnings during the
period  that  temporary   differences  and  carryforwards  are  expected  to  be
available. Because of the uncertain nature of their ultimate utilization,  based
upon the Company's  past  performance,  a full  valuation  allowance is recorded
against these deferred tax assets.


--------------------------------------------------------------------------------
                                                                       Page F-21

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  8 - INCOME TAXES (Continued)

The net operating losses expire in varying amounts,  as follows,  for income tax
reporting purposes:

                                                       Net Operating Loss
                                               ---------------------------------
     Date of expiration                           Federal             California
     ------------------                           --------            ----------

            1996                               $    58,000           $   161,000
            1997                                   125,000               558,000
            1998                                   130,000             1,806,000
            1999                                   124,000             1,715,000
            2000                                    51,000            16,730,000
            2001                                    44,000             4,541,000
            2002                                    11,000                  --
            2003                                    64,000                  --
            2004                                   322,000                  --
            2005                                   443,000                  --
            2006                                   680,000                  --
            2007                                 2,552,000                  --
            2008                                24,221,000                  --
            2009                                33,460,000                  --
            2010                                 9,083,000                  --
                                               -----------           -----------

                                               $71,368,000           $25,511,000
                                               ===========           ===========


NOTE  9 - STOCKHOLDERS' DEFICIT

Series A  preferred  stock - During  1993,  stockholders  authorized  30,000,000
shares  of 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 at $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 yet been  declared on the Series A preferred
stock.

In July 1993,  the Board of Directors  approved a plan for the sale of shares of
Series A preferred stock to certain officers and directors  ("Participants")  at
$0.60 per share. In general,  the Participants could purchase these shares 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 are  pledged to the  Company  as  security  for the  notes.  The notes
provide for interest at 8% per annum payable  annually  with the full  principal
amount and any unpaid interest due on January 31, 1997.

--------------------------------------------------------------------------------
                                                                       Page F-22

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  9 - STOCKHOLDERS' DEFICIT (Continued)

Between August 1993, and January 1994, the Company  completed a private offering
of units at $25,000 per unit. Each unit consisted of 20,000  unregistered shares
of Series A preferred stock and warrants to purchase 10,000  unregistered shares
of common stock  exercisable at $1.25 per share through  December 1993, and then
exercisable at $2.00 through June 1995,  which was the original  expiration date
of the warrants.  In 1995, expiration of the warrants was extended to June 1996,
and the  exercise  price  reduced to $0.30 per share until  January 1, 1996,  at
which  time the  exercise  price  reverts to $2.00 per share.  An  aggregate  of
2,325,000 shares of Series A preferred stock and 1,150,000  warrants to purchase
common  stock were issued  resulting  in  proceeds,  net of issuance  costs,  of
$2,615,000.

During  1994,  875,000  shares of Series A preferred  stock were issued for cash
equal to the exercise  prices ($0.75 to $1.00 per share) of warrants to purchase
common  stock,  which were  surrendered,  resulting  in  proceeds  of  $862,000.
Further,  34,000 shares of Series A preferred stock were issued in consideration
of $28,000 of services provided by employees and consultants.

A total of 2,264,000, 3,078,355 and 1,387,000 shares of Series A preferred stock
were converted on a one-to-one basis to common stock during 1996, 1995 and 1994,
respectively.

Series B preferred stock - In January 1996,  stockholders  authorized  5,000,000
shares  of Series B  preferred  stock.  Series B  preferred  stock is  currently
unregistered and each share is initially  convertible into 6.66 shares of common
stock at the  election of the holder.  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.

In April 1996, the Company issued  1,507,000 shares of Series B preferred stock,
plus a note for $532,000,  in settlement of claims of $3,547,000  under the debt
restructuring  plan.  In July  1996,  an  additional  80,000  shares of Series B
preferred  stock  and a  note  for  $28,000  were  issued  in  settlement  of an
additional $189,000 of claims.

Common stock - In October 1993, the Company issued 1,000,000 unregistered shares
of common stock valued at $1,250,000  related to the purchase of certain  assets
from Mosler Auto Care Center, Inc.
(See Note 3.)

In December 1993, the Company issued 215,000 unregistered shares of common stock
valued at $269,000 related to the purchase of Livermore Research and Engineering
Corporation. (See Note 3.)

In February  1994, the Company issued  1,000,000  unregistered  shares of common
stock and subsequently issued an additional 60,000 unregistered shares of common
stock with an  aggregate  value of  $2,968,000  related to the  purchase  of the
remaining interest in Electricar International Limited.
(See Note 3.)

Between February and June 1994, the Company sold 2,500,000  unregistered  shares
of its common stock at $2.80 per share, and an additional  500,000  unregistered
shares  of  common  stock  at  $3.20  per  share,  pursuant  to a  Regulation  S
Subscription  Agreement.  In connection with this offering,  under Regulation D,
one investor purchased 110,000  unregistered shares of common stock at $2.80 per
share and another investor purchased 31,000  unregistered shares of common stock
at $3.20 per share.  These  transactions  resulted in proceeds,  net of issuance
costs, of $8,320,000. The shares sold in this offering have certain registration
rights.


--------------------------------------------------------------------------------
                                                                       Page F-23

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  9 - STOCKHOLDERS' DEFICIT (Continued)

In June 1994, the Company and ITOCHU Corporation entered into agreements whereby
ITOCHU purchased  2,150,000 shares of unregistered  common stock for $6,020,000,
and loaned  $8,980,000  to the  Company  under an  unsecured  subordinated  note
convertible  into the  Company's  common  stock at $5.00 per  share.  ITOCHU has
certain  registration  rights for the shares purchased,  and the shares would be
issued upon  conversion  of the note.  In addition,  ITOCHU and the Company have
agreed to exchange  certain rights and obligations with respect to international
trade and to the formation of  international  business  ventures in the electric
vehicle industry under a related Strategic Alliance Agreement.

In connection with this transaction, the Company paid $361,000 of issuance costs
associated with the shares of common stock  purchased,  and $500,000 of issuance
costs associated with the subordinated  note, which was being amortized over the
life of the note.  In April 1995,  the  Company and ITOCHU  agreed to reduce the
conversion  price of the  unsecured  subordinated  note from  $5.00 to $0.30 per
share.  Subsequently,  in July 1995,  $4,100,000  of the note was  converted  to
13,667,000  shares of common stock and $151,000 of  unamortized  issuance  costs
associated  with the  converted  amount  of the note was  transferred  to common
stock.  In June 1996,  the  $4,880,000  note balance was converted to 16,267,000
shares of common  stock,  and  $1,612,000  of accrued  interest was converted to
5,372,000 shares of common stock.

Warrants  and options to  purchase  220,000,  664,000  and 632,000  unregistered
shares of common stock were  exercised at prices ranging from $0.25 to $2.00 per
share,  resulting in proceeds,  net of issuance costs, of $28,000,  $174,000 and
$538,000 in 1996, 1995 and 1994, respectively.

During  1994,  the Company  issued  57,000  unregistered  shares of common stock
valued at  $82,000 in  consideration  for  services  rendered,  and sold  37,000
unregistered  shares of common stock for cash of $21,000 and a nonrecourse  note
of $14,000. During 1995, the Company issued 79,000 unregistered shares of common
stock valued at $201,000 in consideration for services rendered.

In June and July 1995,  the Company sold  9,000,000  unregistered  shares of its
common  stock at  $0.10  per  share  pursuant  to a  Regulation  S  Subscription
Agreement resulting in net proceeds of $729,000.

In July 1995,  $4,100,000  of the Series S secured  convertible  bonds issued in
September  1994 were  converted,  at $0.30 per share,  to  13,667,000  shares of
common stock. In December 1995, the Company  converted  $210,000 of the bonds to
700,000  shares of common stock at $0.30 per share.  In March 1996,  the Company
issued  1,638,000  shares of common stock to convert  $491,000 of principal  and
accrued interest of the Series S secured convertible bonds at $0.30 per share of
common stock. In June 1996, the Company  converted  $4,870,000 of Series S bonds
and  $1,111,000  of  accrued  interest  to  16,233,000  and  3,704,000   shares,
respectively, of common stock at $0.30 per share.

In September  1994,  common stock was credited  $1,920,000 for the excess of the
fair-market  value over the exercise price of warrants issued in connection with
the sale of the Series S secured convertible bonds.

In May 1995, 450,000 shares of common stock were canceled in connection with the
cancellation of a $180,000 non-recourse note from a participant in the Company's
stock purchase plan,  which allowed  certain  officers and directors to purchase
Series  A  preferred  stock.  The  common  stock  canceled  was  converted  from
previously issued Series A preferred stock under this plan.

--------------------------------------------------------------------------------
                                                                       Page F-24


<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE  9 - STOCKHOLDERS' DEFICIT (Continued)

Between  December 1995 and April 1996, the Company sold  3,333,000  unregistered
shares  of its  common  stock at $0.15 per  share  and an  additional  7,337,000
unregistered shares at $0.30 per share pursuant to the Regulation S Subscription
Agreement. These transactions resulted in proceeds of $2,701,000.
The shares sold in this offering have certain registration rights.

In June 1996, the Company converted all of the outstanding balance of $2,144,000
of Series I convertible  bonds to 7,147,000  shares of common stock at $0.30 per
share.  The accrued  interest on these bonds of $230,000  was also  converted to
766,000 shares of common stock at $0.30 per share.


NOTE 10 - STOCK OPTIONS AND WARRANTS

In 1993,  stockholders approved the 1993 Employee and Consultant Stock Plan (the
"1993 Plan") which expires in 2003.  Under the 1993 Plan,  the Company  reserved
10,000,000  shares of common stock for incentive and nonstatutory  stock options
as of July 31, 1993. The Company  increased the number of shares of common stock
reserved under the 1993 Plan to 15,000,000 in November 1993 and to 30,000,000 in
September  1995.  Options  under the 1993 Plan expire over periods not to exceed
ten years from date of grant.  Options  which  expire or are canceled may become
available for future grants under the 1993 Plan. In addition, the Company grants
other nonstatutory stock options.

In 1994,  stockholders  approved  the  1994  Director  Stock  Option  Plan  (the
"Director  Option  Plan").  Under this plan,  the Company has  reserved  150,000
shares of common stock for nonstatutory stock options for nonemployee directors.
Options  under this plan are fully  vested upon the  granting of the options and
expire  ten  years  from  the  date  of  grant  unless  terminated  sooner  upon
termination of the optionee's status as a director.  Options which expire or are
canceled may become available for future grants under the Director Option Plan.

In April 1996, the Company, together with Systronix Corporation, entered into an
agreement with Hyundai Motor Company  ("Hyundai") which provided  Systronix with
two  contracts to perform  engineering  services and which  granted  Hyundai the
right to either  purchase common stock in the Company or enter into a multi-year
licensing  agreement to utilize electric vehicle  technology owned by Systronix.
Upon the payment by Hyundai of $250,000 to the Company in July 1996, Hyundai was
granted an option to purchase  12,000,000  shares of common  stock at $0.467 per
share. This option expires on March 1, 1997. Upon the full exercise of the stock
purchase option, the Company and Systronix will grant to Hyundai a manufacturing
and distribution license to a proprietary drive train system. If Hyundai decides
not to exercise the stock purchase option,  the Company and Systronix will grant
a manufacturing  and distribution  license system to Hyundai for $1,500,000 plus
royalties equivalent to 4% of Hyundai's  procurement cost beginning with systems
sold in the year 2000.  The  royalty  will be reduced to 3% in 2004 and to 2% in
2008,  with no royalty due after  2012.  The  $250,000  option  payment  will be
applied  toward the purchase of the stock or the  manufacture  and  distribution
license if either occurs before March 1, 1997.


--------------------------------------------------------------------------------
                                                                       Page F-25

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------


NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)

<TABLE>

The  following  table  summarizes   common  stock  option  activity  (shares  in
thousands):

<CAPTION>

                                                                            Director
                                                 1993 Plan                 Option Plan                   Other
                                             ------------------        ---------------------       --------------------
                                             Shares      Price         Shares       Price           Shares      Price
                                             ------      -----         ------       -----           ------      -----
<S>                                         <C>        <C>                <C>      <C>               <C>     <C>     
Balance, August 1, 1993                      9,910     $   0.60           --       $     --          2,055   $ .60-.87
Granted                                      5,177     .60-5.00            7            6.88         1,043    .75-3.00
Canceled                                      (605)    .60-2.80           --             --           (924)        .60
Exercised                                     --           --             --             --            (10)        .87
Expired                                       --           --             --             --            (95)        .75
                                            ------                      ----                        ------

Balance, July 31, 1994                      14,482     .60-5.00            7            6.88         2,069    .60-3.00
Granted                                      8,126     .40-2.97           17        .24-5.88           --          --
Canceled                                    (4,916)    .60-2.97           (8)       .24-5.88           --          --
Exercised                                      (13)    .60-1.25           --             --            --          --
Expired                                       (784)    .60-2.80           --             --            --          --
                                            ------                      ----                        ------

Balance, July 31, 1995                      16,895     .60-5.00           16        .24-6.88         2,069    .60-3.00
Granted                                     11,415       0.30             13            0.20           --          --
Canceled                                   (10,034)    .60-2.97           --             --            --          --
Exercised                                     --          --              --             --            --          --
Expired                                     (1,007)    .60-2.97           (9)       .71-6.88          (574)   .60-2.80
                                            ------                      ----                        ------

Balance, July 31, 1996                      17,269     .30-5.00           20        .20-6.88         1,495    .60-2.80
                                            ======                      ====                        ======

</TABLE>

The Company recorded $200,000 and $1,551,000 as compensation expense during 1995
and 1994,  respectively,  for the difference between the quoted market price and
the  exercise  price of options  at dates of grant  amortized  over the  service
period related to such options.

Warrants in amounts of 1,122,000 in 1991 and 1992,  1,000,000 in 1993, 1,150,000
in 1994 and 2,400,000 in 1995 were issued in conjunction with private placements
of debentures,  common stock and bonds.  Warrants  relating to the 1991 and 1992
private  placements are  exercisable at the lower of $1.00 or 125% of the market
value of the Company's common stock at date of exercise.  The warrants  relating
to the 1993 private  placement  were  initially  exercisable  at $1.25 per share
through  December 31,  1994,  and $2.00 per share  through  June 30,  1995,  the
expiration  date of the warrants.  On February 1, 1995, the expiration  date was
extended to June 30, 1996, and the exercise price was lowered to $0.30 per share
through  December 31, 1995,  and then $2.00 through June 30, 1996. In connection
with the purchase of the Company's  co-owner's  interest in EIL, a joint venture
(Note 3), 750,000 warrants  exercisable at $3.50 per share were issued. In 1994,
267,000 warrants  exercisable at $3.00 and, in 1995, 20,000 warrants exercisable
at $2.00 were issued in connection  with pledges of  collateral  made by certain
stockholders  for bank lines of credit (Note 6). In September  1994, the Company
issued warrants to purchase  2,400,000 common shares  representing  fees for the
issuance of Series S convertible  secured bonds (Note 6). The exercise  price of
these warrants is $3.20 per share.


--------------------------------------------------------------------------------
                                                                       Page F-26

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)

In May 1996,  the Company  issued  13,333,000  warrants in exchange for services
performed.  The warrants are  exercisable at $0.30 per share for an equal number
of shares of common stock, and expire on May 1, 1997. If the market value of the
common  stock of the Company is equal to or greater  than $0.60 per share on the
date of  exercise,  and if the average  trading  volume was in excess of 100,000
shares per day for the preceding 20 trading days,  the warrants may be exercised
without payment of cash. The warrants may not be exercised in the United States,
and the stock  purchased  may not be delivered to the United States unless first
registered  under the  Securities  Act or receive an  available  exemption  from
registration.

<TABLE>

The following table summarizes warrant activity (in thousands):

<CAPTION>

                                                                        Purchase
                                                                           of
                               1991 &                                  Co-owner's
                                1992          1993          1994        Interest       Bank       Series S
                              Private       Private       Private       in Joint     Lines of       Bond
                             Placements    Placement     Placement      Venture       Credit     Placement        Other
                            -------------  -----------   -----------  -------------  ----------  -----------    ----------
<S>                             <C>           <C>           <C>           <C>           <C>           <C>            <C>
Balance,
     August 1, 1993              1,122         1,000          --            --            --            --            --
Granted                          --            --           1,150           750           267          --             247
Expired                          (100)         --            --            --            --            --            --
Exercised                        (730)         (325)         (297)         --            --            --            (147)
Canceled                         --            --            --            --            (134)         --            --
                              -------       -------       -------       -------       -------       -------       -------

Balance,
     July 31, 1994                292           675           853           750           133          --             100
Granted                          --            --            --            --              20         2,400           100
Expired                          --             (25)         --            --            --            --             (25)
Exercised                          (1)         (650)         --            --            --            --            --
                              -------       -------       -------       -------       -------       -------       -------

Balance,
     July 31, 1995                291          --             853           750           153         2,400           175
Granted                          --            --            --            --            --            --          13,333
Expired                          (291)         --            (853)         --            --            --            (175)
Exercised                        --            --            --            --            (153)         --            --
Canceled                         --            --            --            (750)         --            (220)         --
                              -------       -------       -------       -------       -------       -------       -------

Balance,
     July 31, 1996               --            --            --            --            --           2,180        13,333
                              =======       =======       =======       =======       =======       =======       =======

</TABLE>

--------------------------------------------------------------------------------
                                                                       Page F-27

<PAGE>

                                        U. S. ELECTRICAR, INC., AND SUBSIDIARIES
                                       NOTES TO FINANCIAL STATEMENTS (Continued)

--------------------------------------------------------------------------------

NOTE 11 - CONTINGENCIES

In connection  with the Company's  default on its debt  obligations to unsecured
creditors,  nineteen of these  creditors  have brought  independent  lawsuits to
various  courts in California,  Connecticut,  North Carolina and New York in the
aggregate amount of approximately  $650,000. As of October 23, 1996, nine of the
unsecured creditors have obtained judgments against the Company in the aggregate
amount of approximately  $450,000. The remaining suits are pending. In addition,
in 1995 four former officers of the Company have threatened  actions against the
Company  for  damages  as a result of its  failure  to pay  severance  pay under
certain  employment  contracts in the aggregate  amount of $377,000.  To date no
actions have been filed.

The  Company is also  subject to other  legal  proceedings  and claims that have
arisen  during the period of  restructuring  both its debt and  operations.  The
ultimate  resolution of these  proceedings is not known,  but the final outcomes
are not expected to  significantly  influence  the Company's  current  financial
position.

NOTE 12 - SUBSEQUENT EVENTS

A  substantial  portion of the assets of  Industrial  Electric  Vehicles,  Inc.,
(formerly Nordskog Electric Vehicles, Inc. (Nordskog),  prior to its acquisition
in July 1993 by the Company),  were sold in September  1996.  Consideration  for
this sale included the assumption of the note payable that totaled $1,013,000 at
July 31, 1996 to Nordskog.

As discussed at Note 3, the Company  acquired  substantially  all the assets and
certain liabilities of Systronix  Corporation for cash, notes and stock totaling
approximately $2,686,000.


--------------------------------------------------------------------------------
                                                                       Page F-28

<PAGE>
                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================


 3.1(1)      Certificate  of  Amendment  of  Articles  of  Incorporation,  filed
             1/12/94, changing name to U.S. Electricar, Inc.

 3.2(1)      Certificate  of  Correction  to Amended  and  Restated  Articles of
             Incorporation, filed 8/23/93, correcting number of shares of Series
             A Preferred stock to 30,000,000.

 3.3(1)      Amended and  Restated  Articles of  Incorporation,  filed  7/26/93,
             changing number of authorized Common Stock shares to 60,000,000 and
             Preferred Stock shares to 35,000,000,  authorizing 3,000,000 Series
             A  Convertible  Preferred  Stock  shares and  establishing  rights,
             preferences,  privileges  and  restrictions  of Series A  Preferred
             stock.

 3.4(1)      Amended and Restated  Articles of  Incorporation,  filed  12/29/89,
             changing number of authorized Common Stock shares to 20,000,000 and
             authorizing 10,000,000 shares of Preferred Stock.

 3.5(1)      Certificate  of  Amendment  of  Articles  of  Incorporation,  filed
             3/3/83, authorizing reverse stock split.

 3.6(1)      Certificate  of  Amendment  of  Articles  of  Incorporation,  filed
             10/21/81, increasing authorized Common Stock shares to 80,000,000.

 3.7(1)      Certificate  of  Amendment  of  Articles  of  Incorporation,  filed
             8/24/79, increasing authorized Common Stock shares to 40,000,000.

 3.8(1)      Certificate  of  Amendment  of  Articles  of  Incorporation,  filed
             6/27/79, changing name to Solar Electric Engineering, Inc.

 3.9(1)      Certificate  of  Amendment of Articles of  Incorporation  of Clover
             Solar Corporation, Inc., dated 5/9/79, filed 5/17/79, changing name
             to Solar Electric Eng.,  Inc.,  and  increasing  authorized  Common
             Stock  shares to  20,000,000  and  authorizing  a 1/10 Common Stock
             split.

 3.10(1)     Certificate  of  Amendment of Articles of  Incorporation  of Clover
             Solar Corporation,  Inc., dated 2/21/77, filed 3/15/77,  increasing
             authorized Common Stock shares to 2,000,000, and authorizing a 1/10
             Common Stock split.

 3.11(1)     Articles of Incorporation of Clover Solar Corporation, Inc.

 3.12(1)     Bylaws of Registrant.

 3.13(4)     Certificate  of  Amendment  of  Restated  and  Amended  Articles of
             Incorporation  of U.S.  Electricar,  Inc.,  filed February 1, 1995,
             whereby the number of shares of common  stock  authorized  to issue
             was changed from 60,000,000 shares to 100,000,000 shares.

<PAGE>


                                  EXHIBIT INDEX

Exhibit No.                     Description
================================================================================

 3.14(4)     Certificate  of Correction of  Certificate of Amendment of Restated
             and Amended  Articles of Incorporation  of U.S.  Electricar,  Inc.,
             filed  February  10,  1995,  whereby the total  number of shares of
             Preferred Stock designated as Series A convertible  Preferred Stock
             was corrected to 30,000,000.

 3.15(8)     Restated and Amended Articles of  Incorporation of U.S.  Electricar
             filed March 18, 1996.

 4.1(1)      Specimen Common Stock Certificate.

 4.2(1)      Specimen Series A Preferred Stock Certificate.

 4.3(1)      Articles of  Incorporation  Provision  Defining  Rights of Series A
             Preferred Stock.

 4.4(4)      Form of Solar Electric  Engineering,  Inc.  Subscription  Agreement
             (regarding April 1993 Private Placement Offering).

 4.5(1)      Form of Solar Electric Engineering,  Inc. Common Stock and Warrants
             to  Purchase  Common  Stock   Subscription   Agreement   (regarding
             September 1993 Private Placement Offering).

 4.6(1)      Form  of  Solar  Electric  Engineering,  Inc.  Registration  Rights
             Agreement (regarding September 1993 Private Placement Offering).

 4.7(1)      Form of  U.S.  Electricar,  Inc.  Subscription  Purchase  Agreement
             (regarding January 1994 Reg S Private Placement Offering).

 4.8(1)      Form of U.S.  Electricar,  Inc. S-1  Registration  Rights Agreement
             (regarding January 1994 Reg S Private Placement Offering).

 4.9(1)      Form of U.S.  Electricar,  Inc.  Amended  S-1  Registration  Rights
             Agreement   (regarding   January  1994,  Reg  S  Private  Placement
             Offering).

 4.10(1)     Amendment to U.S. Electricar,  Inc. Amended S-1 Registration Rights
             Agreement,  dated November 23, 1994  (regarding  January 1994 Reg S
             Private Placement Offering).

 4.11(1)     Letter dated August 8, 1994 from U.S.  Electricar,  Inc., regarding
             registration  rights  for  shares  of  Common  Stock  held  by Mark
             Neuhaus.

 4.12(1)     Shareholders' Agreement: ITOCHU Corporation, dated June 9, 1994.

 4.13(1)     Form of U.S.  Electricar,  Inc.  Subscription  and  Loan  Agreement
             (regarding September 1994 Reg S Private Placement Offering).

 4.14(1)     Form of U.S. Electricar,  Inc. Secured Convertible Bond to Purchase
             Common  Stock  (regarding  September  1994 Reg S Private  Placement
             Offering).

<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================

 4.15(1)     Form  of  U.S.  Electricar,   Inc.  Security  Agreement  (regarding
             September 1994 Reg S Private Placement Offering).

 4.16(1)     Form of U.S.  Electricar,  Inc.  Warrant to Purchase  Common  Stock
             (regarding September 1994 Reg S Private Placement Offering).

 4.17        Cashless  Exercise Warrants dated October 25, 1996 issued to Fontal
             International, Ltd.

10.1(1)      Amendment of  Solicitation/Modification of Contract (dated December
             15,  1992,  between  Nordskog  Electric  Vehicles  and the  General
             Services Administration).

10.2(1)      Common Stock Purchase  Agreement  (dated July 30, 1993, among Solar
             Electric  Engineering,   Inc.,  Vehicles  Holding  Company,   Inc.,
             Nordskog Electric Vehicles and Elinor Nordskog).

10.3(1)      Convertible note issued in connection with the purchase of Nordskog
             Electric Vehicles.

10.4(1)      Amendment to Common Stock Purchase  Agreement (dated July 30, 1993,
             among U.S. Electricar,  Inc. (formerly Solar Electric  Engineering,
             Inc.),   Industrial  Electric  Vehicles,  Inc.  (formerly  Nordskog
             Electric  Vehicles),  Vehicles  Holding  Company,  Inc., and Elinor
             Nordskog).

10.5(1)      Asset  Purchase  Agreement  (dated  October 31,  1993,  among Solar
             Electric Engineering, Inc., U.S. Electricar Consulier, Inc., Mosler
             Auto Care Center, Inc., Consulier Engineering,  Inc., and Warren B.
             Mosler).

10.6(3)      International  Distribution  Agreement  (dated  September 10, 1993,
             among Solar Electric Asia Limited, Solar Electric Engineering, Inc.
             and Electric Motor Car Company, Limited).

10.7(3)      Amendment to International  Distribution  Agreement (dated February
             15, 1994).

10.8(1)      Stock Purchase  Agreement  (dated December 31, 1993, among Bruce E.
             Engelmann  and Robert G.  Whirley and Solar  Electric  Engineering,
             Inc.).

10.9(1)      Stock  Purchase  Agreement  (dated  February 17,  1994,  among U.S.
             Electricar,  Inc., Energy Resources  Limited,  EV Resources,  Ltd.,
             Windlass Holdings, Ltd. and Electric Motor Car Company, Limited).

10.10(1)     Form of U.S.  Electricar,  Inc. Promissory Note (dated February 17,
             1994).

10.11(1)     Warrant to Purchase Common Stock (dated February 17, 1994,  granted
             to Energy Resources Limited).

<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================

10.12(1)     Agreement for the Electric & Hybrid Electric  Vehicle  Technology &
             Infrastructure   Program  (EVTI)  dated  as  of  11/24/93   between
             Calstart, Inc. and Solar Electric Engineering, Inc.

10.13(1)     Codding Bank Revolving Line of Credit Promissory Note.

10.14(1)     Letter Confirming Transfer of Solar Home to Earth Options Institute
             by Solar Electric Engineering, Inc. (dated December 9, 1992).

10.15(1)     Form of Stock Option  Agreement  under 1993 Employee and Consultant
             Stock Plan.

10.16(1)     Form  of  Solar  Electric  Engineering,   Inc.  1993  Employee  and
             Consultant Stock Plan.

10.17(1)     Form of U.S. Electricar, Inc. 1994 Director Stock Option Plan.

10.18(1)     Form  of  Solar  Electric  Engineering,   Inc.  Warrant  Issued  in
             Connection with 1992 Private Placement Offering.

10.19(1)     Compensation   Deferral  and  Debt  Conversion  Agreement  (Ted  D.
             Morgan).

10.20(1)     Secured, Partially Nonrecourse Promissory Note (Ted D. Morgan).

10.21(1)     Pledge Agreement (Ted D. Morgan).

10.22(1)     Compensation   Deferral  and  Debt   Conversion   Agreement   (John
             Billington).

10.23(1)     Secured, Partially Nonrecourse Promissory Note (John Billington).

10.24(1)     Pledge Agreement (John Billington).

10.25(1)     Compensation   Deferral  and  Debt  Conversion   Agreement  (Harold
             Robinson).

10.26(1)     Secured, Nonrecourse Promissory Note (Harold Robinson).

10.27(1)     Pledge Agreement (Harold Robinson).

10.28(1)     Compensation   Deferral  and  Debt  Conversion  Agreement  (Michael
             Chobotov).

10.29(1)     Secured, Partially Nonrecourse Promissory Note (Michael Chobotov).

10.30(1)     Pledge Agreement (Michael Chobotov).

10.31(1)     Compensation   Deferral  and  Debt  Conversion   Agreement   (David
             Brandmeyer).
<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================

10.32(1)     Secured, Partially Nonrecourse Promissory Note (David Brandmeyer).

10.33(1)     Pledge Agreement (David Brandmeyer).

10.34(1)     Secured, Partially Nonrecourse Promissory Note (James Miller).

10.35(1)     Pledge Agreement (James Miller).

10.36(1)     Employment Agreement: John J. Micek III (dated January 31, 1994).

10.37(1)     Employment Agreement: David Brandmeyer (dated November 1, 1992).

10.38(1)     Employment Agreement: Ted D. Morgan (dated November 1, 1992).

10.39(1)     Employment Agreement: John A. Billington (dated November 1, 1992).

10.40(1)     Employment Agreement: Thomas A. Hakel (dated January 10, 1994).

10.41(1)     Employment Agreement: Carl D. Perry (dated July 5, 1993).

10.42(1)     Employment Agreement: Michael V. Chobotov (dated July 1, 1993).

10.43(1)     Employment Agreement: Robert Garzee (dated July 1, 1993).

10.44(1)     Employment Agreement: James B. Boyd (dated April 25, 1994).

10.45(1)     Employment Agreement: Chris Crispel (dated July 11, 1994).

10.46(1)     Letter Consulting Agreement: Harold H. Robinson.

10.47(1)     Nordskog Electric Vehicles New Vehicles One-Year Limited Warranty.

10.48(3)     Purchase Order (from U.S. Electricar, Inc. to GM Hughes Electronics
             Co. dated December 16, 1993).

10.49(3)     Purchase  Order  (from  U.S.  Electricar,  Inc.  to  Hawker  Energy
             Products dated March 11, 1994).

10.50(1)     Commercial Lease (dated November 7, 1992, between Daniel and Robbin
             Davis and Solar Electric Engineering, Inc.).

10.51(1)     Sublease (dated March 16, 1994, between Custodis-Ecodyne,  Inc. and
             U.S. Electricar, Inc.).

10.52(1)     Sublease (dated March 16, 1994, between Custodis-Ecodyne,  Inc. and
             U.S. Electricar, Inc.).
<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================

10.53(1)     Standard  Industrial  Lease - Net (dated March 11, 1994 between U.S
             Electricar, Inc. and Dixie J. Walker and R. Ruth Waltenspeil).

10.54(1)     Standard  Industrial Lease - Multi-Tenant  (dated January 20, 1993,
             between Solar Electric Engineering,  Inc. and Roberts Business Park
             - Sunrise).

10.55(1)     Standard  Industrial  Lease -  Multi-Tenant  (dated  May 11,  1994,
             between U.S. Electricar, Inc. and Roberts Business Park - Sunrise).

10.56(1)     Lease  (dated  March 4,  1994,  between  Warren B.  Mosler and U.S.
             Electricar Consulier, Inc.).

10.57(1)     Standard  Industrial/Commercial  Single-Tenant  Lease - Net  (dated
             July,  1993,  between  Elinor T.  Nordskog,  Elinor T.  Nordskog as
             Executor of the estate of Robert A.  Nordskog,  Gerald C. Nordskog,
             Carla M. Wales, and Solar Electric Engineering, Inc.).

10.58(3)     Joint  Venture  Agreement  (dated as of July 16, 1993 between Solar
             Electric Engineering, Inc. and Energy Resources Limited).

10.59(1)     Assignment of Deposit Account (Grantor:  Jean Schulz, dated January
             28, 1994).

10.60(1)     Assignment of Deposit  Account  (Grantor:  Ronald A. Nelson,  dated
             January 28, 1994).

10.61(1)     Assignment  of Deposit  Account  (Grantor:  James S. Miller,  dated
             January 28, 1994).

10.62(1)     Assignment of Deposit Account  (Grantor:  Harold H. Robinson,  III,
             dated January 28, 1994).

10.63(1)     Form of Indemnification Agreement.

10.64(1)     Negotiated  Agreement For  Services:  High  Technology  Development
             Corporation,  an Agency of the  Department  of  Business,  Economic
             Development and Tourism, State of Hawaii, dated March 1, 1994.

10.65(1)     Loan Agreement: ITOCHU Corporation, dated June 9, 1994.

10.66(1)     Convertible Subordinated Promissory Note: ITOCHU Corporation, dated
             June 10, 1994.

10.67(1)     Common Stock Purchase Agreement: ITOCHU Corporation,  dated June 9,
             1994.

10.68(1)     Strategic Alliance  Agreement:  ITOCHU  Corporation,  dated June 9,
             1994.
<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================

10.69(1)     Form of Settlement Agreement between U.S. Electricar, Inc. and Mark
             Neuhaus.

10.70(1)     Agency  Agreement  between  U.S.   Electricar,   Inc.  and  Yorkton
             Securities, Inc. (dated September 23, 1994).

10.71(1)     Business Venture Agreement between U.S. Electricar,  Inc. and Grupo
             Industrial Casa, S.A. de C.V. (dated August 11, 1994).

10.72(2)     First  Amendment  to  Business  Venture   Agreement   between  U.S.
             Electricar,  Inc. and Grupo  Industrial  Casa,  S.A. de C.V. (dated
             December 20, 1994).

10.73(3)     License/Collaboration  Agreement  dated as of July 22, 1994 between
             U.S.  Electricar,  Inc.  and  The  Regents  of  the  University  of
             California, LLNL.

10.74(4)     Second Amendment to Business Venture  Agreement,  dated February 1,
             1995,  by and between U.S.  Electricar,  Inc. and Grupo  Industrial
             Casa, S.A. de C.V.

10.75(5)     Letter  dated May 23,  1995 to U.S.  Electricar,  Inc.  from  Grupo
             Industrial Casa, S.A. de C.V.

10.76(5)     Form of Security  Agreement  dated effective March 30, 1995, by and
             among U.S. Electricar, Inc. and the Series I Bond Holders.

10.77(5)     Form  of  Secured  Convertible  Loan  Purchase   Agreement,   dated
             effective March 20, 1995, by and between U.S. Electricar,  Inc. and
             Investors in Secured Convertible 10% Series I Bonds of the Company.

10.78(5)     Form of Secured  Convertible  10% Series I Bond to Purchase  Common
             Stock, dated as of April 21, 1995.

10.79(5)     Memorandum  dated  May 18,  1995 to  Itochu  Corporation,  Citibank
             (Switzerland),  and Gerlach & Co. re: Amendment to Conversion Terms
             of Outstanding Debt.

10.80(5)     Supplemental Loan Agreement,  entered into as of April 13, 1995, by
             and between U.S. Electricar, Inc. and Itochu Corporation.

10.81(5)     First  Amendment  to Loan  Agreement  entered  into as of April 13,
             1995, by and between U.S. Electricar, Inc. and Itochu Corporation.

10.82(5)     Security  Agreement  dated  April 13,  1995,  by and  between  U.S.
             Electricar, Inc. and Itochu Corporation.

10.83(5)     Convertible  Secured  Promissory  Note dated April 17, 1995, in the
             amount of $500,000 by U.S. Electricar, Inc. to Itochu Corporation.

10.84(5)     Amendment to Security  Agreement  made as of May 31,  1995,  by and
             between Itochu Corporation and U.S. Electricar, Inc.
<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================

10.85(5)     Form of Security  Agreement  made as of May 31,  1995,  between the
             Company and Credit Managers Association of California, Trustee.

10.86(5)     Form of Common Stock  Purchase and Debt  Exchange  Agreement  dated
             March 20, 1995, between the Company and Citibank  (Switzerland) and
             Citibank (Luxembourg).

10.87(6)     Standard  Industrial/Commercial  Multi-Tenant  Lease - Gross (dated
             September 29, 1995, between U.S. Electricar, Inc. and Salvatore and
             Irene Bisagno).

10.88(6)     Lease  Agreement  (dated  as of  November  1,  1995,  between  U.S.
             Electricar, Inc. and OB-1 Associates).

10.89(6)     Form of Secured Convertible Loan Purchase Agreement dated effective
             as of August 7, 1995 (including (i) form of Secured Convertible 10%
             Series I Bond to Purchase  Common Stock,  and (ii) form of Security
             Agreement),  by and between U.S. Electricar,  Inc. and Investors in
             Secured Convertible 10% Series I Bonds.

10.90(7)     Common Stock  Purchase  Agreement  pursuant to Regulation S between
             the Company and Gerlach & Co., dated January 8, 1996.

10.91(7)     Form  of  Confidential   Private  Placement   Memorandum  and  Debt
             Restructuring Disclosure Statement of U.S. Electricar,  Inc., dated
             January 2, 1996,  delivered by the Company to its certain unsecured
             trade creditors (including exhibits).

10.92(7)     Form of Stock  Purchase,  Note and Debt  Exchange  Agreement  dated
             January 2, 1996  between the Company  and certain  unsecured  trade
             creditors.

10.93(8)     Regulation S Common Stock Subscription Agreement dated May 1, 1996,
             with Gerlach & Co.

10.94        Hyundai Agreement

10.95        Agreement  for Purchase and Sale of Assets,  effective  October 25,
             1996,   by  and  between  U.S.   Electricar,   Inc.  and  Systronix
             Corporation, and exhibits.

10.96        U.S. Electricar 1996 Employee and Consultant Stock Option Plan.

10.97(9)     Agreement for the  Purchase and Sale of Assets, effective September
             5, 1996,  by  and  between Industrial Electric Vehicles, Inc., U.S.
             Electricar, Inc., and Legend Electric Vehicles, Inc.

11           Statement Re: Computation of per share earnings.

21(1)        Subsidiaries of the Registrant.

24           Power of Attorney (included on signature page)

27           Financial Data Schedule.

<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                     Description
================================================================================

----------------------------

(1)          Incorporated  by reference to identically  numbered  exhibits filed
             with the  Registration  Statement  on Form 10 filed on November 29,
             1994.
(2)          Incorporated  by reference to identically  numbered  exhibits filed
             with the Amendment No. 1 to Form 10 filed on January 27, 1995.
(3)          Incorporated  by reference to identically  numbered  exhibits filed
             with the Amendment No. 2 to Form 10 filed on February 28, 1995.
(4)          Incorporated  by reference to identically  numbered  exhibits filed
             with the Form 10-Q filed on March 17, 1995.
(5)          Incorporated  by reference to identically  numbered  exhibits filed
             with the Form 10-Q filed on June 14, 1995.
(6)          Incorporated  by reference to identically  numbered  exhibits filed
             with the  Form  10-K for the year  ended  July 31,  1995,  filed on
             October 30, 1995.
(7)          Incorporated  by reference to identically  numbered  exhibits filed
             with the Form 10-Q filed on March 18, 1996.
(8)          Incorporated by reference to the identically numbered exhibit filed
             with the Form 10-Q filed on June 14, 1996.
(9)          Incorporated  by reference to Exhibit No. 10.87 filed with the Form
             8-K filed on September 19, 1996.


                                      EI