SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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


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

                   For the fiscal year ended December 31, 2005


                           Commission File No. 0-25184

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

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

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

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

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

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

                           Common Stock, no par value
                                (Title of class)

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

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

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

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

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

<PAGE>

                               ENOVA SYSTEMS, INC.

                          2004 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>

<S>       <C>                                                                                        <C>
 Item 1   Business.................................................................................... 4

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

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

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

                                     PART II

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

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

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

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

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

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

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

                                    PART III

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

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

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

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

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

                                     PART IV

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


 SIGNATURES...........................................................................................39
</TABLE>

                                       2

<PAGE>

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

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

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

                                     PART I

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

Item 1. Business

General

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

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

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

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

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

                                       3
<PAGE>

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

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

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

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

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

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

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

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

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

                                       4
<PAGE>

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

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


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

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

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

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

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

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

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

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

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

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

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

                                       5
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

Environmental Initiatives and Legislation

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

                                       6
<PAGE>

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

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

Strategic Alliances, Partnering and Technology Developments

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

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

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

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

Products

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

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

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

                                       7
<PAGE>

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

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

HybridPowerTM Electric and Hybrid-Electric Drive Systems

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

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

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

Our family of heavy-duty electric drive systems includes:

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

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

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

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

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

                                       8
<PAGE>

conditions.  For acceleration,  the controller causes the electric motor to kick
in to assist the ICE, both running  simultaneously.  When speed is steady or the
ground is flat, only the ICE runs. Additionally, when the batteries are low, the
controller  causes the ICE and motor to charge the batteries.  As a result,  the
series  hybrid  system is best  suited for  starts  and stops,  and is ideal for
applications such as urban transit buses and urban garbage trucks. The design of
the series hybrid  system is based on a driving cycle with a high  percentage of
random acceleration conditions.
<TABLE>
<CAPTION>
---------------------------- -------------------------- ----------------------------------------- ------------------------
System                       Applications               Advantages                                Disadvantages
---------------------------- -------------------------- ----------------------------------------- ------------------------
<S>                          <C>                        <C>                                       <C>
Series                       Driving with high          Optimally-sized IC engine                 Full size electric
Hybrid                       percentage stop and go     Advanced engine/turbine may be used       drive system required
                             and/or hilly terrain       Simplified transmission                   Generator and
                                                        Independent control                       converter required
---------------------------- -------------------------- ----------------------------------------- ------------------------
Parallel                     Driving with high          No generator and converter needed         Complex transmission
Hybrid                       percentage constant        The drive system may be smaller           and clutch system
                             speed cruising                                                       Complex control
                                                                                                  Limited to low speed
                                                                                                  engines
---------------------------- -------------------------- ----------------------------------------- ------------------------
</TABLE>

Hybrid Drive Configurations

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

Hybrid Drive Motors

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

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

Hybrid Motor Controllers

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

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

Hybrid Drive Systems

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

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

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

                                       9
<PAGE>

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

Drive System Accessories

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

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

Battery Care Unit

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

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

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

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

Hybrid Control Unit

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

Safety Disconnect Unit

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

High Voltage Disconnect Unit

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

                                       10
<PAGE>

Wiring Harness Connector Kits

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

Distributed   Power   Generation  for  Industrial  /  Commercial  /  Residential
Applications

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

20kW bi-directional Fuel Cell Power Conditioning System

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

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

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

Fuel Cell Management Unit

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

Research and Development Strategy

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

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

Manufacturing Strategy

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

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

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

                                       11
<PAGE>

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

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

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

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

Competitive Conditions

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

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

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

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

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

Research and Development

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

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

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

                                       12
<PAGE>

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

Intellectual Property

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

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

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

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

Employees

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

Available Information

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

                                       13
<PAGE>

Item 1A. Risk Factors

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

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

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

We have experienced continued losses and may never become profitable.

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

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

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

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

Our industry is affected by political and legislative changes.

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

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

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

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

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

                                       14
<PAGE>

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

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

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

Future equity financings may dilute your holdings in our Company.

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

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

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

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

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

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

We are an early growth stage company.

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

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

                                       15
<PAGE>

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

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

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

There are minimal barriers to entry in our market.

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

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

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

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

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

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

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

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

Item 2. Properties

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

Item 3. Legal Proceedings

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

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

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

                                     PART II

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


     During  2005,  the Company  effected a reverse  stock split into a fraction
thereof of 1/45th of a share of our  outstanding  common  stock.  In lieu of any
fractional shares to which a holder of Common Stock would otherwise be entitled,
we paid cash equal to (a) the average of the  high-bid and  low-asked  per share
prices of the Common Stock as reported on the NASDAQ electronic "Bulletin Board"
on the  Effective  Date  multiplied  by (b) the number of shares of Common Stock

                                       16
<PAGE>

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

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

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

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


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

Stock Issuances

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

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

Dividend Policy

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


                  (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

                                       17
<PAGE>

Item 6. Selected Financial Data

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

<PAGE>
<TABLE>
<CAPTION>
                                                    As of and for the year ended December 31
                                                    (in thousands, except per share data),
                                                    --------------------------------------
                                             2005        2004        2003        2002        2001
                                           --------    --------    --------    --------    --------
<S>                                        <C>         <C>         <C>         <C>         <C>
Net revenues                               $  6,084    $  2,554    $  4,310    $  4,455    $  3,780
Cost of revenues                              6,001       2,239       3,304       3,784       2,783
                                           --------    --------    --------    --------    --------
Gross margin                                     83         315       1,006         671         997
                                           --------    --------    --------    --------    --------
Operating expenses
     Research and development                   804         925         799       1,152         879
     Asset impairment                                                   200
     Selling, general and administrative      2,870       2,325       2,919       2,837       2,894
                                           --------    --------    --------    --------    --------
     Total operating expense                  3,674       3,250       3,918       3,989       3,773

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

                                       18
<PAGE>

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

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

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

OVERVIEW

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

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

                                       19
<PAGE>

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

                                       20
<PAGE>

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

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

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

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

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

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

RESULTS OF OPERATIONS

Years Ended December 31, 2005 and 2004

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

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

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

                                       21
<PAGE>

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

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

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

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

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

Years Ended December 31, 2004 and 2003

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

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

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

                                       22
<PAGE>

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

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

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

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

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

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

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


                  (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

                                       23
<PAGE>

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

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

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


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

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

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

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

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

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
154).  This  statement  changes  the  requirements  for the  accounting  for and
reporting  of a change in  accounting  principle  and  applies to all  voluntary
changes in  accounting  principle.  It also  applies to changes  required  by an

                                       24
<PAGE>

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

None.

Item 8. Financial Statements and Supplementary Data

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


                                       25
<PAGE>

Item 9A. Controls and Procedures


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

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

Definition of Disclosure Controls

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

Limitations on the Effectiveness of Controls

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

                                       26
<PAGE>

Scope of the Controls Evaluation

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

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

Conclusions

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

As of  December  31,  2005,  we did not  maintain  effective  controls  over the
inventory  pricing,  tracking,  and the reserve analysis  process.  This control
deficiency resulted in an audit adjustment to our 2005 financial  statements and
could result in a misstatement  to cost of sales that would result in a material
misstatement  to the annual and interim  financial  statements that would not be
prevented or detected.

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

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


                  (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)


                                       27
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

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


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

Anthony N. Rawlinson             49          Chairman of the Board

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

Bjorn Ahlstrom (1) (2)           70          Director

Dr. Malcolm Currie (1)           77          Director

Donald H. Dreyer (2)             68          Director

John Wallace (2) (3)             56          Director

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


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

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

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

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

                                       28
<PAGE>

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

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

Relationships Among Directors or Executive Officers

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

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

Code of Ethics

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

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

Item 11. Executive Compensation

Summary Compensation Table

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

                                       29
<PAGE>

Name and Principal Position
---------------------------
<TABLE>
<CAPTION>
                                                                  SUMMARY COMPENSATION TABLE
                                                                      ANNUAL COMPENSATION
                                        --------------------------------------------------------------------------
                                             Year        Salary                  Bonus
                                             ----        ------                  -----
<C>                                          <C>        <C>             <C>
Edwin O. Riddell (1)                         2005       $204,000        $43,500 (10,000 000 Common shares)
  Chief Executive Officer and President      2004          --                     --
                                             2003          --                     --

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

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

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


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

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

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

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

Option/SAR Grants

     The following grants of stock options or stock appreciation rights ("SARs")
were made during 2005 to the Named Executive Officers.
<TABLE>
<CAPTION>
                                                   Option Grants During Fiscal 2005

                               Number of                                                         Potential Realizable Value of
                               Securities      Percentage of Total                                   Assumed Annual Rates of Stock
                               Underlying      Options Granted to      Exercise                                Price
   Name of Individual            Options          Employee in           Price     Expiration         Appreciation for the Option
     and Position                Granted          Fiscal 2005         Per Share       Date                   Term  (1)
     ------------                -------          -----------         ---------       ----                   ---------
                                                                                                        5%               10%
                                                                                                        --               ---
<C>                             <C>                   <C>               <C>         <C>              <C>               <C>
Edwin Riddell,                  60,000                19%               4.35        9-12-15          $185,399          $483,663
Chief Executive Officer

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

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

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

                                       30
<PAGE>

Option Exercises and Option Values

     The following  table sets forth  information  concerning  option  exercises
during 2005, and the aggregate  value of unexercised  options as of December 31,
2005, held by each of the Named Executive Officers:
<TABLE>
<CAPTION>
                                                     Aggregated Option/SAR Exercises in 2005
                                                      and Option Values at December 31, 2005
---------------------------- ------------------------------ ----------------------------- -----------------------------
                                                                Number of Securities
                                       Aggregate               Underlying Unexercised         Value of Unexercised
                                        Option                       Options at             In-the-Money Options at
                                   Exercises in 2005           December 31, 2005 (#)       December 31, 2005 ($) (1)
                                   -----------------           ---------------------       -------------------------
                                  Shares
                                Acquired on     Value
                                Exercise       Realized
Name                              (#)           ($)        Exercisable    Unexercisable   Exercisable    Unexercisable
----                              ----          ----       -----------    -------------   -----------    -------------
<C>                                <C>           <C>          <C>             <C>            <C>             <C>
Edwin O. Riddell                   --            --            --              --             --(1)           N/A

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

Edward M. Moore                    --            --            --              --             --(1)           N/A
</TABLE>


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

Compensation of Directors

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

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

Edwin O. Riddell

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

Donald Dreyer

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

                                       31
<PAGE>

Audit Committee

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

Compensation Committee Interlocks and Insider Participation

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


                  (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)


                                       32
<PAGE>

The  following  table sets forth certain  information  known to the Company with
respect to beneficial ownership of the Company's Common Stock as of December 31,
2005, by (i) each shareholder known to the Company to own beneficially more than
5% of the Company's Common Stock;  (ii) each of the Company's  Directors;  (iii)
the Named Executive Officer;  and (iv) all Executive Officers and Directors as a
group.  Except as  indicated  in the  footnotes  to this  table and  subject  to
applicable  community  property laws,  the persons named in the table,  based on
information provided by such persons, have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
                                                    Shares                   Percentage of Shares            Voting
          Name                               Beneficially Owned (1)          Beneficially Owned (2)       Percentage (3)
          ----                               ----------------------          ----------------------       --------------
<C>                                               <C>                            <C>                        <C>
Jagen, Pty., Ltd.                                 3,222,222                      21.16%                     21.64%
9 Oxford Street, South Ybarra 3141
Melbourne, Victoria Australia

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

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

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

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

Carl D. Perry                                       208,476                       1.37%                      1.40%

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

Bjorn Ahlstrom                                        7,873                           *                          *

Dr. Malcolm Currie                                   20,555                           *                          *

Donald H. Dreyer                                     19,242                           *                          *

John R. Wallace                                       6,144                           *                          *

Delphi Delco Electronics                             28,406(6)                        *                          *

Jean Schulz                                          77,062(7)                        *                          *

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

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

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

*    Indicates less than 1%

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

                                       33
<PAGE>

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

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

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

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

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

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

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

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

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

Equity Compensation Plan Information

The following table provides information regarding our equity compensation plans
as of December 31, 2005:
<TABLE>
<CAPTION>
                                            Equity Compensation Plan Information
                                                                                                  Number of securities
                                                                                                   remaining available
                                                                                                          for
                                                                                                  future issuance under
                                                                                                   equity compensation
                                               Number of securities to      Weighted-average        plans (excluding
                                               be issued upon exercise      exercise price of      securities reflected
                                               of outstanding options,     utstanding options,               in
                                                 warrants and rights       warrants and rights         column (a))
         Plan category                                   (a)                       (b)                       (c)
         -------------                         -----------------------     -------------------     --------------------
<C>                                                  <C>                        <C>                     <C>
         Equity compensation plans approved
         by security holders                         436,000                    $4.46                   64,,564,000

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


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

                                       34
<PAGE>
directors  and  consultants.  Incentive  stock  options  may only be  granted to
employees.  In 1999,  our  board  of  directors  and  shareholders  approved  an
amendment  to the 1996 Plan to  increase  the  number of shares of common  stock
reserved for issuance  thereunder by 30,000,000 shares and in 2004, our board of
directors  and  shareholders  approved an amendment to the 1996 Plan to increase
the  number of shares  of common  stock  reserved  for  issuance  thereunder  by
20,000,000  shares,  bringing the total number of shares issuable under the 1996
Plan to  65,000,000.  The  share  increases  to the  1996  Plan  assured  that a
sufficient  reserve  of  common  stock  are  available  to  provide  us with the
continuing  opportunity to utilize  equity  incentives to attract and retain the
services of employees essential to our long-term growth and financial success. A
copy of the actual 1996 Plan document was  previously  filed with the Securities
and Exchange Commission.

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

Item 13. Certain Relationships and Related Transactions

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

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

Item 14. Principal Accountant Fees and Services

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

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

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

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

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

Tax Fees
--------

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

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

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

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

                                       35
<PAGE>
                                    PART IV

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

(a)1. Financial Statements

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

(a)2. Financial Statement Schedule

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

(a)3. Exhibits

     See Item 15 (c) for Index of Exhibits.

(b)  Reports on Form 8-K

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

(c)  Exhibits

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

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

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

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

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

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

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

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

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

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

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

                                       36
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

23.1     Consent of Independent Registered Public Accounting Firm

24*      Power of Attorney (included on signature page)

                                       37
<PAGE>


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

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

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

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


                                       38
<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 by the undersigned, thereunto duly authorized.

ENOVA SYSTEMS, INC.


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

Dated: March 31, 2006

                                POWER OF ATTORNEY

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

     IN WITNESS  WHEREOF,  each of the  undersigned  has executed  this Power of
Attorney  as of  the  date  indicated.  Pursuant  to  the  requirements  of  the
Securities  Exchange Act of 1934,  this report has been signed by the  following
persons  on  behalf  of the  registrant  and in the  capacities  and on the date
indicated.
<TABLE>
<CAPTION>
Signature                                                    Title                               Date
---------                                                    -----                               ----
<C>                                                  <C>                                    <C>
/s/   Edwin O. Riddell                               Acting Chief Financial Officer
----------------------------------------             (Principal Financial Officer)          March 31, 2006
Edwin O. Riddell


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


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


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

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


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

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


                                       39
<PAGE>

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



<PAGE>

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


                                                                        Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                   1

FINANCIAL STATEMENTS

       Balance Sheets                                                   2-4

       Statements of Operations                                           5

       Statements of Stockholders' Equity                                 6

       Statements of Cash Flows                                         7-8

       Notes to Financial Statements                                   9-26


SELECTED QUARTERLY DATA (Unaudited)                                      27

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

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

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

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



SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 9, 2006

                                       F-1
<PAGE>

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


                                     ASSETS

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

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

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

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

                                       F-2

<PAGE>

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

                     LIABILITIES AND STOCKHOLDERS' EQUITY


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

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

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

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

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

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


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

                                       F-3

<PAGE>

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

               LIABILITIES AND STOCKHOLDERS' EQUITY (continued)


<TABLE>
<CAPTION>
                                                                      2005            2004
                                                                 -------------    -------------
<C>                                                              <C>              <C>
Stockholders' equity
      Series A convertible preferred stock - no par value
        30,000,000 shares authorized
        2,674,000 and 2,748,000 shares issued and
        outstanding
        Liquidating preference at $0.60 per share, aggregating
        $1,604,000 and $1,649,000                                $   1,679,000    $   1,774,000
      Series B convertible preferred stock - no par value
      5,000,000 shares authorized
        1,217,000 and 1,217,000 shares issued and outstanding
        Liquidating preference at $2 per share                       2,434,000        2,434,000
      Common Stock, no par value
      750,000,000 shares authorized
      14,783,000 and 9,228,000 shares issued and
      outstanding                                                  109,323,000       90,465,000
      Common stock subscribed                                           30,000          165,000
      Stock notes receivable                                        (1,176,000)      (1,176,000)
      Additional paid-in capital                                     6,900,000        6,900,000
      Accumulated deficit                                         (102,586,000)    (100,459,000)
                                                                 -------------    -------------
              Total stockholders' equity                            16,604,000          103,000
                                                                 -------------    -------------
Total liabilities and stockholders' equity                       $  21,973,000    $   5,888,000
                                                                 =============    =============
</TABLE>

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

                                       F-4
<PAGE>

<TABLE>
<CAPTION>

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

                                                                  2005            2004           2003
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>
Net revenues
      Research and development contracts                      $  1,555,000    $  1,070,000    $  1,889,000
      Production                                                 4,529,000       1,484,000       2,421,000
                                                              ------------    ------------    ------------
           Total net revenues                                    6,084,000       2,554,000       4,310,000
                                                              ------------    ------------    ------------

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

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

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

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

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

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

                                       F-5

<PAGE>
<TABLE>
<CAPTION>
                                                                                                        ENOVA SYSTEMS, INC.
                                                                                         STATEMENTS OF STOCKHOLDERS' EQUITY
                                                                                           For the Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------------
                                                   Convertible Preferred Stock
                                                 Series A                  Series B               Common Stock
                                                 --------                  --------               ------------
                                          Shares        Amount       Shares       Amount       Shares        Amount
                                          ------        ------       ------       ------       ------        ------
<C>                                     <C>          <C>           <C>         <C>            <C>         <C>
Balance, December 31, 2002              2,824,000    $ 1,842,000   1,217,000   $ 2,434,000    7,671,000   $ 84,026,000
Conversion of Series
    A preferred stock                      (4,000)        (5,000)                                    --          5,000
Issuance of common
    stock for
      Cash                                                                                      513,000      1,500,000
      Issuance of subscribed
         common stock                                                                            22,000        100,000
      Exercise of options                                                                       193,000        389,000
      Stock option
      Services                                                                                    8,000         34,000
Net loss
                                        ---------     ----------   ---------    ----------   ----------   ------------
Balance, December 31, 2003              2,820,000     $1,837,000   1,217,000    $2,434,000    8,407,000   $ 86,054,000
                                        =========     ==========   =========    ==========   ==========   ============
Conversion of Series
    A preferred stock                     (73,000)       (63,000)                                 2,000         63,000
Issuance of common
    stock for
      Cash                                                                                      613,000      3,450,000
      Issuance of subscribed
         common stock                                                                             8,000         60,000
      Exercise of options                                                                       188,000        783,000
      Stock option conversions                                                                    7,000         39,000
      Services                                                                                    3,000         16,000
Net loss
                                        ---------     ----------   ---------    ----------   ----------   ------------
Balance, December 31, 2004              2,747,000     $1,774,000   1,217,000    $2,434,000    9,228,000   $ 90,465,000
                                        =========     ==========   =========    ==========   ==========   ============

Conversion of Series
    A preferred stock                     (73,000)       (95,000)                                 1,000        95,000
Issuance of common
    stock for
      Cash                                                                                    5,473,000    18,361,000
      Issuance of common stock
         for director services                                                                   56,000       293,000
      Director bonus                                                                             25,000       109,000
Subscribed Common Stock
Net loss
                                        ---------     ----------   ---------    ----------   ----------   ------------
Balance, December 31, 2005              2,674,000     $1,679,000   1,217,000    $2,434,000   14,783,000   $109,323,000
                                        =========     ==========   =========    ==========   ==========   ============
</TABLE>
<TABLE>
<CAPTION>
                                        Common Stock           Stock           Additional
                                         Subscribed            Notes            Paid-In        Accumulated
                                      Shares       Amount     Receivable         Capital         Deficit         Total
                                      ------       ------     ----------         -------         -------         -----
<C>                                   <C>       <C>          <C>                <C>           <C>              <C>
Balance, December 31, 2002            30,000    $ 130,000    $ (1,203,000)      $6,949,000    $ (93,891,000)  $   287,000
Conversion of Series
    A preferred stock                                                                                                  --
Issuance of common stock for
      Cash                                                                                                      1,500,000
      Issuance of subscribed
         common stock                (22,000)    (100,000)                                                             --
      Exercise of options                                                                                         389,000
      Stock option                                                                  82,000                         82,000
      Services                        17,000       30,000                                                          64,000
Net loss                                                                                         (3,186,000)   (3,186,000)
                                      ------    ---------     -----------       ----------    -------------   -----------
Balance, December 31, 2003            25,000     $ 60,000    $ (1,203,000)      $7,031,000    $ (97,077,000)  $  (864,000)
                                      ======    =========     ===========       ==========    =============   ===========
Conversion of Series
    A preferred stock                                                                                                  --
Issuance of common
    stock for
      Cash                                                         27,000                                       3,477,000
      Issuance of subscribed
         common stock                (25,000)     (60,000)                                                            --
      Exercise of options                                                                                         783,000
      Stock option conversions                                                     (39,000)                           --
      Services                        27,000      165,000                          (92,000)                        89,000
Net loss                                                                                         (3,382,000)   (3,382,000)
                                      ------    ---------     -----------       ----------    -------------   -----------
Balance, December 31, 2004            27,000    $ 165,000     $(1,176,000)      $6,900,000    $(100,459,000)  $   103,000
                                      ======    =========     ===========       ==========    =============   ===========

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

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

                                       F-6

<PAGE>
<TABLE>
<CAPTION>
                                                                            ENOVA SYSTEMS, INC.
                                                                       STATEMENTS OF CASH FLOWS
                                          For the Years Ended December 31, 2005, 2004, and 2003
-----------------------------------------------------------------------------------------------
                                                       2005           2004             2003
                                                  ------------    ------------    ------------
<C>                                               <C>            <C>            <C>
Cash flows from operating activites
 Net loss                                         $(2,127,000)   $(3,382,000)   $(3,186,000)
 Adjustments to reconcile net loss
  to net cash used by operating activities
Debt extinguishment                                (1,011,000)            --             --
Interest extinguishment                              (558,000)            --             --
  Depreciation and amortization                       304,000        376,000        351,000
  Provision for asset impairment                           --             --        200,000
  Equity in losses of equity method investee          118,000        192,000         40,000
  Issuance of common stock for services               158,000         89,000         34,000
  Issuance of common stock for bonuses                109,000             --             --
  (Increase) decrease in
      Accounts receivable                          (1,651,000)       281,000        457,000
      Inventory  and supplies                          20,000        570,000         48,000
      Note receivable - related party                      --          8,000         24,000
      Prepaid expenses and other current assets       122,000       (226,000)        29,000
      Other assets                                     (2,000)            --        (14,000)
  Increase (decrease) in
      Accounts payable                              1,330,000       (702,000)      (424,000)
      Accrued expenses                                290,000        (11,000)      (112,000)
      Deferred revenues                              (392,000)       392,000             --
      Accrued interest payable                        293,000        256,000        234,000
                                                  -----------    -----------    -----------
Net cash used by operating activities              (2,997,000)    (2,157,000)    (2,319,000)
                                                  -----------    -----------    -----------

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

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

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

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

                                       F-7
<PAGE>
<TABLE>
<CAPTION>

                                                     2005            2004          2003
                                                  -----------    -----------    ----------
<C>                                               <C>             <C>             <C>
Interest paid                                     $     2,000    $    10,000    $    9,000
                                                  ===========    ===========    ===========
Income taxes paid                                 $        --    $        --    $       --
                                                  ===========    ===========    ===========
Conversion of preferred stock to common stock     $    94,000    $    63,000    $    (5,000)
                                                  ===========    ===========    ===========
Acquired investment under common stock purchase   $        --    $ 1,000,000    $ 1,000,000
                                                  ===========    ===========    ===========
Offering costs on common stock purchases          $        --    $    93,000    $       --
                                                  ===========    ===========    ===========
Common Stock issued for purchase of options       $        --    $    39,000    $       --
                                                  ===========    ===========    ===========
</TABLE>

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

                                       F-8

<PAGE>

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

NOTE 1 - Organization and Line of Business

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

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

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

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

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

                                       F-9
<PAGE>

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

NOTE 2- Summary of Significant Accounting Policies

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

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

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

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

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

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

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

                                      F-10
<PAGE>

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

NOTE 2- Summary of Significant Accounting Polices (Continued)

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

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

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

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

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

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

                                      F-11
<PAGE>

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

NOTE 2- Summary of Significant Accounting Polices (Continued)

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

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

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

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

     If the Company had elected to recognize compensation expense based upon the
     fair value at the grant date for awards under this plan consistent with the
     methodology prescribed by SFAS No. 123, the Company's net loss and loss per
     share  would be reduced to the pro forma  amounts  indicated  below for the
     years ended December 31, 2005,  2004, and 2003. Per share amounts have been
     restated to illustrate the effects of the reverse stock split, as described
     in Note 10.
<TABLE>
<CAPTION>
                                              2005           2004           2003
                                              ----           ----           ----
<S>                                       <C>            <C>            <C>
Loss applicable to common stockholders    $(2,127,000)   $(3,382,000)   $(3,186,000)

Compensation under APB Opinion 25                  --             --             --

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

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

                                      F-12
<PAGE>

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

NOTE 2- Summary of Significant Accounting Polices (Continued)

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

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

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

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

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


                                      F-13
<PAGE>

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

NOTE 2- Summary of Significant Accounting Policies (Continued)

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

     Estimates
     ---------
     The  preparation  of  financial  statements  requires  management  to  make
     estimates and  assumptions  that affect the reported  amounts of assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of the  financial  statements  and the  reported  amounts  of  revenue  and
     expenses  during the  reporting  period.  Actual  results could differ from
     those estimates.

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

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

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

                                      F-14
<PAGE>

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

NOTE 2- Summary of Significant Accounting Policies (Continued)

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

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

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

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

                                      F-15
<PAGE>

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

NOTE 2- Summary of Significant Accounting Policies (Continued)

     In March 2005, the FASB issued FIN 47,  "Accounting for  Conditional  Asset
     Retirement  Obligations  - an  Interpretation  of FASB  Statement  No. 143,
     Accounting for Asset Retirement Obligations." This interpretation addresses
     the timing of liability  recognition for legal obligations  associated with
     the retirement of a tangible long-lived asset when the timing and/or method
     of settlement of the obligation are conditional on a future event.

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

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

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

                                      F-16
<PAGE>

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

NOTE 3- Property and Equipment

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

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


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


NOTE 4 - Equity Method Investment

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

                                      F-17
<PAGE>

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

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


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

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

NOTE 5- Other Assets

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

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

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


                                                       2005             2004
                                                       ----             ----

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

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

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

                                      F-18
<PAGE>

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

NOTE 6- Line of Credit

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

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

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

NOTE 8- Notes Payable

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

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

                                      F-19
<PAGE>

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

NOTE 8- Notes Payable (Continued)

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

     Notes payable at December 31, consisted of the following:
<TABLE>
<CAPTION>
                                                                 2005            2004
                                                                 ----            ----
<C>                                                           <C>              <C>
       Secured note payable to Credit Managers
          Association of California, bearing interest
          at prime plus 3% in 2005 and through
          maturity.  Principal and unpaid interest
          due in April 2016.  A sinking fund escrow is
          required to be funded with 10% of future
          equity financing, as defined in the agreement.      $2,321,000       $3,332,000

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

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

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


                                      F-20
<PAGE>

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

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


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

NOTE 9- Commitments and Contingencies

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

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

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

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

NOTE 10 - Stockholders' Equity

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

                                      F-21
<PAGE>

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

NOTE 10 - Stockholders' Equity (Continued)

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

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

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

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

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

                                      F-22
<PAGE>

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

NOTE 10 - Stockholders' Equity (Continued)

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

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

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

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

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

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

                                      F-23
<PAGE>

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

NOTE 10 - Stockholders' Equity (Continued)

     Stock Options and Warrants (Continued)
     --------------------------------------
     The  following  summarizes  common  stock option  activity.  All prior year
     amounts have been  restated to reflect the reverse  stock split,  discussed
     above:
<TABLE>
<CAPTION>
                              1996 Plan                      1993 Plan                            Other
                       ------------------------       ---------------------------       -------------------------
                                      Weighted-                         Weighted-                       Weighted-
                                       Average                          Average                         Average
                                      Exercise                          Exercise                        Exercise
                       Shares           Price         Shares             Price          Shares           Price
                       ------           -----         ------             -----          ------           -----
<S>                    <C>             <C>            <C>               <C>             <C>             <C>
 Outstanding,
   December
   31, 2002            475,000         $ 4.95         157,000           $  23.40        33,000          $76.50

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

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

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

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

                                      F-24
<PAGE>

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

NOTE 10 - Stockholders' Equity (Continued)

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

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

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

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

NOTE 11 - Income Taxes

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

                                      F-25
<PAGE>

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

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

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

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

NOTE 12 - Related Party Transactions

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

NOTE 13- Employee Benefit Plan

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

NOTE 14- Geographic Area Data

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

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

                                      F-26
<PAGE>
<TABLE>
<CAPTION>
                                                                                           ENOVA SYSTEMS, INC.
                                                                             SELECTED QUARTERLY FINANCIAL DATA
                                                                                                    (Unaudited)
---------------------------------------------------------------------------------------------------------------
                                                                March 31                       June 30
                                                          2005         2004            2005            2004
                                                          ----         ----            ----            ----
<S>                                                    <C>          <C>             <C>              <C>
Net revenues                                           $ 692,000    $1,108,000      $1,322,000       $ 718,000

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

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

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


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

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

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

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

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


                                      F-27