SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                     For the fiscal year ended July 31, 1998
                         Commission File Number 0-25184

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

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

             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. [X]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  as of  October  23,  1998  was  $1,886,000.  For  purposes  of  this
calculation  only,  (i) shares of Common Stock and Series A Preferred  Stock are
deemed to have a market  value of $0.033 per share,  and the Series B  Preferred
Stock is deemed to have a market value of $0.147 per share, based on the average
of the high bid and low ask prices of the Common Stock on October 23, 1998,  and
(ii) each of the executive officers, directors and persons holding 5% or more of
the outstanding  Common Stock (including Series A and B Preferred Stock on an as
converted basis) is deemed to be an affiliate.

The number of shares of Common  Stock  outstanding  as of October  23,  1998 was
151,789,681.


                                       1
<PAGE>


                             U. S. ELECTRICAR, INC.

                          1998 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I

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

Item 2.   Properties ..........................................................7

Item 3.   Legal Proceedings ...................................................7

Item 4.   Submission of Matters to a Vote of Security Holders .................7

                                     PART II

Item 5.   Market for Registrant's Common Equity and Related
                  Stockholder Matters .........................................8

Item 6.   Selected Financial Data .............................................9

Item 7.   Management's Discussion and Analysis of Financial Condition
                  and Results of Operations ..................................10

Item 8.   Financial Statements and Supplementary Data ........................14

Item 9.   Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure .....................14

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant .................15

Item 11.  Executive Compensation .............................................16

Item 12.  Security Ownership of Certain Beneficial Owners and Management .....19

Item 13.  Certain Relationships and Related Transactions .....................21

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...22


SIGNATURE ....................................................................23

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


                                       2
<PAGE>

                                     PART I

Item 1.  Business

General

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

         The Company originally was established to develop,  convert,  assemble,
manufacture and distribute battery-powered electric vehicles,  including on-road
pick up trucks,  passenger  cars,  buses and  delivery  vehicles,  and  off-road
industrial  vehicles.  The Company's  product lines include  converted  vehicles
(originally  built to be powered by internal  combustion  engines)  and vehicles
that are built  specifically to be battery  powered.  Currently,  the Company is
directing  its  efforts  toward the  development  of electric  drive  trains and
related  components,  vehicle systems integration and the performance of various
engineering  contracts.  The Company's efforts relating to the converted vehicle
program have been  discontinued,  and current  efforts in this  program  consist
primarily of supporting  customers with vehicle integration and proof of concept
vehicles. The Company,  however, is retrofitting long life vehicles for the U.S.
Postal Service electric vehicle research and development  program.The  Company's
fiscal year ends July 31. All year references refer to fiscal years.

         In  1997,  the  Company  made  two  significant  moves  to  adjust  and
strengthen  its overall  product base and realign its  operations.  In September
1996,  the  Company  sold  substantially  all the assets and  properties  of the
Company's wholly owned subsidiary, Industrial Electric Vehicles, Inc. In October
1996, the Company acquired substantially all the tangible and intangible assets,
and assumed  certain  liabilities  of  Systronix  Corporation  ("Systronix"),  a
developer of fully  integrated  propulsion  systems and related  components  for
electric vehicles, located in Torrance, California.

         In March 1997,  the Company  completed an agreement  with Hyundai Motor
Company ("HMC") and Hyundai Electronics Industries Co., Ltd. ("HEI") whereby HMC
and HEI  collectively  purchased $3.6 million of the Company's  common stock and
secured a technology license for an additional payment of $2.0 million.  For the
technology  license,  the Company received $1,850,000 in cash, and the remaining
$150,000 is to be received over 6 years.

         In 1998, the Company  restructured  its top  management,  realigned its
product base and  concentrated  on the  reduction of overall  company  operating
costs.  Facilities  have  been  closed,  operations  streamlined  and  personnel
reduced.  Headcount decreased from 51 employees at July 31, 1997 to 26 employees
at  July  31,  1998,  yet  the  Company  has  maintained  its  core  engineering
capabilities.  The  Company  is now  primarily  focused on the  development  and
manufacture of a family of electric vehicle drive trains, designated Panther(TM)
systems,  to include 60 kw, 90 kw and 120 kw systems for light vehicles,  medium
duty  vehicles and large trucks and buses,  respectively.  Hyundai Motor Company
has adapted a  customized  version of the  Panther(TM)  60 for their  production
electric vehicle. The Company is actively engaged in developing related electric
vehicle  components,  vehicle systems integration and the performance of various
engineering contracts.  The Company is extending the Panther(TM) drive system to
hybrid  vehicle  applications  in projects  sponsored  by Hyundai.  These hybrid
systems will be applied to light and medium duty  transportation  vehicles.  The
Company is also  offering the modular  drive  systems to OEM  manufacturers  and
other  customers.  These drive systems have been installed in various  vehicles.
The Company offers other components such as air  conditioning,  heat pump units,
electro-hydraulic power steering units and battery management units to OEMs. The
Company is  developing  a Plastic  Lithium Ion  battery for a vehicle  operation
funded by an agency of the U.S.  government.  The Company is also  developing  a
high power  charger for a major auto  manufacturer,  and the Company has several
contracts from Hyundai Motor Company to design,  develop and test electric drive
train projects and related components.

Debt Restructuring

         In March 1995,  as a result of the  Company's  insolvency,  the Company
developed  and  implemented  a  voluntary  debt   restructuring  plan  with  the
cooperation of its secured  creditors and, through an informal  committee of the
Company's unsecured creditors,  with the cooperation of its unsecured creditors.
Under this plan,  approximately  $16,000,000  of secured  debt was  converted to
common stock at $.30 per share.  The maturity date of the  remaining  $3,000,000
debt was extended to April 17, 1998. Negotiations to extend the maturity date of
the debt were initiated, but to date no agreement has been reached.

                                       3
<PAGE>

         The  restructuring  plan for the  unsecured  creditors was finalized on
March 31, 1996. To date,  approximately $1,095,000 has been paid on this plan by
the Company and  distributed  to creditors.  As of October 23, 1998, the Company
had obtained  settlements for  approximately  $11.8 million out of approximately
$14 million of unsecured debt obligated prior to March 18, 1995. The Company has
outstanding  $307,000 of three year and $3.3 million of 20 year promissory notes
and 1.6 million  shares of Series B  Preferred  Stock.  As of October 23,  1998,
approximately  280  creditors   representing   approximately   $2.5  million  in
antecedent trade debt have not participated in the debt restructuring plan.

         TO THE EXTENT  THAT THE  COMPANY IS UNABLE TO  COMPLETE  THE  VOLUNTARY
RESTRUCTURING OR OTHERWISE REFINANCE OR CONVERT SUCH DEBT AND ADDITIONAL FUNDING
IS NOT  AVAILABLE,  THE  COMPANY  WOULD  BE  FORCED  TO  SEEK  PROTECTION  UNDER
APPLICABLE BANKRUPTCY AND INSOLVENCY LAWS. IN ADDITION,  ADDITIONAL FUNDING WILL
BE NEEDED IN FISCAL 1999 TO CONTINUE OPERATIONS.

Environmental Initiatives and Legislation

         Federal  legislation was enacted to promote the use of alternative fuel
vehicles,   including  electric  vehicles.  Several  states  have  also  adopted
legislation that sets deadlines for the  introduction of zero emission  vehicles
("ZEV"). The State of California  delayed the mandated  introduction of ZEV from
1998 to 2003,  but  still  retained  the  original  required  percentage  of ZEV
vehicles  for 2003 at 10%. The U.S.  Department  of Energy also  modified  their
rules  governing how state fleets and utility fleets must comply with the Energy
Policy Act of 1992 on alternative fuel transportation programs.

Products

         The Company  completed  the  restructuring  of its product  base during
1998.  The Company is  concentrating  its  product  base to focus  primarily  on
electric propulsion systems and components for electric and hybrid vehicles. The
Company has developed a family of electric propulsion systems consisting of a 60
kw drive  system  for light  vehicles,  a 90 kw drive  system  for  medium  size
vehicles and a 120 kw drive system for larger trucks and buses.

         The  Company  is no longer  involved  in  product  sales of  conversion
vehicles,  industrial  electric vehicles or light electric delivery trucks.  The
Company is attempting to sell the international  manufacturing  rights for a 1.5
ton electric delivery truck previously built for international markets.

Strategic Partnering And Technology Developments

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

         The Company believes that two of the principal  component  technologies
relevant to a cost effective  electric vehicle are the electric drive system and
the battery/charging  system. Pursuant to an agreement with the Hyundai Group of
Korea,  the Company has received  investments to cooperate in the development of
advanced  drive-train  technology  and  related  systems.  It is  the  Company's
strategy to continuously  review emerging  technological  developments  and seek
alliances  with or, if sufficient  additional  capital  funding can be obtained,
complete  acquisitions  with  companies  that it  perceives  own the best proven
technologies  for  incorporation  into  its  electric  vehicles.  The  Company's
progress and current plans for each system are described below.

                                       4
<PAGE>

Electric Drive System

         The electric drive system  consists of an electric motor and electronic
controls  that  regulate the flow of  electricity  to and from the batteries (at
various  voltages  and  amperages)  to propel  the  vehicle.  Auxiliary  vehicle
functions (e.g.,  radio,  lights,  windshield wipers,  etc.) are also powered by
stored electrical energy similar to that of an internal combustion drive system.

         On October 25, 1996, the Company acquired all of the assets and certain
liabilities of Systronix Corporation, located in Torrance, California. Systronix
Corporation was a development stage company which was incorporated in September,
1994, and began research and development  operations in January,  1995. Its goal
was  to  become  a  leading  developer  of  technologically   advanced  electric
propulsion  systems  for  electric  vehicles.  The  Hyundai  Group of Korea  has
recognized this advanced technology and has invested in the Company and licensed
the drive  system  technology  for  production  in Korea.  The Company has fully
validated its first  propulsion  system product,  the Panther(TM) 60 alternating
current (AC) drive train for light duty vehicles. Also under development are the
Panther(TM)  90 and  Panther(TM)  120 systems for buses and heavy duty vehicles,
and the C20(TM)  offboard  charging  system,  the first of an intended family of
rapid chargers for all sizes of electric vehicles.

         The Company  continues to be awarded a number of engineering  contracts
with HMC for the  development  of  various  types of drive  trains  and  related
systems.

Hybrid Vehicles

         The  Company is  developing  for HMC an  electric  hybrid  system for a
vehicle to be  introduced  at the  Seoul,  Korea  Auto Show in April  1999.  The
Company is extending the Panther drive system to the hybrid vehicle  application
by adapting the  Panther(TM)  120 as the drive system and the  Panther(TM) 60 as
the induction  generator  for a series hybrid bus project  sponsored by HMC. The
Company is also developing a parallel hybrid drive system and a dual-mode hybrid
drive system utilizing the Panther controller and the BLDC motor. The Company is
working to  introduce  a hybrid  drive  system  for light  duty and medium  duty
transportation applications in conjunction with a major auto manufacturer.

Battery Management and Charging System

         Pursuant to a United States  Department  of Defense/ ARPA program,  the
Company is working with numerous battery  manufacturers to "beta test" their new
battery  technologies.  The Company  believes  that these new systems will allow
design  advantages  in  battery   placement,   weight   distribution,   and  car
crashworthiness.   Additionally,   the  Company  is  monitoring   other  battery
innovations  that may extend an electric  vehicle driving range by up to 50% and
permit a shorter  recharging time. The Company is developing Plastic Lithium Ion
("PLI")  batteries in  collaboration  with a major  battery OEM. The PLI battery
project is  sponsored  by DARPA,  and the  project is in two  phases.  The early
bi-cell  testing of this  technology  is very  promising  and delivers an energy
density of 130 Ahr/Kg.

         The  Company  is also  developing  a 40 kW  high  power  charger  under
contract for a major auto  manufacturer.  The high power charger is based on the
modular Panther system technology,  and it is sufficiently precise that it could
also be used for battery conditioning.

Components

         The Company is offering the modular drive system and components to OEMs
and other  customers.  The  Panther(TM)  60,  Panther(TM) 90 and Panther(TM) 120
drive systems have been installed in various  vehicles and are under  evaluation
by customers and potential  customers.  HMC has adapted a customized  version of
the  Panther(TM)  60 for their  production  electric  vehicle.  The Company also
offers an air conditioning heat pump, an  electro-hydraulic  power steering unit
and a safety  disconnect  unit for  utilization  by OEMs.  The  Company  is also
offering  BatteryCare(TM),  a battery  management  system, to OEMs. This battery
management system is utilized in the U.S. Postal Service electric  vehicle,  and
it is  capable of  providing  communication  to both  inductive  and  conductive
chargers simultaneously and managing the on-board and off-board charging systems
with  multiple  technologies.  This battery care unit is also being  utilized to
upgrade the electric vehicles in the DARPA battery testing program in Hawaii. It
makes these vehicles  compatible with the high power charging stations utilizing
the SAE standards.

                                       5
<PAGE>

Competitive Conditions

         The competition to develop and market  electric  vehicles has increased
during the last  fiscal  year and is  expected  to  continue  to  increase.  The
competition  consists of development  stage  companies as well as major U.S. and
international  companies.  MOST OF THESE  COMPANIES HAVE  FINANCIAL,  TECHNICAL,
MARKETING, SALES, MANUFACTURING, DISTRIBUTION AND OTHER RESOURCES VASTLY GREATER
THAN  THOSE OF THE  COMPANY.  The  Company's  future  prospects  will be  highly
dependent upon the successful  development and introduction of new products that
are  responsive  to market needs and can be  manufactured  and sold at a profit.
There can be no assurance that the Company will be able to successfully  develop
or market any such products.

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

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

Research and Development

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

         *Technical  proposal and program development under ARPA; 
         *Power Control and Drive Systems and related technology;
         *Bus development; 
         *Subsystem development (i.e., climate control, power management).

         Company funded research and  development  expense charged to operations
in fiscal years 1998,  1997 and 1996 were $445,000,  $1,218,000 and  $1,401,000,
respectively.

         The Company is  continually  evaluating and updating the technology and
equipment used in developing each of its products. The electric vehicle industry
has only  recently  come into  existence,  and the  technology  involved  in the
industry is rapidly changing.  There is limited  experience in the operation and
testing of electric  vehicles and  components,  and the  development of electric
vehicle technology therefore involves inherent risks.

Licenses, Patents and Trademarks

         The  Company   currently  holds  one  patent,   and  it  has  submitted
applications  for another patent and several  trademarks or  servicemarks in the
United States. As the Company further develops its own technology,  particularly
relating to its proprietary  drive train and component  technology,  the Company
may apply for patents or for other appropriate statutory protection.  The status
of patents  involves  complex  legal and factual  questions,  and the breadth of
claims  allowed is uncertain.  Accordingly,  there can be no assurance  that any
patent  application filed by the Company will result in patents being issued. In
addition, the laws of any foreign country in which the Company elects to conduct
business may not protect the Company's products and intellectual property rights
to the same extent as the laws of the United States.

                                       6
<PAGE>

Backlog

         As of July 31, 1998, the Company's  backlog of orders was approximately
$1,571,000.   As  of  July  31,  1997,  the  Company's  backlog  of  orders  was
approximately  $1,800,000.  Backlog  consists of orders for which shipments have
not yet been made and unfilled  portions of orders for which  partial  shipments
have been made.

Employees

         As of July 31,  1998,  the  Company  had 26  employees,  including 5 in
administration,  8 in  engineering  and  research  and  development,  and  13 in
manufacturing.

Item 2.  Properties

         The Company's corporate offices are located in Torrance, California, in
leased  office  space  of  approximately   20,000  square  feet.  The  Company's
administrative  departments and senior level  operations,  including  executive,
legal,  finance,  planning,  purchasing,  personnel,  engineers  and  operations
personnel,  are housed in this  location.  These  facilities  are leased through
February, 2000.

Item 3.  Legal Proceedings

         None

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

         None

                                       7
<PAGE>

PART II
<TABLE>
Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters

         The Company's Common Stock is presently traded in the  over-the-counter
market and quoted on the  National  Association  of  Securities  Dealers  (NASD)
"Bulletin  Board" under the symbol  "ECAR." The  following  table sets forth the
high and low prices of the Common Stock as reported on the NASD  Bulletin  Board
by the National Quote Bureau for the fiscal  quarters  indicated.  The following
over-the-counter  market quotations reflect inter-dealer prices,  without retail
mark-up,  mark-down or  commission,  and may not  necessarily  represent  actual
transactions.
<CAPTION>
                                                            Common Stock                Average Daily
                                                     High Price       Low Price             Volume
                                                     --------------------------         -------------
<S>                                                  <C>              <C>                  <C>
    Fiscal 1997
    -----------
    First Quarter ...............................    $0.450           $0.180               169,815
    Second Quarter ..............................    $0.280           $0.100                92,990
    Third Quarter ...............................    $0.320           $0.130               131,467
    Fourth Quarter ..............................    $0.150           $0.080                60,959


                                                           Common Stock                 Average Daily
                                                     High Price       Low Price             Volume
                                                     --------------------------         -------------
    Fiscal 1998
    -----------
    First Quarter ...............................    $0.120           $0.045               104,692
    Second Quarter ..............................    $0.085           $0.039                71,019
    Third Quarter ...............................    $0.047           $0.031                16,094
    Fourth Quarter ..............................    $0.048           $0.040                22,739

</TABLE>

         On October 23,  1998,  the last  reported  high bid price of the Common
Stock was  $0.033  and the last  reported  low asking  price was  $0.035.  As of
October 23, 1998, there were approximately 1,624 holders of record of the Common
Stock.  As of October 23, 1998, the Company's  Series A Preferred Stock was held
by  approximately  106  shareholders,   many  of  whom  are  also  Common  Stock
shareholders.  The Company's  Series B Preferred Stock was held by approximately
43 shareholders as of October 23, 1998. The number of holders of record excludes
beneficial holders whose shares are held in the name of nominees or trustees.

Dividend Policy

         To date,  the Company has neither  declared nor paid any cash dividends
on shares of its Common  Stock or Series A or B  Preferred  Stock.  The  Company
presently  intends to retain all future  earnings  for its business and does not
anticipate  paying cash dividends on its Common Stock or Series A or B Preferred
Stock in the  foreseeable  future.  However,  the  Company  is  required  to pay
dividends on its Series A and B Preferred Stock before  dividends may be paid on
any shares of Common  Stock.  At July 31, 1998,  the Company had an  accumulated
deficit of approximately $85,050,000 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.

                                       8
<PAGE>

<TABLE>
Item 6.  Selected Financial Data
As of and for the fiscal year ended July 31, (in thousands, except per share data)
<CAPTION>


                                                         1998           1997           1996          1995           1994
                                                         ----           ----           ----          ----           ----
<S>                                                     <C>            <C>            <C>           <C>            <C>     
NET SALES                                               $  1,938       $  4,484       $  4,209      $  11,625      $  5,787
COST OF SALES                                              2,765          2,042          5,370         20,210         6,372
                                                      -----------   ------------   ------------   ------------   -----------
GROSS MARGIN                                                (827)         2,442         (1,161)        (8,585)         (585)
                                                      -----------   ------------   ------------   ------------   -----------
OTHER COSTS AND EXPENSES
      Research and Development                               445          1,218          1,401          6,697         7,724
      Selling, general and administrative                  1,697          3,116          5,608         13,952        12,638
      Interest and financing fees                            665            792          1,890          5,732           339
      Other expense (income)                                 (67)           274            740            449            17
      Acquisition of research and development                             1,630
      Market development expense                                                                           77         3,718
      Facility closures and consolidations
      of operations                                                                        701          2,378
                                                      -----------   ------------   ------------   ------------   -----------
      Total other costs and expenses                       2,740          7,030         10,340         29,285        24,436
                                                      -----------   ------------   ------------   ------------   -----------
LOSS FROM CONTINUING OPERATIONS                           (3,567)        (4,588)       (11,501)       (37,870)      (25,021)
LOSS FROM DISCONTINUED OPERATIONS
GAIN ON DEBT RESTRUCTURING                                    42             53          2,147            305
                                                      -----------   ------------   ------------   ------------   -----------
NET LOSS                                                $ (3,525)      $ (4,535)      $ (9,354)      $(37,565)     $(25,021)
                                                      ===========   ============   ============   ============   ===========
PER COMMON SHARE:
      Loss from continuing operations                   $  (0.02)      $  (0.03)      $  (0.17)      $  (1.88)     $  (2.61)
      Loss from discontinued operations
      Gain on debt restructuring                                                          0.03           0.02
                                                      -----------   ------------   ------------   ------------   -----------
      Net loss per common share                         $  (0.02)      $  (0.03)      $  (0.14)      $  (1.86)     $  (2.61)
                                                      ===========   ============   ============   ============   ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING                                       151,265        133,806         67,906         20,156         9,571
                                                      ===========   ============   ============   ============   ===========
      Total Assets                                      $  1,658       $  4,513       $  4,363       $ 10,230      $ 21,306
                                                      ===========   ============   ============   ============   ===========
      Long-term debt                                    $  3,332       $  3,639       $  3,987                     $  9,980
                                                      ===========   ============   ============   ============   ===========
      Shareholders' equity (deficit)                    $(12,615)      $ (9,095)      $(12,736)      $(24,760)     $  1,605
                                                      ===========   ============   ============   ============   ===========
</TABLE>

                                       9
<PAGE>

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

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

GENERAL

U. S. Electricar, Inc. and Subsidiaries (collectively, the "Company") originally
was  established  to develop,  convert,  assemble,  manufacture  and  distribute
battery-powered  electric vehicles,  including on-road pick up trucks, passenger
cars,  buses and  delivery  vehicles,  and  off-road  industrial  vehicles.  The
Company's  product  lines include  converted  vehicles  (originally  built to be
powered by internal combustion engines) and vehicles that are built specifically
to be battery  powered.  Currently,  the Company is directing its efforts toward
the development of electric drive trains and related components, vehicle systems
integration and the performance of various engineering contracts.  The Company's
efforts relating to the converted  vehicle program have been  discontinued,  and
current efforts in this program consist  primarily of supporting  customers with
vehicle  integration and proof of concept  vehicles.  The Company,  however,  is
retrofitting  long life vehicles for the U.S.  Postal Service  electric  vehicle
research and  development  program.The  Company's  fiscal year ends July 31. All
year references refer to fiscal years.

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

The company also acquired  substantially all the tangible and intangible assets,
and assumed certain liabilities, of Systronix Corporation (Systronix) on October
25, 1996, for stock, a note and cash.

In March 1997,  the Company  completed an agreement  with Hyundai  Motor Company
("HMC") and Hyundai Electronics Industries Co., Ltd. ("HEI") whereby HMC and HEI
collectively  purchased $3.6 million of the Company's  common stock for cash and
secured a technology license for an additional payment of $2.0 million.  For the
technology  license,  the Company received  $1,850,000 in cash and the remaining
$150,000 is to be received over 6 years.

In 1998,  the Company  aggressively  concentrated  on the reduction of operating
costs.  Headcount  has been  reduced  from 51  employees  at July 31, 1997 to 26
employees  as of July 31,  1998.  The  Company is now focused  primarily  on the
development  of a family of electric  drive trains,  to include  60kw,  90kw and
120kw systems,  and related  components,  vehicle  systems  integration  and the
performance of various engineering contracts.  The Company has several important
contracts with the U. S. Defense  Advanced  Research  Project Agency  ("DARPA"),
including  the  development  of a new 120kw AC bus, a new  plastic  lithium  ion
battery  for  automotive  use and  testing of advanced  vehicle  batteries.  The
Company also has several engineering contracts with the Hyundai Motor Company to
design,  develop and test electric drive train products and related  components.
Hyundai Motor Company is contracting  with the Company for the  development of a
hybrid  vehicle and is  preparing  to produce the  Panther(TM)  drive system for
their electric vehicles.

LIQUIDITY AND CAPITAL RESOURCES

The Company has  experienced  recurring  cash flow  shortages  due to  operating
losses primarily attributable to research, development, administrative and other
costs  associated  with  the  Company's   effortd  to  become  an  international
manufacturer  and distributor of electric  vehicles.  Cash flows from operations
have  been  negative  and  have  not  been  sufficient  to  meet  the  Company's
obligations  as they came due.  The  Company  has  therefore  had to raise funds
through numerous  financial  transactions and from various  resources.  At least
until the Company reaches breakeven volume in sales and develops and/or acquires
the  capability and  technology  necessary to manufacture  and sell its products
profitably,  it will need to continue to rely  extensively on cash from external
financing.  The Company  anticipates  that it will  require  additional  outside
financing for at least one more year.

During 1998, the Company spent $274,000 in cash on operating  activities to fund
the net  loss  of  $3,525,000,  resulting  from  the  factors  explained  in the
following section of this discussion and analysis. Accounts receivable decreased
by


                                       10
<PAGE>

$753,000 as many of the Company's  engineering contracts were funded in advance.
This also resulted in the increase of $343,000 in customer  deposits.  Inventory
decreased  by  $371,000,  net  of  write-downs  of  $949,000.  The  Company  has
discontinued  production activity on certain products,  with the result that the
inventories for these products was no longer expected to be used,  converted and
sold in the  normal  course  of  business.  The value of these  inventories  was
reduced to reflect their sale at liquidation  prices. This reduction resulted in
a charge to operations of $734,000 in the quarter ended January 31, 1998, and an
additional charge to operations of $215,000 in the quarter ended July 31, 1998.

The operations of the Company  during 1998 were financed  primarily by the funds
received on engineering contracts and partly on funds received in the prior year
from the sale of a technology  license.  In January,  1998 the Company  received
$200,000  from  a  European  investor  group  in  the  form  of  a  short  term,
non-interest bearing promissory note.

It is  management's  intention  to continue its debt  restructuring  and to seek
additional  financing  through private  placements as well as other means. As of
October  23,  1998,  however,  the Company  had no firm  commitments  to provide
significant additional financing to the Company.

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

ADDITIONAL  FUNDING  WILL BE NEEDED  DURING 1999.  AS OF OCTOBER 23,  1998,  THE
COMPANY HAD NO FIRM COMMITMENTS FROM ANY PERSON OR ENTITY TO PROVIDE CAPITAL AND
THERE CAN BE NO  ASSURANCE  THAT  ADDITIONAL  FUNDS WILL BE  AVAILABLE  FROM ANY
SOURCE AT THE TIME THE  COMPANY  WILL  NEED SUCH  FUNDS.  THE  INABILITY  OF THE
COMPANY TO OBTAIN  ADDITIONAL  FUNDING ON TERMS  ACCEPTABLE  TO THE COMPANY WILL
HAVE A MATERIAL  ADVERSE EFFECT ON ITS BUSINESS.  THE FUTURE  UNAVAILABILITY  OR
INADEQUACY  OF  FINANCING TO MEET FUTURE NEEDS COULD FORCE THE COMPANY TO DELAY,
MODIFY,  SUSPEND OR CEASE SOME OR ALL ASPECTS OF ITS PLANNED OPERATIONS,  AND/OR
SEEK PROTECTION  UNDER  APPLICABLE  STATE AND FEDERAL  BANKRUPTCY AND INSOLVENCY
LAWS.

RESULTS OF OPERATIONS

Net sales of $1,938,000 for 1998 decreased $2,546,000, or 57% from $4,484,000 in
1997.  Two primary  factors  caused the  decrease.  In 1997,  the Company sold a
technology  license  to HMC and  HEI  for  $2,000,000,  and  there  were no such
corresponding  sales of a  technology  license in 1998.  Secondly,  the  Company
discontinued  the  sales  of  electric  vehicles  in  1998  and  focused  on the
engineering,  development  and  testing of  electric  drive  trains and  related
components.  Of the  Company's  total  sales for 1998,  $1,218,000,  or 63% were
revenues  realized on  engineering  contracts  with DARPA,  the Hyundai Group of
Korea and other customers.

Net sales of $4,484,000 for 1997 increased  $275,000,  or 7% from 1996. Sales of
converted  sedans and light trucks  decreased by 39% from 1996.  The Company was
working  down its  backlog  of these  vehicles  in 1997.  The  Company  realized
revenues  of  $525,000  in  1997  from  various  engineering  contracts  of  its
Components division,  acquired in October,  1996. Sales revenue for this product
line also included the sale of a $2,000,000  technology  license to HMC and HEI.
Sales of off-road industrial electric vehicles decreased significantly from 1996
because the Company sold the assets and certain  liabilities  of the  Industrial
Electric Vehicles business in September, 1996.

In 1998,  cost of sales as a percentage of sales increased to 143%. The increase
in cost of sales is largely due to charges of $949,000 related to the write-down
of inventory to market value.  Since the Company  discontinued the production of
some product lines in 1998, market value represented liquidation prices for some
of the inventory. The Company has continued to achieve cost reductions.

Cost of sales as a  percentage  of sales  decreased  to 46% in 1997 from 128% in
1996.  Sales  revenue  for  1997  included  a sale of a  technology  license  of
$2,000,000. Excluding the sale of the technology license, cost of sales for 1997
was 82.2% of sales. As the Company worked down its backlog of retrofit  vehicles
and delivered them to customers, some of the obsolescence and liability reserves
proved to be  larger  than the  costs  incurred  in  completing  the  work.  The

                                       11
<PAGE>

adjustment of these  reserves to  appropriate  current levels at the end of 1997
resulted in a reduction in reported cost of sales

Research and development  expense decreased in 1998 to $445,000 from $1,218,000,
a decrease of $773,000,  or 63%. While the Company's efforts to reduce staff and
cut costs has  reduced  spending  in all areas,  the new focus of the Company is
centered on research and development.  The product  development cost incurred in
the performance of engineering development contracts is charged to cost of sales
for this contract revenue. Non-funded development costs are reported as research
and development expense.  Research and development expense of $1,218,000 in 1997
declined  $183,000,  or  13%  from  1996.  The  decline  was  the  result  of  a
continuation  of the reduction of technical  resources by the Company,  although
this was offset by the October, 1996 acquisition of Systronix Corporation, which
is primarily a research company.

Selling,   general   and   administrative   expense  of   $1,697,000   decreased
significantly in 1998, by $1,419,000, or 46%, from $3,116,000 in 1997. Continued
and  significant  reductions  in  headcount,  facility  costs and spending  were
responsible  for the decline.  Selling,  general and  administrative  expense of
$3,116,000 in 1997 declined $2,492,000, or 44% from 1996, as the Company reduced
headcount and spending and consolidated operations.

Interest and financing fees in 1998 decreased $127,000,  or 16% to $665,000 from
$792,000 in 1997. The  conversion of debt to common stock in June 1996,  October
1996 and March 1997,  plus the  payment of some debt in March 1997,  resulted in
lower  levels  of  outstanding  debt for all of  1998.  In  1997,  interest  and
financing fees decreased to $792,000 from  $1,890,000 in 1996, a decline of 58%.
The  conversion  of   $15,000,000  of  debt  to  common  stock  in  June,   1996
significantly  reduced the amount of  outstanding  debt for the Company for 1997
and 1998. An additional  $3,600,000 of debt was converted to common stock during
1997.  The Company paid off  $3,021,000  of debt in 1997,  further  reducing the
outstanding debt.

In connection with the settlement of $11.8 million of unsecured trade debt under
the Company's Debt  Retructuring  Plan,  several  unsecured  creditors agreed to
settle their claims for amounts  less than the original  debt owed to them.  The
reductions from the original amounts owed and the settlement amounts resulted in
a gain on debt  restructuring  of  $2,147,000  in 1996.  Additional  settlements
resulted in a gain on debt restructuring of $53,000 in 1997 and $42,000 in 1998.

As a result of the foregoing  changes in net sales,  cost of sales,  other costs
and  expenses  and  gain  on debt  restructuring,  the  net  loss of  $3,525,000
decreased  $1,010,000,  or 22% from the $4,535,000  loss in 1997,  while the net
loss for 1997 decreased $4,819,000 or 52% from $9,354,000 in 1996. These results
reflect a significant change in the operating condition of the Company. The cost
structure and operating  conditions of the Company are now more in line with the
sales volume and the scope of business.  While the Company is not yet  operating
at a profit, the fixed costs have been reduced significantly, and the Company is
now approaching a position where it will be able to sustain its current level of
operations through self-funding.

Year 2000 Computer  Software  Problem Could  Adversely  Impact  Operations.  The
Company is aware of the issues  associated with the programming code in existing
computer  systems  as the Year 2000  approaches.  The  "Year  2000"  problem  is
concerned with whether computer  systems will properly  recognize date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail. The Company,  like most owners of computer  software,  will be required to
modify significant portions of its software so that it will function properly in
the Year 2000.  The  Company  plans to replace  its  current  accounting  system
software in the near future with new software  that is compliant  with Year 2000
requirements.  The particular  software  system has not been identified yet, but
preliminary  estimates  of the total  costs to be  incurred  by the  Company  to
resolve this  problem  range from  $10,000 to $20,000.  The Company  mainly uses
third party "off the shelf"  software,  and it does not  anticipate a problem in
resolving  the Year 2000  problem in a timely  manner.  The Company is currently
taking steps to ensure that its computer  systems and services  will continue to
operate on and after January 1, 2000.  However,  there can be no assurance  that
Year 2000  problems  will not  occur  with  respect  to the  Company's  computer
systems.

The Year 2000 problem may impact other entities with which the Company transacts
business,  and the Company cannot predict the effect of the Year 2000 problem on
such entities or the economy in general, or the resulting effect on the Company.
As a result, if preventative  and/or corrective actions by the Company and those
companies  with

                                       12
<PAGE>

whom the Company does  business are not made in a timely  manner,  the Year 2000
issue could have a material adverse effect on the Company's business,  financial
condition  and  results of  operations.  The  Company  has not yet  developed  a
contingency plan to operate in the event that any noncompliant  critical systems
are not  remedied by January 1, 2000,  but it intends to develop  such a plan in
the near future.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Going  Concern / Net Operating  Losses.  The Company has  experienced  recurring
losses from operations and had an accumulated deficit of $85,050,000 at July 31,
1998.  There is no assurance,  however,  that any net  operating  losses will be
available to the Company in the future as an offset  against  future profits for
income tax purposes.  A substantial  portion of the losses are  attributable  to
product  development  and other  start-up  costs  associated  with the Company's
business  focus  on the  development,  production  and sale of  battery  powered
electric  vehicles.  Cash flows from future  operations may not be sufficient to
enable the Company to achieve profitable  operations.  Market conditions and the
Company's  financial  position  may inhibit  its  ability to achieve  profitable
operations. These factors, as well as others, indicate the Company may be unable
to  continue  as a  going  concern  unless  it is  able  to  obtain  significant
additional  financing and generate sufficient cash flows to meet its obligations
as they come due and sustain its operations. As of October 23, 1997, the Company
had no firm commitments from any person or entity to provide capital,  and there
can be no assurance that  additional  funds will be available from any source at
the time the Company will need such funds.

Continued  Losses.  For the fiscal years ended July 31, 1998, 1997 and 1996, the
Company had  substantial  net losses of $3,525,000,  $4,535,000 and  $9,354,000,
respectively on sales of $1,938,000, $4,484,000 and $4,209,000, respectively.

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

Changed  Legislative  Climate.  Because vehicles powered by internal  combustion
engines cause pollution,  there has been  significant  public pressure in Europe
and Asia, and enacted or pending legislation in the United States at the federal
level and in certain  states,  to promote or mandate the use of vehicles with no
tailpipe  emissions  ("zero emission  vehicles") or reduced  tailpipe  emissions
("low  emission  vehicles").  Legislation  requiring or promoting  zero emission
vehicles is necessary  to create a  significant  market for  electric  vehicles.
There can be no assurance,  however, that further legislation will be enacted or
that current  legislation  or state mandates will not be repealed or amended (as
recently  occurred in California),  or that a different form of zero emission or
low emission vehicle will not be invented,  developed and produced,  and achieve
greater market acceptance than electric vehicles.  Extensions,  modifications or
reductions of current federal and state legislation,  mandates and potential tax
incentives   could  adversely  affect  the  Company's   business   prospects  if
implemented.

                                       13
<PAGE>

Item 8.  Financial Statements and Supplementary Data

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

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

None.


(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

                                       14
<PAGE>

PART III
<TABLE>
Item 10.     Directors and Executive Officers of the Registrant

         The following table sets forth certain  information with respect to the
Directors and executive officers of the Company:
<CAPTION>
====================================================================================================================
<S>                                                    <C>               <C>
Name                                                   Age               Position
--------------------------------------------------------------------------------------------------------------------

Carl D. Perry                                          66                Chairman of the Board and Chief Executive
                                                                         Officer
--------------------------------------------------------------------------------------------------------------------

Edwin O. Riddell (1) (2)                               56                Director
--------------------------------------------------------------------------------------------------------------------

David A. Ishag (1) (2)                                 31                Director
--------------------------------------------------------------------------------------------------------------------

Donald H. Dreyer (2)                                   62                Director
====================================================================================================================
<FN>
(1)      Member of the Compensation Committee.
(2)      Member of the Audit Committee.
</FN>
</TABLE>

         Carl D. Perry,  Chairman of the Board and Chief Executive Officer.  Mr.
Perry  served as a Director and as an  Executive  Vice  President of the Company
from July 1993 until  November  1997. In November 1997, Mr. Perry was elected as
Chairman  of the Board and Chief  Executive  Officer  of the  Company.  Prior to
joining  the  Company,  he  was  an  international   aerospace  and  finanancial
consultant,  from 1989 to July 1993.  From 1984 until 1988,  Mr. Perry served as
Executive  Vice  President  of  Canadair  Ltd.,   Canada's   largest   aerospace
corporation,  where he conducted strategic planning,  worldwide  marketing,  and
international  joint ventures.  From 1979 to 1983, Mr. Perry served as Executive
Vice President of the Howard Hughes Summa Corporation's  Helicopter Company, now
known as McDonnell  Douglas  Helicopters,  where he was  responsible for general
management, worldwide business development, and international operations.

         Edwin O. Riddell, Director. Mr. Riddell has served as a Director of the
Company  since June 1995.  From  January 1991 to the  present,  Mr.  Riddell has
served as Manager of the  Transportation  Business Unit in the Customer  Systems
Group at the Electric Power  Research  Institute in Palo Alto,  California,  and
from 1985 until November 1990, he served with the  Transportation  Business Unit
as Vice  President,  Engineering,  working  on  electric  public  transportation
systems. From 1979 to 1985, he was Vice President and General Manager 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  (styling),  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 Transit Association's  ("APTA") Association
Member Board of Governors for over 15 years.  He has also served on APTA's Board
of Directors.

         David A.  Ishag,  Director.  Mr.  Ishag was  elected a Director  of the
Company in September  1995.  In 1994,  Mr.  Ishag  founded,  and  continues as a
general partner of the firm Hirsch & Cie, an external financial advisor to Union
Bancaire Privee (CGI-TDB) in Geneva, Switzerland, where his principal activities
are private banking and asset allocation. From 1991 to 1994, Mr. Ishag conducted
asset  management and general  banking

                                       15
<PAGE>

duties  for the  Republic  National  Bank of New  York  (Geneva),  and  also had
marketing  responsibility for building clientele portfolios.  From 1988 to 1991,
Mr. Ishag was associated  with European  Investments & Development  Group PLC, a
London  property  investment   company,   acting  as  a  Director  of  portfolio
management. From 1986 to 1988, Mr. Ishag was with Barclays de Zoete Wedd Ltd., a
graduate banking program, working with mergers and acquisitions in the Corporate
Finance department.

         Donald H. Dreyer.  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 was
established  in 1990.  Mr.  Dreyer has served as Chairman of the Board of Credit
Managers Association of California during the 1994 to 1995 term and continues to
serve as a member of the Advisory Committee of that organization.  Mr. Dreyer is
currently the co-Chair of the Creditors Committees' Subcommittee of the American
Bankruptcy  Institute and is a member of the Western 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 the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

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

         The Company believes,  based solely on its review of the copies of such
reports received or written representations from certain Reporting Persons, that
during fiscal 1998, all Reporting  Persons  complied with all applicable  filing
requirements.

Item 11.     Executive Compensation

Summary Compensation Table

         The following table sets forth all compensation earned by the Company's
Chief  Executive  Officer and former Chief  Executive  Officer,  and each of the
other most highly  compensated  executive  officers of the Company  whose annual
salary and bonus exceeded  $100,000 for the years ended July 31, 1998, 1997, and
1996 (collectively,  the "Named Executive  Officers").  There are no Officers or
Executives of the Company whose salary currently exceeds $100,000.00.

                                       16
<PAGE>

<TABLE>
                           Summary Compensation Table
<CAPTION>
Name and Principal Position                                                   Annual Compensation
---------------------------                         --------------------------------------------------------------
                                                                                            Long-Term Compensation
                                                                                            ----------------------
                                                      Year                                  Awards
                                                      ----                                  ------
                                                                                                  Securities
                                                                                                  Underlying
                                                                  Salary      Bonus              Options/SARs
                                                                    ($)        ($)                    (#)
                                                                  ------      -----              ------------

<S>                                                   <C>         <C>             <C>                 <C>
Roy Y. Kusumoto (2)                                   1998        17,308           --                 --
Former Chief Executive Officer                        1997        50,000           --                 --
  and President                                       1996        50,000           --                 --


Carl D. Perry (1)                                     1998        55,770           --                 --
Chief Executive Officer                               1997        75,000           --                 --
                                                      1996        75,000           --                 --
<FN>
 (1)     Mr.  Perry was elected as Chief  Executive  Officer in  November  1997.
         Amounts paid to Mr. Perry for all periods  shown were paid to Mr. Perry
         as an Executive  Vice  President of the Company.  Mr.  Perry's  current
         salary is $50,000 per year.

  (2)    Mr.  Kusumoto  became Chief  Executive  Officer of the Company in April
         1995 and ceased to be a Director  or officer of the Company in November
         1997.
</FN>
</TABLE>
Option/SAR Grants

              No grants of stock options or stock  appreciation  rights ("SARs")
were made during fiscal 1998 to the Named Executive Officers.

Option Exercises and Option Values
<TABLE>
              The  following  table sets  forth  information  concerning  option
exercises during 1998, and the aggregate value of unexercised options as of July
31, 1998, held by each of the Named Executive Officers:
<CAPTION>
                                          Aggregated Option/SAR Exercises in 1998
                                            and Option Values at July 31, 1998

                                                                Number of Securities
                                   Aggregate                    Underlying Unexercised             Value of Unexercised
                                     Option                          Options at                   In-the-Money Options at
                                 Exercises in 1998                  July 31, 1998                    July 31, 1998 (1)
                                 -----------------                -------------------          --------------------------

                                      Shares          Value
                                   Acquired on       Realized
Name                               Exercise (#)        ($)        Exercisable   Unexercisable   Exercisable   Unexercisable
----                               ------------      --------     -----------   -------------   -----------   -------------
<S>                                    <C>             <C>          <C>           <C>              <C>            <C>
Carl D. Perry                          --              --           1,092,000     108,000          $ --           $ --

Roy Y. Kusumoto                        --              --           2,000,000          --          $ --           $ --
<FN>
(1)  Calculated  on the basis of the  average of the high bid and low ask prices
     of the  Common  Stock on July 31,  1998 of  $0.045  per  share,  minus  the
     exercise price.
</FN>
</TABLE>

                                       17
<PAGE>

Compensation of Directors

         Directors  of the  Company do not receive  any  compensation  for their
services as Directors.  All Directors are  reimbursed  for expenses  incurred in
connection with attending Board and committee meetings. One Director,  Donald H.
Dreyer is paid a consulting  fee for  attendance at Company Board  meetings.  In
1998,  the total amount paid to Mr.  Dreyer was  approximately  $4,000 for Board
meetings and other consulting activities.

         Each nonemployee  Director of the Company is entitled to participate in
the Company's 1994 Director Stock Option Plan (the "Director Option Plan").  The
Board of  Directors  and the  shareholders  have  authorized  a total of 150,000
shares of Common Stock for issuance under the Director Option Plan. The Director
Option  Plan  provides  for the grant of  nonstatutory  options  to  nonemployee
Directors  of the  Company.  The  Director  Option  Plan  is  designed  to  work
automatically  and  not  to  require  administration;  however,  to  the  extent
administration is necessary, it will be provided by the Board of Directors.

         The  Director  Option  Plan  provides  that each  eligible  Director is
granted  an option to  purchase  1,000  shares  of Common  Stock for each  Board
meeting attended in person.  Options granted under the Director Option Plan have
a term of five years unless terminated sooner upon termination of the optionee's
status as a Director or  otherwise  pursuant to the  Director  Option  Plan.  No
option granted under the Director  Option Plan is  transferable  by the optionee
other than by will or the laws of descent and  distribution,  and each option is
exercisable,  during the lifetime of the optionee,  only by such  optionee.  The
Director  Option Plan  provides  that the  options  become  exercisable  in full
immediately upon the grant of such options.

         The  exercise  price of all stock  options  granted  under the Director
Option Plan is equal to the fair market value of a share of the Company's Common
Stock on the date of grant of the option. Fair Market Value is defined under the
Director  Option Plan as the  average of the bid and asked  prices of the Common
Stock in the  over-the-counter  market on the date of grant,  as reported by the
National Association of Securities Dealers Automated Quotation System.

         In  the  event  of a  merger  of  the  Company  with  or  into  another
corporation or a sale of substantially all of the Company's assets, the Director
Option Plan  requires that each  outstanding  option be assumed or an equivalent
option substituted by the successor  corporation.  The Director Option Plan will
terminate in December  2004.  The Board of Directors  may amend or terminate the
Director  Option  Plan;  provided,  however,  that no such action may  adversely
affect any outstanding  options,  and the provisions of the Director Option Plan
affecting the grant and terms of options  granted  thereunder may not be amended
more than once in any six-month  period.  Executive  officers of the Company are
not eligible to participate in the Director Option Plan.

         As of October 18,  1998,  4,000  options had been  granted and remained
outstanding under the Director Option Plan.

Compensation Committee Interlocks and Insider Participation

         The Compensation  Committee currently consists of Mr. Edwin Riddell, as
Chairman,  and Mr. David Ishag. Mr. Riddell was elected Chairman in August 1998.
Mr. Ishag served as a member of the Compensation  Committee during all of Fiscal
1998. Malcolm Currie and James Miller,  former Directors of the Company,  served
on the Compensation Committee until their resignation in 1998.

                                       18
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management
<TABLE>
         The following table sets forth certain information regarding beneficial
ownership of the Company's  stock as of September  30, 1998,  (i) by each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of each class of the Company's stock, (ii) by each of the Company's
Directors, (iii) by each of the Company's Named Executive Officers listed in the
Summary  Compensation  Table  below,  and  (v) by the  Company's  Directors  and
executive  officers 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 stock beneficially owned by them.
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

5% Shareholders, Directors, Officers                       Common Shares     Percentage of Common Shares             Voting
and Directors and Officers as a Group             Beneficially Owned (1)          Beneficially Owned (2)     Percentage (3)
-------------------------------------             ----------------------     ---------------------------     --------------

---------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                                     <C>                <C>   
Itochu Corporation                                        51,789,122 (4)                          31.18%             29.56%
2-5-1, Kita-Aoyama 2-chome,
Minato-ku, Tokyo
107-77, Japan
------------------------------------------  -----------------------------  ------------------------------  -----------------

Gerlach & Co.                                                 10,731,507                           7.07%              6.67%
c/o Citibank N.A.
111 Wall Street, 8th Floor
New York, NY  10043
------------------------------------------  -----------------------------  ------------------------------  -----------------

Citibank N.A.                                                 43,508,314                          28.66%             27.05%
111 Wall Street, 8th Floor
New York, NY  10043
------------------------------------------  -----------------------------  ------------------------------  -----------------

Fontal International Ltd.                                 13,499,999 (5)                           8.17%              7.74%
9 Quai des Bergues
Geneva, Switzerland
------------------------------------------  -----------------------------  ------------------------------  -----------------

Hyundai Motor Company                                          8,400,000                           5.53%              5.22%
140-2 Kye-Dong, Chongro-Ku
Seoul, 110-793 Korea
------------------------------------------  -----------------------------  ------------------------------  -----------------

Hyundai Electronics Industries                                 3,600,000                           2.37%              2.22%
San 136-1, Ami-ri, Bubal-eub, Ichon-si
Kyoungki-do, 467-701 Korea
------------------------------------------  -----------------------------  ------------------------------  -----------------

Roy S. Kusumoto                                            2,000,000 (6)                           1.30%              1.23%
------------------------------------------  -----------------------------  ------------------------------  -----------------

Carl D. Perry                                              1,132,500 (7)                               *                  *
----------------------------------------------------------------------------------------------------------------------------

                                                              19
<PAGE>

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

5% Shareholders, Directors, Officers                       Common Shares     Percentage of Common Shares             Voting
and Directors and Officers as a Group             Beneficially Owned (1)          Beneficially Owned (2)     Percentage (3)
-------------------------------------             ----------------------     ---------------------------     --------------

---------------------------------------------------------------------------------------------------------------------------
Edwin O. Riddell                                               3,000 (8)                               *                  *
------------------------------------------  -----------------------------  ------------------------------  -----------------

David A. Ishag                                                 1,000 (9)                               *                  *
------------------------------------------  -----------------------------  ------------------------------  -----------------

Donald H. Dreyer                                                       0                               *                  *
------------------------------------------  -----------------------------  ------------------------------  -----------------

All Directors and executive officers as                   1,136,500 (10)                               *                  *
a group (4 persons)
------------------------------------------  -----------------------------  ------------------------------  -----------------
<FN>
*        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 September 30, 1998.

(2)      The percentages are based on the number of shares of Common 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 September 30, 1998.

(3)      The percentages are based on the number of shares of Common Stock owned
         by the  shareholder  divided by the sum of: (i) the total  Common Stock
         outstanding, (ii) the total Series A Preferred Stock outstanding; (iii)
         the total Series B Preferred Stock  outstanding;  and (iv) Common Stock
         issuable pursuant to warrants, options and other convertible securities
         exercisable or convertible by such  shareholder  within sixty (60) days
         after September 30, 1998. 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  14,333,333 shares of Common Stock issuable upon conversion of
         convertible debt in the amount of $4,300,000 plus accrued interest,  at
         a conversion price of $0.30 per share.

(5)      Includes (i) 2,666,667  shares of Common Stock issuable upon conversion
         of convertible debt in the amount of $800,000 plus accrued interest, at
         a conversion  price of $0.30 per share,  and (ii) 10,833,332  shares of
         Common Stock issuable pursuant to warrants.

(6)      Includes  2,000,000  shares of Common Stock issuable  pursuant to stock
         options  exercisable  at a price  of  $0.40  per  share.  Mr.  Kusumoto
         resigned as Chairman and President of the Company and from the Board of
         Directors in November 1997.

                                       20
<PAGE>

(7)      Includes  1,132,000  shares of Common Stock issuable  pursuant to stock
         options exercisable at a price of $0.30 per share.

(8)      Includes  3,000  shares  of Common  Stock  issuable  pursuant  to stock
         options.

(9)      Includes  1,000  shares  of Common  Stock  issuable  pursuant  to stock
         options

(10)     Includes  1,136,000  shares of Common Stock issuable  pursuant to stock
         options exercisable at prices ranging from $0.30 to $0.60 per share.
</FN>
</TABLE>

Item 13.     Certain Relationships and Related Transactions

         The following are certain transactions entered into between the Company
and its  officers,  directors and principal  shareholders  and their  affiliates
since August 1, 1997.

Transactions with Secured Creditors and Others:

Itochu Corporation

         As of August 1997,  there was $3,000,000 of debt outstanding to Itochu,
a  principle  shareholder  of  the  Company,  pursuant  to a  Supplemental  Loan
Agreement.  The debt is  convertible  at the election of Itochu at any time,  or
automatically upon the occurrence of certain events, into shares of Common Stock
at a  conversion  rate of $0.30 per  share.  The debt is  secured  by all of the
assets  of  the  Company.  The  maturity  date  of  the  debt  was  April  1998.
Negotiations to extend the maturity date of the debt were initiated, but to date
no agreement has been reached.

         Additionally,  Itochu issued $1,300,000 of convertible secured notes to
the Company under a Supplemental Loan Agreement with a maturity date of December
1997.  To date,  no agreement has been reached on extending the maturity date of
this debt.

Fontal International, Ltd. ("Fontal")

         In January 1998, the Company borrowed  $200,000 from Fontal, a creditor
and  shareholder  of the  Company,  under a  short  term,  non-interest  bearing
promissory   note,  and  this  amount  was  outstanding  at  the  end  of  1998.
Additionally,   there  is  an  outstanding  balance  of  $800,000  on  unsecured
convertible bonds held by Fontal at the end of 1998.

         The Company believes that the transactions described above were made on
terms no less  favorable  to the  Company  than  could have been  obtained  from
unaffiliated third parties. The above referenced transactions were approved by a
majority  of the  disinterested  members of the Board of  Directors.  All future
transactions   between  the  Company  and  its  officers  directors,   principal
shareholders  and  affiliates  will be  approved  by a majority  of the Board of
Directors,  including,  where  appropriate,  a  majority  of the  disinterested,
nonemployee directors on the Board of Directors, and, where appropriate, will be
on  terms  no  less  favorable  to the  Company  than  could  be  obtained  from
unaffiliated third parties.

                                       21
<PAGE>

PART IV

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

         (a)1.    Financial Statements

                  The  financial  statements  filed as a part of this report are
identified in the Index to Consolidated Financial Statements on page 24.

         (a)2.    Financial Statement Schedules

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

         (a)3.    Exhibits

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

         (b)      Reports on Form 8-K

                  None





         (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)



                                       22
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized, on October 27, 1998.

U.S. ELECTRICAR, INC.

By:    /s/ Carl D. Perry
       -------------------------------------------------------------------------
       Carl D. Perry, Chief Executive Officer and Acting Chief Financial Officer


                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes  and appoints  Carl D. Perry,  with full power to act
alone, his true and lawful  attorneys-in-fact,  with full power of substitution,
and  re-substitution,  for him and in his name,  place and stead, in any and all
capacities,  to sign any and all  amendments  to the annual report on Form 10-K,
and file the same, with all exhibits thereto,  and other documents in connection
therewith,  with the  Securities  and Exchange  Commission,  granting  unto said
attorneys-in-fact  full power and authority to do and perform each and every act
and  thing  requisite  and  necessary  to be done as  fully to all  intents  and
purposes as he might or could do in person,  hereby ratifying and confirming all
that  said  attorneys-in-fact  may  lawfully  do or cause  to be done by  virtue
hereof.
<TABLE>
         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.
<CAPTION>
Signature                                            Title                      Date
---------                                            -----                      ----
<S>                                                  <C>                        <C>
/s/ Carl D. Perry                                    Chief Executive            October 27, 1998
--------------------------------------------         Officer and Director
Carl D. Perry                                        (Principal Executive
                                                     Officer)            


/s/ Edwin O. Riddell                                 Director                   October 27, 1998
--------------------------------------------
Edwin O. Riddell


/s/ David A. Ishag                                   Director                   October 27, 1998
--------------------------------------------
David A. Ishag


/s/ Donald H. Dreyer                                 Director                   October 27, 1998
--------------------------------------------
Donald H. Dreyer

</TABLE>

                                       23


<PAGE>

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



                             U. S. ELECTRICAR, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            PAGE

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

CONSOLIDATED BALANCE SHEETS - JULY 31, 1998 AND 1997.........................F-2

CONSOLIDATED STATEMENTS OF OPERATIONS -
     YEARS ENDED JULY 31, 1998, 1997 AND 1996................................F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT -
     YEARS ENDED JULY 31, 1998, 1997 AND 1996................................F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS -
     YEARS ENDED JULY 31, 1998, 1997 AND 1996................................F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-9


--------------------------------------------------------------------------------
                                       24


<PAGE>



                                                                                
INDEPENDENT AUDITOR'S REPORT



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


We  have  audited  the  accompanying   consolidated  balance  sheets  of  U.  S.
Electricar,  Inc.  as of July 31, 1998 and 1997,  and the  related  consolidated
statements of operations,  stockholders' deficit, and cash flows for each of the
three  years  ended  July  31,  1998.   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  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of U. S. Electricar,
Inc.  as of July 31,  1998  and  1997,  and the  consolidated  results  of their
operations and their cash flows for each of the three years ended July 31, 1998,
in conformity with generally accepted accounting principles.

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


                                               /s/ MOSS ADAMS LLP

Santa Rosa, California
September 24, 1998

                                                                        Page F-1

<PAGE>



                                                          U. S. ELECTRICAR, INC.
                                                     CONSOLIDATED BALANCE SHEETS
                                                          July 31, 1998 and 1997
                             (In thousands, except for share and per share data)
--------------------------------------------------------------------------------


                                     ASSETS

                                                                  1998     1997
                                                                 ------   ------
CURRENT ASSETS
  Cash                                                           $  266   $  333
  Accounts receivable, net of allowance for doubtful accounts
    of $108 and $115                                                108      829
  Inventories                                                       492    1,812
  Note receivable                                                   250     --  
  Prepaids and other current assets                                 124      258
                                                                 ------   ------
        Total current assets                                      1,240    3,232

PROPERTY, PLANT AND EQUIPMENT                                       318    1,099

OTHER ASSETS                                                        100      182
                                                                 ------   ------
        Total assets                                             $1,658   $4,513
                                                                 ======   ======

The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                        Page F-2

<PAGE>

<TABLE>


                                                          U. S. ELECTRICAR, INC.
                                         CONSOLIDATED BALANCE SHEETS (Continued)
                                                          July 31, 1998 and 1997
                             (In thousands, except for share and per share data)
--------------------------------------------------------------------------------
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

                                                                                  1998        1997
                                                                                --------    --------
<S>                                                                             <C>         <C>
CURRENT LIABILITIES
  Accounts payable                                                              $  2,448    $  2,335
  Accrued payroll and related expenses                                               358         634
  Accrued warranty reserve                                                           474         564
  Accrued interest                                                                 1,262         598
  Other accrued expenses                                                             285         337
  Customer deposits                                                                  387          44
  Current maturities of long-term debt                                             5,727       5,220
  Reserve for lease terminations                                                    --            28
  Current maturities of obligations under capital lease                             --           209
                                                                                --------    --------

        Total current liabilities                                                 10,941       9,969
                                                                                --------    --------

LONG-TERM DEBT, less current maturities                                            3,332       3,639
                                                                                --------    --------

STOCKHOLDERS' DEFICIT
  Series A preferred stock - no par value; 30,000,000 shares
      authorized; 3,321,000 and 3,621,000 shares issued and
      outstanding at 1998 and 1997, respectively; liquidating
      preference $0.60 per share aggregating $1,993 and $2,173,
      respectively                                                                 2,258       2,630
  Series B preferred stock - no par value; 5,000,000 shares
      authorized; 1,291,000 and 1,340,000 shares issued and
      outstanding at 1998 and 1997, respectively                                   2,584       2,682
  Stock notes receivable                                                          (1,149)     (1,149)
  Common stock - no par value; 300,000,000 share authorized;
      151,767,000 and 151,068,000 shares issued and outstanding
      at 1998 and 1997, respectively                                              68,742      68,267
  Accumulated deficit                                                            (85,050)    (81,525)
                                                                                --------    --------

        Total stockholders' deficit                                              (12,615)     (9,095)
                                                                                --------    --------

        Total liabilities and stockholders' deficit                             $  1,658    $  4,513
                                                                                ========    ========
<FN>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
</FN>
</TABLE>

                                                                        Page F-3

<PAGE>

<TABLE>


                                                          U. S. ELECTRICAR, INC.
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                        Years Ended July 31, 1998, 1997 and 1996
                             (In thousands, except for share and per share data)
--------------------------------------------------------------------------------

<CAPTION>
                                                             1998             1997             1996
                                                    -------------    -------------    -------------

<S>                                                 <C>              <C>              <C>          
     NET SALES                                      $       1,938    $       4,484    $       4,209

     COST OF SALES                                          2,765            2,042            5,370
                                                    -------------    -------------    -------------

     GROSS MARGIN                                            (827)           2,442           (1,161)
                                                    -------------    -------------    -------------

     OTHER COSTS AND EXPENSES
          Research and development                            445            1,218            1,401
          Selling, general and administrative               1,697            3,116            5,608
          Interest and financing fees                         665              792            1,890
          Other (income)/expense                              (67)             274              740
          Acquisition of research and development            --              1,630             --
          Facility closures and consolidation
              of operations                                  --               --                701
                                                    -------------    -------------    -------------

                  Total other costs and expenses            2,740            7,030           10,340
                                                    -------------    -------------    -------------

     LOSS FROM CONTINUING OPERATIONS                       (3,567)          (4,588)         (11,501)

     GAIN ON DEBT RESTRUCTURING                                42               53            2,147
                                                    -------------    -------------    -------------

     NET LOSS                                       $      (3,525)   $      (4,535)   $      (9,354)
                                                    =============    =============    =============

     PER COMMON SHARE
          Loss from continuing operations           $       (0.02)   $       (0.03)   $       (0.17)
          Gain on debt restructuring                         --               --               0.03
                                                    -------------    -------------    -------------

                  Net loss per common share         $       (0.02)   $       (0.03)   $       (0.14)
                                                    =============    =============    =============

     WEIGHTED AVERAGE SHARES
          OUTSTANDING                                 151,265,026      133,805,603       67,905,941
                                                    =============    =============    =============

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

                                                                        Page F-4

<PAGE>

<TABLE>

                                                                      U. S. ELECTRICAR, INC.
                                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                                    Years Ended July 31, 1998, 1997 and 1996
                                                                              (In thousands)
--------------------------------------------------------------------------------------------
<CAPTION>

                                                                               PREFERRED STOCK
                                                                   ------------------------------------------
                                                                        SERIES A              SERIES B              COMMON STOCK    
                                                                   -------------------   --------------------    -------------------
                                                                   SHARES      AMOUNT     SHARES      AMOUNT      SHARES     AMOUNT 
                                                                   --------   --------   --------    --------    --------   --------
                                                                                                                                    
<S>                                                               <C>       <C>                     <C>           <C>      <C>      
     BALANCE, JULY 31, 1995                                        6,275    $  5,148        --      $   --        55,223   $ 38,715 
                                                                                                                                    
     PREFERRED STOCK TRANSACTION                                                                                                    
        Conversion of unsecured debt                                --          --         1,587       3,175        --         --   
                                                                                                                                    
     COMMON STOCK TRANSACTIONS                                                                                                      
        Sales under Regulation S subscription                                                                                       
         agreement                                                  --          --          --          --        10,670      2,701
        Exercise of warrants                                                                                         220         28
        Conversion of Series S Bonds and                                                                                            
         accrued interest                                           --          --          --          --        43,214     12,964
        Conversion of Series I Bonds and                                                                                            
         accrued interest                                           --          --          --          --         7,913      2,374
        Conversion of Series A preferred stock                    (2,265)     (2,165)       --          --         2,265      2,165
        Conversion of debt                                          --          --          --          --           715        210
                                                                                                                                    
     INTEREST ON STOCK NOTES RECEIVABLE                             --          --          --          --          --         --   
                                                                                                                                    
     NET LOSS                                                       --          --          --          --          --         --   
                                                                --------    --------    --------    --------    --------   -------- 
                                                                                                                                    
     BALANCE, JULY 31, 1996                                        4,010       2,983       1,587       3,175     120,220     59,157 
                                                                                                                                    
     PREFERRED STOCK TRANSACTION                                                                                                    
        Conversion of unsecured debt                                --          --            42          85        --         --   
                                                                                                                                    
     COMMON STOCK TRANSACTIONS                                                                                                      
        Sales under Regulation S subscription                                                                                       
         agreement                                                  --          --          --          --        12,000      3,600 
        Systronix acquisition                                       --          --          --          --         3,800        760 
        Conversion of Series S Bonds and                                                                                            
         accrued interest                                           --          --          --          --        10,732      3,219 
        Conversion of Series A preferred stock                    (389)         (353)       --          --           389        353
        Conversion of Series B preferred stock                      --          --          (289)       (578)      1,927        578
        Conversion of debt                                          --          --          --          --         2,000        600
                                                                                                                                    
     INTEREST ON STOCK NOTES RECEIVABLE                             --          --          --          --          --         --   
                                                                                                                                    
     NET LOSS                                                       --          --          --          --          --         --   
                                                                --------    --------    --------    --------    --------   -------- 
                                                                                                                                    
     BALANCE, July 31, 1997                                        3,621       2,630       1,340       2,682     151,068     68,267
                                                                                                                                    
     COMMON STOCK TRANSACTIONS                                                                                                      
        Conversion of Series A preferred stock                      (300)       (372)       --          --           300        372
        Conversion of Series B preferred stock                      --          --           (49)        (98)        324         98
        Stock for services                                          --          --          --          --            75          5
                                                                                                                                    
     NET LOSS                                                       --          --          --          --          --         --   
                                                                --------    --------    --------    --------    --------   -------- 
                                                                                                                                    
     BALANCE, July 31, 1998                                        3,321    $  2,258       1,291    $  2,584     151,767   $ 68,742 
                                                                ========    ========    ========    ========    ========   ======== 
</TABLE>

<TABLE>
<CAPTION>


                                                                STOCK NOTES     ACCUMULATED       
                                                                 RECEIVABLE       DEFICIT      TOTAL   
                                                                ------------     ---------   -------  
                                                                                                      
<S>                                                             <C>              <C>         <C>      
     BALANCE, JULY 31, 1995                                     $   (987)        $(67,636)   $(24,760)
                                                                                                      
     PREFERRED STOCK TRANSACTION                                                                      
        Conversion of unsecured debt                                --               --        3,175  
                                                                                                      
     COMMON STOCK TRANSACTIONS                                                                        
        Sales under Regulation S subscription                                                         
         agreement                                                  --               --        2,701
        Exercise of warrants                                        --               --           28
        Conversion of Series S Bonds and                                                              
         accrued interest                                           --               --       12,964
        Conversion of Series I Bonds and                                                              
         accrued interest                                           --               --        2,374
        Conversion of Series A preferred stock                      --               --       --
        Conversion of debt                                          --               --          210
                                                                                                      
     INTEREST ON STOCK NOTES RECEIVABLE                              (74)            --          (74) 
                                                                                                      
     NET LOSS                                                       --             (9,354)    (9,354) 
                                                                --------         --------    -------- 
                                                                                                      
     BALANCE, JULY 31, 1996                                       (1,061)         (76,990)   (12,736) 
                                                                                                      
     PREFERRED STOCK TRANSACTION                                                                      
        Conversion of unsecured debt                                --               --           85  
                                                                                                      
     COMMON STOCK TRANSACTIONS                                                                        
        Sales under Regulation S subscription                                                         
         agreement                                                  --               --        3,600  
        Systronix acquisition                                       --               --          760  
        Conversion of Series S Bonds and                                                              
         accrued interest                                           --               --        3,219  
        Conversion of Series A preferred stock                      --               --       --
        Conversion of Series B preferred stock                      --               --       --
        Conversion of debt                                          --               --          600  
                                                                                                      
     INTEREST ON STOCK NOTES RECEIVABLE                              (88)            --          (88) 
                                                                                                      
     NET LOSS                                                       --             (4,535)    (4,535) 
                                                                --------         --------    -------- 
                                                                                                      
     BALANCE, July 31, 1997                                       (1,149)         (81,525)    (9,095) 
                                                                                                      
     COMMON STOCK TRANSACTIONS                                                                        
        Conversion of Series A preferred stock                      --               --               
        Conversion of Series B preferred stock                      --               --               
        Stock for services                                          --               --            5  
                                                                                                      
     NET LOSS                                                       --             (3,525)    (3,525) 
                                                                --------         --------    -------- 
                                                                                                      
     BALANCE, July 31, 1998                                     $ (1,149)        $(85,050)  $(12,615)
                                                                ========         ========   ========= 
                                                                               
<FN>                                                                        
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------------------------
</FN>
</TABLE>

                                                                        Page F-5

<PAGE>

<TABLE>
                                                          U. S. ELECTRICAR, INC.
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        Years Ended July 31, 1998, 1997 and 1996
                                                                  (In thousands)
--------------------------------------------------------------------------------
<CAPTION>

                                                                                     1998           1997           1996
                                                                                 -------------  -------------  -------------
<S>                                                                                  <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                        $ (3,525)      $ (4,535)      $ (9,354)
     Adjustments to reconcile net loss to net
         cash used by operating activities:
             Depreciation and amortization                                                212            578            968
             Provision for facility closures and consolidation
                 of operations                                                              -              -            701
             Change in allowance for doubtful accounts                                     (7)          (319)            93
             Provision to reduce inventory values                                         949            308              -
             Gain on debt restructuring                                                   (42)           (53)        (2,147)
             Changes in valuation allowances and reserves                                (368)        (1,011)        (1,449)
             Purchase of research and development                                           -          1,630              -
             Stock issued in settlement of legal claim                                      5              -              -
             Loss of disposal of equipment                                                353              -              -
             Gain on sale of Industrial Electric Vehicles                                   -           (158)             -
             Interest income on stock notes receivable                                      -            (88)           (74)
             Write-off of development costs and leasehold
                 improvements                                                               -              -            137
             Interest converted to common stock                                             -            194          1,575
         Change in operating assets and liabilities:
             Accounts receivable                                                          753            (54)           415
             Inventories                                                                  371            589          4,916
             Prepaids and other current assets                                            191            (53)           302
             Accounts payable and accrued expenses                                        491            (39)           (27)
             Deferred revenues                                                              -              -            250
             Customer deposits                                                            343           (164)          (690)
                                                                                 -------------  -------------  -------------

                     Net cash used by operating activities                               (274)        (3,175)        (4,384)
                                                                                 -------------  -------------  -------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Advances to Systronix Corporation                                                      -              -         (1,000)
     Purchases of property, plant and equipment                                            (8)           (13)             -
     Proceeds from sale of equipment                                                       35              -              -
     Repayments on advances to Systronix Corporation                                        -            209              -
                                                                                 -------------  -------------  -------------

                     Net cash provided (used) by investing activities                      27            196         (1,000)
                                                                                 -------------  -------------  -------------

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



<PAGE>

<TABLE>

                                                          U. S. ELECTRICAR, INC.
                               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                        Years Ended July 31, 1998, 1997 and 1996
                                                                  (In thousands)
--------------------------------------------------------------------------------
<CAPTION>


                                                                                     1998           1997           1996
                                                                                 -------------  -------------  -------------
<S>                                                                              <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
     Payments on notes payable                                                              -         (3,021)          (259)
     Payments on capital leases                                                           (20)          (152)             -
     Borrowings on notes payable                                                          200          3,122          2,608
     Proceeds from issuance of common stock                                                 -          3,350          2,701
     Exercise of options and warrants                                                       -              -             28
                                                                                 -------------  -------------  -------------

                 Net cash provided by financing activities                                180          3,299          5,078
                                                                                 -------------  -------------  -------------

NET INCREASE (DECREASE) IN CASH                                                           (67)           320           (306)

CASH

     Beginning of year                                                                    333             13            319
                                                                                 -------------  -------------  -------------

     End of year                                                                 $        266   $        333   $         13
                                                                                 =============  =============  =============

<FN>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
</FN>
</TABLE>
                                                                        Page F-7

<PAGE>

<TABLE>
                                                          U. S. ELECTRICAR, INC.
                               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                        Years Ended July 31, 1998, 1997 and 1996
                                                                  (In thousands)
--------------------------------------------------------------------------------
<CAPTION>

                                                                              1998              1997              1996
                                                                         --------------    --------------    --------------
<S>                                                                       <C>              <C>               <C>
SUPPLEMENTAL CASH-FLOW INFORMATION: 
     Cash paid during the year for interest                               $   3            $  162            $  30

NON-CASH INVESTING AND FINANCING ACTIVITIES:
     Conversion of Series A preferred stock to common stock               $   372          $  353            $  2,165
     Conversion of Series B preferred stock to common stock               $    98          $  578            $  -
     Decrease in capital lease payable due to cancellation                $   190          $  -              $  -
     Conversion of investment to note receivable                          $   250          $  -              $  -
     Conversion of debt to common stock                                   $   -            $  600            $  210
     Conversion of debt to Series B preferred stock                       $   -            $  85             $  3,175
     Notes issued in connection with debt restructuring                   $   -            $  15             $  4,148
     Conversion of deferred revenues to common stock                      $   -            $  250            $  -
     Conversion of Series S bonds to common stock                         $   -            $  3,000          $  15,338
     Assumption of notes payable in connection with acquisition           $   -            $  800            $  -
     Note issued in connection with acquisition                           $   -            $  830            $  -
     Note assumed by buyer in connection with sale of Industrial                                               
         Electric Vehicles                                                $   -            $ (1,013)         $  -
     Conversion of accrued interest to common stock                       $   -            $  219            $  -
     Conversion of accrued interest to notes payable                      $   -            $  139            $  -
     Acquisition of assets through capital lease                          $   -            $  361            $  -
     Sale of net assets of Industrial Electric Vehicles                   $   -            $  858            $  -
     Acquistion of certain assets, related debt and research and 
         development from Systronix Corporation for debt and     
         stock options, net                                               $   -            $ (819)           $  -

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

                                                                        Page F-8

<PAGE>



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


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


NOTE  1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization - U. S. Electricar,  Inc. was incorporated in 1976 in California as
Solar Electric  Engineering,  Inc., and  subsequently  changed its name to U. S.
Electricar,  Inc., in 1994.  Prior to fiscal year 1998, the Company produced and
sold  electric  vehicles.  In 1998,  the  Company  focused  its  efforts  on the
development  of  electric  drive  trains and  related  components  for  electric
vehicles and hybrid systems,  vehicle systems integration and the performance of
various engineering  contracts.  The Company's efforts related to the production
of electric vehicles were discontinued.

Principles of consolidation - The consolidated  financial statements include the
accounts of U. S. Electricar, Inc., and its wholly owned subsidiary,  Industrial
Electric Vehicles,  Inc.  Substantially all assets and liabilities of Industrial
Electric Vehicles, Inc., were sold during the year ended July 31, 1997 (see Note
3). All material intercompany  transactions and balances have been eliminated in
consolidation.

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

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

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

Income taxes - Deferred income taxes are recognized using enacted tax rates, and
are  composed of taxes on  financial  accounting  income  that is  adjusted  for
requirements  of current  tax law and  deferred  taxes.  Deferred  taxes are the
expected future tax consequences of temporary  differences between the financial
statement carrying amounts and tax bases of existing assets and liabilities.

Revenue  recognition - Revenue from the sale of electric vehicles was recognized
when the vehicle was  delivered  to the  customer.  Revenue on  engineering  and
research and  development  contracts is recognized on a percentage of completion
basis.

Loss per common  share - The  Company has  implemented  Statement  of  Financial
Accounting  Standards  ("SFAS")  No. 128,  "Earnings  Per  Share."  SFAS No. 128
provides  for the  calculation  of  "Basic"  and  "Diluted"  earnings  per share
("EPS").  Basic EPS  includes  no dilution  and is  computed by dividing  income
available  to  common  stockholders,   after  deduction  for  cumulative  unpaid
dividends,  by the weighted average number of common shares  outstanding for the
period.  Diluted EPS reflects the potential  dilution of  securities  that could
share in the earnings of an entity, similar to fully diluted earnings per share.
The Company's losses for the periods  presented cause the inclusion of potential
common stock  instruments  outstanding to be  antidilutive  and,  therefore,  in
accordance  with SFAS No. 128,  the Company is not required to present a diluted
EPS.  Series A and B preferred  stock,  stock options,  warrants and convertible
notes  and bonds  exercisable  into  55,800,000  shares  of  common  stock  were
outstanding  as of July 31,  1998.  These  securities  were not  included in the
computation of diluted EPS because of the losses,  but could potentially  dilute
EPS in future years.


--------------------------------------------------------------------------------
                                                                        Page F-9

<PAGE>

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


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


NOTE  1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations  of  risk -  Financial  instruments  potentially  subjecting  the
Company to  concentrations  of credit  risk  consist  primarily  of bank  demand
deposits that may, from time to time, be in excess of FDIC insurance thresholds.
Cash is  deposited  with  known  creditable  financial  institutions.  Two major
customers  accounted  for 70% of Company sales for the year ended July 31, 1998.
The Company's  largest customer is also a stockholder,  and accounted for 53% of
total  sales.  At July 31,  1998,  amounts  due from  this  customer,  which are
included in accounts receivable, were $39,000.

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

Fair value of financial  instruments - The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. The
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current  transaction  between willing parties.  For certain of
the Company's  financial  instruments,  including cash,  accounts receivable and
accounts  payable,  the carrying amount  approximates  fair value because of the
short maturities.  The fair value of the Company's short-term 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  - The  Financial  Accounting  Standards  Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123),  "Accounting for
Stock-Based  Compensation".  Under  SFAS  123,  a fair  value  method is used to
determine  compensation  cost for stock options or similar  equity  instruments.
Compensation is measured at the grant date and is recognized over the service or
vesting period.  Under the current accounting  standard prescribed in Accounting
Principles Board Opinion No. 25 (APB 25),  compensation  cost is the excess,  if
any,  of the quoted  market  price of the stock at a  measurement  date over the
amount  that must be paid to acquire  the stock.  SFAS 123  permits a company to
continue to use APB 25 to account for stock options, but proforma disclosures of
net income and earnings per share must be made as if SFAS 123 had been  adopted.
The Company has chosen to continue to account for stock-based compensation under
APB 25.


--------------------------------------------------------------------------------
                                                                       Page F-10

<PAGE>

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


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


NOTE  1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent  accounting  pronouncements  - The Financial  Accounting  Standards Board
("FASB") has issued SFAS No. 130,  "Reporting  Comprehensive  Income";  SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information"; SFAS
No.  132,  "Employers'  Disclosures  about  Pensions  and  Other  Postretirement
Benefits";  and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."  SFAS No. 130  establishes  standards  for reporting and display of
comprehensive income, its components,  and accumulated  balances.  Comprehensive
income is defined to include all changes in equity except those  resulting  from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial statements.  SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business  Enterprise."  SFAS No. 131 establishes  standards on
the way that public  companies  report  financial  information  about  operating
segments in annual  financial  statements,  and  requires  reporting of selected
information about operating  segments in interim financial  statements issued to
the public. It also establishes  standards for disclosure regarding products and
services,  geographic areas and major customers.  SFAS No. 131 defines operating
segments as components of a company about which separate  financial  information
is available that is evaluated  regularly by the chief operating  decision maker
in deciding how to allocate resources and in assessing performance. SFAS No. 132
standardizes the disclosure  requirements for pensions and other  postretirement
benefits  and  requires  additional   information  on  changes  in  the  benefit
obligations  and fair  values  of plan  assets  that will  facilitate  financial
analysis.  SFAS No. 133  establishes  accounting  and  reporting  standards  for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts, and for hedging activities.

SFAS No. 130 and No. 131 are  effective  for  financial  statements  for periods
beginning  after  December 15, 1997,  and require  comparative  information  for
earlier  years to be  restated.  SFAS No. 132 is effective  for years  beginning
after December 15, 1997, and requires comparative  information for earlier years
to be restated,  unless such information is not readily available.  SFAS No. 133
is effective for all fiscal  quarters of fiscal years  beginning  after June 15,
1999.  The  adoption of these  statements  will have no  material  impact on the
Company's  consolidated  financial  statements and the results of operations and
financial position will be unaffected by their implementation.

Reclassifications  - Certain  reclassification  have  been made to prior  years'
financial statements to conform to the current year's presentation.


NOTE  2 - GOING CONCERN

The Company has  experienced  recurring  losses from  operations and use of cash
from operations and had an accumulated  deficit of $85,050,000 at July 31, 1998.
A substantial  portion of the losses are  attributable to research,  development
and other costs  associated  with the Company's  development  and  production of
electric vehicles, including the conversion of gas-powered cars and light trucks
to electric power, as well as restructuring the Company's operations.

During the three years ended July 31, 1998, the Company  obtained  approximately
$9 million (net of debt  repayments) in cash from financing  activities  through
private placements of common stock and Series A preferred stock, the exercise of
options and warrants, and the issuance of convertible subordinated notes payable
and secured  convertible bonds and notes. During 1997 the Company was successful
in selling  $3,600,000  of its common  stock and  converting  $3,600,000  of its
convertible debt to common stock.


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

<PAGE>

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


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


NOTE  2 - GOING CONCERN (Continued)

It is management's plan to seek additional  financing through private placements
as well as other means. As of September 24, 1998, the Company had no commitments
from any person or entity to provide additional financing to the Company.

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

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


NOTE  3 - ACQUISITIONS AND SALES

The Company acquired  substantially  all the tangible and intangible  assets and
assumed  certain  liabilities  of Systronix  Corporation  (Systronix) in October
1996. Systronix was a developer of technologically  advanced electric propulsion
systems for electric-powered vehicles.

The  purchase  price,  in addition to the assumed  liabilities,  consisted  of a
credit for the $1,020,000 previously advanced to Systronix;  an $830,000 secured
note due within 30 days of closing;  and 3,800,000  shares of restricted  common
stock, with an approximate market value of $0.20 per share at the purchase date.
Two million cashless warrants,  exercisable at $0.30 per share, were also issued
pursuant to a finders fee.

The purchase of Systronix was reported  using the purchase  method of accounting
and,  accordingly,  the purchase price was allocated to the assets  acquired and
liabilities  assumed  based  upon the fair  values  at the date of  acquisition.
Assets  associated  with  research and  development,  and for which there was no
alternative use, were expensed.

In conjunction with this transaction,  the Company employed substantially all of
then-existing  employees of Systronix Corporation.  Pursuant to such employment,
the Company granted to these employees qualified and non-qualified stock options
under the Company's 1996 Employee and Consultant  Stock Option Plan. The options
granted in the aggregate total  approximately  10,228,000 options at an exercise
price of $0.30 cents per share,  subject to various vesting schedules,  with all
options vested no later than five (5) years from date of grant.
The Plan was approved by the Board of Directors of the Company.

In 1997,  substantially  all  assets  of the  Company's  subsidiary,  Industrial
Electrical Vehicles,  Inc. (formerly Nordokog Electric Vehicles, Inc. (Nordskog)
prior to its  acquisition  by the Company) were sold to a group headed by former
employees of the Company in exchange for the buyers  assuming the Company's debt
to Nordskog. The liabilities assumed by the buyers,  including a $1,013,000 note
payable, exceeded the reported values of the assets sold, resulting in a gain of
approximately $155,000.


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

<PAGE>

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


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


NOTE  4 -     INVENTORIES (in thousands)

                                          1998                    1997
                                    --------------------    --------------------

Finished goods                      $               120     $               667
Work-in-process                                     101                     375
Raw materials                                       437                   1,062
                                    --------------------    --------------------

                                                    658                   2,104
Less valuation adjustment                           166                     292
                                    --------------------    --------------------

                                    $               492     $             1,812
                                    ====================    ====================


The Company has approximately $30,000 of inventory in Mexico at July 31, 1998.

In December  1994,  the Company  entered into a  manufacturing  agreement with a
vendor whereby the Company agreed to sell to the vendor sufficient  inventory to
complete the  conversion of 84 sedans and pick-up  trucks to electric  power and
then to repurchase the completed  vehicles upon completion of the  manufacturing
process. The selling price was established at a 10% discount from the repurchase
price;  and the terms of the agreement gave the vendor a purchase money interest
in inventory.  Due to the repurchase agreement,  the Company did not account for
this transaction as a sale. The Company initially accrued the difference between
the  selling  price and  repurchase  price as  interest  expense.  However,  the
interest  expense  accrual  was later  reversed by the Company as a result of an
amendment to the agreement in July 1995,  which  eliminated the price difference
and  required  only the  refund to the vendor of the net amount of money paid to
the  Company  under the  agreement.  During  1995,  the vendor  paid the Company
$867,000, and the Company paid the vendor $64,000--for a difference of $803,000,
which was recorded as an account  payable.  Under the July 1995  amendment,  and
separate from the debt restructuring  process, a portion of anticipated proceeds
from future  sales of unsold  vehicles in which the vendor had a purchase  money
interest was to be paid to the vendor; and the vendor was to ratably release its
interest in such vehicles as they were sold until the $803,000 was fully repaid.
At July 31,  1998,  approximately  $98,000  remains  unpaid and is  included  in
accrued expenses.

<TABLE>
NOTE  5 - PROPERTY, PLANT AND EQUIPMENT (in thousands)
<CAPTION>
                                                            1998              1997
                                                     ----------------    -----------------

<S>                                                  <C>                 <C>             
Computers                                            $           872     $          1,191
Machinery and equipment                                          267                  470
Furniture and office equipment                                   196                  513
Leasehold improvements                                            47                  106
Construction in progress                                           7                  450
Automobiles and demonstration vehicles                             -                  135
                                                     ----------------    -----------------

                                                               1,389                2,865
Less accumulated depreciation and amortization                 1,071                1,766
                                                     ----------------    -----------------

                                                     $           318     $          1,099
                                                     ================    =================
</TABLE>

--------------------------------------------------------------------------------
                                                                       Page F-13

<PAGE>

<TABLE>
                                                          U. S. ELECTRICAR, INC.   
                                       NOTES TO FINANCIAL STATEMENTS (Continued)   
                                                                                   
                                                                                   
--------------------------------------------------------------------------------   
<CAPTION>                                                                          
                                                                                   
                                                                                   
NOTE  6 - LONG-TERM DEBT (in thousands, except for shares data)                    
                                                                                   
                                                                                          1998                    1997
                                                                                   --------------------    --------------------
<S>                                                                                <C>                     <C>
Convertible  secured  note  under a  Supplemental  Loan  Agreement  with  ITOCHU   
     Corporation, with interest at 12%; principal and interest were due in April   
     1998; secured by the Company's personal                                       
     property                                                                      $             3,000     $             3,000
                                                                                   
Secured  subordinated   promissory  note  -  Credit  Management  Association  of   
     California  (CMAC) as  exclusive  agent for  NonQualified  Creditors,  with   
     interest  at 3% for the  first 5 years,  6% for  years 6 and 7, and then at   
     prime plus 3% through  date of  maturity;  interest  payments are made upon   
     payment of principal,  with  principal and interest due no later than April   
     2016;  secured  with an interest in a sinking fund escrow with a balance of   
     $4 thousand and $7 thousand as of July 31, 1998 and 1997, respectively; the   
     sinking  fund  escrow  requires  the Company  fund the account  with 10% of   
     future equity  financing,  including  convertible debt converted to equity;   
     payments on this note are  subordinated to payment in full on all principal   
     and accrued interest owed on the Qualified Creditors promissory note                        3,332                   3,332
                                                                                   
Convertible  secured  notes  under a  Supplemental  Loan  Agreement  with ITOCHU   
     Corporation,  with  interest at 12%;  principal  and  interest  were due in   
     December 1997; secured by the Company's personal property                                   1,300                   1,300
                                                                                   
Convertible bonds with interest at 10%; principal and interest were due            
     in July 1997                                                                                  800                     800
                                                                                   
Secured  subordinated  promissory note - (CMAC) as exclusive agent for Qualified   
     Creditors,  with  interest at 3%;  principal  and interest are due in April   
     1999; secured with an interest in a sinking fund escrow                       
                                                                                                   307                     307
                                                                                   
Other                                                                                              320                     120
                                                                                   --------------------    --------------------
                                                                                   
                                                                                                 9,059                   8,859
Less current maturities                                                                          5,727                   5,220
                                                                                   --------------------    --------------------
                                                                                   
                                                                                   $             3,332     $             3,639
                                                                                   ====================    ====================
</TABLE>                                                                        
                                                                                
--------------------------------------------------------------------------------
                                                                       Page F-14
                                                                                
<PAGE>                                                                          
                                                                                
                                                          U. S. ELECTRICAR, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)


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


NOTE  6 - LONG-TERM DEBT (Continued)

In September 1994, the Company issued 120 units of Series S secured  convertible
bonds, totaling $12,000,000,  and received proceeds of $10,140,000,  net of fees
of  $1,860,000.  Each of the units  consisted  of  $100,000 in  principal  and a
warrant to purchase 10,000 common shares. The bonds, which bear interest at 10%,
were  initially  due in March 1995 and were secured by the personal  property of
the parent company,  excluding  securities of its  subsidiary.  The Company also
issued  additional  warrants to purchase  1,200,000  common shares  representing
additional  issuance fees. The warrants were exercisable through July 1997 at an
exercise  price of $3.20 per  share.  The excess of  fair-market  value over the
exercise price of the warrants of $1,920,000,  and the fees of $1,860,000,  were
recorded as debt discount and amortized over the initial period of the bonds. In
March 1995, the Company had neither sufficient funds, nor commitments to receive
sufficient funds, to pay the principal and interest.  Subsequently,  the Company
negotiated an extension of the bonds'  maturity to March 1996; the conversion of
$600,000 of the unpaid interest to principal; and a conversion price for most of
the debt of $0.30 per share. In July 1995, the Company  converted  $4,100,000 of
the Series S bonds to 13,667,000  shares of common stock at $0.30 per share.  In
December  1995,  the  company  converted   $210,000  of  the  Series  S  secured
convertible bonds to 700,000 shares of common stock at $0.30 per share. In March
1996,  accrued  unpaid  interest of $71,000 on the bonds was added to principal.
Also in March 1996,  the Company  converted  $491,000 of the bonds to  1,638,000
shares of common stock at $0.30 per share.  In June 1996, the Company  converted
$4,870,000 of the Series S secured  convertible  bonds to  16,233,000  shares of
common  stock at $0.30  per  share,  and  accrued  interest  of  $1,111,000  was
converted to 3,704,000 shares of common stock at $0.30 per share. In March 1997,
the remaining $3,000,000 of Series S Bonds and $219,000 of accrued interest were
converted to 10,732,000 shares of common stock at $0.30 per share.

The Company and ITOCHU Corporation entered into a Supplemental Loan Agreement in
April 1995, whereby ITOCHU agreed to lend the Company amounts equal to funds the
Company received from other outside lenders or investors,  up to $3,000,000,  at
10% annual  interest.  The notes were  secured by the  personal  property of the
parent company and were convertible at $0.30 per share into the Company's common
stock. The convertible  subordinated  note from ITOCHU had an original  maturity
date of June 1997,  with  interest  payments  due  semi-annually.  The  interest
payment of $331,000 due December 1994 was not paid, causing an event of default.
In February 1995,  the Company made a partial  interest  payment of $25,000.  In
April 1995, the Company and ITOCHU agreed to accelerate the maturity of the note
to April 1996, and change the conversion price from $5.00 to $0.30 per share. In
July 1995,  $4,100,000 of the note was converted to 13,667,000  shares of common
stock at $0.30 per share.  In June 1996,  the Company  converted the  $4,880,000
balance of the convertible subordinated note from ITOCHU to 16,267,000 shares of
common stock at $0.30 per share,  and the accrued unpaid  interest of $1,612,000
was  converted  to  5,372,000  shares of common  stock at $0.30 per  share.  The
maturity date was extended to April 1998. The principal and accrued interest due
under the notes have not been paid,  causing an event of default under the terms
of the notes.  Discussions  about  extending  the maturity date of the notes are
underway. As of September 24, 1998, Itochu Corporation had not yet exercised any
of its remedies with respect to the notes.

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


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

<PAGE>

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


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


NOTE  6 - LONG-TERM DEBT (Continued)

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

In April 1996,  and as amended in July 1996,  the Company  issued two promissory
notes,  due April 1999, for $256,000 and $560,000,  and one promissory  note due
April 2016 for  $3,332,000,  to the Credit  Managers  Association  of California
("CMAC") as the exclusive agent for certain unsecured creditors who settled with
the Company in  connection  with its Debt  Restructuring  Plan.  In May 1997 the
Company issued an additional promissory note, due April 1999 for $15,000 to CMAC
under the Debt Restructuring Plan.


NOTE  7 - CAPITAL LEASE

Included in the  acquisition of certain assets and  liabilities of Systronix was
the assumption of a purchase contract for a high performance  dynamometer.  This
acquisition  was financed  through a capital lease.  The lease required  monthly
payments of $22,000  and was  scheduled  to mature in May 1998.  The Company was
unable to continue  making the monthly lease  payments and the  dynamometer  was
returned to the manufacturer, who was the holder of the lease. The excess of the
undepreciated  capital asset's cost over the remaining liability,  which totaled
$249,000, was charged to expense in 1998.


NOTE  8 - LEASE COMMITMENTS

In 1996 the Company moved  substantially all their operations from San Francisco
to Torrance,  California and assumed the lease of the Torrance  facility when it
purchased  Systronix.  The lease expires in February 2000.  Future minimum lease
payments under this lease  agreement are $95,000 and $56,000 for the years ended
July 31, 1999 and 2000, respectively.


NOTE  9 - INCOME TAXES (in thousands)

The Tax  Reform Act of 1986 and the  California  Conformity  Act of 1987  impose
restrictions  on the  utilization  of net  operating  losses  in the event of an
"ownership  change" as defined by Section 382 of the  Internal  Revenue  Code of
1986.  An  "ownership  change"  occurred  at the time of the  private  placement
memorandums  in 1991 and 1992,  at the time of the  common and  preferred  stock
issuances in 1993, and upon  conversion of certain debt to equity in 1995,  1996
and 1997.  This change will limit  future  availability  of net  operating  loss
carryforwards. The extent of the limitation has not been determined.


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

<PAGE>

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


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


NOTE  9 - INCOME TAXES (Continued)

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

                                                     1998              1997
                                               ---------------    --------------
Deferred tax assets
     Federal tax loss carryforward             $       23,558     $      23,682
     State tax loss carryforward                        2,705             3,394
     Basis difference                                   1,610             1,610
     Reserves and allowances                              107               153
     Other, net                                           498               233
                                               ---------------    --------------

                                                       28,478            29,072
Less valuation allowance                               28,478            29,072
                                               ---------------    --------------

Net deferred tax asset                         $            -     $           -
                                               ===============    ==============
Net operating losses expire as follows:

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

            1999                    $               124     $             1,715
            2000                                     51                  16,730
            2001                                     44                   4,541
            2002                                     11                   2,778
            2003                                     64                   1,541
            2004                                    322                       -
            2005                                    443                       -
            2006                                    680                       -
            2007                                  2,552                       -
            2008                                 24,221                       -
            2009                                 33,460                       -
            2010                                  9,083                       -
            2011                                  5,557                       -
            2012                                  2,998                       -
                                    --------------------    --------------------

                                    $            79,610     $            27,305
                                    ====================    ====================


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

<PAGE>

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


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


NOTE 10 - STOCKHOLDERS' DEFICIT

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

In July 1993,  the Board of Directors  approved a plan for the sale of shares of
Series A preferred stock to certain officers and directors  ("Participants")  at
$0.60 per share. In general,  the Participants could purchase these shares for a
combination of cash,  promissory notes payable to the Company, and conversion of
debt and deferred compensation due to the Participants.  All shares issued under
this plan 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 at July 31, 1998. The likelihood of collecting the interest on these
notes is remote,  therefore,  for the year ended July 31, 1998, accrued interest
was not recorded.

Series B preferred  stock - Series B preferred  stock is currently  unregistered
and each share was initially convertible into 6.66 shares of common stock at the
election of the holder. The Series B preferred stock has certain liquidation and
dividend  rights prior and in  preference  to the rights of the common stock and
Series A preferred stock.

In April 1996, the Company issued  1,507,000 shares of Series B preferred stock,
plus a note for $532,000,  in settlement of claims of $3,547,000  under the debt
restructuring  plan. In 1997 and 1996, an additional 42,300 and 80,000 shares of
Series B preferred stock, and notes payable for $15,000 and $28,000, were issued
in settlement of $100,000 and $189,000 of claims, respectively.

A total of 49,000 and 289,000 shares of Series B preferred  stock were converted
to common stock on a 6.66-to-one basis during 1998 and 1997, respectively.

Other  significant  stock  activity - In July 1995,  $4,100,000  of the Series S
secured  convertible  bonds issued in September 1994 were converted at $0.30 per
share to  13,667,000  shares of common  stock.  In  December  1995,  the Company
converted  $210,000 of the bonds to 700,000  shares of common stock at $0.30 per
share.  In March 1996,  the Company issued  1,638,000  shares of common stock to
convert  $491,000  of  principal  and  accrued  interest of the Series S secured
convertible  bonds at $0.30 per share of common stock. In June 1996, the Company
converted  $4,870,000 of Series S bonds and  $1,111,000  of accrued  interest to
16,233,000  and  3,704,000  shares,  respectively,  of common stock at $0.30 per
share. In March 1997, the remaining  $3,000,000 of Series S Bonds,  plus accrued
interest,  were  converted  to  10,732,000  shares of common  stock at $0.30 per
share.

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


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

<PAGE>

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


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


NOTE 10 - STOCKHOLDERS' DEFICIT (Continued)

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

In March 1997,  the Company sold  12,000,000  unregistered  shares of its common
stock at $0.30 per share  pursuant  to a  Regulation  S  Subscription  Agreement
resulting in net proceeds of  $3,600,000.  Also in 1997,  the Company  converted
$600,000 of  convertible  secured  notes to 2,000,000  shares of common stock at
$0.30 per share.


NOTE 11 - STOCK OPTIONS AND WARRANTS

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

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

In 1997, in connection with the purchase of Systronix, stockholders approved the
1996 Stock Option Plan (1996 Plan) which  expires in 2006.  The Company,  during
the term of the 1996 Plan,  will at all times  reserve and keep  available  such
number of shares of common stock for incentive and  non-qualified  stock options
as shall be sufficient to satisfy the  requirements  of the plan.  Options under
the 1996 Plan expire over a period not to exceed ten years.


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

<PAGE>

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


--------------------------------------------------------------------------------
<TABLE>

NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
<CAPTION>

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

                                     1996 Plan                      1993 Plan              
                              -------------------------    -----------------------------   
                                Shares         Price          Shares          Price        
                              ------------   ----------    -------------  --------------   

<S>                                <C>          <C>             <C>          <C>
Balance, August 1, 1995                 -       $    -           16,895      $0.60-5.00    
Granted                                 -            -           11,415            0.30    
Canceled                                -            -          (10,034)      0.60-5.00    
Exercised                               -            -                -               -    
Expired                                 -            -           (1,007)      0.60-5.00    
                              ------------                 -------------                   

Balance, July 31, 1996                  -            -           17,269       0.30-.060    
Granted                            10,367         0.30                -               -    
Canceled                             (445)        0.30           (1,135)           0.30    
Exercised                               -            -                -               -    
Expired                                 -            -              (38)           0.30    
                              ------------                 -------------                   

Balance, July 31, 1997              9,922         0.30           16,096       0.30-0.60    
Canceled                           (1,403)        0.30           (4,650)           0.30    
Expired                               (80)        0.30              (63)           0.30    
                              ------------                 -------------                   

Balance, July 31, 1998              8,439       $ 0.30           11,383      $0.30-0.60    
                              ============                 =============                   

</TABLE>

<TABLE>
<CAPTION>
                                       Director
                                     Option Plan                        Other              
                              ---------------------------   ------------------------------ 
                                Shares         Price           Shares           Price      
                              -----------  --------------   --------------  -------------- 
                                                                                           
<S>                                  <C>      <C>                   <C>        <C>
Balance, August 1, 1995               16      $0.24-6.88            2,069      $0.60-3.00  
Granted                               13            0.20                -               -  
Canceled                               -               -                -               -  
Exercised                              -               -                -               -  
Expired                               (9)      0.71-6.88             (574)      0.60-2.80  
                              -----------                   --------------                 
                                                                                           
Balance, July 31, 1996                20       0.20-6.88            1,495       0.60-2.80  
Granted                                -               -                -               -  
Canceled                               -               -                -               -  
Exercised                              -               -                -               -  
Expired                                -               -                -               -  
                              -----------                   --------------                 
                                                                                           
Balance, July 31, 1997                20       0.20-6.88            1,495       0.60-2.80  
Canceled                             (16)      0.20-6.88                -                  
Expired                                -               -                -                  
                              -----------                   --------------                 
                                                                                           
Balance, July 31, 1998                 4      $0.20-6.88            1,495      $0.60-2.80  
                              ===========                   ==============                 
</TABLE>

In  1995,   the  FASB  issued  SFAS  No.  123,   "Accounting   for   Stock-based
Compensation".  This  standard  requires  expanded  disclosures  of  stock-based
compensation  arrangements with employees and encourages application of the fair
value recognition provisions in the statement.

SFAS No.  123 does not  rescind  the  existing  accounting  rules  for  employee
stock-based  compensation.   Companies  may  continue  following  the  rules  to
recognize and measure  compensation as provided by Accounting  Principles  Board
Opinion  Number 25 (APB No. 25), but companies  will now be required to disclose
the pro forma  amounts of net income and earnings per share that would have been
reported had the Company elected to follow the fair value recognition provisions
of SFAS No. 123.  The Company  continues  to measure  its  employee  stock-based
compensation  arrangements  under the provisions of APB No. 25. Had compensation
costs for the Company's stock option plans been  determined  based upon the fair
value at the  grant  date for  awards  under  these  plans  consistent  with the
methodology  prescribed  under SFAS 123, the  Company's net loss would have been
increased by approximately  $549,900 for the years ended July 31, 1998 and 1997,
respectively,  and $307,000 for the year ended July 31, 1996.  The fair value of
options  granted  were  estimated  on the date of grant using the  Black-Scholes
option-pricing model with the following  assumptions:  (1) dividend yield of 0%,
(2) expected  volatility of 164%, (3) risk free interest rate of 5.88% to 6.59%,
and (4) an expected life of the options of 5 years.  Options  issued during 1997
and 1996 have an  estimated  weighted  average  fair  value of $0.12 and  $0.13,
respectively.


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

<PAGE>

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


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


NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)

In May 1996,  the Company  issued  13,333,000  warrants in exchange for services
performed.  The warrants were exercisable at $0.30 per share for an equal number
of shares of common  stock,  and expired on May 1, 1997.  At September 24, 1998,
negotiations  were  underway to extend the period of time in which the  warrants
could be  exercised.  If the market  value of the common stock of the Company is
equal to or  greater  than $0.60 per share on the date of  exercise,  and if the
average trading volume was in excess of 100,000 shares per day for the preceding
20 trading  days,  the warrants may be exercised  without  payment of cash.  The
warrants may not be exercised in the United States,  and the stock purchased may
not be  delivered  to the  United  States  unless  first  registered  under  the
Securities Act or receive an available exemption from registration.

In conjunction  with the acquisition of Systronix,  the Company issued 2,000,000
cashless  warrants as a finders fee. The terms of these warrants are the same as
above,  and expired in October 1997. At September  24, 1998,  negotiations  were
underway to extend the period of time in which the warrants could be exercised.
<TABLE>
The following summarizes warrant activity (in thousands):
<CAPTION>

                                                                      Bank               Series S
                                                                    Lines of               Bond
                                                                     Credit              Placement              Other
                                                                ------------------   ------------------   ------------------

<S>                                                                          <C>                 <C>                  <C>
Balance, August 1, 1995                                                       153                 2,400                  175
Granted                                                                         -                     -               13,333
Expired                                                                      (153)                    -                 (175)
Canceled                                                                        -                  (220)                   -
                                                                ------------------   ------------------   ------------------

Balance, July 31, 1996                                                          -                 2,180               13,333
Granted                                                                         -                     -                2,000
Expired                                                                         -                (2,180)                   -
                                                                ------------------   ------------------   ------------------

Balance, July 31, 1997                                                          -                     -               15,333
Granted                                                                         -                     -                    -
Expired                                                                         -                     -                    -
                                                                ------------------   ------------------   ------------------

Balance, July 31, 1998                                                          -                     -               15,333
                                                                ==================   ==================   ==================
</TABLE>


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

<PAGE>

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


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


NOTE 12 - CONTINGENCIES

The Company has not yet reviewed its software and hardware  components to ensure
its  computers and other  associated  systems are year 2000  compliant.  Cost of
compliance, if any, can not be estimated at this time.

In connection  with the Company's  default on its debt  obligations to unsecured
creditors,  19 of these creditors have brought  independent  lawsuits to various
courts in California,  Connecticut, North Carolina and New York in the aggregate
amount  of  approximately  $650,000.  As of  September  24,  1998,  nine  of the
unsecured creditors have obtained judgments against the Company in the aggregate
amount of approximately  $450,000. The remaining suits are pending. In addition,
four former officers have threatened  actions against the Company for damages as
a result of its failure to pay severance pay under certain employment  contracts
in the aggregate amount of $377,000.

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


--------------------------------------------------------------------------------
                                                                       Page F-22
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.        Description
--------------------------------------------------------------------------------


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

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

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

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

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

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

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

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

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

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

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

3.12(1)   Bylaws of Registrant.

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

                                       E-1
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.        Description
--------------------------------------------------------------------------------

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

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

4.1(1)    Specimen Common Stock Certificate.

4.2(1)    Specimen Series A Preferred Stock Certificate.

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

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

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

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

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

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

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

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

4.17(10)  Cashless  Exercise  Warrants  dated  October 25, 1996 issued to Fontal
          International, Ltd.

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

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

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

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

                                       E-2
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.        Description
--------------------------------------------------------------------------------

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

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

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

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

10.24(1)  Pledge Agreement (John Billington).

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

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

10.30(1)  Pledge Agreement (Michael Chobotov).

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

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

10.33(1)  Pledge Agreement (David Brandmeyer).

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

10.35(1)  Pledge Agreement (James Miller).

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

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

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

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

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

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

10.63(1)  Form of Indemnification Agreement.

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

                                       E-3
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.        Description
--------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

10.95(10) Agreement for Purchase and Sale of Assets, effective October 25, 1996,
          by and between U.S. Electricar,  Inc. and Systronix  Corporation,  and
          exhibits.

10.96(10) U.S. Electricar 1996 Employee and Consultant Stock Option Plan.

10.98(11) Stock  Purchase  Agreement  and  Technology  License  Agreement  dated
          February 27, 1997 by and between the Company and Hyundai Motor Company
          and Hyundai Electronics Industries Co., Ltd.

10.99(12) Loan Agreement for $400,000  convertible  promissory  note with Fontal
          International, Ltd., dated April 30, 1997.

21(1)     Subsidiaries of the Registrant.

                                       E-4
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.        Description
--------------------------------------------------------------------------------

24        Power of Attorney (included on signature page)

27        Financial Data Schedule.

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

*         Indicates management contract or compensatory plan or arrangement.

(1)       Incorporated by reference to identically  numbered exhibits filed with
          the Registration Statement on Form 10 filed on November 29, 1994.

(2)       Incorporated by reference to identically  numbered exhibits filed with
          the Amendment No. 1 to Form 10 filed on January 27, 1995.

(3)       Incorporated by reference to identically  numbered exhibits filed with
          the Amendment No. 2 to Form 10 filed on February 28, 1995.

(4)       Incorporated by reference to identically  numbered exhibits filed with
          the Form 10-Q filed on March 17, 1995.

(5)       Incorporated by reference to identically  numbered exhibits filed with
          the Form 10-Q filed on June 14, 1995.

(6)       Incorporated by reference to identically  numbered exhibits filed with
          the Form 10-K for the year ended July 31,  1995,  filed on October 30,
          1995.

(7)       Incorporated by reference to identically  numbered exhibits filed with
          the Form 10-Q on March 18, 1996.

(8)       Incorporated  by reference to the identically  numbered  exhibit filed
          with the Form 10-Q filed on June 14, 1996.

(9)       Incorporated  by  reference  to Exhibit  10.87 filed with the Form 8-K
          filed on September 20, 1996.

(10)      Incorporated  by reference to the identically  numbered  exhibit filed
          with the Form 10-K filed on November 12, 1996.

(11)      Incorporated  by reference to the identically  numbered  exhibit filed
          with the Form 10-Q filed on March 14, 1997.

(12)      Incorporated  by reference to the identically  numbered  exhibit filed
          with the Form 10-Q filed on June 13, 1997.

                                      E-5