Edgar Filing: ENOVA SYSTEMS INC

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

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

For the fiscal year ended December 31, 2003

Commission File No. 0-25184

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

California 95-3056150
(State or other jurisdiction of (I.R.S. Employer 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. [ ]

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2003 (the last business day of
the registrant's more recently completed second quarter) was $7,958,000. For
purposes of this calculation only, (i) shares of Series A and Series B Preferred
Stock have been included in the calculation, (ii) shares of Common Stock and
Series A Preferred Stock are deemed to have a market value of $0.06 per share,
and the Series B Preferred Stock is deemed to have a market value of $0.12 per
share, based on the average of the bid and ask prices of the Common Stock on
June 30, 2003, and (iii) each of the executive officers, directors and persons
holding 5% or more of the outstanding Common Stock (including Series A and B
Preferred Stock on an as-converted basis) is deemed to be an affiliate.

The number of shares of Common Stock outstanding as of March 22, 2004 was
378,341,000.

ENOVA SYSTEMS, INC.

2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

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

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

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

Item 4. Submission of Matters to a Vote of Security Holders.......................................12

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.....................................................12

Item 6 Selected Financial Data..................................................................13

Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................14

Item 7A. Quantitative and Qualitative Disclosures about Market Risk...............................22

Item 8. Financial Statements and Supplementary Data..............................................22

Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................................................22

Item 9A. Controls and Procedures..................................................................23

PART III

Item 10. Directors and Executive Officers of the Registrant.......................................24

Item 11. Executive Compensation...................................................................26

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...............................................29

Item 13. Certain Relationships and Related Transactions...........................................31

Item 14. Principal Accountant Fees and Services...................................................31

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................33

SIGNATURES.........................................................................................35

PART I

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

Item 1. Business

General

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

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

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

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

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

During 2003, the Company experienced a shift to more development work,
both commercial and military, as demand for drive systems slowed. Management
believes that this trend will continue in the first half of 2004; however, many
of these development programs may lead to production programs beginning in 2005.

The Company has received greater recognition from both governmental and
private industry with regards to U.S. military applications of its hybrid drive
systems and fuel cell power management technologies. Although the company
believes that current negotiations with several parties may result in
development contracts in the first and second quarters of 2004 and beyond, there
are no assurances that such additional contracts will be signed.

During the year ended December 31, 2003, we completed development on
several new power management and drive systems such as our High Voltage version
of our 120kW drive system, Dual 8kW inverter, 380V DC/DC converter, Mobile Fuel
Cell Generator, a multi-functional processor, as well as upgrades to our Battery
Care Management system, Fuel Cell Management system and our High Voltage Power
Converter. We continued to develop and produce electric and hybrid electric
drive systems and components for Ford Motor Company (Ford), Mack/Volvo, the City
of Honolulu and several domestic and international vehicle and bus manufacturers
in China, Italy, the United Kingdom, Malaysia and Japan. Our various electric
and hybrid-electric drive systems, power management and power conversion systems
are being used in applications including Class 8 trucks, monorail systems,
transit buses and industrial vehicles. Enova has furthered its development and
production of systems for both mobile and stationary fuel cell powered systems
with major companies such as Ford, ChevronTexaco and UTC Fuel Cells, a division
of United Technologies. We also are continuing on our current research and
development programs with Mack/Volvo, EDO Corporation, the U.S. Air Force and
the U.S. Navy, as well as developing new programs with Hyundai Motor Company
(HMC), the U.S. government and other private sector companies for hybrid and
fuel cell systems.

For the year ended December 31, 2003, the following customers accounted
for more than ten percent (10%) of the Company's total revenues:

Customer Percent
-----------------------------------------------------------
Advanced Vehicle Systems 18.5%
Ballard Power Systems 16.9%
Hawaii Electric Vehicle Development Project 13.4%
ChevronTexaco 11.3%

Heavy-Duty Drive Systems - Buses and Truck for Urban operators

Heavy-duty drive system sales continue to be a prime focus for Enova.
Although this market sector has developed more slowly than anticipated,
management believes that this area will see significant growth over the next
several years. Our PantherTM 120kW and PantherTM 240kW drive systems were
developed completely in-house and are in production and operating in global
markets giving Enova a potential edge on other competitors in this sector. Sales
of our PantherTM 120kW drive systems continue to provide revenues for our
company.

Eco Power Technology of Italy purchased components for our Panther
120kW hybrid electric drive systems during 2003 for both revenue service
operations and as service and maintenance parts for its fleet of 42 buses
powered by Panther 120kw drive systems. Eco Power is one of the largest
integrators of medium size transit buses for the European shuttle bus market,
with key customers in five Italian cities namely Turin, Genoa, Brescia, Ferrara
and Vicenza. For the year ended December 31, 2003, we billed approximately
$213,000 for these systems.

Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. of Japan
continues to procure our 240kW, 120kW and 90kW drive systems for integration
into their industrial vehicle platforms. During the year, Enova successfully
integrated its Panther drive systems into a heavy-duty Isuzu dump truck, three
passenger trams and a mine tunnel crawler. The three Tomoe passenger trams are
currently in service in Okinawa. Furthermore, Tomoe and Enova are working on
other commercial and industrial applications for our drive systems. For the year
ended December 31, 2003, we billed approximately $146,000 for these various
systems. Although we anticipate additional orders for these systems in 2004 and
beyond, there are no assurances that such additional orders will be forthcoming.

Wrights Environment, a division of Wrights Bus, one of the largest
low-floor bus manufacturers in the United Kingdom, has integrated our hybrid
electric PantherTM 120kW drive system into two of its buses utilizing a 30kW
Capstone microturbine as their power source. These buses have been in field
service in several major cities throughout the United Kingdom and are performing
to specifications. Wrights has purchased additional production drive systems
which were delivered in early 2004 including our 240kW drive system and has
notified us of additional purchase requirements for the latter half of 2004.
Additionally, Wright Bus has agreed to partially fund development of our diesel
generator system for diesel engines compatible with their driveline. Such
development is scheduled to commence in the second quarter of 2004. At this
time, however, there are no assurances that such additional orders will be
forthcoming.

MTrans of Malaysia, that country's leading monorail provider, has
procured and integrated our high voltage Panther 120kW systems into its monorail
trains for service on new monorail systems. Each monorail train require four
drive systems which may be modified to operate as pure hybrids or connected to a
power rail system. Additionally, MTrans has integrated a standard Panther 120kW
drive system into a hybrid 10-meter bus with a Capstone microturbine as its
power source. For the year ended December 31, 2003, we billed approximately
$184,000 for these various systems. MTrans has discussed the potential of
utilizing Enova drive systems for all of its hybrid and monorail requirements in
2004 and beyond. At this time, however, there are no assurances that such
additional orders will be forthcoming.

Although Advanced Vehicle Systems no longer exists, we gained
immeasurable experience and recognition from the programs and vehicles into
which we integrated them. Enova delivered drive systems and integrated these
into both 30 and 38-foot transit buses as well as a Class 8 urban delivery
truck. The integration of these systems into this wide variety of vehicles
assisted Enova in developing more efficient and cost beneficial integration and
maintenance programs for use with other customers. Additionally, the fleet and
transit operators of these vehicles are beginning to provide Enova with a new
customer base for upgrades and service of the installed systems.

Hyundai Heavy Industries has been selected as a major partner for our
outsource manufacturer for the Panther 120kW controller, the motor and
controller for our Panther 240kW drive systems and many other Enova digital
power management components. Enova's strategy is to minimize capital outlays and
maximize efficiencies by utilizing proven manufacturing partners.

Light-Duty Drive Systems - Automobiles and Delivery vehicles

Our 90kW controller, motor and gear unit is utilized in light duty
vehicles such as midsize automobiles and delivery vehicles. As part of our
corporate strategy to outsource manufacturing, Enova selected Hyundai Heavy
Industries to produce the Enova developed Panther 90kW drive system.

The City of Honolulu has contracted with Enova to upgrade several S-10
trucks in its electric vehicle fleet. During the third quarter of 2003, we
completed the upgrade of 3 trucks to our Panther 90kW drive system. Two
additional vehicles are currently being upgraded for delivery in March 2004. For
the year ended December 31, 2003, this program generated $81,000 in revenues.

We are beginning to receive more interest in our light-duty systems
from both European and Asian customers. Eneco of the United Kingdom, a hybrid
vehicle integrator which has purchased our Panther 120 for its hybrid bus
applications, has notified us of its intent to purchase these systems for its
light-duty vehicle conversions in 2004. Although we anticipate additional orders
for these systems in 2004 and beyond, there are no assurances that such
additional orders will be forthcoming.

We continue to cross-sell our systems to new and current customers in
the light and medium duty vehicle markets, both domestically and globally.

Fuel Cell Technologies

The High Voltage Energy Converter (HVEC) development program with Ford
Motor Company for their fuel cell vehicle was essentially completed in 2003.
This converter is a key component in Ford's Focus Fuel Cell Vehicle which
utilizes the Ballard fuel cell system. It converts high voltage power from the
fuel cell into a lower voltage for use by the drive system and electronic
accessories. Enova received a purchase order for 36 production system in the
third quarter of 2003 for delivery in late March 2004 valued at approximately
$410,000. There is a potential for additional production orders from Ford in
2004; however at this time, there are no assurances that such additional orders
will be forthcoming.

Furthermore, we are applying the technology and components derived from
this program to other applications. The HVEC is a critical component of our Fuel
Cell bus programs, noted below in development programs, and other fuel cell
powered systems such as the Hyundai fuel cell vehicle noted below under research
and development programs. The Company will continue to explore new applications
for this versatile technology in both mobile and stationary systems.

Enova's fuel cell management and control systems work with a variety of
fuel cells provided by such manufacturers as Hydrogenics of Canada, UTC Fuel
Cells, part of the UTC Power unit of United Technologies Corporation and Ballard
Power Systems of Canada. Our strategy is to provide power components that are
impartial to the type of power source, therefore allowing our systems to work
efficiently with any alternative source available such as fuel cells, diesel
generators, advanced batteries, microturbines, in-line power and other advanced
energy sources.

During 2003, UTC Fuel Cells purchased 32 Fuel Cell Care units from us
over the course of the year. We will continue to work with both UTC Fuel Cells
directly and as a partner in our alliance development programs for fuel cell
applications in the future.

Research and Development Programs

We are aggressively pursuing several government and commercially
sponsored development programs for both ground and marine heavy-duty drive
system applications.

In the fourth quarter of 2003, we entered into several development
contracts with major corporations for programs funded by the U.S. military. Many
of these programs provide for dual-use application of the technologies
developed.

Our first new program is in conjunction with Mack Truck, Inc.,
Powertrain division - a unit of The Volvo Group, Sweden, for the development and
manufacture of a motor controller, electric motor and battery management systems
for a new parallel hybrid drive system using Mack Trucks' MD11 diesel engine.
The new parallel hybrid vehicle program is part of the Air Force's efforts to
improve efficiency, reduce fuel and maintenance costs, provide re-generative
brake energy and reduce emissions. The refueler fleet consists of approximately
300 vehicles and, upon successful completion and evaluation of the refueler
vehicle, there is the potential for additional upgrades to the parallel hybrid
drive system. As part of the program, Mack Trucks will also evaluate the
applicability of the drive system to commercial vehicle commencing with its
Class 8 Refuse Hauler. Mack Trucks currently produces approximately 3,000 refuse
vehicles per annum for major customers such as Waste Management. This
development program will be completed in late 2004 followed by an evaluation
period of approximately three to six months. The program generated $75,000 in
revenues for us in the fourth quarter of 2003 with the remaining $175,000 to be
billed in 2004. There is a potential for additional production orders for both
military and commercial application of this technology. However at this time,
there are no assurances that such additional orders will be forthcoming.

We also entered into a development contract with EDO Corporation of New
York for the design and fabrication of a high voltage DC-DC power conversion
system utilizing a Capstone microturbine as the primary power source for the
U.S. Navy unmanned minesweeper project. The electronics package will include
Enova's advanced power components including a new, enhanced 50V,

700A DC-DC power converter, our Battery Care Unit and Hybrid Control Unit which
will power the minesweeper's electromagnetic detection system. Our power
management and conversion system will be used to provide on-board power to other
accessories on the platform. We believe that the aggregate value of the program
will be approximately $420,000 of which $75,000 was billed in the fourth quarter
of 2003. Although this program also has the potential for additional system
sales following the demonstration phase, there are no assurances that such
additional orders will be forthcoming.

Enova's program with the U.S. Air Force and the State of Hawaii to
integrate a Panther 120kW hybrid drive system into a second 30-foot bus for the
Hickman Air Force base was amended to develop this propulsion system as a
hydrogen fuel cell hybrid vehicle teaming with Hydrogenics of Canada. In
integrating this new system for Enova, our engineers developed several new power
management systems including our dual 8kW inverter, 380V DC/DC converter and our
Mobile Fuel Cell Generator that utilizes our HVEC from our Ford development
program. This latest fuel cell vehicle application utilized a Hydrogenics 20kW
fuel cell power generation module underscoring our technologies ability to
optimize fuel cell performance across a range of fuel cell products. The program
was completed in the fourth quarter of 2003 and the bus has met all performance
requirements. As a result of this program meeting schedule, cost and performance
benchmarks, we are experiencing a notable increase in interest from both
government and military organizations for our products and integration services.
For the year ended December 31, 2003, we billed approximately $550,000 for this
program.

The all-electric Hyundai Santa Fe SUV demonstration project in Honolulu
Hawaii has been extended for another two years for three of the vehicles.
Fast-charging capabilities and performance will be the primary focus of this
continued evaluation. This is a continuation of the State of Hawaii and Hyundai
Motor Company's program for pure electric vehicle performance.

Enova commenced development for Hyundai Motor Company of fuel cell
power management and conversion components for Hyundai's latest fuel cell hybrid
electric vehicle, the Tucson, which was unveiled at the Geneva Auto Show in
March 2004. Enova will develop this next generation hybrid-electric drive-train,
motor and control unit based on its prior development work on both light and
heavy-duty power-trains for both electric and hybrid-electric vehicle platforms.
Enova is working in conjunction with UTC Fuel Cells, part of the UTC Power unit
of United Technologies Corporation, to develop the power electronics for this
vehicle. For the year ended December 31, 2003, Enova billed approximately
$271,000 for this program. This program will continue through the second quarter
of 2004 and is estimated to generate approximately $400,000 in revenues for
Enova. Although we believe there is potential for further production of these
drive system components in the future, there can be no assurances at this time
that such orders will be realized.

Several other programs are in negotiation or discussion in conjunction
with Hyundai Motor Company, the U.S. Air Force and several other government
agencies and private corporations. We anticipate commencing work on these
contracts during 2004. There can be no assurances at this time, however, that
any of such contracts will be realized.

We anticipate establishing new development programs with the Hawaii
High Technology Development Corporation in mobile and marine applications as
well as other state and federal government agencies as funding becomes
available.

Stationary Power Applications

Enova continues to attract new partners and customers from both fuel
cell manufacturers and petroleum companies. It is our belief that utilizing our
power management systems for stationary applications for fuel cells will open
new markets for our Company.

We completed the design and fabrication of our process controller for
ChevronTexaco Technology Ventures (CTTV) for their fuel reformer for a
stationary fuel cell application. The first prototype of the controller board
for this system performed to customer requirements. The process controller is
now in final integration and test phases at CTTV which will last through the
first half of 2004. For the year ended December 31, 2003, Enova has billed CTTV
$492,000 for this program. We believe there may be additional follow-on
development and production for this program. However , there are no assurances
that such orders or contracts will be realized.

We believe the stationary power market will play a key role in our
future. We continue to pursue alliances with leading manufacturers in this area.
There are, however, no assurances that this market will develop as anticipated
or that such alliances will occur.

Environmental Initiatives and Legislation

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

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

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

Strategic Alliances, Partnering and Technology Developments

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

Enova continues to seek and establish alliances with major players in
the automotive, stationary power and fuel cell fields. For instance, the Hyundai
Group of Korea and Enova are partnering in the development of advanced hybrid
and hydrogen fuel cell drive-train technology and related systems.

Our recent joint venture alliance with Hyundai Heavy Industries (HHI)
is a prime example of our partnering strategy to maximize the utilization of
Enova's knowledge and expertise in power management and control. Teaming with
HHI may lead to other additive technologies and products which Enova can market
to current and prospective customers. The joint venture corporation,
Hyundai-Enova Innovative Technology Center (ITC), commenced operations in the
second quarter of 2003. The advanced technology center focuses on leading-edge
technologies in power management and power conversion for industrial,
commercial, residential and vehicle applications. The ITC's first development
program focuses on an advanced parallel hybrid drive system for Hyundai Motor
Company which is currently in the initial evaluation phases. Another major
project for the ITC is the commercialization of Enova's diesel genset. Other
projects slated for development for the ITC include commercial inverters and
other power management systems which build on Enova's and HHI's technology base.
It is our intent to utilize the resources provided through the ITC to optimize
Enova's current product line for greater performance and production cost
efficiencies, while we continue new research and development for the next
generation of digital power management systems for mobile and stationary
applications.

Enova's alliances with other major OEMs in the automotive, transit,
commercial and energy sectors continue to expand. During 2003, we formed new
alliances with Mack/Volvo, EDO, MTrans of Malaysia, CARTA (Chattanooga Area
Rapid Transit Agency), Eneco, Hydrogenics of Canada and other commercial and
industrial intermediaries and OEMS to find new markets and applications for our
products and technologies. We continue our strategy as a "systems integrator" by
establishing relationships to utilize other independently developed technologies
such as those provided by HHI, UTC Fuel Cells, Hydrogenics and national
universities. We have implemented our plans to outsource manufacturing of our
components to companies such as HHI, Ricardo, and other Asian manufacturers. We
believe that one of our competitive advantages is our ability to identify,
attract and integrate the latest technology available to produce state of the
art products at competitive prices.

Our products are "production-engineered," meaning they are designed so
they can be commercially produced all formats and files are designed with
manufacturability in mind from the start. For the automotive market, Enova
designs its products to QS9000 manufacturing and quality standards. We believe
that our redundancy of systems, robustness of design, and rigorous quality
standards result in higher performance and reduced risk. For every component and
piece of hardware, there are detailed performance specifications. Each piece is
tested and evaluated against these specifications, which enhances the value of
the systems to OEM customers.

Enova performs low-volume production in-house and assembly and
out-sources manufacturing for mass production. Outsourcing enables us to keep
our capital investment to a minimum, reducing expenditures for hardware,
installation and training, to avoid the problems of manufacturing equipment
obsolescence. Outsourcing also enables Enova to search out and work with a
number of the best QS 9000-certified manufacturers worldwide. We believe our
strategy ensures that our OEM customers have confidence in our products and
receive quality products.

Products

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

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

Enova is moving to expand its product base into new markets outside of
the traditional electric and hybrid-electric automotive fields. Key areas which
Enova has begun to penetrate include energy management in distributed generation
in the utility industry, and stand-by/backup power generation in the commercial
electronics industry. Both of these markets can be served with our existing
energy management and power control products. Enova has entered into agreements
or begun discussions with various alternative power generation manufacturers
such as Capstone Turbine, UTC Fuel Cells and Hydrogenics as well as others. We
believe our enabling technologies will prove beneficial to these types of
companies in their strategies to bring these new power systems to
commercialization.

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

PantherTM Electric and Hybrid-Electric Drive Systems

Enova's Panther electric drive system provides all the functionality
one would find under the hood of an internal combustion engine powered vehicle.
The Panther system consists of an enhanced electric motor and the electronic
controls that regulate the flow of electricity to and from the batteries at
various voltages and power to propel the vehicle. In addition to the motor and
controller, the system includes a gear reduction/differential unit. The system
is designed to be installed in a "drop in," fully integrated turnkey fashion, or
on a modular, "as-needed" basis for OEMs.

Enova's family of light-duty drive systems includes 30kW, 60kW, 90kW
all-electric drives, 90kW fuel cell powered series-hybrid drive and combinations
of these systems based on customer requirements. Our family of heavy-duty
electric drive systems includes a 120kW all-electric drive, a 120kW turbine or
diesel genset powered series-hybrid drive, and a new 240kW turbine powered
series-hybrid drive system with our 120kW and 240kW diesel genset powered
series-hybrid drive systems anticipated to be introduced in mid 2004.

Electric Drive Motors

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

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

Electric Motor Controllers

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

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

Hybrid Drive Systems

The Enova Panther hybrid-electric drive systems are based on the
component building blocks of the electric drive family, including the motor,
controller and optional components. As an example, the 120/30 kW series hybrid
system uses the 120kW electric drive components to propel the vehicle, and uses
a 30kW Capstone micro-turbine to generate power while the vehicle is in
operation. This synergy of design reduces the development cost of Enova's hybrid
systems by taking advantage of existing designs. Accessories for these drives
include battery management, chargers and 12-volt power supplies for the electric
drive family.

Enova's hybrid systems are designed to work with a variety of hybrid
power generation technologies. In our 120/60kW hybrid system, an internal
combustion engine connected to a motor and motor controller performs the power
generation. Other power options include liquid fueled turbines, such as the
Capstone system, fuel cells, such as the UTC Fuel Cell, Ballard or Hydrogenics
system, and many others. In all of these examples, Enova's battery management
system provides the power management to allow for proper power control.

Battery Care Unit

We place a great amount of focus on our power management systems.
Enova's Battery Care Unit "BCU" monitors, manages, protects, and reports. It
controls and manages battery performance, temperature, voltage and current to
avoid harm to the batteries, to the entire system, and to the driver, operator
and passengers. It also allows for monitoring for service to the battery and
drive system. This battery management system 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.
The versatility of this system allows us to adapt the hardware and software for
a variety of power sources such as batteries, turbines and fuel cells.

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

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

The on-board memory allows the BCU to update, store and report key
battery pack parameters such as amp hours, kilowatt-hours and state of change.
Using Enova's proprietary Windows(TM)-based diagnostic software, the BCU control
parameters can be programmed in-vehicle. Additionally, battery performance can
be monitored in real-time. Reports can be output to a laptop computer.

Hybrid Control Unit

We have reconfigured our BCU to perform the critical role of hybrid
controller. The Hybrid Control Unit "HCU" continuously monitors the condition of
the battery pack through communications with the BCU, monitors the driver
commands through communications with the motor controller, and the state of the
hybrid generator. Based upon the data received, the HCU provides continuous
updates to the hybrid generator with instructions on mode of operation and power
level. The purpose of this innovative control loop is to ensure that the entire
system is optimized to provide quick response to driver commands while providing
the best possible system efficiency.

Safety Disconnect Unit

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

Fuel Cell Power Conditioning Unit

Enova has developed and is now producing a 30kW bi-directional Fuel
Cell Power Conditioning System. This system has been designed to meet the
demands of an automotive Fuel Cell propulsion system. This unique unit, not much
larger than a conventional briefcase, provides a transparent interface between
the Fuel Cell or Turbine, the battery pack, accessory loads, and the output
load. Fast response time allows the output load to be serviced without
interruption while the Fuel Cell or Turbine ramps up.

This unit is designed to interface directly with the master controller
of the vehicle over a CAN bus. Other communications protocols supported are SAE
J-1850, RS-232, and RS-485. This proprietary package allows all key parameters
of the Power Conditioner to be monitored and control boundaries to be adjusted.

50kW ICE Generator Unit

Enova provides a complete 50kW Internal Combustion Engine Generator
Set. This unit is powered by a 4-cylinder direct injection diesel engine and is
controlled over the common CAN bus shared with the rest of the Panther product
line. The same HCU that controls the Capstone micro-turbine in other Enova
series hybrid configurations provides power command, start command, and stop
commands.

Fuel Cell Management Unit

Enova has added a Fuel Cell Control Unit "FCU" to broaden our market in
the power management field. The FCU is designed to manage fuel cell powered
systems whether stationary or mobile, such as automobiles. The FCU can be
adapted to regulate the input and output to and from the fuel cell as well as
regulate temperature and communications. We continue to develop our current
systems for new products and markets.

Enova has reconfigured its Battery Management Unit to perform the
functions required to monitor, manage, and report on the status of a Fuel Cell
Stack. This new unit, the FCU, is currently being used by UTC Fuel Cells as a
Fuel Stack Management System.

An internal real-time clock allows the FCU to wake up at user-specified
times to initiate battery charging or pack monitoring. A precision shunt allows
it to offer a wide dynamic range for monitoring charging and motoring current,
without errors commonly associated with other types of sensors. The built-in
memory allows the FCU to update, store and report key battery pack parameters
such as amp hours, kilowatt-hours and state of change. Using Enova's proprietary
Windows(TM)-based diagnostic software, the FCU control parameters can be
programmed in-system. Additionally, fuel cell performance can be monitored in
real-time. Reports can be output to a laptop computer.

Distributed Power Generation for Industrial / Commercial / Residential
Applications

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

Competitive Conditions

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

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

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

creating a more diversified product mix. We believe that this strategy will
enhance our position as a power management and conversion components supplier to
both the mobile and stationary power markets.

Research and Development

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

*Power Control and Drive Systems and related technologies for vehicle
applications;

*Stationary Power Management and Conversion and related technologies;

*Heavy Duty Drive System development for Buses; Trucks, Industrial,
Military and Marine applications

*Fuel Cell Generation system power management and process control

*Systems Integration of these technologies;

*Technical and product development under DOE/DOT/DOD and Hyundai Group
Contracts

*OEM Technical and Product development.

For the years ended December 31, 2003, 2002 and 2001, we spent
$799,000, $1,152,000 and $879,000, respectively, on internal research and
development activities. Enova is continually evaluating and updating the
technology and equipment used in developing each of its products. The power
management and conversion industry utilizes rapidly changing technology and we
will endeavor to modernize our current products as well as continue to develop
new leading edge technologies to maintain our competitive edge in the market.

Intellectual Property

Enova currently holds four U.S. patents and has one patent pending, in
power management and control, with an additional patent in crash management
safety, which was originally issued in 1997. We also have trademarks or service
marks in the United States and have been filing for international patents as
well. We continually review and append our protection of proprietary technology.
We have placed renewed emphasis on the development and acquisition of patentable
technology in 2003 and will continue to do so in future years. We maintain an
internal review and compensation process to encourage our employees to create
new patentable technologies. The status of patents involves complex legal and
factual questions, and the breadth of claims allowed is uncertain. Accordingly,
there can be no assurance that patent applications filed by us will result in
patents being issued. Moreover, there can be no assurance that third parties
will not assert claims against us with respect to existing and future products.
Although we intend to vigorously protect our rights, there can be no assurance
that these measures will be successful. In the event of litigation to determine
the validity of any third party claims, such litigation could result in
significant expense to Enova. Additionally, the laws of certain countries in
which our products are or may be developed, manufactured or sold may not protect
our products and intellectual property rights to the same extent as the laws of
the United States.

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

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

Employees

As of December 31, 2003, we had 28 full time employees. Additionally,
we employ three individuals as independent contractors, engaged on an hourly
basis, one of whom is domiciled in South Korea. The departmental breakdown of
these individuals includes 3 in administration, 1 in sales, 20 in engineering
and research and development, and 7 in production.

Item 2. Properties

Enova's corporate offices are located in Torrance, California, in
leased office space of approximately 20,000 square feet. This facility houses
our various departments, including engineering, operations, executive, finance,
planning, purchasing, investor relations and human resources. This lease
terminates in February 2008. The monthly lease expense is $13,500. Enova also
has a leased office in Hawaii which is rented on a month-to-month basis at
$1,500 per month and an office in South Korea which is also rented on a
month-to-month basis at $500 per month. We believe that these offices are
suitable and adequate for our current and readily foreseeable needs.

Item 3. Legal Proceedings

We may from time to time become a party to various legal proceedings
arising in the ordinary course of business.

In April 2003, one of our customers, Advanced Vehicle Systems, Inc.,
filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. At
the time of filing, AVS had an outstanding account balance with Enova of
approximately $595,000, of which approximately $564,000 is for components
delivered during the first quarter of 2003. During the second quarter, Enova was
informed by AVS that various vehicle manufacturing contracts which were
anticipated to be completed by AVS were terminated by AVS customers and was
therefore we were unable to collect on post-filing offset agreements. Enova's
Audit Committee chairman has been appointed chairman of the creditor's committee
formed by the Bankruptcy Court. Enova believes it will recover a portion of the
funds now owed Enova by AVS. However, there are no assurances that we will
recover any or all of the amounts owed to us. As of December 31, 2003, we have
reserved $595,000 against these balances owed as an allowance for uncollectible
receivables.

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

No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2003.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

PART II

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

Our 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 "ENVA." The following table sets forth the high and low bid
prices of the Common Stock as reported on the NASD Bulletin Board by the
National Quote Bureau for the fiscal quarters indicated. The following
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions.

Common Stock Average Daily
High Price Low Price Volume
-------------------------- -------------
Calendar 2002
First Quarter ................ $ 0.23 $ 0.14 265,875
Second Quarter ............... $ 0.19 $ 0.10 111,600
Third Quarter ................ $ 0.15 $ 0.09 38,861
Fourth Quarter ............... $ 0.13 $ 0.07 146,977

Calendar 2003
First Quarter ................ $ 0.09 $ 0.06 172,237
Second Quarter ............... $ 0.09 $ 0.06 119,057
Third Quarter ................ $ 0.10 $ 0.05 465,683
Fourth Quarter ............... $ 0.14 $ 0.07 463,240

On March 22, 2004, the last reported high bid price of the Common Stock
was $0.14 and the last reported low asking price was $0.14. As of March 22,
2004, there were approximately 9,600 holders of record of our Common Stock. As
of March 22, 2004, approximately 111 shareholders, many of who are also Common
Stock shareholders, held our Series A Preferred Stock. Approximately 34
shareholders as of March 22, 2004 held our Series B Preferred Stock. The number
of holders of record excludes beneficial holders whose shares are held in the
name of nominees or trustees.

Stock Issuances

In September 2003, the Company issued 23,076,923 shares of common stock
to Hyundai Heavy Industries Co., Ltd. in exchange for $1,500,000 in cash.
$1,000,000 of the proceeds from this issuance was used to fund Enova's
$1,000,000 joint venture interest in the Hyundai-Enova Innovative Technology
Center as previously noted, with the $500,000 balance of proceeds to be used for
general operations and working capital. The Company relied upon Regulation D,
Rule 506 promulgated by the Securities and Exchange Commission as the exemption
from registration for the issuance of these shares.

During 2003, we issued an aggregate of 754,167 shares of Common Stock
to our directors in consideration for attendance at Board meetings and Board
committee meetings during fiscal 2003. We relied on Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933, as amended, for the exemption from
registration of the sales of such shares. See Item 10, "Compensation of
Directors."

Dividend Policy

To date, we have neither declared nor paid any cash dividends on shares
of our Common Stock or Series A or B Preferred Stock. We presently intend to
retain all future earnings for our business and do not anticipate paying cash
dividends on our Common Stock or Series A or B Preferred Stock in the
foreseeable future. We are required to pay dividends on our Series A and B
Preferred Stock before dividends may be paid on any shares of Common Stock. At
December 31, 2003, Enova had an accumulated deficit of approximately $97,077,415
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.

Item 6. Selected Financial Data

The following selected financial data tables set forth selected
financial data for the years ended December 31, 2003, 2002, 2001 and 2000, the
five month period ended December 31, 1999 and the fiscal year ended July 31,
1999. The five-month period is related to a change in the fiscal year end which
was effective December 31, 1999. The statement of income data and balance sheet
data for and as of the end of the years ended December 31, 2003, 2002, 2001 and
2000, the five month period ended December 31, 1999 and the fiscal year ended
July 31, 1999 are derived from the audited financial statements of Enova. The
following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, including the notes thereto, appearing
elsewhere in this 10K.

As of and for the year ended December 31 Fiscal Year
(in thousands, except per share data), Five Months Ended
------------------------------------- Ended July 31,
2003 2002 2001 2000 Dec. 31, 1999
--------- --------- --------- --------- --------- ---------

NET SALES $ 4,310 $ 4,455 $ 3,780 $ 2,883 $ 629 $ 2,774
COST OF SALES 3,304 3,784 2,783 2,013 377 1,460
--------- --------- --------- --------- --------- ---------
GROSS MARGIN 1,006 671 997 870 252 1,314
--------- --------- --------- --------- --------- ---------
OTHER COSTS AND EXPENSES
Research and Development 799 1,152 879 626 262 499
Selling, general and administrative 2,919 2,837 2,894 1,999 796 1,141
Interest and financing fees 234 199 113 174 244 724
Other expenses (income) 200 (7) 6 (41)
Gain on Warranty Reevaluations (474)
Equity in losses 40
--------- --------- --------- --------- --------- ---------
Legal Settlements 81 900 75 125
--------- --------- --------- --------- --------- ---------
Total other costs and expenses 4,192 4,269 4,779 2,880 1,427 1,849
--------- --------- --------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (3,186) (3,598) (3,782) (2,010) (1,175) (535)
GAIN ON DEBT RESTRUCTURING 354 1,551 214 140
--------- --------- --------- --------- --------- ---------
NET LOSS $ (3,186) $ (3,598) $ (3,428) $ (459) $ (961) $ (395)
========= ========= ========= ========= ========= =========
PER COMMON SHARE:
Loss from continuing operations $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Gain on debt restructuring 0.01
--------- --------- --------- --------- --------- ---------
Net loss per common share $ (0.01) $ (0.01) $ (0.01) $ 0.00 $ (0.01) $ (0.01)
========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
COMMON SHARES OUTSTANDING 334,840 326,390 275,189 235,199 251,994 152,077
Total Assets $ 4,870 $ 6,224 $ 4,340 $ 3,094 $ 2,697 $ 3,940
========= ========= ========= ========= ========= =========
Long-term debt $ 3,347 $ 3,332 $ 3,332 $ 3,332 $ 3,332 $ 3,332
========= ========= ========= ========= ========= =========
Shareholder's equity (deficit) $ (864) $ 287 $ (232) $ (1,648) $ (5,015) $ (7,316)
========= ========= ========= ========= ========= =========

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

You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with our 2003 Financial
Statements and Notes thereto. The matters addressed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, with
the exception of the historical information presented contains certain
forward-looking statements involving risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under the
heading "Certain Factors That May Affect Future Results" and elsewhere in this
report.

Cautionary Note on Forward-looking Statements

Some of the matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this Form 10-K include forward-looking statements.
We have based these forward-looking statements on our current expectations and
projections about future events.

In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "predicts," "potential,"
"continue," "expects," "anticipates," "future," "intends," "plans," "believes,"
"estimates" and similar expressions. These statements are based on our current
beliefs, expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those

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

OVERVIEW

Enova Systems develops and produces advanced software, firmware and
hardware for applications in the growing alternative power industry. Our focus
is digital power conversion, power management, and system integration, for two
broad market applications - vehicle power generation and stationary power
generation.

Enova's products and systems are the enabling technologies for power
systems. Without them, power cannot be converted into the appropriate form
required by the vehicle or device; and without them, power is not properly
managed to protect the battery, vehicle or device, and user.

Specifically, we develop, design and produce drive systems and related
components for electric, hybrid-electric, fuel cell and microturbine-powered
vehicles. We also develop, design and produce power management and power
conversion components for stationary power generation - both on-site distributed
power and on-site telecommunications back-up power applications. These
stationary applications also employ fuel cells, microturbines and advanced
batteries for power storage and generation. Additionally, Enova performs
significant research and development to augment and support others' and our
internal related product development efforts.

The financial statements present the financial position of Enova
Systems, Inc. as of December 31, 2003 and 2002 and the results of operations and
cash flows for the year ended December 31, 2003, 2002 and 2001.

Critical Accounting Policies

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

Our discussion and analysis of our financial condition and result of
operations are based on our financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Our preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. We based our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. The most significant estimates and assumptions relate to revenue
recognition and potential allowances for doubtful accounts. Actual amounts may
differ from such estimates under different assumptions or conditions. The
following summarizes our critical accounting policies and significant estimates
used in preparing our consolidated financial statements:

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

We have experienced cash flow shortages due to operating losses
primarily attributable to research, development, marketing and other costs
associated with our strategic plan as an international developer and supplier of
electric propulsion and power management systems and components. Cash flows from
operations have not been sufficient to meet our obligations. Therefore, we have
had to raise funds through several financing transactions. At least until we
reach breakeven volume in sales and develop and/or acquire the capability to
manufacture and sell our products profitably, we will need to continue to rely
on cash from external financing sources. Enova is seeking new investment capital
to fund research and development and create new market opportunities. In order
to fuel our growth in the stationary power market, we will need additional
capital to further these development programs and augment our intellectual
properties. The

Company believes that at least through fiscal 2004, assuming there are no
unanticipated material adverse developments and no material decrease in
revenues, its cash flows from operations and through credit facilities will be
sufficient to enable the Company to pay its debts and obligations as they
mature. The Company will benefit in fiscal 2004 from expense reductions through
reduced number of employees and other expenses undertaken in fiscal 2003.
However, the Company's current sources of funds are not sufficient to provide
the working capital for material growth, and it would be required to obtain
additional debt or equity financing to support such growth. As of March 22,
2004, we continue to seek private accredited investors to purchase Enova common
stock. Currently, we are seeking up to $10 million in new investment funding. As
of March 30, 2004, Enova has entered into three and received one verbal
commitment for $700,000 to enter into Stock Purchase Agreements with several
accredited investors to purchase 15,833,333 shares of our common stock through a
private placement offering at $0.12 per share for a total cash purchase of
$1,900,000. These investors represented that they were accredited investors. We
relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933, as amended, for the exemption from registration of the sale of such
shares. Although we believe that we will execute a written Stock Purchase
Agreement with respect to the one verbal commitment, there can be no assurance
that such an Agreement will be executed and that such funds will be made
available. Enova continues to seek additional investment capital to fund its
operations, development and expansion plans. As of March 30, 2004, there were no
other firm commitments than those noted. Enova also has a commitment from
Hyundai Heavy Industries to invest, in June 2004, an additional $1,500,000 in
Enova under the same terms as the initial investment, subject to stock price
adjustments, in accordance with the terms of the Joint Venture Agreement as
noted below.

Throughout 2003, management reassessed its current resource allocations
and overhead costs. Due to the loss of the Advanced Vehicle Systems (AVS)
programs - please refer to Part II, Item 1, Legal Proceedings - and an overall
slowdown in heavy-duty drive system purchases, Enova's management analyzed
current processes and budgets for potential targets for cost reduction. As a
result of this analysis, management implemented several cost reduction programs
including personnel reductions, work-week modifications and other cost restraint
endeavors to achieve these goals. Personnel levels have been reduced to 28
employees at December 31, 2003 from 45 at December 31, 2002. In early October
2003, management discontinued its modified compensation plan for full-time
salaried employees as well as work-week reductions for other employees. These
employees have had their prior pay levels re-instated. Management believed these
pay level reinstatements appropriate based on increasing research and
development business. Because of the workforce reductions and other cost
containment policies, the Company continues to realize a reduction in monthly
cash outlays of approximately $120,000 via these cost reductions compared with
the monthly average for the first six months of 2003 without impact to our
current operations.

In 2003, we expanded our sales and development efforts to capture
additional global market share for our product line and our technical expertise.
Enova expanded further into U.S., European and Asian markets with our heavy duty
drive systems and added to our development programs with Ford, Hyundai and the
U.S. Department of Transportation with major customers such as Mack Truck /
Volvo, EDO Corporation, MTrans of Malaysia, the U.S. Navy and others. We
continue to focus on building our product line, increasing our market share and
developing the next generation of advanced power management and conversion
systems.

Our operations during the year ended December 31, 2003 were financed by
development contracts and product sales, as well as from working capital
reserves.

During the year ended December 31, 2003, our operations required
$1,378,000 more in cash than was generated. Enova continues to increase research
and development spending, as well as increased sales, marketing and
administrative expenses necessary for expansion to meet customer demand.
Accounts receivable increased by $142,000 from $1,256,000, or approximately 11%
from the balance at December 31, 2002 (net of write-offs). Including the AVS
write-off, accounts receivable were $803,000 at December 31, 2003 or 36% lower
than comparable balances at December 31, 2002. To a large extent, the decrease
is due to write-offs caused by the bankruptcy of AVS, as noted below, and the
overall slowdown in new business in the third and fourth quarters of 2003. Enova
began several new development contracts in the fourth quarter, as noted
throughout this Form 10-K, which we anticipate will increase receivables in
future quarters. During the twelve months ending December 31, 2003, we charged
off approximately $595,000 primarily for sales made to AVS in 2002 and 2003. We
continually monitor our receivables and have had immaterial charge-offs during
the years, other than AVS, due to this policy. Inventory decreased slightly by
$46,000 from $1,652,000 or less than 3% from December 31, 2002 balances. During
late 2002, we increased our inventory stock to meet forecasted customer demand
from AVS and other heavy-duty drive systems customers. In 2003, several of these
customers experienced slower demand than anticipated which resulted in fewer
purchases from Enova. We have been selling these systems throughout 2003 and
anticipate additional sales of such in 2004. Additionally, included in our
inventory are raw materials and equipment related to the Ballard/Ford Th!nk city
program, as noted below under Ballard Power Systems, which have a book value of
approximately $180,000 based on our negotiated settlement with Ballard. These
materials have an original cost value of over $700,000. It is our intention to
resell these materials during 2004.

Fixed assts increased by $112,000 or 7%, before depreciation and a
write-down of $200,000 for our Hawaii demonstration tram, for the year ended
December 31, 2003 from the prior year balance of $1,668,000 primarily due
purchases of test equipment, production machinery, software and tooling for
programs and products developed during the year. The Hawaii tram was originally
booked as an asset at a value of $350,000 based on then applicable market
conditions for such pure electric vehicles. Management has determined that,
after allowing for depreciation of $100,000, the tram has a net realizable value
in the range between $50,000 and $100,000. It is our intent to sell the tram in
2004.

Investments increased by $960,000 during 2003, net of our pro-rata
share of losses attributable to the investment, which reflects our forty percent
(40%) interest in the Hyundai-Enova Innovative Technology Center as noted
elsewhere in this Form 10-K. For the year ended December 31, 2003, the ITC
generated a net loss of approximately $100,000, resulting in a charge to Enova
of $40,000 utilizing the equity method of accounting for our interest in the
ITC. Based on contractual obligations of our Joint Venture Agreement with
Hyundai Heavy Industries Co., such investment is anticipated to increase by
$1,000,000 in 2004.

Other assets decreased by $105,000 during 2003 from $542,000 in 2002 as
we continued to amortize the asset relating to the Ford Value Participation
Agreement. Intellectual property assets, including patents and trademarks,
increased by $11,000 in 2003 from $78,000 at December 31, 2002 as we continued
to capitalize new intellectual property rights on our technology.

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

RESULTS OF OPERATIONS

Years Ended December 31, 2003 and 2002

Net sales of $4,310,000 for the twelve months ended December 31, 2003
decreased $145,000 or 3% from $4,455,000 during the same period in 2002. Our
sources of revenue for 2003 came primarily from product sales. Product sales as
a percentage of total revenues of 56% in 2003 were consistent to the 2002
product sales to total revenues percentage of 59%. Sales of our Panther 120kW
drive systems accounted for a majority of our product sales in 2003. We believe
this trend will continue over the next several years. However we will continue
to seek out and contract for new development programs with both our current
partners such as Ford, Mack/Volvo, UTC, Hyundai and our other U.S., Asian and
European alliance partners, as well as with new alliances with other vehicle
manufacturers and energy companies.

Cost of sales consists of component and material costs, direct labor
costs, integration costs and overhead related to manufacturing our products.
Product development costs incurred in the performance of engineering development
contracts for the U.S. Government and private companies are charged to cost of
sales for this contract revenue. During 2003, we continued our trend of
establishing new customers and strengthening current alliances with customers,
such as Tomoe and MTrans in the heavy-duty drive system market. Because the
market is relatively nascent, our customers require additional integration and
support services to customize, integrate and evaluate our products. We believe
these costs to be initial, one-time costs for these customers and anticipate
similar costs to be incurred with respect to new customers as we gain additional
market share. Cost of sales for the year ended December 31, 2003 decreased
$438,000, or 12%, from $3,784,000 for the year ended December 31, 2002. This
decrease is attributable to follow-on orders from existing customers such as EPT
and MTrans, which no longer require as much integration support, and from
decreased pricing from our contract manufacturers as our order quantities rise.
As we increase our sales volume, we believe the costs associated with
manufacturing and integrating these products should continue to decrease,
improving our gross margins.

Research and development expenses consist primarily of personnel,
facilities, equipment and supplies for our research and development activities.
Non-funded development costs are reported as research and development expense.
Research and development expense decreased in 2003 to $799,000 from $1,152,000
for the same period in 2002, a decrease of $352,000, or 31%. During 2003, we
reduced non-essential expenses for internal research and development without
sacrificing that development necessary to maintain our competitive edge in our
markets. We supplemented this reduction by teaming with other companies in our
sector such as Mack/Volvo, Hyundai, and the U.S. Government to offset the costs
of development for new products in the areas of mobile and stationary power
management and conversion. Programs included our advanced power management
systems for fuel cells, our diesel generation engine/motor system for our
heavy-duty drive systems, a dual 8kW inverter, and upgrades and improvements to
our current power conversion and management components. Additionally, we
continue to enhance our technologies to be more universally adaptable to the
requirements of our current and prospective customers. By modifying our software
and firmware, we believe we should be able to provide a more comprehensive,
adaptive and effective solution to a larger base of customers and applications.
We will continue to research and develop new technologies and products, both
internally and in conjunction with our alliance partners and other manufacturers
as we deem beneficial to our global growth strategy.

Selling, general and administrative expenses consist primarily of
personnel and related costs of sales and marketing employees, consulting fees
and expenses for travel, trade shows and promotional activities and personnel
and related costs for general corporate functions, including finance,
accounting, strategic and business development, human resources and legal.
Selling, general and administrative expenses were further reduced in 2003 from
2002 levels continuing a trend from prior years. Net of the $595,000 AVS bad
debt write-off, our selling, general and administrative expenses decreased
$515,000 in the year ended December 31, 2003, to $2,322,000 from $2,837,000 for
the similar period in 2002. This represents an 18% reduction in these expenses
as a result of management's cost reduction programs implemented throughout 2003
including workforce cutbacks, elimination of non-essential expenses and
exercising tighter constraint over overhead costs in general. We are continually
reviewing operations to lower overhead costs and increase operational
efficiencies

For the year ended December 31, 2003, interest and financing fees
increased by $22,000 to $242,000, an increase of 10%. The increase was due
solely to an increase in 2003 in the interest rate on the Note due the Credit
Managers Association of California for $3.2 million per the terms of the Note.

Our $3,186,000 net loss for the year ended December 31, 2003 is
$411,000 less than the loss incurred in 2002 of $3,598,000, a decrease of 11%.
Excluding the bad debt charge of $595,000 for the AVS bankruptcy and the
write-down of the Hawaii tram of $200,000, our loss for the year would be
$1,206,000 less, or $2,392,000 for the year ended December 31, 2003, over 34%
lower than that incurred in 2002. This decrease is a significant milestone in
Enova's goal to break-even in the near future. Management will continue to seek
operational efficiencies and methods to reduce manufacturing and overhead costs
as well as increase revenues to achieve this goal of profitability.

Ballard Power Systems

Our development and production program with Ballard Power Systems for
low voltage 30kW electric drive system components for use in Ford's Global Th!nk
City was terminated by Ford and Th!nk Nordic in early 2003, as previously
reported. Under the terms of the contract, Ballard is liable for all costs
incurred by Enova which are normally associated with the production including
inventory and other development or production costs. We invoiced Ballard for
approximately $952,000 for work-in-process inventory and other additional
material, tooling and engineering costs for the initial production of the drive
system component. Of this amount, Ballard remitted $580,400 during the second
quarter of 2003. In October 2003, Enova and Ballard reached a settlement on all
remaining balances due wherein Enova will receive $198,125 in cash and title to
all inventory, raw materials, tooling and equipment in its possession that is
associated with the program. The Company intends to sell such in the resale
markets. The Company believes that the resale market value of the inventory and
equipment will amount to at least the value of the remainder balance of the
receivable of approximately $173,000.

Hyundai-Enova Innovative Technology Center

In September 2003, Enova and Hyundai Heavy Industries, Co. Ltd. (HHI)
funded the Hyundai-Enova Innovative Technology Center (HEITC) to be located at
Enova's Torrance headquarters. In connection with the Joint Venture Agreement
entered into between the two parties in March 2003, HHI purchased $1,500,000 of
common stock of Enova Systems, Inc. HHI purchased 23,076,923 shares representing
a 6.2% ownership in Enova, Inc. Of this amount, Enova invested $1,000,000 in the
HEITC for a forty percent (40%) ownership interest. HHI invested an additional
$1,500,000 for a sixty percent (60%) ownership interest in the HEITC.
Furthermore, in June of 2004, HHI will invest an additional $3,000,000 in Enova
and HEITC under the same terms as the initial investment, subject to stock price
adjustments, in accordance with the Joint Venture Agreement. The joint venture
company officially opened in November 2003 to pursue advanced research and
development in hybrid automotive and stationary applications for fuel cell
technologies.

Years Ended December 31, 2002 and 2001

Net sales of $4,455,000 for the twelve months ended December 31, 2002
increased $675,000 or 18% from $3,780,000 during the same period in 2001. Our
revenue base is shifting to higher concentration in product sales as we expand
our market penetration in these areas. Accordingly, we have added this
delineation in our financial statement representation for sales and costs of
sales. Product sales as a percentage of total revenues increased to 59% in 2002
as compared with 26% of total revenues in 2001. Sales of our Panther 240kW,
120kW and 90kW drive systems accounted for a majority of our product sales. We
believe this trend will continue over the next several years. We continue to
seek out and contract for new development programs with both our current
partners such as Ford, the DOT and Hyundai, as well as creating new alliances
with other vehicle manufacturers and energy companies. Furthermore, we believe
that markets are developing for our stationary process and power control and
conversion systems in which we intend to gain market share.

Cost of sales consists of component and material costs, direct labor
costs, integration costs and overhead related to manufacturing our products.
Product development costs incurred in the performance of engineering development
contracts for the U.S. Government and private companies are charged to cost of
sales for this contract revenue. During 2002, we established several new
customers, such as AVS, Tomoe and MMT, in the heavy-duty drive system market
which required additional integration and support services to customize,
integrate and evaluate our products. We believe these costs to be initial,
one-time costs for these customers and anticipate similar costs to be incurred
as we gain additional market share. During the year ended December 31, 2002, we
charged off approximately $200,000 in obsolete inventory and other engineering
costs related to the cancellation of the Ballard/Ford Th!nk program. A portion
of these costs may be recoverable in 2003 from Ballard, however, we can give no
assurance at this time that such reimbursement will occur. Due to the increase
in net sales, the aforementioned costs, the Ballard program cancellation and
other inventory adjustments, cost of sales of $3,784,000 for the year ended
December 31, 2002 reflect an increase of $1,001,000, or 36%, from $2,783,000 for
the year ended December 31, 2001. Our product line is well established. As we
increase our sales volume, we believe the costs associated with manufacturing
and integrating these products should continue to decrease, improving our gross
margins.

existing products as well as develop new products in the areas of mobile and
stationary power management and conversion. Programs included our 240kW drive
system, advanced power management systems for fuel cells, a Panther 90kW Dual
Motor drive system, a diesel generation engine/motor system for our heavy-duty
drive systems, a 18kW on-board charger system and upgrades and improvements to
our current power conversion and management components. Additionally, we are
enhancing our technologies to be more universally adaptable to the requirements
of our current and prospective customers. By modifying our software and
firmware, we believe we should be able to provide a more comprehensive, adaptive
and effective solution to a larger base of customers and applications. During
2002, we expended additional resources toward these types of programs and
therefore modified our allocation of engineering costs to reflect this shift. We
will continue to research and develop new technologies and products, both
internally and in conjunction with our alliance partners and other manufacturers
as we deem beneficial to our global growth strategy. Our joint venture advanced
technology center with HHI, as previously reported, is a specific example of
this strategy.

Selling, general and administrative expenses consist primarily of
personnel and related costs of sales and marketing employees, consulting fees
and expenses for travel, trade shows and promotional activities and personnel
and related costs for general corporate functions, including finance,
accounting, strategic and business development, human resources and legal.
Selling, general and administrative expense decreased in the year ended December
31, 2002 to $2,837,000 from $2,894,000 for the similar period in 2001. We are
continually reviewing operations to lower over head costs and increase
operational efficiencies. During 2002, legal and accounting fees of
approximately $318,000 in conjunction with two Form S-1 Registration Statements,
required quarterly, annual and other periodic SEC filings, as well as compliance
with the Sarbanes-Oxley Act of 2002 and other legal matters, accounted for the
majority of these expenses. We believe these professional fees should not
increase significantly in 2003, however due to the increased regulatory
oversight of public companies and additional legal and accounting obligations
mandated by Sarbanes-Oxley, we can make no assurance that increases will not
occur.

For the year ended December 31, 2002, interest and financing fees
increased by $86,000 to $199,000, an increase of 76%. The increase was due
primarily to an increase in the rate on the Note due the Credit Managers
Association of California for $3.2 million per its terms and additional lease
financings for equipment during 2002.

Our net loss for the year ended December 31, 2002 of $3,598,000 is
comparable to the loss incurred in 2001 of $3,428,000, however we believe the
components of the 2002 net loss should provide much greater near and long-term
benefits to Enova. Certain factors, such as the Ballard program cancellation,
could not be anticipated and did contribute substantially to the net loss from
operations. Other elements however, such as the increased funding levels for
development of new systems and enhancement of current systems, we believe, will
provide opportunities for increased sales and market share capture in 2003 and
beyond. Depending on the level of externally funded engineering programs,
additional internal funds may be expended to maintain or improve our
technologies to remain competitive in the market.

Our basic strategy continues toward increased research and development
and increased marketing and administrative operations relating to further
establishing ourselves as one of the key players in the mobile power conversion
and management markets and to develop new systems for the stationary markets.
During 2002, we experienced increased demand and recognition of our products and
expertise in theses markets, thus increasing our revenue base, and we shall
continue to increase engineering, production, and support personnel as we deem
necessary to meet our current and prospective customer needs.

Recent accounting pronouncements - The Financial Accounting Standards Board
(FASB) has not issued any new accounting pronouncements that will have an impact
on our financial statements.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

This Form 10-K contains forward looking statements concerning our
existing and future products, markets, expenses, revenues, liquidity,
performance and cash needs as well as our plans and strategies. These
forward-looking statements involve risks and uncertainties and are based on
current management's expectations and we are not obligated to update this
information. Many factors could cause actual results and events to differ
significantly from the results anticipated by us and described in these forward
looking statements including, but not limited to, the following risk factors.

Net Operating Losses. We have experienced recurring losses from operations and
had an accumulated deficit of $97,078,000 at December 31, 2003. There is no
assurance, however, that any net operating losses will be available to us in the
future as an offset against future profits for income tax purposes.

Continued Losses. For the year ended December 31, 2003, 2002 and 2001, we had
net losses of $3,186,000, $3,598,000, and $3,428,000, respectively, on sales of
$4,310,000, $4,455,000, and $3,780,000, respectively.

Nature of Industry. The mobile and stationary power markets, including electric
vehicle and hybrid electric vehicles, continue to be subject to rapid
technological change. Most of the major domestic and foreign automobile
manufacturers: (1) have already produced electric and hybrid vehicles, and/or
(2) have developed improved electric storage, propulsion and control systems,
and/or (3) are now entering or have entered into production, while continuing to
improve technology or incorporate newer

technology. Various companies are also developing improved electric storage,
propulsion and control systems. In addition, the stationary power market is
still in its infancy. A number of established energy companies are developing
new technologies. Cost-effective methods to reduce price per kilowatt have yet
to be established and the stationary power market is not yet viable.

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

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

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 or low
emission vehicles is necessary to create a significant market for electric
vehicles. The California Air Resources Board (CARB) is continuing to modify its
regulations regarding its mandatory limits for zero emission and low emission
vehicles. Furthermore, several car manufacturers have challenged these mandates
in court and have obtained injunctions to delay these mandates.

There are substantial risks involved in the development of unproven products. In
order to remain competitive, we must adapt existing products as well as develop
new products and technologies. In fiscal years 2002 and 2003 we spent in excess
of $1.9 million on research and development of new products and technology.
Despite our best efforts a new product or technology may prove to be unworkable,
not cost effective, or otherwise unmarketable. We can give you no assurance that
any new product or technology we may develop will be successful or that an
adequate market for such product or technology will ever develop.

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

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

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

We may be exposed to product liability or tort claims if our products fail,
which could adversely impact our results of operations. A malfunction or the
inadequate design of our products could result in product liability or other
tort claims. Accidents involving our products could lead to personal injury or
physical damage. Any liability for damages resulting from malfunctions could be
substantial and could materially adversely affect our business and results of
operations. In addition, a

well-publicized actual or perceived problem could adversely affect the market's
perception of our products. This could result in a decline in demand for our
products, which would materially adversely affect our financial condition and
results of operations.

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

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

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

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

None.

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 15.

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

On November 21, 2003, Enova Systems, Inc. ("Company") dismissed Moss
Adams LLP ("Moss Adams") as its independent auditors and engaged Singer, Lewak,
Greenbaum & Goldstein ("SLGG") as its independent auditors to audit its
financial statements for its year ending December 31, 2003. This decision was
approved by the Board of Directors of the Company. Prior to such engagement, the
Company did not consult with SLGG regarding the application of accounting
principles to a specific, completed or contemplated transaction, or the type of
audit opinion that might be rendered on the Company's financial statements.

During the fiscal years ended December 31, 2001 and 2002, and the
subsequent interim period through the date of Moss Adams dismissal, November 21,
2003, there have been no disagreements on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Moss Adams, would have
caused it to make reference to the subject matter of the disagreements in
connection with its reports, except the following:

In connection with the audit of the Company's financial statements for
the year ended December 31, 2002, Moss Adams had a disagreement with
the Company over the valuation of inventory.

In connection with the review of the Company's financial statements for
the quarter ended September 30, 2003, Moss Adams had a disagreement
with the Company over the allowance for uncollectible receivables.

The audit committee of the Board of Directors and the management of the
Company discussed each of these disagreements with Moss Adams and resolved the
matters to each party's satisfaction prior to the filing of the Company's Form
10-K for the year ended December 31, 2002 and Form 10-Q for the quarter ended
September 30, 2003, respectively. The Company has authorized Moss Adams to
respond fully to inquiries from SLGG concerning the matters described in this
section.

Item 9A. Controls and Procedures

An evaluation was carried out by Carl D. Perry, the Company's Chief
Executive Officer and then Acting Chief Financial Officer, of the effectiveness
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of December
31, 2003. Based upon that evaluation, the Chief Executive Officer and then
Acting Chief Financial Officer concluded that these disclosure controls and
procedures were effective. During the period covered by this report, there have
been no changes in the Company's internal control over financial reporting that
have materially affected or are reasonably likely to materially affect the
Company's internal control over financial reporting.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

PART III

Item 10. Directors and Executive Officers of the Registrant

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

Name Age Position
---- --- --------
Anthony N. Rawlinson 48 Chairman of the Board

Carl D. Perry 71 Chief Executive Officer,
President and Director

Edwin O. Riddell (1) 61 Director

Dr. Malcolm Currie (1) 77 Director

John J. Micek, III (2) 51 Director

Donald H. Dreyer (2) 66 Director

John Wallace 55 Director

Larry B. Lombard 43 Acting Chief Financial Officer

Edward M. Moore 42 Chief Operating Officer

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Anthony N. Rawlinson, Chairman of the Board. Mr. Rawlinson was
appointed non-executive Chairman of the Board in July 1999. Since 1996, Mr.
Rawlinson has been Managing Director of the Global Value Investment Portfolio
Management Pte. Ltd., a Singapore based International Fund Management Company
managing discretionary equity portfolios for institutions, pension funds and
clients globally. Mr. Rawlinson has more than twenty years experience in
international fund management. Mr. Rawlinson is a specialist in analysis and
investment in high technology companies. From 1996 to 1999, Mr. Rawlinson was
Chairman of IXLA Ltd., an Australian public company in the field of PC
photography software and its wholly-owned subsidiary, photohighway.com. Mr.
Rawlinson is also a Chairman of Cardsoft, Inc., a high technology software
company with secure java based solutions for mobile phones and handheld devices.

Carl D. Perry, Chief Executive Officer, President and Director. 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, and was
elected President in June 1999. In July 1999, Mr. Perry resigned his position as
Chairman of the Board to allow Mr. Anthony N. Rawlinson to become Chairman. Mr.
Perry continues as Chief Executive Officer and President and as a Director. He
served as Acting Chief Financial Officer of the Company from November 1997 to
March 2004. Prior to joining the Company, he was an international aerospace and
financial consultant from 1989 to 1993. Mr. Perry served as Executive Vice
President of Canadair Ltd. (now known as Bombadier), Canada's largest aerospace
corporation, from 1984 to 1989, 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 Helicopter Company, now known
as Boeing Helicopter Company, where he was responsible for general management,
worldwide business development, and international operations.

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

Edwin O. Riddell, Director. Mr. Riddell has served as a Director of the
Company since June 1995. From March 1999 to the present, Mr. Riddell has been
President of CR Transportation Services, a consultant to the electric vehicle
industry. From January 1991 to March 1999, 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 Group, Inc. 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 Transportation Association's (APTA) Member Board of
Governors for over 15 years, and has served on APTA's Board of Directors. Mr.
Riddell was also Managing Partner of the U.S. Advanced Battery Consortium.

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

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

John J. Micek III, Director. Mr. Micek was elected a Director of the
Company in April 1999. Mr. Micek served as the Company's Vice President, General
Counsel and Secretary from March 1994 to March 1997. From June 1997 to August
1998, Mr. Micek was COO of Pelion Systems, Inc. Mr. Micek is currently Managing
Director of Silicon Prairie Partners, LP. He also is a practicing attorney
specializing in corporate finance and business development in Palo Alto, CA. He
is a Board Member of Universal Warranty and also sits on the boards of UTEK
Corp., Pelion Systems, Inc., Universal Assurors Agency, Inc., and Armanino
Foods.

Larry B. Lombard, Acting Chief Financial Officer. Mr. Lombard was
appointed Acting Chief Financial Officer in March 2004. He has served as
Director of Finance and Administration at Enova Systems, Inc. since 1998. Mr.
Lombard has over twenty years experience in management and finance for a wide
range of companies including software development, insurance, petroleum and
banking. He received his BA in Business Economics, University of California at
Los Angeles and his MBA in Global Management from the University of Phoenix.

Edward M. Moore, Chief Operating Officer. Mr. Moore was appointed Chief
Operating Officer in March 2004. He has served as Vice President, Marketing and
Sales at Enova Systems, Inc. since 2000. Mr. Moore was vice president, sales for
E-Bus from 1999 to 2000. Mr. Moore has experience in creating and implementing
strategic marketing plans for both domestic and international markets. He has an
extensive background in the alternative fuels and drive system industry, having
worked with GM Hughes, AeroEnvironment and E-Bus in both the technology and
marketing fields. He received his BS, Occupational Education from Southern
Illinois University and his MBA from the University of Phoenix.

Relationships Among Directors or Executive Officers

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

We believe, based solely on our review of the copies of such reports
received or written representations from certain Reporting Persons, that each of
Messrs. Rawlinson, Riddell, Currie, Micek, Wallace and Dreyer, each of whom is a
Director of Enova, and James M. Strock (who resigned as a Director of Enova in
March 2004), failed to file on a timely basis three separate Form 4s, each of
which Form 4 reported one transaction, namely the issuance of shares of Common
Stock in partial payment of directors' fees for August and November 2003 and
February 2004.

Code of Ethics

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

Enova Systems, Inc.
Larry Lombard, Acting Chief Financial Officer
19850 S. Magellan Drive
Torrance, CA 90502

Item 11. Executive Compensation

Summary Compensation Table

The following table sets forth all compensation earned by our Chief
Executive Officer and each of the other most highly compensated executive
officers of Enova whose annual salary and bonus exceeded $100,000 for the years
ended December 31, 2003, 2002 and 2001 (collectively, the "Named Executive
Officers"). Mr. Carl D. Perry was the sole executive officer of Enova whose
salary currently exceeded $100,000 as of December 31, 2003.

Name and Principal Position

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

Carl D. Perry (1) 2003 139,615 --
Chief Executive Officer, Acting Chief 2002 150,000 $30,000 (earned in 2000)
Financial Officer and President 2001 160,989 --

(1) Mr. Perry was elected as Chief Executive Officer in November 1997. Mr.
Perry's current salary is $120,000 per year, a 20% voluntary reduction from
prior year's salary. Mr. Perry served as Acting Chief Financial Officer during
the periods reflected in the above chart and through March 6, 2004.

Option/SAR Grants

No grants of stock options or stock appreciation rights ("SARs")
were made during 2003 to the Named Executive Officer.

Option Exercises and Option Values

The Named Executive Officer did not exercise any options during the
year ended December 31, 2003. All options of the Named Executive Officer expired
prior to December 31, 2003 without exercise.

Compensation of Directors

In September 1999, our Board of Directors unanimously approved a
compensation package for outside directors consisting of the following: for each
meeting attended in person, each outside director is to receive $1,000 in cash
and $2,000 of stock valued on the date of the meeting at the average of the
closing ask and bid prices; for each telephonic Board meeting, each outside
director is to receive $250 in cash and $250 of stock valued on the date of the
meeting at the average of the closing ask and bid prices; for each meeting of a
Board committee attended in person, the committee chairperson is to receive $500
in cash and $500 of stock valued on the date of the meeting at the average of
the closing ask and bid prices. As of January 2002, this package was amended to
include like compensation of $500 in cash and $500 in stock to all committee
members in attendance at each committee meeting. All Directors are also
reimbursed for out-of-pocket expenses incurred in connection with attending
Board and committee meetings. For and with respect to fiscal 2003, 754,167
shares of Common Stock were issued under the above compensation plan for
Directors. As of March 22, 2004, an aggregate of 2,938,529 shares have been
issued under the above compensation plan for Directors since its inception in
September 1999.

James M. Strock

The Company has entered into a consulting agreement with James Strock &
Company, a corporation wholly owned by James M. Strock. Mr. Strock served as a
Director of the Company from July 2000 until his resignation in March 2004.
Under the terms of that consulting agreement, the Company retained Mr. Strock's
services for a minimum monthly retainer of $3,000 plus reasonable expenses.
This consulting agreement was terminated in April 2003. During 2003, the
Company paid Mr. Strock $17,000 in cash for consulting services and expenses
and $12,000 for directors fees (which latter amount includes the cash paid and
the value of the stock issued to him pursuant to the outside directors'
compensation package described above).

John R. Wallace

The Company has entered into a consulting agreement with John R.
Wallace wherein the Company compensates Mr. Wallace at the rate of $1,500 per
day plus reasonable expenses for consulting services rendered. Mr. Wallace is
not compensated per this agreement when acting in the capacity of a director of
the Company. During 2003, the Company paid Mr. Wallace $6,000 in cash for
consulting services and expenses and $12,000 for directors fees (which latter
amount includes the cash paid and the value of the stock issued to him pursuant
to the outside directors' compensation package described above).

Donald Dreyer

The Company utilizes the consulting service of Donald Dreyer wherein
the Company compensates Mr. Dreyer at the rate of $150 per hour plus reasonable
expenses for consulting services rendered. Mr. Dreyer is not compensated when
acting in the capacity of a director of the Company other than the fees noted
above. During 2003, the Company paid Mr. Dreyer $10,000 in cash for consulting
services and expenses and $12,000 for directors fees (which latter amount
includes the cash paid and the value of the stock issued to him pursuant to the
outside directors' compensation package described above).

Compensation Committee Interlocks and Insider Participation

The Compensation Committee held two meetings in the year ended December
31, 2003. The Compensation Committee currently consists of Mr. Edwin Riddell and
Dr. Malcolm Currie, neither of who have been officers of the Company. The
Compensation Committee's functions are to establish and apply the Company's
compensation policies with respect to the Company's Executive Officers, and to
administer the Company's stock option plans.

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Stock Performance Graph

The graph below compares the cumulative total shareholder return on our
Common Stock with the cumulative total return on the Standard & Poor's Small
Capitalization 600 Index and an index of peer companies selected by us. A group
of five other electric vehicle companies comprise the peer group index.(1)

The period shown commences on December 31, 1998, and ends on December
31, 2003, the end of our last fiscal year. The graph assumes an investment of
$100 on December 31, 1998 and the reinvestment of any dividends. The comparisons
in the graph below are based upon historical data and are not indicative of, nor
intended to forecast, future performance of our Common Stock.

[The following table was depicted as a line graph in the printed material.]

ENOVA SYSTEMS INC
Cumulative Total Return
-------------------------------------------------------
12/98 12/99 12/00 12/01 12/02 12/03
ENOVA SYSTEMS, INC. 100.00 1048.39 548.39 483.87 258.06 435.48
S & P SMALLCAP 600 100.00 112.40 125.67 133.89 114.30 158.63
PEER GROUP 100.00 179.53 157.93 100.05 48.78 75.62

* $100 invested on 12/31/98 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31. 1 - Companies included in the peer
group index are Amerigon, Inc. (ARGN), Electric Fuel Corp. (EFCX) - Electric
Fuel Corp changed it's name to Arotech Corp. (ARTX), Energy Conversion Devices,
Inc. (ENER), Unique Mobility (UQM), and Valence Technology, Inc. (VLNC).

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

The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of March 22,
2004, by (i) each shareholder known to the Company to own beneficially more than
5% of the Company's Common Stock; (ii) each of the Company's Directors; (iii)
the Named Executive Officer; and (iv) all Executive Officers and Directors as a
group. Except as indicated in the footnotes to this table and subject to
applicable community property laws, the persons named in the table, based on
information provided by such persons, have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.

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

Jagen, Pty., Ltd. 145,000,000 34.54% 37.81%
9 Oxford Street, South Ybarra 3141
Melbourne, Victoria Australia

Hyundai Heavy Industries, Co. 23,076,923 5.50% 6.02%
1 Cheona-Dong, Dong-Ku
Ulsan, Korea

Citibank N.A. 31,405,754 7.48% 8.19%
111 Wall Street, 8th Floor
New York, NY 10043

Carl D. Perry 10,000,500 2.38% 2.61%
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502

Anthony N. Rawlinson 25,389,806 6.05% 6.62%
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502

John J. Micek III 1,473,596(4) * *

Edwin O. Riddell 634,803 * *

Dr. Malcolm Currie 524,174 * *

Donald H. Dreyer 433,858 * *

John R. Wallace 145,238 * *

Delphi Delco Electronics 1,278,720(5) * *

Jean Schulz 1,329,111(6) * *

Larry B. Lombard 1,800,000(7) * *

Edward M. Moore 2,063,923(8) * *

All directors and executive officers 42,465,442(9) 10.12% 10.42%
as a group (9 persons)

* Indicates less than 1%

(1) Number of Common Stock shares includes Series A Preferred Stock, Series
B Preferred Stock and Common Stock shares issuable pursuant to stock
options, warrants and other securities convertible into Common Stock
beneficially held by the person or class in question which may be
exercised or converted within 60 days after March 22, 2004.

(2) The percentages are based on the number of shares of Common Stock,
Series A Preferred Stock and Series B Preferred Stock owned by the
shareholder divided by the sum of: (i) the total Common Stock
outstanding, (ii) the Series A Preferred Stock owned by such
shareholder; (iii) the Series B Preferred Stock owned by such
shareholder; and (iv) Common Stock issuable pursuant to warrants,
options and other convertible securities exercisable or convertible by
such shareholder within sixty (60) days after March 22, 2004.

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

(4) Includes 1,000,000 shares of Common Stock issued to Silicon Prairie
Partners, LP, a limited partnership in which John J.
Micek III is the general partner.

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

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

(7) Includes 1,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at a price of $.16.

(8) Includes 2,033,467 shares of Common Stock issuable pursuant to stock
options exercisable at prices from $.051 to $.20.

(9) Includes 3,033,467 shares of Common Stock issuable pursuant to stock
options exercisable at prices from $.051 to $.20 per share and
1,000,000 shares of Common Stock issued to Silicon Prairie Partners,
LP, a limited partnership in which John J. Micek III is the general
partner.

Equity Compensation Plan Information

The following table provides information regarding our equity compensation plans
as of December 31, 2003:

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

Equity compensation plans approved
by security holders 21,156,000 $0.14 23,844,000

Equity compensation plans not
approved by security holders -- -- --
Total 21,156,000 $0.14 23,844,000

Our board of directors adopted the 1996 Employee and Consultant Stock
Option Plan in October 1996 which was subsequently approved by our shareholders
in May 1997. A total of 15,000,000 shares were reserved for issuance under the
1996 Plan. Options granted under the 1996 Plan may be either incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, or
nonstatutory stock options. The 1996 Plan provides that options may be granted
to employees (including officers and directors who are also employees),
directors and consultants. Incentive stock options may only be granted to
employees. In 1999, our board of directors and shareholders approved an
amendment to the 1996 Plan to increase the number of shares of common stock
reserved for issuance thereunder by 30,000,000 shares, bringing the total number
of shares issuable under the 1996 Plan to 45,000,000. The share increase to the
1996 Plan assured that a sufficient reserve of common stock are available to
provide us with the continuing opportunity to utilize equity incentives to
attract and retain the services of employees

essential to our long-term growth and financial success. A copy of the actual
1996 Plan document was previously filed with the Securities and Exchange
Commission.

Options granted under the amended 1996 Plan will vest over such periods
as may be determined by the board of directors and will generally have an
exercise price equal to the closing price for our stock on the NASDAQ OTC
Bulletin Board on the last trading day immediately prior to the date of grant.
As of December 31, 2003, the Company had reserved 23,844,000 common shares for
issuance under the 1996 Plan, as amended. Options to purchase 9,998,000 shares
of Enova common stock were granted to employees in 2003.

In September 1999, our Board of Directors unanimously approved a
compensation package for outside directors consisting of the following: for each
meeting attended in person, each outside director is to receive $1,000 in cash
and $2,000 of stock valued on the date of the meeting at the average of the
closing ask and bid prices; for each telephonic Board meeting, each outside
director is to receive $250 in cash and $250 of stock valued on the date of the
meeting at the average of the closing ask and bid prices; for each meeting of a
Board committee attended in person, the committee chairperson is to receive $500
in cash and $500 of stock valued on the date of the meeting at the average of
the closing ask and bid prices. As of January 2002, this package was amended to
include like compensation of $500 in cash and $500 in stock to all committee
members in attendance at each committee meeting. For and with respect to fiscal
2003, 754,167 shares of Common Stock were issued under the above compensation
plan for Directors. As of March 22, 2004, an aggregate of 2,938,529 shares have
been issued under the above compensation plan for Directors since its inception
in September 1999. Shares of common stock are not specifically allocated for
this program other than those issued after each meeting.

Item 13. Certain Relationships and Related Transactions

The following are certain transactions entered into between Enova and
its officers, directors and principal shareholders and their affiliates since
January 1, 2003.

During 2003, Hyundai Heavy Industries, Co. (HHI) purchased 23,076,923
shares representing a 6.2% ownership in Enova, Inc. Additionally, during 2003,
we purchased from HHI approximately $599,000 in components, materials and
services for manufacture of our drive systems and power management systems.
These purchases were made on terms and conditions equal to or better than our
standard commercial terms with other vendors. At the year ended December 31,
2003, our outstanding payables balance due HHI was approximately $395,000.

Item 14. Principal Accountant Fees and Services

Singer, Lewak, Greenbaum & Goldstein were engaged on November 21, 2003
to audit our financial statements for the fiscal year ended December 31, 2003.
Moss Adams, LLP served as our auditors prior to November 21, 2003 and audited
our financial statements for the fiscal year ended December 31, 2002.

Audit Fees

The aggregate fees billed for the fiscal year ended December 31, 2003
for professional services rendered by Singer, Lewak, Greenbaum & Goldstein for
the audit of Enova's financial statements for that fiscal year were $7,500.

The aggregate fees billed during the last two fiscal years for
professional services rendered by Moss Adams, LLP for the audit of Enova's
financial statements for the fiscal year ended December 31, 2002 and for its
review of financial statements included in Enova's Form 10-Q-s during the last
two fiscal years and other services that are normally provided by an accountant
in connection with statutory and regulatory filings or engagements during such
fiscal years were $87,210 for fiscal 2003 and $82,916 for fiscal 2002.

Audit-Related Fees

Singer, Lewak, Greenbaum & Goldstein did not perform for Enova any
assurance and related services that were reasonably related to the performance
of the audit of our financial statements for the fiscal year ended December 31,
2003.

Moss Adams, did not perform for Enova any assurance and related
services that were reasonably related to the performance of the audit of our
financial statements for the fiscal year ended December 31, 2003.

Tax Fees

Since November 21, 2003, Singer, Lewak, Greenbaum & Goldstein did not
perform for Enova any tax compliance, tax advice and tax planning services.

Moss Adams, LLP did not perform for Enova any tax compliance, tax
advice and tax planning services in fiscal 2002 or fiscal 2003.

All Other Fees

Neither Singer, Lewak, Greenbaum & Goldstein nor Moss Adams, LLP
performed any other services for fees other than audit fees in fiscal 2002 or
2003.

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PART IV

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

(a)1. Financial Statements

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

(a)2. Financial Statement Schedule

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

(a)3. Exhibits

See Item 15 (c) for Index of Exhibits.

(b) Reports on Form 8-K

On December 1, 2003, Registrant filed a Form 8-K, with date of
earliest event reported of November 21, 2003, reporting under items 4
and 7.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

24* Power of Attorney (included on signature page)

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

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

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

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

SIGNATURES

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

ENOVA SYSTEMS, INC.

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

Dated: March 30, 2004

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

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

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

/s/ Carl D. Perry Chief Executive March 30, 2004
------------------------------- Officer and Director
Carl D. Perry (Principal Executive Officer)

/s/ Larry B. Lombard Acting Chief Financial Officer
------------------------------- (Principal Financial Officer)
Larry B. Lombard March 30, 2004

/s/ Anthony N. Rawlinson Chairman March 30, 2004
-------------------------------
Anthony N. Rawlinson

/s/ Malcolm Currie Director March 30, 2004
-------------------------------
Malcolm Currie

/s/ Edwin O. Riddell Director March 30, 2004
-------------------------------
Edwin O. Riddell

/s/ John J. Micek, III Director March 30, 2004
-------------------------------
John J. Micek, III

/s/ Donald H. Dreyer Director March 30, 2004
-------------------------------
Donald H. Dreyer

/s/ John R. Wallace Director March 30, 2004
-------------------------------
John R. Wallace

ENOVA SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002, AND 2001

ENOVA SYSTEMS, INC.
CONTENTS
December 31, 2003

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

Page

INDEPENDENT AUDITOR'S REPORTS 1 - 2

FINANCIAL STATEMENTS

Balance Sheets 3 - 4

Statements of Operations 5

Statements of Stockholders' Equity 6

Statements of Cash Flows 7 - 8

Notes to Financial Statements 9 - 23

SUPPLEMENTAL INFORMATION

Independent Auditor's Report on Financial Statement Schedule 24

Valuation and Qualifying Accounts - Schedule II 25

[Letterhead of SINGER LEWAK GREENBAUM & GOLDSTEIN LLP]

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders Enova Systems, Inc.

We have audited the accompanying balance sheet of Enova Systems, Inc. as of
December 31, 2003, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. .

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

In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of Enova Systems, Inc. as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 25, 2004

INDEPENDENT AUDITOR'S REPORT

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

We have audited the accompanying balance sheet of Enova Systems Inc., as of
December 31, 2002, and the statements of operations, stockholders' equity, and
cash flows for the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of Enova Systems, Inc., as of
December 31, 2002, and the results of its operations and cash flows for the two
years then ended, in conformity with accounting principles generally accepted in
the United States of America.

/s/ MOSS ADAMS LLP
------------------
Santa Rosa, California
February 24, 2003

ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
--------------------------------------------------------------------------------

ASSETS

2003 2002
---------- ----------
Current assets
Cash and cash equivalents $ 530,000 $1,868,000
Accounts receivable 803,000 1,256,000
Inventories and supplies 1,606,000 1,652,000
Note receivable - related party 8,000 32,000
Prepaid expenses and other current assets 78,000 107,000
---------- ----------
Total current assets 3,025,000 4,915,000

Property and equipment, net 481,000 811,000
Investment 960,000 --
Other assets 404,000 498,000
---------- ----------
Total assets $4,870,000 $6,224,000
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

2003 2002
---------- ----------
Current liabilities
Accounts payable $ 768,000 $1,192,000
Line of credit 120,000 14,000
Accrued payroll and related expenses 120,000 240,000
Other accrued expenses 98,000 95,000
Current portion of notes payable 131,000 120,000
Current portion of capital lease obligations 23,000 28,000
---------- ----------
Total current liabilities 1,260,000 1,689,000

Accrued interest payable 1,122,000 889,000
Capital lease obligations, net of current portion 5,000 27,000
Notes payable, net of current portion 3,347,000 3,332,000
---------- ----------
Total liabilities 5,734,000 5,937,000
---------- ----------
Commitments and contingencies

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

ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
--------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

2003 2002
------------ ------------

Stockholders' equity
Series A convertible preferred stock, no par value
30,000,000 shares authorized
2,820,000 and 2,824,000 shares issued and
outstanding
Liquidating preference at $0.60 per share, aggregating
$1,692,000 and $1,706,000 $ 1,837,000 1,842,000
Series B convertible preferred stock, no par value
5,000,000 shares authorized
1,217,000 shares issued and
outstanding
Liquidating preference at $2 per share, aggregating $2,434,000 2,434,000 2,434,000
Common stock, no par value
500,000,000 shares authorized
378,341,000 and 345,194,000 shares issued and
outstanding 86,054,000 84,026,000
Common stock subscribed 60,000 130,000
Stock notes receivable (1,203,000) (1,203,000)
Additional paid-in capital 7,031,000 6,949,000
Accumulated deficit (97,077,000) (93,891,000)
------------ ------------

Total stockholders' equity (864,000) 287,000
------------ ------------

Total liabilities and stockholders' equity $ 4,870,000 $ 6,224,000
============ ============

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

ENOVA SYSTEMS, INC.
STATEMENT OF OPERATIONS
For the Years Ended December 31,
--------------------------------------------------------------------------------

2003 2002 2001
------------- ------------- -------------

Net revenues
Research and development contracts $ 1,889,000 $ 1,843,000 $ 2,813,000
Production 2,421,000 2,612,000 967,000
------------- ------------- -------------
Total net revenues 4,310,000 4,455,000 3,780,000
------------- ------------- -------------

Cost of revenues
Research and development contracts 1,326,000 1,288,000 2,149,000
Production 1,978,000 2,496,000 634,000
------------- ------------- -------------
Total cost of revenues 3,304,000 3,784,000 2,783,000
------------- ------------- -------------

Gross profit 1,006,000 671,000 997,000
------------- ------------- -------------

Other costs and expenses
Research and development 799,000 1,152,000 879,000
Selling, general, and administrative 2,919,000 2,837,000 2,894,000
Interest and financing fees, net 234,000 199,000 113,000
Loss on disposal of property and equipment -- -- (7,000)
Equity in losses 40,000 -- --
Asset impairement 200,000 -- --
Legal settlements -- 81,000 900,000
------------- ------------- -------------

Total other costs and expenses 4,192,000 4,269,000 4,779,000
------------- ------------- -------------

Loss from continuing operations (3,186,000) (3,598,000) (3,782,000)

Extraordinary item
Gain on debt restructuring -- -- 354,000
------------- ------------- -------------

Net loss $ (3,186,000) $ (3,598,000) $ (3,428,000)
============= ============= =============

Basic loss and diluted per share
Loss from continuing operations $ (0.01) $ (0.01) $ (0.01)
Gain on debt restructuring -- -- --
------------- ------------- -------------

Total basic and diluted loss per share $ (0.01) $ (0.01) $ (0.01)
============= ============= =============

Weighted-average number of
shares outstanding 334,839,700 326,390,422 275,188,979
============= ============= =============

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

ENOVA SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
--------------------------------------------------------------------------------

Convertible Preferred Stock
------------------------------------------------------------
Series A Series B Common Stock
--------------------------- --------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
--------- ------------ --------- ------------ ----------- ------------

Balance, December 31, 2000 2,844,000 $ 1,867,000 1,217,000 $ 2,434,000 244,249,000 $ 75,680,000
Issuance of common
stock for
Exercise of warrants 50,000,000 3,000,000
Exercise of options 1,805,000 181,000
Services 448,000 98,000
Legal settlement 6,000,000 900,000
Warrants issued for
value participation
agreement
Net loss -- -- --
--------- ------------ --------- ------------ ----------- ------------
Balance, December 31, 2001 2,844,000 1,867,000 1,217,000 2,434,000 302,502,000 79,859,000
Conversion of Series
A preferred stock (20,000) (25,000) 20,000 25,000
Issuance of common
stock for
Cash, net of offering
costs of $206,000 41,100,000 3,904,000
Exercise of options 30,000 3,000
Services 1,242,000 190,000
Legal settlement 300,000 45,000
Stock notes receivable
Net loss
--------- ------------ --------- ------------ ----------- ------------
Balance, December 31, 2002 2,824,000 $ 1,842,000 1,217,000 $ 2,434,000 345,194,000 $ 84,026,000
Conversion of Series
A preferred stock (4,000) (5,000) 4,000 5,000
Issuance of common
stock for
Cash 23,077,000 1,500,000
Issuance of subscribed
common stock 1,000,000 100,000
Exercise of options 8,694,000 389,000
Stock option
Services 372,000 34,000
Net loss
--------- ------------ --------- ------------ ----------- ------------
Balance, December 31, 2003 2,820,000 $ 1,837,000 1,217,000 $ 2,434,000 378,341,000 $ 86,054,000
--------- ------------ --------- ------------ ----------- ------------

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

Balance, December 31, 2000 45,000 $ 13,000 $ (1,149,000) $ 6,372,000 $(86,865,000) $ (1,648,000)
Issuance of common
stock for
Exercise of warrants 3,000,000
Exercise of options (59,000) 122,000
Services 955,000 147,000 245,000
Legal settlement 900,000
Warrants issued for
value participation
agreement 577,000 577,000
Net loss -- (3,428,000) (3,428,000)
--------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 1,000,000 160,000 (1,208,000) 6,949,000 (90,293,000) (232,000)
Conversion of Series
A preferred stock --
Issuance of common
stock for
Cash, net of offering
costs of $206,000 1,000,000 100,000 4,004,000
Exercise of options 3,000
Services (628,000) (130,000) 60,000
Legal settlement 45,000
Stock notes receivable 5,000 5,000
Net loss (3,598,000) (3,598,000)
--------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 1,372,000 $ 130,000 $ (1,203,000) $ 6,949,000 $(93,891,000) $ 287,000
Conversion of Series
A preferred stock --
Issuance of common
stock for
Cash 1,500,000
Issuance of subscribed
common stock 1,000,000) (100,000) --
Exercise of options 389,000
Stock option 82,000 82,000
Services 754,000 30,000 64,000
Net loss (3,186,000) (3,186,000)
--------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 1,126,000 $ 60,000 $ (1,203,000) $ 7,031,000 $(97,077,000) $ (864,000)
--------- ------------ ------------ ------------ ------------ ------------

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

ENOVA SYSTEMS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------------------------------------------

2003 2002 2001
----------- ----------- -----------

Cash flows from operating activities
Net loss $(3,186,000) $(3,598,000) $(3,428,000)
Adjustments to reconcile net loss
to net cash used in operating
activities
Depreciation and amortization 351,000 134,000 205,000
Bad debt expense 595,000 -- --
Provision for asset impairment 200,000 -- --
Equity in losses 40,000 -- --
Gain on debt restructuring -- -- (210,000)
Issuance of common stock for
services 34,000 60,000 245,000
Issuance of common stock for
legal settlement -- 45,000 900,000
(Increase) decrease in
Accounts receivable (138,000) (19,000) (233,000)
Inventories and supplies 48,000 (727,000) (520,000)
Related party receivable 24,000 25,000 25,000
Prepaid expenses and other
current assets 29,000 (20,000) (19,000)
Other assets (14,000) 76,000 (39,000)
Increase (decrease) in
Accounts payable and
accrued expenses (536,000) 1,112,000 (112,000)
Accrued interest payable 234,000 212,000 163,000
----------- ----------- -----------
Net cash used in operating activities (2,319,000) (2,700,000) (3,023,000)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment (113,000) (613,000) (219,000)
----------- ----------- -----------
Net cash used in investing activities (113,000) (613,000) (219,000)
----------- ----------- -----------

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

ENOVA SYSTEMS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------------------------------------------

2003 2002 2001
----------- ----------- -----------

Cash flows from financing activities
Net increase from line of credit $ 106,000 $ 14,000 $ --
Payments on notes payable and
capital lease obligations (1,000) (24,000) (11,000)
Proceeds from sale of common stock 600,000 4,210,000 --
Offering costs -- (206,000) --
Proceeds from exercise of warrants
and options 389,000 3,000 3,122,000
Payments on stock notes receivable -- 5,000 --
----------- ----------- -----------
Net cash provided by financing activities 1,094,000 4,002,000 3,111,000
----------- ----------- -----------

Net increase (decrease) in cash and
cash equivalents (1,338,000) 689,000 (131,000)

Cash and cash equivalents,
beginning of year 1,868,000 1,179,000 1,310,000
----------- ----------- -----------
Cash and cash equivalents,
end of year $ 530,000 $ 1,868,000 $ 1,179,000
=========== =========== ===========

Supplemental disclosures of cash
flow information
Interest paid $ 9,000 $ 8,000 $ 5,000
=========== =========== ===========
Income taxes paid $ -- $ -- $ --
=========== =========== ===========

Supplemental schedule of non-cash
investing and financing activities

Equipment acquired under capital
lease agreements $ -- $ 52,000 $ --
=========== =========== ===========
Conversion of preferred stock
to common stock $ (5,000) $ 25,000 $ --
=========== =========== ===========
Acquired investment under
common stock purchase $ 1,000,000 $ -- $ --
=========== =========== ===========

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

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

General

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

Liquidity

At December 31, 2003, the Company had a net working capital of
approximately $1,765,000 as compared to $3,226,000 at December 31,
2002, representing a decrease of $1,461,000. This decrease is due
mostly to losses from operations. Operating and investing activities
used approximately $2,306,000 and $113,000, respectively, while
financing activities provided $1,094,000.

During the year ended December 31, 2003, the Company reduced its
headcount and other administrative expenses. The Company anticipates
realizing the full impact of expense reductions in 2004. The Company's
business plan for 2004 provides for raising additional capital in order
to continue with the Company's operations until it becomes profitable.
The Company will also continue to search for areas in which to further
reduce expenses and increase sales.

In addition, additional payment of $500,000 is expected in June 2004
from HHI under the stock purchase agreement (Note 1), which will help
the Company to fund its operations.

See Note 15 for additional information.

Stock Purchase Agreement

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

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)

Stock Purchase Agreement (Continued)

The second installment of $1.5 million will be made one year after the
first installment in consideration for the issuance to HHI of
additional shares of the Company's common stock at a price per share
equal to the average daily volume weighted closing price of the
Company's common stock, as quoted on the NASDAQ OTC market (or
successor trading market) for the three month period preceding the
closing date of the second installment.

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenue on engineering and research and development contracts is
recognized at the completion of specified engineering or billing
milestones, as set forth in each agreement. Revenues from sales of
components are recognized when shipped and title passes to the
customer.

Comprehensive Income

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

Cash and Cash Equivalents

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

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts Receivable

Receivables are reported at net realizable value and are considered
past due when payments have not been received for 90 days. In general,
receivables are charged off as uncollectible upon exhausting all
avenues of collection. Receivables older than 90 days totaled $678,000
(of which $595,000 have been reserved for) and $365,000 at December 31,
2003 and 2002, respectively.

Inventories and Supplies

Inventories and supplies are comprised of materials used in the design
and development of electric, hybrid electric, and fuel cell drive
systems, and other power and ongoing management and control components
for production and ongoing development contracts, and is stated at the
lower of cost (first-in, first-out) or market.

Property and Equipment

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

Investment

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

Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalents,
accounts receivable and accounts payable. The book value of all other
financial instruments are representative of their fair values. The
Company's short and long term debt may be substantially less than the
carrying value since there is no readily ascertainable market for the
debt given the financial position of the Company.

Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the intrinsic value based
method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Advertising Expense

The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the years
ended December 31, 2003, 2002, and 2001 was $21,000, $20,000, and
$32,000, respectively.

Income Taxes

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

Loss Per Share

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

Estimates

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

Concentrations of Credit Risk

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

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Major Customers

During the year ended December 31, 2003, the Company conducted business
with four customers whose sales comprised 18%, 17%, 13%, and 11% of
total revenues. As of December 31, 2003, these customers accounted for
5%, 0%, 23%, and 3%, respectively, of total accounts receivable.

During the year ended December 31, 2002, the Company conducted business
with two customers whose sales comprised 46% of total revenues. As of
December 31, 2002, these customers accounted for 24%, of total accounts
receivable.

In addition, one of the Company's stockholders accounted for 1%, 16%,
and 13% of total revenues during the years ended December 31, 2003,
2002, and 2001, respectively. This stockholder holds less than 5% of
the total issued and outstanding common stock. Demand deposits are
placed with known, creditable financial institutions.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2003 and 2002 consisted of the
following:

2003 2002
---------- ----------
Computers $ 213,000 $ 177,000
Machinery and equipment 715,000 643,000
Furniture and office equipment 192,000 189,000
Demonstration vehicles and buses 297,000 497,000
Equipment under capital lease obligations 94,000 94,000
Leasehold improvements 68,000 68,000
---------- ----------

1,579,000 1,668,000
Less accumulated depreciation and amortization 1,098,000 857,000
---------- ----------

Total $ 481,000 $ 811,000
========== ==========

Depreciation and amortization expense was $241,000, $134,000, and
$205,000 for the years ended December 31, 2003, 2002, and 2001,
respectively.

NOTE 4 - INVESTMENT

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

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 4 - INVESTMENT (Continued)

The following is the condensed financial position and results of
operations of ITC, as of and for the year ended December 31, 2003:

Financial position
Current assets $ 2,413,000
Property and equipment, net 12,000
Liabilities (27,000)
-----------

Equity $ 2,398,000
===========

Operations
Net revenues $ 6,000
Expenses (107,000)
-----------

Net loss $ (101,000)
===========

Company's proportionate share of net loss $ (40,000)
===========

NOTE 5 - OTHER ASSETS

During the year ended December 31, 2002, the Company incurred legal
costs of $78,000 associated with two patents. These patents have been
capitalized and are being amortized over their estimated useful lives..

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

2003 2002
-------- --------
Patents $ 92,000 $ 78,000
Valuation Participation Agreement 577,000 577,000
-------- --------

669,000 655,000
Less accumulated amortization 265,000 157,000
-------- --------

Total $404,000 $498,000
======== ========

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 6 - LINE OF CREDIT

The Company has available $250,000 revolving line of credit from a bank
with interest payable monthly at 3.25%. The line of credit is secured
by $250,000 Certificate of Deposit and it's maturity has been extended
until April 2004.

NOTE 7 - NOTES PAYABLE

Notes payable at December 31, 2003 consisted of the following:

2003 2002
--------------- ----------------

Secured note payable to Credit Managers Association of
California, bearing interest at 6% per annum during 2003
and 2002 and at prime plus 3% per annum through maturity.
Principal and unpaid interest at due in April 2016. A
sinking fund escrow is required to be funded with 10% of
future equity financing, as defined in the agreement. $ 3,332,000 $ 3,332,000

Unsecured note payable, bearing interest at 10%
per annum. This note payable is in default. 120,000 120,000

Secured note payable to a financial institution in the
original amount of $33,000, bearing interest at 8% per
annum, payable in 36 equal monthly installments. 26,000 -
--------------- ----------------

3,478,000 3,452,000
Less current portion 131,000 120,000
--------------- ----------------

Long-term portion $ 3,347,000 $ 3,332,000
=============== ================

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 7 - NOTES PAYABLE (Continued)

Future minimum principal payments of notes payable at December 31, 2003
consisted of the following:

Year Ending
December 31,
------------
2004 $ 131,000
2005 12,000
2006 3,000
2007 -
2008 -
Thereafter 3,332,000
----------------

Total $ 3,478,000
================

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its facilities under an operating lease agreement,
which requires monthly payments of $11,000 and expires in February
2008. In addition, the Company rents manufacturing and office equipment
under various capital lease agreements.

Future minimum lease payments under these non-cancelable operating and
capital lease obligations at December 31, 2003 were as follows:

Year Ending Operating Capital
December 31, Leases Leases
-------- --------
2004 $ 97,000 $ 23,000
2005 155,000 8,000
2006 166,000 --
2007 168,000 --
2008 28,000 --
-------- --------
$614,000 31,000
========
Less amount representing interest 3,000
--------
28,000

Less current portion 23,000
--------
Long-term portion $ 5,000
========

Rent expense was $150,000, $206,000, and $210,000 for the years ended
December 31, 2003, 2002, and 2001, respectively.

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)

Contingency

Ballard Power Systems cancelled its development and production program
for low voltage 30kw electric drive system components that were for use
in Ford's Th!nk City vehicle. At December 31, 2002, included in
inventories and supplies was approximately $450,000 of materials
related to this program. Approximately $300,000 of materials and
engineering costs have been incurred by a subcontractor for which the
Company may be liable for payment.

In October 2003, Enova and Ballard reached a settlement on all
remaining balances due whereas Enova will receive $198,125 cash and
title to all inventory, raw materials, tooling and equipment in its
possession that is associated with the program. The Company intends to
sell this equipment and recover at least the remaining balance of the
receivable of approximately $173,000.

NOTE 9 - STOCKHOLDERS' EQUITY

Series A Preferred Stock

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

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

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 9 - STOCKHOLDERS' EQUITY (Continued)

Series B Preferred Stock

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

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

Common Stock

The Company settled an outstanding lawsuit in 2001 by agreeing to issue
6,000,000 shares of common stock, with a fair market value on the date
of issuance of $900,000. Delays in issuing the stock resulted in the
Company issuing an additional 300,000 shares of stock in 2002. The fair
market value of these additional shares was $45,000.

Stock Options and Warrants

The 1993 Employee and Consultant Stock Plan expired in 2003 and all
outstanding stock options were forfeited.

The Company grants other non-statutory stock options. Under the
Director Stock Option Plan, the Company reserved 1,500,000 shares of
common stock for non-statutory stock options for non-employee
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 or upon termination of the optionee's status as a
director. Options that expire or are canceled may become available for
future grants under the Director Option Plan. No options are
outstanding under this Plan.

The 1996 Stock Option Plan reserves 45,000,000 shares for incentive and
non-statutory stock options during the period of the Plan, which
expires in 2006. Options under the 1996 Plan expire over a period not
to exceed ten years.

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 9 - STOCKHOLDERS' EQUITY (Continued)

Stock Options and Warrants (Continued)

The following summarizes common stock option activity:

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

Outstanding,
December
31, 2000 20,465,000 $ 0.10 - 0.30 9,654,000 $ 0.10 - 0.60 1,495,000 $ 0.60 - 2.80
Granted 7,472,000 $ 0.11 - 0.18 - $ - - $ -
Exercised (1,805,000) $ 0.06 - 0.11 - $ - - $ -
Forfeited (5,266,000) $ 0.11 - 0.30 - $ - - $ -
------------- -------------- -------------

Outstanding,
December
31, 2001 20,866,000 $ 0.10 - 0.30 9,654,000 $ 0.10 - 0.60 1,495,000 $ 0.60 - 2.80
Granted 900,000 $ 0.10 - $ - - $ -
Exercised - $ - (35,000) $ 0.10 - $ -
Forfeited (439,000) $ 0.11 - 0.18 (2,565,000) $ 0.10 - $ -
------------- -------------- -------------

Outstanding,
December
31, 2002 21,327,000 $ 0.10 - 0.30 7,054,000 $ 0.10 - 0.60 1,495,000 $ 0.60 - 2.80
Granted 9,998,000 $ 0.05 - $ - - $ -
Exercised (8,638,000) $ 0.05 - 0.11 - $ - - $ -
Forfeited (1,556,000) $ 0.11 - 0.18 (7,054,000) $ 0.10 - 0.60 (1,495,000) $ 0.60 - 2.80
------------- -------------- -------------

Outstanding,
December
31, 2003 21,131,000 $ 0.14 - $ - - $ -
============= ============== =============

Exercisable,
December
31, 2003 20,898,000 $ 0.14 - $ - - $ -
============= ============== =============

The weighted-average remaining contractual life of the options
outstanding at December 31 2003 was 1.8 years. The exercise prices of
the options outstanding at December 31, 2003 ranged from $0.05 to
$0.30. Options exercisable were 20,898,000, 28,304,228, and 26,293,358
at December 31, 2003, 2002 and 2001.

The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB Opinion No. 25 and related interpretations in accounting
for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock and
options issued to outside third parties.

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 9 - STOCKHOLDERS' EQUITY (Continued)

Stock Options and Warrants (Continued)

If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net loss
and loss per share would be reduced to the pro forma amounts indicated
below for the years ended December 31, 2003, 2002, and 2001:

2003 2002 2001
------------ ------------- -------------
Net loss
As reported $ (3,186,000) $ (3,598,000) $ (3,428,000)
Pro forma $ (3,501,000) $ (3,795,000) $ (4,204,500)
Basic and diluted loss per
common share
As reported $ (0.01) $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.01) $ (0.01)

For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the years ended
December 31, 2003, 2002, and 2001: dividend yields of 0%, 0%, and 0%,
respectively; expected volatility of 88%, 83%, and 125%, respectively;
risk-free interest rates of 4%, 4%, and 5%, respectively; and expected
lives of three, five, and five years, respectively. The
weighted-average fair value of options granted during the year ended
December 31, 2003 for which the exercise price equals the market price
on the grant date was $0, and the weighted-average exercise price was
$0.051.

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

The agreement with Ford Motor Company (see Note 4) included issuing
warrants to Ford to purchase 4.6% of the fully diluted common stock of
Enova Systems over a 66 month period. The number of shares to be
acquired will be adjusted from time to time for increases in the
Company's fully diluted common stock. The vesting of these warrants is
dependent upon Ford meeting specific purchase requirements. Initially,
the exercise price of the warrants is equal to the price of the stock
on the date of issuance, with the exercise price adjusted when the
aggregate number of shares is adjusted.

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 9 - STOCKHOLDERS' EQUITY (Continued)

Stock Options and Warrants (Continued)

The fair value of warrants granted were estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 102%,
risk-free interest rate of 4.76% and an expected life of the warrants
of 66 months. Warrants issued and vested under this agreement totaled
2,500,000 at an exercise price of $0.29 per share during the year ended
December 31, 2001. No warrants were vested under this program during
2002 and 2003.

NOTE 10 - INCOME TAXES

Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31, 2003
and 2002 consisted of the following:

2003 2002
----------- -----------
Deferred tax assets
Federal tax loss carry-forward $31,286,000 $30,513,000
State tax loss carry-forward 712,000 404,000
Basis difference 1,610,000 1,610,000
Other, net 555,000 433,000
----------- -----------

34,163,000 32,960,000
Less valuation allowance 34,163,000 32,960,000
----------- -----------

Net deferred tax assets $ -- $ --
=========== ===========

As of December 31, 2003, the Company had net operating loss carry
forwards for federal and state income tax purposes of approximately
$92,867,000 and $8,589,000, respectively. The net operating loss carry
forwards began expiring in 2003.

NOTE 11 - RELATED PARTY TRANSACTIONS

During 2003, the Company purchased approximately $599,000 in
components, materials and services from HHI. The outstanding balance
owed to HHI at December 31, 2003 was approximately $395,000.

During 2003, the Company paid a total of $33,000 to three of its
directors in consulting fees.

ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------

NOTE 12 - EMPLOYEE BENEFIT PLAN

The Company has a 401(k) profit sharing plan covering substantially all
employees. Eligible employees may elect to contribute a percentage of
their annual compensation, as defined, to the plan. The Company may
also elect to make discretionary contributions. For the years ended
December 31, 2003, 2002, and 2001 the Company did not make any
contributions to the plan.

NOTE 13 - GEOGRAPHIC AREA DATA

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

2003 2002 2001
---------- ---------- ----------
United States $2,672,000 $2,478,000 $2,854,000
Italy 213,000 1,040,000 359,000
Korea 297,000 726,000 483,000
Japan 146,000 87,000 --
Malaysia 184,000 65,000 --
Ireland -- 59,000 --
Canada 738,000 -- --
England 60,000 -- 84,000
---------- ---------- ----------

Total $4,310,000 $4,455,000 $3,780,000
========== ========== ==========

NOTE 14 - EXTRAORDINARY ITEM

During the year ended December 31, 2000, the Company negotiated
repayment of long-term trade payables for less than the amounts
originally recorded. The gain from these negotiated payments is
reflected as an extraordinary item.

In consultation with legal counsel, certain payables were extinguished
under a provision of the California Code of Civil Procedure in which
the statute of limitations precluded the ability of a creditor to
commence an action to recover stale account balances. The Company
determined that conditions surrounding the application of the statute
of limitations had been met; accordingly, the 2001 and 2000
extraordinary item includes the gain from these extinguishments.

NOTE 15 - Subsequent Events

As of March 30, 2004, the Company has obtained several commitments from
investors to purchase approximately 15,000,000 shares of common stock
at $0.12 per share for a total cash purchase of approximately
$1,800,000.

SUPPLEMENTAL INFORMATION

Independent Auditor's Report on Financial Statement Schedule

[Letterhead of SINGER LEWAK GREENBAUM & GOLDSTEIN LLP]

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders Enova Systems, Inc.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule II for the year
ended December 31, 2003 is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 25,2004

ENOVA SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
For the Years Ended December 31,
--------------------------------------------------------------------------------

Balance Additions Deductions Balance,
Beginnin Charged to from End
of Year Operations Reserve of Year
------- ---------- ------- -------
Allowance for doubtful accounts

December 31, 2003 $ -- $595,000 $-- $595,000
======== ======== ====== ========

December 31, 2002 $ -- $ -- $-- $ --
======== ======== ====== ========

December 31, 2001 $ -- $ -- $-- $ --
======== ======== ====== ========

Reserve for obsolete inventories

December 31, 2003 $ 80,000 $ -- $-- $ 80,000
======== ======== ====== ========

December 31, 2002 $ 80,000 $ -- $-- $ 80,000
======== ======== ====== ========

December 31, 2001 $ 80,000 $ -- $-- $ 80,000
======== ======== ====== ========

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