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Annual Financial Report - FYE 2008

1st Apr 2009 07:00

RNS Number : 8797P

Enova Systems, Inc.

01 April 2009

For Immediate Release 31st of March 2009

Enova Systems INC., (AMEX: ENA and AIM: ENV and ENVS), a leading developer and manufacturer of electric, hybrid and fuel cell digital power management systems, announces annual results for the period ended December 31st 2008

Results of Operations

Highlights
	For The Years Ended
	December 31,
	2008	2007	$ Change	% Change
Net revenues	$6,443,000	$9,175,000	($2,732,000)	-30%
Cost of revenues	8,224,000	10,313,000	(2,089,000)	-20%
Gross loss	(1,781,000)	(1,138,000)	(643,000)	-57%

Net Revenues. The decrease in revenue was primarily due to a 60% reduction in sales to Tanfield Group Plc, our largest customer, which included the Company's authorization of a sales return totaling $515,000 for P90 systems in July 2008. In 2008, Tanfield, IC Corporation and HCATT comprised 28%, 13% and 22%, respectively of our 2008 revenues. In the prior year, the share of 2007 revenues attributable to Tanfield, IC Corporation and HCATT were 52%, 15% and 8%, respectively. The Company concentrated on support of several major customers in our migration to a first phase production company through 2007 and the first half of 2008. The change in the economic environment and the slow down in sales volume from major customers has led management to pursue development contracts with several new customers during the second half of the year, such as Optare Plc and the Darwen Group.

Cost of Revenues. Cost of revenues 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. Our customers continue to require additional integration and support services to customize, integrate, and evaluate our products. We believe that a portion of these costs are initial, one-time costs for these customers and anticipate similar costs to be incurred with respect to new customers as we gain additional market share. Customers who have been using our products over one year do not typically incur this same type of initial costs. The cost of revenues decreased in proportion with sales, with the exception that the Company recorded an inventory valuation allowance of $803,000 resulting from evaluation of inventory turnover.

Inquires:
Enova Systems Mike Staran, Chief Executive Officer	+1(310) 527-2800 x137
Jarett Fenton, Chief Financial Officer	+1(310) 527-3847
Investec James Grace	+44 (0) 20 7597 5970

Gross Margin. The gross margin for the year ended December 31, 2008 was negative 28% compared to a negative 12% in the prior year. Gross margins declined compared to the prior year due to an increase in the inventory reserve as well as reduced margins experienced in the second half of 2008 as compared to margins achieved due to record sales volumes in the second half of 2007.

Research and Development Expenses Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development activities. Non-funded development costs are reported as research and development expense. Research and development expense increased during the year ended December 31, 2008 to $2,505,000 from $1,947,000 for the same period in 2007, an increase of $558,000 or 29%. 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 will be able to provide a more comprehensive, adaptive and effective solution to a larger base of customers and applications. Major initiatives in 2008 revolved around additional resources towards implementation of new battery technologies, software development of engine stop for hybrid buses, and continuous improvement of key components such as chargers. 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. Selling, general and administrative expenses consist primarily of sales and marketing costs, including consulting fees and expenses for travel, trade shows and promotional activities and personnel and related costs for the quality and field service functions and general corporate functions, including finance, strategic and business development, human resources, IT and MRP implementation, accounting reserves and legal costs. Selling, general and administrative expenses increased by $2,264,000, or 35%, during the year ended December 31, 2008 to $8,692,000 from $6,428,000 in the prior year. During the first quarter of 2008, we moved into our new facility, resulting in an increase in costs for the move and rent for the year. In addition, we incurred consultant and internal labor charges of approximately $250,000 with respect to standardization efforts associated with Section 404 of the Sarbanes-Oxley Act of 2002 and the International Organization for Standardization ("ISO 9001 and 14001") certification,. To improve customer service after record 2007 sales, we devoted significant resources to the Field Service function, adding up to nearly $750,000 in costs for the year. We also incurred additional non-cash, stock compensation charges of $279,000 associated with option grants and stock issuances when comparing 2008 versus 2007, as well as an increase in the allowance for doubtful accounts of $575,000.

Interest and Financing Fees, Net. For the year ended December 31, 2008, interest and financing fees income was $202,000, a decrease of $141,000, or 41%, from $343,000, in 2007. The decrease is a result of a lower average cash balance through the latter half of 2008, when compared to the average cash balance during 2007 as well as lower prevailing money market rates in comparison to the same period in the prior year.

Equity in losses of non-consolidated joint venture. For the year ended December 31, 2008, ITC generated a net loss of approximately $296,000, resulting in a charge to Enova of $118,000 utilizing the equity method of accounting for our interest in the pro-rata share of losses attributable to this investment, which represents a decrease of $59,000, or 33%, from $177,000 for the same period in 2007.

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 2008 Financial Statements and accompanying Notes. The matters addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, may contain certain forward-looking statements involving risks and uncertainties.

Overview

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

We continue to support IC Corp. in their efforts to maximize exposure in the hybrid school bus market. We have been involved in large shows in Albany, NY and Reno, NV, Chicago, IL, Washington, DC, smaller venues throughout the Midwest as well as in Birmingham in the United Kingdom. The exposure via shows and direct interface was aggressively pursued throughout the remainder of 2008, in an effort to promote IC Corp.'s production intent for hybrid school buses. As a result of these continued domestic efforts, the Company expanded throughout the North American continent and has delivered hybrid school buses to Canada and Mexico through IC Corp.

Some notable highlights of Enova's accomplishments in 2008 are:

• In cooperation with International Truck and Engine ("IC Corp"), we delivered a plug-in hybrid bus to Denali National Park for use in transporting visitors. The IC Corp bus included our unique post-transmission parallel hybrid drive technology. We believe the utilization of our products in environments such as National Parks further demonstrates the diverse opportunities for our drive system. The delivery of this plug-in hybrid bus is part of the continued worldwide sales growth of our drive system technology for commercial and transit buses. According to results from recent independent third-party dynamometer testing, our IC Corporation plug-in hybrid bus is cleaner than standard diesel buses as they reduce carbon dioxide emissions by as much as 40 percent, nitrogen oxide by up to 20 percent and particulate matter by as much as 30 percent.

• The Internal Revenue Service ("IRS") granted several IC Corp school and commercial buses equipped with Enova's Charge Depleting Hybrid Drive System for the Qualified Heavy Hybrid Vehicles tax credit. Qualifying Heavy Hybrid vehicles are new vehicles with a gross vehicle weight in excess of 8,500 pounds that meet the definition of a qualifying hybrid vehicle. A qualifying hybrid vehicle means a motor vehicle which draws propulsion energy from onboard sources of stored energy which are both an internal combustion or heat engine using consumable fuel, and a rechargeable energy storage system. The 2008 and 2009 Navistar IC Bus Model PB10500 CE Series Hybrid School Buses as well as the 2008 and 2009 Navistar IC Bus Model PB10500 CE Commercial Buses, both equipped with Enova's Charge Depleting Hybrid Drive Systems with gross vehicle weights ranges from 14,001 - 26,000 lbs. and 26,001 - 33,000 lbs. are eligible for $6,000 and $12,000 tax credits, respectively.

• Enova management visited First Auto Works of China's ("FAW") research and development center and FAW's affiliate electronics manufacturer in China, to further develop the basis for a continued cooperation on hybrid transit buses, and potentially on other FAW vehicles. In addition, Enova completed twenty (20) successful trials of our pre-transmission hybrid drive systems. These trials were completed on passenger routes within the Olympic sector during the Beijing Olympics. As a result of these trials, additional orders have been placed for our pre-transmission hybrid-electric drive from FAW. The FAW hybrid-electric "City Bus" is a vehicle that is built by the Wuxi division of FAW Bus & Coach. The factory is now set to begin mass production of the new hybrid municipal transit bus which is designed for China's increasingly popular Bus Rapid Transit (BRT) systems and traditional inner city mass transit routes. This new model, for which FAW has 10 proprietary patents, delivers a fuel economy increase of 38% and an emissions reduction of 30%, compared to traditional diesel buses.

• Optare Plc ("Optare") engaged Enova to develop two different prototype transit buses for a new UK bus manufacturer. These vehicles were delivered in the third quarter of 2008. The plug-in hybrid diesel-electric and full-electric vehicles will use the latest lithium ion battery technology to provide maximum vehicle range and fuel efficiency. Enova's electric and hybrid drive system solutions include fully integrated on-board or stationary battery charging systems. The Enova drive systems and chargers will were featured in two, new Optare transit buses which debuted in the fourth quarter of 2008 at the Euro Bus Expo in Birmingham, UK.

• In September 2008, the material weakness in our inventory process was remediated and management asserted that internal controls over financial reporting were operating effectively as of September 30, 2008. Management asserts that our internal controls over financial reporting were also operating effectively as of December 31, 2008 or the date of this Form 10-K annual report as referenced in Item 9A of Part II herein.

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

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

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

In light of our efforts to grow market share in our target markets and penetrate emerging ones, the Company acknowledged the principal barrier to commercialization of our drive systems is cost. The high cost of engineering proprietary software and hardware for our drive systems is high because economies of production in specialized hybrid drive system component parts, batteries, and vehicle integration have not been achieved. Therefore, the cost of our products and engineering services are currently higher than our gasoline and diesel competitor counterparts. We also believe maturation into commercialization of our drive systems will result in decreases to our long run average costs of materials and services as volume increases over time.

Financial Results

	For and as of the Years Ended December 31,
	2008	2007	2006	2005	2004
	(In thousands, except per share data)
Statement of Operations Data
Net revenues	$6,443	$9,175	$1,666	$6,084	$2,554
Cost of revenues	8,224	10,313	2,900	6,001	2,239
Gross profit (loss)	(1,781)	(1,138)	(1,234)	83	315
Operating expenses
Research and development	2,505	1,947	1,363	804	925
Selling, general and administrative	8,692	6,428	4,178	2,870	2,325
Total operating expense	11,197	8,375	5,541	3,674	3,250
Other income and expense
Interest and financing fees, net	202	343	550	13	(255)
Equity in losses of non-consolidated joint venture	(118)	(177)	(3)	(118)	(192)
Gain on debt restructuring	-	-	1,392	1,569	-
Total other income, net	84	166	1,939	1,464	(447)
Net loss	$(12,894)	$(9,347)	$(4,836)	$(2,127)	$(3,382)
Per common share:
Basic and diluted loss per share	$(0.66)	$(0.59)	$(0.33)	$(0.18)	$(0.38)
Weighted average number of common shares outstanding	19,660	15,796	14,802	11,644	8,832
Balance Sheet Data
Total assets	$19,242	$21,173	$15,730	$21,973	$5,888
Long-term debt	$1,263	$1,306	$1,295	$2,321	$3,341
Shareholders' equity	$14,143	$ 14,177	$11,964	$16,604	$ 103

Critical Accounting Policies

The following represents a summary of our critical accounting policies, defined as those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve inherently uncertain issues which require management's most difficult, subjective or complex judgments.

Cash and cash equivalents - Cash consists of currency held at reputable financial institutions. Short-term, highly liquid investments with an original maturity of three months or less are considered cash equivalents.

Allowance for doubtful accounts - The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectibility. If the financial condition of the Company's customers were to deteriorate resulting in an impairment of their ability to make payment, additional allowances may be required. In addition, the Company maintains a general reserve for all invoices by applying a percentage based on the age category. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.

Inventory - Inventories are priced at the lower of cost or market utilizing the first-in, first-out (FIFO) cost flow assumption. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of transfer to the customer. Generally, title transfer is documented in the terms of sale.

Inventory reserve - We maintain an allowance against inventory for the potential future obsolescence or excess inventory. A substantial decrease in expected demand for our products, or decreases in our selling prices could lead to excess or overvalued inventories and could require us to substantially increase our allowance for excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the revision is made.

Property and Equipment - Property and equipment are stated at cost and depreciated over the estimated useful lives of the related assets, which range from three to seven years using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Repairs and maintenance are expensed as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. When property and equipment are retired, sold, or otherwise disposed of, the asset's cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

Impairment of Long-Lived Assets - The Company assesses the impairment of its long-lived assets periodically in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for the Impairment and Disposal of Long-Lived Assets". The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. Long-lived assets that management commits to sell or abandon are reported at the lower of carrying amount or fair value less cost to sell.

Equity Method Investment - Investment in ITC, a joint venture (see Note 1) is accounted for by the equity method. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's balance sheets or statements of operations; however, the Company's share of the earnings or losses of the investee company is reflected in the caption "Equity losses in non-consolidated joint venture" in the statements of operations. The Company's carrying value in an equity method joint venture company is reflected in the caption "Investment in non-consolidated joint venture" in the Company's balance sheets.

Stock-Based Compensation - The Company calculates stock-based compensation expense in accordance with SFAS No. 123 revised, "Share-Based Payment" ("SFAS 123(R)"). This pronouncement requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options to be based on estimated fair values. The Company also applies the provisions sets forth in the Securities and Exchange Commission's Staff Accounting Bulletin 107 ("SAB 107") relating to its adoption of SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the beginning in 2006.

The Company's determination of estimated fair value of share-based awards utilizes the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company's stock price as well as assumptions regarding certain highly complex and subjective variables. These variables include, but are not limited to; the Company's expected stock price volatility over the term of the awards as well as actual and projected employee stock option exercise behaviors. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees ("APB 25").

Revenue recognition - The Company manufactures proprietary products and other products based on design specifications provided by its customers. The Company recognizes revenue only when all of the following criteria have been met:

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

• The fee for the arrangement is fixed or determinable; and

• Collectibility is reasonably assured.

Persuasive Evidence of an Arrangement - The Company documents all terms of an arrangement in a written contract signed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Rendered - The Company performs all services or delivers all products prior to recognizing revenue. Professional consulting and engineering services are considered to be performed when the services are complete. Equipment is considered delivered upon delivery to a customer's designated location. In certain instances, the customer elects to take title upon shipment.

The Fee for the Arrangement is Fixed or Determinable - Prior to recognizing revenue, a customer's fee is either fixed or determinable under the terms of the written contract. Fees professional consulting services, engineering services and equipment sales are fixed under the terms of the written contract. The customer's fee is negotiated at the outset of the arrangement and is not subject to refund or adjustment during the initial term of the arrangement.

Collectibility is Reasonably Assured - The Company determines that collectibility is reasonably assured prior to recognizing revenue. Collectibility is assessed on a customer-by-customer basis based on criteria outlined by management. New customers are subject to a credit review process, which evaluates the customer's financial position and ultimately its ability to pay. The Company does not enter into arrangements unless collectibility is reasonably assured at the outset. Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined during the arrangement that collectibility is not reasonably assured, revenue is recognized on a cash basis. Additionally, in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104 ("SAB 104"), amounts received upfront for engineering or development fees under multiple-element arrangements are deferred and recognized over the period of committed services or performance, if such arrangements require the Company to provide on-going services or performance. All amounts received under collaborative research agreements or research and development contracts are nonrefundable, regardless of the success of the underlying research.

Pursuant to Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board Issue 00-21. EITF Issue 00-21 addressed the accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Specifically, Issue 00-21 requires the recognition of revenue from milestone payments over the remaining minimum period of performance obligations. As required, the Company applies the principles of Issue 00-21 to multiple element agreements.

The Company also recognizes engineering and construction contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues when management believes that the company is responsible for the ultimate acceptability of the project. Contracts are segmented between types of services, such as engineering and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered.

Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Claims against customers are recognized as revenue upon settlement. Revenues recognized in excess of amounts received are classified as current assets under contract work-in-progress. Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities on contracts.

Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to engineering and development contract costs and revenue.

These accounting policies were applied consistently for all periods 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.

Several other factors related to the Company may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition related to product contracts are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as acceptance of services provided, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of our products often cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred.

Research and Development - In accordance with SFAS No. 2, "Accounting for Research Development Costs" research, development, and engineering costs are expensed in the year incurred. Costs of significantly altering existing technology are expensed as incurred.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS 141R") which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until January 1, 2009. The Company does not expect SFAS 141R will have an impact on its financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date. The Company is evaluating the impact of this standard and currently does not expect it to have a significant impact on its financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 introduces significant changes in the accounting and reporting for business acquisitions and noncontrolling interest ("NCI") in a subsidiary. SFAS 160 also changes the accounting for and reporting for the deconsolidation of a subsidiary. Companies are required to adopt the new standard for fiscal years beginning after January 1, 2009. The Company is evaluating the impact of this standard and currently does not expect it to have a significant impact on its financial position, results of operations or cash flows.

In February 2008, The FASB issued FSP No. 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP No. 140-3"). FSP No. 140-3 clarifies repurchase financing, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. FSP No. 140-3 is effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company is evaluating the impact of this standard and currently does not expect the adoption of FSP No. 140-3 to have a significant impact on its financial position, cash flows and results of operations.

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. The provisions of SFAS No. 157 were to be effective for fiscal years beginning after November 15, 2007. On February 6, 2008, the FASB agreed to defer the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Effective January 1, 2008, the Company adopted SFAS No. 157 except as it applies to those nonfinancial assets and nonfinancial liabilities. The adoption of SFAS No. 157 did not have significant impact on its financial position, cash flows and results of operations.

In February 2007, the FASB issued SFAS No. 159 ", "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value. Effective January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115." SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in the results of operations. SFAS No. 159 also establishes additional disclosure requirements. The Company did not elect the fair value option under SFAS No. 159 for any of its financial assets or liabilities upon adoption. The adoption of SFAS No. 159 did not have a significant impact on its financial position, cash flows and results of operations.

In March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Companies are required to adopt the new standard for be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS 161 to have a significant impact on its financial position, results of operations or cash flows.

In June 2007 the FASB ratified EITF No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities" ("EITF 07-3") which requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. EITF 07-3 is effective for fiscal years beginning after December 15, 2007. Effective January 1, 2008, the Company adopted EITF 07-3. The adoption of EITF 07-3 did not have a significant impact on its financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3, "Determination of the Useful Life of Intangible Assets," ("FSP 142-3"). The intent of this FSP is to improve consistency between the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and the period of expected cash flows used to measure the fair value of the intangible asset under SFAS No. 141R. FSP No. 142-3 will require that the determination of the useful life of intangible assets acquired after the effective date of this FSP shall include assumptions regarding renewal or extension, regardless of whether such arrangements have explicit renewal or extension provisions, based on an entity's historical experience in renewing or extending such arrangements. In addition, FSP No. 142-3 requires expanded disclosures regarding intangible assets existing as of each reporting period. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP 142-3 to have a significant impact on its financial position, results of operations or cash flows.

In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, "The Hierarchy of Generally Accepted Accounting Principles." The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards (SAS) No. 69, "The Meaning of Present in Conformity With GAAP," FAS No. 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with GAAP," and is not expected to have any impact on the Company's results of operations, financial condition or liquidity.

In June 2007, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 06-11 ("EITF Issue No. 06-11"), "Accounting for Income Tax Benefits of Dividends on Shared-Based Payment Awards". EITF Issue No 06-11 requires that tax benefits generated by dividends paid during the vesting period on certain equity- classified share-based compensation awards be treated as additional paid-in capital and included in a pool of excess tax benefits available to absorb tax deficiencies from share-based payment awards. EITF Issue No. 06-11 is effective beginning with the 2009 fiscal year. The Company does not expect it to have a significant impact on its financial position, results of operations or cash flows.

Liquidity and Capital Resources

We have experienced losses primarily attributable to research, development, marketing and other costs associated with our strategic plan as an international developer and supplier of electric propulsion and power management systems and components. Cash flows from operations have not been sufficient to meet our obligations. Therefore, we have had to raise funds through several financing transactions. At least until we reach breakeven volume in sales and develop and/or acquire the capability to manufacture and sell our products profitably, we will need to continue to rely on cash from external financing sources. Our operations during the year ended December 31, 2008 were financed by product sales, working capital reserves and equity capital raises. At fiscal year end, the Company had $7,324,000 of cash and cash equivalents and short term investments.

We have a secured revolving credit facility from Union Bank of California for $2,000,000. The credit facility expires on June 30, 2009. As of December 31, 2008, $1,800,000 was available under the credit facility as a $200,000 irrevocable letter of credit was issued by Union bank in favor of our landlord with respect to the lease of our new corporate headquarters. The credit facility is secured by a $2,000,000 certificate of deposit. The interest rate is the certificate of deposit rate plus 1.25% with interest payable monthly and the principal due at maturity.

Net cash used in operating activities was $13,582,000 for the year ended December 31, 2008 compared to $10,561,000 for the prior year ended December 31, 2007. Cash used in operating activities was affected mostly by the cost of revenue, R&D, personnel and general operating costs, as well as an increase in inventory balances. Non-cash items included expenses for stock-based compensation, depreciation and amortization, inventory valuation reserve, bad debt expense, equity losses in our non-consolidated joint venture, and issuance of common stock for services.

Net cash used in investing activities was $3,524,000 for the year ended December 31, 2008 compared to net cash provided of $4,485,000 in the prior year. Cash used in investing activities in 2008 was attributed to leasehold improvements and fixed asset purchases associated with our move into a new facility and the purchase of a certificate of deposit of $2,000,000 used as security for the revolving credit facility referenced above. Cash provided by investing activities in 2007 was attributed to the maturity of a certificate of deposit of $5,000,000 and purchases of $515,000 of property and equipment.

Net cash provided by financing activities totaled $11,945,000 for the year ended December 31, 2008, compared to net cash provided of $10,949,000 for the year ended December 31, 2007. During the first and second quarters of 2008, we raised capital through two placements of common stock. On April 3, 2008, we sold 2,131,274 shares of common stock at 195 pence sterling per share (approximately US$3.91 per share) to certain eligible offshore investors. We received approximately 3,990,000 pounds sterling or approximately $7,784,000 in net proceeds. On May 1, 2008, we sold 1,273,700 shares of common stock for $3.91 per share to certain accredited investors, resulting in net proceeds of approximately $4,704,000.

Short term investments increased by $2,000,000 in 2008 compared to 2007. The company purchased a $2,000,000 certificate of deposit to secure a credit facility of $2,000,000 with Union Bank.

Accounts receivable decreased by $3,448,000 or 81% from $4,256,000 at December 31, 2007 to $808,000 at December 31, 2008 due to reduced revenue and increased collection efforts in 2008.

Inventory increased from $3,565,000 as of December 31, 2007 to $7,649,000 as of December 31, 2008, representing a 115% increase in the balance. The increase was a result of inventory purchases through the third quarter of 2008 as the Company took delivery of product in anticipation of sales volume from key customers.

Prepaid expenses and other current assets decreased by $242,000, or 53%, from the December 31, 2007 balance of $457,000. The decrease is primarily attributable to deposits made in prior years being released in 2008.

Property and equipment increased by $959,000 or 110%, net of accumulated depreciation, to $1,829,000 as of December 31, 2008 from the prior year balance of $870,000. The increase was primarily due to the investment in leasehold improvements for the new facility moved in to during the first quarter of 2008 and continued planned purchases of computers, furniture, office equipment, software, production tooling, machinery and equipment associated with the expansion. These increases were consistent with the Company's progression to a production stage.

Intangible assets decreased by $5,000 during 2008 from $70,000 at December 31, 2007. Enova did not recognize any additional intellectual property assets, including patents and trademarks, during 2008. The change in the balance was a result of the amortization of the patents.

Accounts payable decreased by $1,285,000, or 68%, from $1,877,000 at December 31, 2007 to $592,000 at December 31, 2008. The accounts payable balance was reduced through the second half of the year as the company decreased purchase volumes in-line with changes in anticipated sales volume.

Enova reported $0 of deferred revenue at December 31, 2008, compared to a deferred revenue balance at December 31, 2007 of $101,000, which the Company recognized into revenue.

Accrued payroll and related expenses decreased by $385,000 or 57% from $680,000 at December 31, 2007 to $295,000 at December 31, 2008, due to decreased personnel costs in light of the Company's reorganization efforts during 2008.

Other accrued expenses and payables decreased by $204,000 during 2008, from $2,063,000 at December 31, 2007. The decrease is primarily attributable to a decline in accruals for inventory receipts due to lower sales activity in the latter half of 2008.

Accrued interest increased by $118,000 from $874,000 at December 31, 2007 to $992,000. The majority of the increase is associated with the interest accrued on the $1.2 million note due the Credit Managers Association of California (CMAC).

Contractual Obligations

As of December 31, 2008, our contractual obligations for the next five years, and thereafter, were as follows (in thousands):

	Payments Due by Period
	Total	Less than 1 Year	1-3 Years	3-5 Years	More than 5 Years
Long-Term Debt Obligations	$1,361	$ 98	$25	$-	$ 1,238
Operating Lease Obligations	1,756	439	878	439	-
Purchase Obligations	-	-	-	-	-
Accrued Interest	992	16	-	-	976
Total	$4,109	$553	$903	$439	$ 2,214

Joint Venture - Hyundai-Enova Innovative Technology Center

In September 2003, Enova and Hyundai Heavy Industries, Co. Ltd. ("HHI") commenced a relationship to establish the Hyundai-Enova Innovative Technology Center ("ITC") to be located at Enova's Torrance headquarters. ITC was originally established as a technical center for specified products that would engage Enova as the commercial managers, ITC as the primary engineering and development venture, and HHI as the primary components supplier. ITC was integral to our development and financial stability in prior years, however Enova is now more established in the market as a fully functional, self-sufficient entity. Enova, along with HHI, evaluated this relationship to determine its future role for both companies. As a result of this evaluation, HHI and Enova have entered negotiations to dissolve the joint venture.

ENOVA SYSTEMS, INC.

BALANCE SHEETS

	December 31,
	2008		2007
ASSETS
Current assets:
Cash and cash equivalents	$ 5,324,000		$ 10,485,000
Short term investments	2,000,000		-
Accounts receivable, net	808,000		4,256,000
Inventories and supplies, net	7,649,000		3,565,000
Prepaid expenses and other current assets	215,000		457,000
Total current assets	15,996,000		18,763,000
Property and equipment, net	1,829,000		870,000
Investment in non-consolidated joint venture	1,352,000		1,470,000
Intangible assets, net	65,000		70,000
Total assets	$ 19,242,000		$ 21,173,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 592,000		$ 1,877,000
Deferred revenues	-		101,000
Accrued payroll and related expenses	295,000		680,000
Other accrued expenses	1,859,000		2,063,000
Current portion of notes payable	98,000		95,000
Total current liabilities	2,844,000		4,816,000
Accrued interest payable	992,000		874,000
Notes payable, net of current portion	1,263,000		1,306,000
Total liabilities	5,099,000		6,996,000
Commitments and contingencies (Note 10)
Stockholders' equity:
Series A convertible preferred stock - no par value, 30,000,000 shares authorized; 2,652,000 shares issued and outstanding; liquidating preference at $0.60 per share as of December 31, 2008 and 2007	530,000		530,000
Series B convertible preferred stock - no par value, 5,000,000 shares authorized; 546,000 shares issued and outstanding; liquidating preference at $2 per share as of December 31, 2008 and 2007	1,094,000		1,094,000
Common stock - no par value, 750,000,000 shares authorized; 20,817,000 and 17,182,000 shares issued and outstanding as of December 31, 2008 and 2007, respectively	134,233,000		122,000,000
Additional paid-in capital	7,949,000		7,322,000
Accumulated deficit	(129,663,000)		(116,769,000)
Total stockholders' equity	14,143,000		14,177,000
Total liabilities and stockholders' equity	$ 19,242,000	$ 21,173,000

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

ENOVA SYSTEMS, INC.

STATEMENTS OF OPERATIONS

	For the Years Ended December 31,
	2008	2007
Revenues	$ 6,443,000	$ 9,175,000
Cost of revenues	8,224,000	10,313,000
Gross loss	(1,781,000)	(1,138,000)
Operating expenses
Research and development	2,505,000	1,947,000
Selling, general & administrative	8,692,000	6,428,000
Total operating expenses	11,197,000	8,375,000
Operating loss	(12,978,000)	(9,513,000)
Other income and (expense)
Interest and financing fees, net	202,000	343,000
Equity in losses of non-consolidated joint venture	(118,000)	(177,000)
Total other income, net	84,000	166,000
Net loss	$ (12,894,000)	$ (9,347,000)
Basic and diluted loss per share	$ (0.66)	$ (0.59)
Weighted average number of common shares outstanding	19,660,000	15,796,000

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

ENOVA SYSTEMS, INC.

	Convertible Preferred Stock
	Series A		Series B			Common Stock
	Shares	Amount		Shares	Amount	Shares	Amount
Balance, December 31, 2006	2,652,000	$530,000		1,185,000	$2,432,000	14,848,000	$109,496,000
Conversion of series B preferred stock				(639,000)	(1,338,000)	28,000	1,338,000
Exercise of stock options						44,000	193,000
Issuance of common stock for cash						2,218,000	10,767,000
Issuance of common stock for director services						28,000	138,000
Issuance of common stock for employee services						16,000	68,000
Stock option expense
Cash received for stock note receivable
Net loss
Balance, December 31, 2007	2,652,000	$530,000		546,000	$ 1,094,000	17,182,000	$122,000,000
Issuance of common stock for cash						3,430,000	12,008,000
Issuance of common stock for director services						153,000	174,000
Issuance of common stock for employee services						52,000	51,000
Stock option expense
Net loss
Balance, December 31, 2008	2,652,000	$530,000		546,000	$1,094,000	20,817,000	$134,233,000

	Notes Receivable for the Sale of Preferred Stock	Additional Paid-in Capital	Deficit	Total
Balance, December 31, 2006	$(27,000)	$6,955,000	$(107,422,000)	$11,964,000
Conversion of series B preferred stock				-
Exercise of stock options				193,000
Issuance of common stock for cash				10,767,000
Issuance of common stock for director services				138,000
Issuance of common stock for employee services				68,000
Stock option expense		367,000		367,000
Cash received for stock note receivable	27,000			27,000
Net loss			(9,347,000)	(9,347,000)
Balance, December 31, 2007	$ --	$7,322,000	$(116,769,000)	$14,177,000
Issuance of common stock for cash				12,008,000
Issuance of common stock for director services				174,000
Issuance of common stock for employee services				51,000
Stock option expense		627,000		627,000
Net loss			(12,894,000)	(12,894,000)
Balance, December 31, 2008	$ --	$7,949,000	$(129,663,000)	$14,143,000

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

ENOVA SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

	For the Years Ended December 31,
	2008	2007
Cash flows from operating activities
Net loss	$ (12,894,000)	$ (9,347,000)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization	593,000	300,000
Loss on asset disposal	-	52,000
Inventory reserve	803,000	100,000
Reserve for doubtful accounts	575,000	-
Equity in losses of non-consolidated joint venture	118,000	177,000
Issuance of common stock for director services	174,000	138,000
Issuance of common stock for employee services	51,000	68,000
Stock option expense	627,000	367,000
(Increase) decrease in:
Accounts receivable	2,873,000	(3,898,000)
Inventories and supplies	(4,887,000)	(1,961,000)
Prepaid expenses and other current assets	242,000	251,000
Increase (decrease) in:
Accounts payable	(1,285,000)	1,495,000
Accrued payroll and related expenses	(385,000)	460,000
Accrued expenses	(204,000)	1,396,000
Deferred revenues	(101,000)	(298,000)
Accrued interest payable	118,000	139,000
Net cash used in operating activities	(13,582,000)	(10,561,000)
Cash flows from investing activities
Purchases of short-term investments	(2,000,000)	-
Maturities of short-term investments	-	5,000,000
Purchases of property and equipment	(1,524,000)	(515,000)
Net cash provided by (used in) investing activities	(3,524,000)	4,485,000
Cash flows from financing activities
Payments on notes payable	(63,000)	(38,000)
Net proceeds from sales of common stock	12,008,000	10,767,000
Proceeds from the execution of stock options	-	193,000
Proceeds from repayment of stock note receivable	-	27,000
Net cash provided by financing activities	11,945,000	10,949,000
Net increase (decrease) in cash and cash equivalents	(5,161,000)	4,873,000
Cash and cash equivalents, beginning of period	10,485,000	5,612,000
Cash and cash equivalents, end of period	$ 5,324,000	$ 10,485,000
Supplemental disclosure of cash flow information
Interest paid	$ 9,000	$ 7,000
Assets acquired through financing arrangements	$ 23,000	$ 74,000

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

ENOVA SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

1. Description 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

The Company has sustained recurring losses and negative cash flows from operations. Over the past year, the Company's growth has been funded through a combination of private equity and financing agreements. As of December 31, 2008, the Company had approximately $7.3 million of cash and cash equivalents. At December 31, 2008, the Company had a net working capital of approximately $13.1 million as compared to $13.9 million at December 31, 2007, representing a decrease of $800,000. Management has implemented measures to conserve cash, including reductions in employee headcount, restrictions on inventory and capital expenditure purchases, and plans that utilize current inventory balances through sales to core customers in 2009. Therefore, the Company believes that it currently has sufficient cash and financial resources to meet its funding requirements over the next year. However, the Company has experienced and continues to experience recurring operating losses and negative cash flows from operations, as well as an ongoing requirement for substantial additional capital investment. The Company expects that it will need to raise additional capital to accomplish its business plan over the next several years. The Company is striving to expand its presence in the marketplace and achieve operating efficiencies.

Hyundai-Enova Innovative Technology Center

In June 2003, the Company and Hyundai Heavy Industries of Korea ("HHI") commenced operations of Hyundai-Enova Innovative Technology Center, Inc. ("ITC"), a 60/40 joint venture to develop hybrid drive technology. ITC is domiciled in Torrance, California. Concurrent with the formation of the joint venture, the Company entered into a stock purchase agreement with HHI.

Pursuant to the stock purchase agreement HHI agreed to make a $3 million investment in the Company through the purchase of shares of the Company's authorized and unissued common stock pursuant to Regulation D of the Securities Act of 1933. This investment was made in two installments of $1.5 million each. The first installment was made in June 2003 upon incorporation of ITC and in consideration for the issuance to HHI by the Company of 512,820 shares of common stock at $2.925 per share. The second installment was made in September 2004 in consideration for the issuance to HHI by the Company of 251,895 shares of common stock at $5.953 per share.

The Company invested $1 million of each installment into 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, was retained by the Company). HHI acquired a 60% equity interest in ITC by investing $3 million in ITC. HHI and the Company have invested an aggregate of $5 million in ITC.

Enova, along with HHI, evaluated the future role in ITC for both companies. As a result of this evaluation, HHI and Enova have entered into negotiations to dissolve the joint venture.

2. Summary of Significant Accounting Policies

Revenue Recognition

The Company manufactures proprietary products and other products based on design specifications provided by its customers.

The Company recognizes revenue only when all of the following criteria have been met:

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

• The fee for the arrangement is fixed or determinable; and

• Collectibility is reasonably assured.

Persuasive Evidence of an Arrangement - The Company documents all terms of an arrangement in a written contract signed by the customer prior to recognizing revenue.

Pursuant to Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board Issue 00-21. the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets is considered. Specifically, Issue 00-21 requires the recognition of revenue from milestone payments over the remaining minimum period of performance obligations. As required, the Company applies the principles of Issue 00-21 to multiple element agreements.

The Company recognizes engineering and construction contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Customer-furnished materials, labor, and equipment, and in certain cases subcontractor materials, labor, and equipment, are included in revenues and cost of revenues when management believes that the company is responsible for the ultimate acceptability of the project. Contracts are segmented between types of services, such as engineering and construction, and accordingly, gross margin related to each activity is recognized as those separate services are rendered. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Claims against customers are recognized as revenue upon settlement. Revenues recognized in excess of amounts billed are classified as current assets under contract work-in-progress. Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities under advance billings on contracts. Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to engineering and development contract costs and revenue.

Deferred Revenue

The Company recognizes revenues as earned. Amounts billed in advance of the period in which service is rendered are recorded as a liability under Deferred Revenue.

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

Short-term, highly liquid investments with an original maturity of three months or less are considered cash equivalents.

Short-Term Investments

Short-term investments consist of certificates of deposit with maturities of less than a year.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. If the financial condition of the Company's customers were to deteriorate resulting in an impairment of their ability to make payment, additional allowances may be required. In addition, the Company maintains a general reserve for all invoices by applying a percentage based on the age category. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote. As of December 31, 2008 and 2007, the Company maintained a reserve of $640,000 and $261,000 for doubtful accounts receivable. Bad debt expense of $575,000 and $0 was recorded in 2008 and 2007, respectively.

Inventory

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, finished goods and work-in-progress, and is stated at the lower of cost or market utilizing the first-in, first-out (FIFO) cost flow assumption. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of transfer to the customer. Generally, title transfer is documented in the terms of sale.

Inventory reserve

We maintain an allowance against inventory for the potential future obsolescence or excess inventory. A substantial decrease in expected demand for our products, or decreases in our selling prices could lead to excess or overvalued inventories and could require us to substantially increase our allowance for excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the revision is made.

Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated useful lives of the related assets, which range from three to seven years using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Impairment of Long-Lived Assets

The Company assesses the impairment of its long-lived assets periodically in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for the Impairment and Disposal of Long-Lived Assets".

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. Long-lived assets that management commits to sell or abandon are reported at the lower of carrying amount or fair value less cost to sell.

Equity Method Investment

Investment in ITC, a joint venture (see Note 1) is accounted for by the equity method. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's balance sheets or statements of operations; however, the Company's share of the earnings or losses of the investee company is reflected in the caption "Equity losses in non-consolidated joint venture" in the statements of operations. The Company's carrying value in an equity method joint venture company is reflected in the caption "Investment in non-consolidated joint venture" in the Company's balance sheets.

Patents

Patents are measured based on their fair values. Patents are being amortized on a straight-line basis over a period of 20 years and are stated net of accumulated amortization.

Impairment of Intangible Assets

The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset's carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2008 and 2007, the Company did not have any impairment loss related to intangible assets (see Note 6).

Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115." SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in the results of operations. SFAS No. 159 also establishes additional disclosure requirements. The Company did not elect the fair value option under SFAS No. 159 for any of its financial assets or liabilities upon adoption.

The carrying amount of financial instruments, including cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short maturity of these instruments. The recorded values of notes payable and long-term debt approximate their fair values, as interest approximates market rates.

Stock-Based Compensation

The Company calculates stock-based compensation expense in accordance with SFAS No. 123 revised, "Share-Based Payment" ("SFAS 123(R)"). This pronouncement requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options to be based on estimated fair values. The Company also applies the provisions sets forth in the Securities and Exchange Commission's Staff Accounting Bulletin 107 ("SAB 107") relating to its adoption of SFAS 123(R).

Advertising Expense

The Company expenses all advertising costs as they are incurred. Advertising expense for the years ended December 31, 2008 and 2007 was $1,000 and $1,000, respectively.

Research and Development

In accordance with SFAS No. 2, "Accounting for Research Development Costs" research, development, and engineering costs are expensed in the year incurred. Costs of significantly altering existing technology are expensed as incurred.

Income Taxes

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company adopted FIN 48 effective January 1, 2007 and the provisions of FIN 48 have been applied to all tax positions under Statement No. 109, "Accounting for Income Taxes" ("SFAS 109") upon initial adoption.

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.

The potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows:

	Fiscal Years Ended
	December 31,
	2008	2007
Options to purchase common stock	623,000	329,000
Series A and B preferred shares conversion	84,000	84,000
Potential equivalent shares excluded	707,000	413,000

Commitments and Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company's management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit, quality financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. With respect to accounts receivable, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.

Major Customers

During the year ended December 31, 2008, the Company conducted business with three customers whose gross sales comprised 28%, 22% and 13% of total revenues and accounted for 3%, 34% and 4% of gross accounts receivable, respectively. During the year ended December 31, 2007, the Company conducted business with two customers whose gross sales comprised 52% and 15% of total revenues and accounted for 60% and 15% of gross accounts receivable, respectively.

Recent Accounting Pronouncements

3. Inventory

Inventories, consisting of materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consist of the following at December 31:

	2008	2007
Raw materials	$ 7,114,000	$ 3,037,000
Work-in-process	391,000	489,000
Finished Goods	1,047,000	139,000
Reserve for obsolescence	(903,000)	(100,000)
	$ 7,649,000	$ 3,565,000

As of December, 31 2008, the reserve for obsolescence totaled $903,000 and was increased during the year by approximately $803,000. For the year ended December 31, 2007 the reserve for obsolescence was increased by approximately $37,000 to $100,000.

4. Property and Equipment

Property and equipment at December 31, 2008 and 2007 consisted of the following:

	2008	2007
Computers and software	$ 598,000	$ 593,000
Machinery and equipment	1,470,000	1,485,000
Furniture and office equipment	107,000	269,000
Demonstration vehicles and buses	346,000	397,000
Leasehold improvements	1,348,000	70,000
Construction in progress	-	60,000
	3,869,000	2,874,000
Less accumulated depreciation and amortization	(2,040,000)	(2,004,000)
Total	$1,829,000	$ 870,000

During the year ended December 31, 2008, fully depreciated fixed assets totaling $549,000 were retired. Depreciation and amortization expense was $588,000 and $296,000 for the years ended December 31, 2008 and 2007, respectively.

5. Investment in Non-Consolidated Joint Venture - ITC

The Company has invested an aggregate of $2,000,000 into ITC. The Company's share of income and losses is 40% as stated in the agreement (see Note 1). During the years ended December 31, 2008 and 2007, the Company recorded $118,000 and $177,000 as its proportionate share of losses in the joint venture.

The following is the condensed financial position and results of operations of ITC, as of and for the years ended presented below:

		December 31, 2008	December 31, 2007
Financial position
	Current assets	$ 3,344,000	$ 3,635,000
	Property and equipment, net	35,000	42,000
	Liabilities	-	(2,000)
	Equity	$ 3,379,000	$ 3,675,000
Operations
	Net revenue	$ 150,000	$ 202,000
	Expenses	(579,000)	(872,000)
	Interest income	133,000	233,000
	Net loss	$ (296,000)	$ (437,000)
Company's proportionate share of net loss		$ (118,000)	$ (177,000)

HHI and Enova have entered into negotiations to dissolve the joint venture (see Note 1).

6. Intangible Assets

Intangible assets consist of legal fees directly associated with patent licensing. The Company has been granted three patents. These patents have been capitalized and are being amortized on a straight-line basis over a period of 20 years.

Intangible assets consisted of the following as of December 31:

	2008	2007
Patents	$ 93,000	$ 93,000
Less accumulated amortization	(28,000)	(23,000)
Total	$ 65,000	$ 70,000

Amortization expense charged to operations was $5,000 and $4,000 for the years ended December 31, 2008 and 2007, respectively.

7. Notes Payable

Notes payable at December 31, consisted of the following:

	2008	2007
Secured note payable to Credit Managers Association of California, bearing interest at prime plus 3% (8.25% as of December 31, 2008), and is adjusted annually in April through maturity. Principal and unpaid interest due in April 2016. A sinking fund escrow may be funded with 10% of future equity financing, as defined in the Agreement. ......................................	$1,238,000	$1,238,000
Secured note payable to a financial institution in the original amount of $95,000, bearing interest at 6.21%, payable in 36 equal monthly installments of principal and interest through October 1, 2009…. ……………………………………… ……………………………….	27,000	59,000
Secured note payable to a financial institution in the original amount of $35,000, bearing interest at 10.45%, payable in 30 equal monthly installments of principal and interest through November 1, 2009 …………………………………………………………………………	14,000	27,000
Secured note payable to a financial institution in the original amount of $23,000, bearing interest at 11.70%, payable in 36 equal monthly installments of principal and interest through October 1, 2010…………………………………………………………………………….	15,000	-
Secured note payable to a Coca Cola Enterprises in the original amount of $40,000, bearing interest at 10% per annum. Principal and unpaid interest due on demand ……… …………..	40,000	40,000
Secured note payable to a financial institution in the original amount of $39,000, bearing interest at 4.99% per annum, payable in 48 equal monthly installments of principal and interest through September 1, 2011 ………………………………………..	27,000	37,000
	1,361,000	1,401,000
Less current portion ……………………………………………………………....	(98,000)	(95,000)
Long-term portion …………………………………………………………… …...	$1,263,000	$1,306,000

As of December 31, 2008 and 2007, the balance of long term interest payable with respect to the Credit Managers Association of California note amounted to $976,000 and $861,000, respectively.

Future minimum principal payments of notes payable consisted of the following:

	December 31, 2008
2009	$ 98,000
2010	17,000
2011	8,000
2012	-
2013	-
Thereafter	1,238,000
Total	$ 1,361,000

8. Revolving Credit Agreement

In October 2007, the Company entered into a secured revolving credit facility with the Union Bank of California (the "Credit Agreement") for $2,000,000. The Credit Agreement is secured by a $2,000,000 certificate of deposit. The interest rate is the certificate of deposit rate plus 1.25% with interest payable monthly and the principal due at maturity. The Credit Agreement expires on June 30, 2009. As of December 31, 2008, the Company had $1,800,000 million available under the terms of the Credit Agreement as Union Bank of California issued a $200,000 irrevocable letter of credit in favor of Sunshine Distribution LP ("Landlord"), with respect to the lease of an approximately 43,000 square foot facility located at 1560 West 190th Street, Torrance, California (the "Lease").

9. Deferred Revenues

The company has entered into several production and development contracts with other customers. The Company has evaluated these contracts, ascertained the specific revenue generating activities of each contract, and established the units of accounting for each activity. Revenue on these units of accounting is not recognized until a) there is persuasive evidence of the existence of a contract, b) the service has been rendered and delivery has occurred, c) there is a fixed and determinable price, and d) collectability is reasonable assured. This treatment is consistent with the guidance prescribed in SEC Staff Accounting Bulletin 104 "Revenue Recognition" and FASB Emerging Issues Task Force Issue 08-01 "Revenue Arrangements with Multiple Deliverables." At December 31, 2008 and 2007, the Company had deferred $0 and $101,000 in revenue related to these contracts, respectively.

10. Commitments and Contingencies

Leases

Enova's corporate offices were previously located in Torrance, California, in leased office space of approximately 20,000 square feet. This facility housed various departments, including engineering, operations, executive, finance, planning, purchasing, investor relations and human resources. This lease terminated on February 28, 2008.

In October 2007, Enova entered into a lease agreement with Sunshine Distribution LP ("Landlord"), with respect to the lease of an approximately 43,000 square foot facility located at 1560 West 190th Street, Torrance, California (the "Lease"). The lease term commenced on November 1, 2007, and expires January 1, 2013. The total base monthly rent is approximately $37,000, and will be increased effective May 1, 2011 based on the increase in the consumer price index. Under the Lease, Enova will pay the Landlord certain commercially reasonable and customary common area maintenance costs of approximately $5,000 per month, increasing ratably as these costs are increased to the Landlord. The Lease is secured by an irrevocable standby letter of credit in the amount of $200,000 and naming the Landlord as the beneficiary. Enova also has an office in Hawaii which is rented on a month-to-month basis at $3,400 per month, and a sales office in Michigan that it rents on a month-to-month basis at $500 per month. Rent expense was $616,000 and $288,000 for the years ended December 31, 2008, and 2007, respectively.

Future minimum lease payments under non-cancelable operating lease obligations at December 31, 2008 were as follows:

Year Ending December 31	Operating Leases
2009	$ 439,000
2010	439,000
2011	439,000
2012	439,000
2013 and thereafter	-
Total	$ 1,756,000

Employment Contracts

Prior to his appointment as Chief Executive Officer, Mr. Staran's compensation was governed by a letter agreement executed on March 27, 2007 retroactive to January 22, 2007 when he served as Executive Vice President. Pursuant to the letter agreement, Mr. Staran received an annual salary of $190,000, was eligible to participate in the executive bonus program, received health and life insurance benefits, and received living and transportation reimbursements. We also agreed to issue Mr. Staran 5,000 shares of common stock.

Upon his appointment as Chief Executive Officer on August 28, 2007, the Board of Directors increased Mr. Staran's annual salary from $190,000 to $235,000 retroactive to July 1, 2007 and he was granted 6,000 shares of Enova's common stock.

Effective February 11, 2008, we entered into an employment agreement with Mr. Staran to provide him an annual salary of $250,000 beginning as of January 1, 2008. On October 29, 2008, Mr. Staran was granted 12,000 shares of Enova's common stock. Pursuant to the February 11, 2008 employment agreement, we leased a car for Mr. Staran's use and pay for related expenses. Mr. Staran also is entitled to reimbursement for an apartment at the rate of $2,975 per month. The employment agreement further provides for life, medical and disability benefits and 15 days of annual accrued vacation.

11. Stockholders' Equity

Common Stock

During the years ended December 31, 2008 and 2007, the Company issued 153,000 and 28,000 shares of common stock, respectively, to directors as compensation. The common stock issued to directors in 2008 and 2007 was valued at $174,000 and $138,000, respectively, based upon the trading value of the common stock on the date of issuance.

During the years ended December 31, 2008 and 2007, the Company issued 52,000 and 16,000 shares of common stock, respectively, to employees as compensation. The common stock issued to employees in 2008 and 2007 was valued at $51,000 and $68,000, respectively, based upon the trading value of the common stock on the date of issuance.

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.

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, including adjustments to reflect the Company's 1-45 reverse stock split on July 20, 2005, 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. In October 2007, approximately 639,000 shares were converted into common stock at the election of the holder for approximately 28,000 shares of common stock.

12. Stock Options

Stock Option Program Description

For the year ended December 31, 2008 the Company had two equity compensation plans, the 1996 Stock Option Plan (the "1996 Plan") and the 2006 equity compensation plan (the 2006 "Plan"). The 1996 Plan has expired for the purposes of issuing new grants. However, the 1996 Plan will continue to govern awards previously granted under that plan. The 2006 Plan has been approved by the Company's Shareholders. Equity compensation grants are designed to reward employees and executives for their long term contributions to the Company and to provide incentives for them to remain with the Company. The number and frequency of equity compensation grants are based on competitive practices, operating results of the company, and government regulations.

The maximum number of shares issuable over the term of the 1996 Plan was limited to 65 million shares. Options granted under the 1996 Plan typically have an exercise price of 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. The 2006 Plan has a total of 3,000,000 shares reserved for issuance, of which 420,000 were granted in 2008.

In conjunction with the adoption of SFAS 123(R), the Company elected to attribute the value of share-based compensation to expense using the straight-line method over the vesting period for the options granted. Share-based compensation expense related to stock options was $627,000 and $367,000 for the years ended December 31, 2008 and 2007, respectively, and was recorded in the financial statements as a component of selling, general and administrative expense. As of December 31, 2008, the total compensation cost related to non-vested awards not yet recognized is $905,000. The remaining period over which the future compensation cost is expected to be recognized is 27 months. The aggregate intrinsic value of total awards outstanding is $0.

Stock-based compensation expense recognized in the Statement of Operations for the year ended December 31, 2008 has been based on awards ultimately expected to vest and it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the year ended December 31, 2008, the Company applied estimated average forfeiture rates of approximately 3% for non-officer grants, based on historical forfeiture experience. The expected life of options granted in 2008 is 4 years.

SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the Company's loss position, there were no such tax benefits for the years ended December 31, 2008 and 2007. Prior to the adoption of SFAS 123(R), those benefits would have been reported as operating cash flows had the Company received any tax benefits related to stock option exercises.

The fair value of stock-based awards to officers and employees is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the bond equivalent yields that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company's stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

The following is a summary of changes to outstanding stock options during the fiscal year

ended December 31, 2008:

		Number of Share Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2006		162,000	$ 4.43	7.96	$ -
	Granted	215,000	$ 4.10	5.00	$ -
	Exercised	(44,000)	$ 4.36	-	$ -
	Forfeited or Cancelled	(4,000)	$ 4.35	-	$ -
Outstanding at December 31, 2007		329,000	$ 4.23	5.85	$ -
	Granted	420,000	$ 3.82	9.74	$ -
	Exercised	-	$ -	-	$ -
	Forfeited or Cancelled	(126,000)	$ 3.91	-	$ -
Outstanding at December 31, 2008		623,000	$ 4.02	7.09	$ -
Exercisable at December 31, 2008		387,000	$ 4.14	5.77	$ -

At December 31, 2008, there were 2,491,000 shares available for grant under the employee stock option plan. The weighted-average remaining contractual life of the options outstanding at December 31, 2008 was 7.09 years. The exercise prices of the options outstanding at December 31, 2008 ranged from $3.81 to $4.95. The weighted-average remaining contractual life of the options outstanding at December 31, 2007 was 5.85 years. The exercise prices of the options outstanding at December 31, 2007 ranged from $4.10 to $4.50. Options exercisable were 387,000 and 204,000, at December 31, 2008 and 2007, respectively. The weighted-average grant date fair value of the options granted during the year ended December 31, 2008 was $2.88.

The table below presents information related to stock option activity for the fiscal years ended December 31, 2008 and 2007:

	Fiscal Year Ended
	December 31,
	2008	2007
Total intrinsic value of stock options exercised	$ -	$ 29,000
Cash received from stock option exercises	$ -	$ 193,000
Gross income tax benefit from the exercise of stock options	$ -	$ -

Valuation and Expense Information under SFAS 123(R)

The fair values of all stock options granted during the fiscal years ended December 31, 2008 and 2007 were estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:

	Fiscal Year Ended
	December 31,
	2008	2007
Expected life (in years)	4	3 - 5
Average risk-free interest rate	3%	3 - 4%
Expected volatility	111 - 113%	75 - 104%
Expected dividend yield	0%	0%
Forfeiture rate	3%	3%

The estimated fair value of grants of stock options and warrants to nonemployees of the Company is charged to expense, if applicable, in the financial statements. These options vest in the same manner as the employee options granted under each of the option plans as described above.

13. Income Taxes

Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of December 31, 2008 and 2007 consisted of the following:

	2008	2007
Deferred tax assets
Net operating loss carry-forwards	$34,163,000	$37,725,000
Stock based compensation	357,000	167,000
Other, net	(6,000)	(222,000)
	34,514,000	37,670,000
Less valuation allowance	(34,514,000)	(37,670,000)
Net deferred tax assets	$ -	$ -

The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in certain situations where changed occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be restricted.

Deferred taxes arise from temporary differences in the recognition of certain expenses for tax and financial reporting purposes. The deferred tax assets have been offset by a valuation allowance since management does not believe the recoverability of these in future years is more likely than not to occur. The valuation allowance decreased by $3,156,000 and $24,000 during the years ended December 31, 2008 and 2007, respectively. As of December 31 2008, the Company had net operating loss carry forwards for federal and state income tax purposes of approximately $91,591,000 and $34,183,000, respectively. Net operating loss carry forwards of $24,221,000 expired in 2008 and remaining operating loss carry forwards will expire in 2009 to 2023.

The provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2008 and 2007) to income taxes as follows:

	December 31, 2008	December 31, 2007
Tax benefit computed at 34%	$4,384,000	$3,178,000
Change in valuation allowance	3,156,000	24,000
State tax (net of Federal benefit)	748,000	543,000
Change in carryovers and tax attributes	(8,288,000)	(3,745,000)
Net tax benefit	$ -	$ -

14. Related Party Transactions

During 2008 and 2007, the Company purchased approximately $1,478,000 and $1,953,000, respectively, in components, materials and services from HHI. Sales to HHI amounted to approximately $88,000 and $24,000 for the years ended December 31, 2008 and 2007, respectively. The Company had an outstanding payable balance owed to HHI of approximately $30,000, net of a receivable of approximately $10,000, and $483,000, net of a receivable of approximately $10,000 at December 31, 2008 and 2007, respectively.

A relative of one of the Company's directors is a majority owner of a website consulting firm which provided services (branding) to the Company. The Company paid consulting fees and expenses to this firm in the amount of approximately $111,000 in 2008 and $180,000 in 2007.

15. 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, 2008 and 2007, the Company did not make any contributions to the plan.

16. 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:

	2008	2007
United States	$2,726,000	$3,080,000
Mexico	-	59,000
Italy	274,000	-
Korea	256,000	359,000
Japan	259,000	87,000
China	249,000	-
United Kingdom	2,033,000	5,138,000
Norway	646,000	452,000
Total	$6,443,000	$9,175,000

17. Subsequent Events

Dissolution of Joint Venture - Hyundai-Enova Innovative Technology Center

In September 2003, Enova and Hyundai Heavy Industries, Co. Ltd. (HHI) commenced a relationship to establish the Hyundai-Enova Innovative Technology Center (ITC) to be located at Enova's Torrance headquarters. The ITC was originally established as a technical center for specified products that would engage Enova as the commercial managers, the ITC as the primary engineering and development venture, and HHI as the primary components supplier.

ITC was integral to our development and financial stability in prior years, Enova now is however more established in the market as a fully functional, self-sufficient entity. Enova, along with HHI, evaluated this relationship to determine its future role for both companies. As a result of this evaluation, HHI and Enova have entered into negotiations to dissolve the joint venture.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On January 31, 2007, we dismissed Windes as our registered public accounting firm and engaged PMB Helin Donovan, LLP as our new independent registered public accounting firm. The decision regarding the end of the Windes engagement and the commencement of the PMB Helin Donovan's engagement was made and approved by the audit committee of our board of directors after consideration of our current needs and position. Concurrent with the change in auditor, we also undertook managerial changes to our finance and operations departments, including a change in chief financial officer. In light of these organization changes and given the disagreement between us and Windes with respect to the filing of our Form 10-Q for the fiscal quarter ended September 30, 2006 filed November 13, 2006 (the "Form 10-Q"), the audit committee believed that engagement of a new auditor would lead to enhanced communications with respect to audit matters.

During the course of its engagement, Windes did not provide an audit report on our financial statements. Therefore, there is no applicable disclosure within the meaning of Item 304(a)(1)(ii).

During our two most recent fiscal years, and through the date of Windes' dismissal, we and Windes had the following three "disagreements" within the meaning of Item 304(a)(1)(iv) of Regulation S-K on matters of accounting principles or practices, financial statement disclosure, or auditing or review scope or procedure, which if not resolved to the satisfaction of Windes would have caused it to make reference to the subject matter of the disagreement in its reports on our financial statements:

First, as reflected in the Current Reports on Form 8-K dated November 29 and December 5, 2006, Windes and we disagreed whether Windes authorized the Form 10-Q filing. After numerous discussions among Windes and us involving management and the audit committee, the disagreement was resolved by filing the requisite Item 4.02 Form 8-K (the "amended Form 10-Q") and later filing the amended Form 10-Q for the fiscal period ended September 30, 2006 on December 29, 2006.

Second, Windes and we disagreed whether we followed the appropriate accounting policy and accounting literature to record revenue. This disagreement was resolved upon further analysis and by reversing the recorded revenue and related expenses in the amended Form 10-Q.

Third, Windes and we disagreed whether adequate documentation had been produced to support a material debt forgiveness transaction which, although negotiated in the 2005 fiscal year, was completed in the first quarter of the 2006 fiscal year and therefore included in our year-to-date operations. Consistent with the amended Form 10-Q's Item 4 Controls and Procedures disclosure, we were unable to locate original documentation to support the accounting treatment for the transaction. This disagreement was resolved when we obtained replacement copies to reflect the original documentation and the accounting treatment.

Our audit committee discussed the subject matter of all three disagreements above with Windes and authorized Windes to respond fully to inquiries of PMB Helin Donovan concerning the subject matter of the disagreements.

During our two most recent fiscal years and through the date of Windes' dismissal, the following were "reportable events" within the meaning of Item 304(a)(1)(v) of Regulation S-K:

(A) Consistent with the our Item 4 Controls and Procedures disclosure in the amended Form 10-Q, Windes advised that material weaknesses existed in our internal controls, and thereby our financial statement preparation and disclosure, regarding the (i) correct application of relevant accounting standards; (ii) ability to produce original documentation to support an accounting treatment; and (iii) internal and external communication by us in ensuring there was appropriate independent accountant review and authorization to file periodic reports such as the Form 10-Q for the fiscal period ended September 30, 2006.

(B) Given the three disagreements cited above, Windes expressed concern about its ability to rely on management representations. As a result, consistent with the Item 4 Controls and Procedures disclosure in our amended Form 10-Q, we agreed to dedicate additional time and resources to internal control matters and specifically agreed to (1) retain a consultant to review our accounting, documentation, and internal control policies and (2) implement more stringent oversight policies to ensure proper auditor authorization is received prior to making SEC filings.

(C) Given the third disagreement cited above with respect to adequate documentation, Windes further advised us that it would need to expand significantly the scope of its audit within the meaning of Item 304(a)(1)(v)(C) to ensure that proper and sufficient documentation existed to support accounting conclusions reached in prior fiscal periods including the cited debt forgiveness transaction.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by SEC Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2008. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2008.

Management's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included an assessment of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this evaluation, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2008.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.

Changes in Internal Control over Financial Reporting

There have not been any other changes in our internal control over financial reporting as of the quarter ended December 31, 2008 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

For the fiscal year ended December 31, 2008, we had two equity compensation plans: the 1996 Option Plan and the 2006 Equity Compensation Plan. Each plan was adopted with the approval of our shareholders. The 1996 Stock Option Plan has expired for purposes of issuing new grants. The 1996 Stock Option Plan, however, will continue to govern awards previously granted under that plan. The 2006 plan, adopted at our annual meeting in November 2006, has a total of 3,000,000 shares reserved for issuance. The following table provides information regarding our equity compensation plans as of December 31, 2008:

Plan category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)	Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Equity compensation plans approved by security holders	623,000	$ 4.02	2,491,000
Equity compensation plans not approved by security holders	-	-	-
Total	623,000	$ 4.02	2,491,000

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR SDFEDFSUSELD

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