Our product development strategy is to design and introduce to market successively advanced products, each based on our core technical competencies. In each of our product/market segments, we provide products and services to leverage these competencies in digital power management, power conversion and system integration. We believe that the underlying technical requirements shared among the market segments will allow us to more quickly transition from one emerging market to the next, with the goal of capturing early market share.
The Company's primary market focus centers on both series and parallel heavy-duty drive systems for multiple vehicle and marine applications. A series hybrid system is one where only the electric motor connects to the drive shaft; a parallel hybrid system is one where both the internal combustion engine and the electric motor are connected to the drive shaft. We believe series-hybrid and parallel hybrid medium and heavy-duty drive system sales offer Enova the greatest return on investment in both the short and long term. We believe the medium and heavy-duty hybrid market's best chances of significant growth lie in identifying and pooling the largest possible numbers of early adopters in high-volume applications. We will attempt to utilize our competitive advantages, including customer alliances, to gain greater market share. By aligning ourselves with key customers in our target market(s), we believe that the alliance will result in the latest technology being implemented and customer requirements being met, with a minimal level of additional time or expense. Additionally, our management believes that this area will see significant growth over the next several years. As we penetrate more market areas, we are continually refining and optimizing both our market strategy and our product line to maintain our leading edge in power management and conversion systems for mobile applications.
In January 2008, we announced a production contract with Smith Electric Vehicles, a division of The Tanfield Group Plc. At the time, based upon the contract, the Company expected to supply in excess of 1,000 units in 2008 and as many as 3,000 in 2009 to Smith Electric Vehicles. In July 2008, however, Tanfield announced that although demand for electric vehicles has remained, it now expects lower forecast sales of electric vehicles. To date, Enova has delivered 450 drive systems to Tanfield, consisting of 306 units in 2007 and 144 units in 2008. Due to Tanfield's realigned growth strategy, Enova now expects fewer orders of drive systems from Tanfield in 2008 and 2009. There are no assurances that purchase orders will be realized from Tanfield and therefore revenues may decline in comparison to the prior fiscal 2007 year.
In May 2008, we expanded an existing customer relationship by entering into a long term supply agreement with IC Corporation, a division of Navistar. Pursuant to the agreement, Navistar has agreed to purchase Post-Transmission Hybrid drive systems equipment and services exclusively from Enova, and Enova has agreed to supply drive systems equipment and services to Navistar. In addition, Enova has agreed to not sell drive systems equipment and services to any other party other than Navistar into the North American school and commercial bus market, unless expressly authorized by Navistar. The initial term of the agreement terminates on February 28, 2011 and may be extended for two additional terms of 12 months upon agreement by Enova and Navistar. The agreement may be terminated by Navistar for any reason with 120 days prior notice to Enova by Navistar. If certain Navistar purchasing goals are not achieved by Navistar, Enova's obligation to exclusively supply drive systems to Navistar in the North American school and commercial bus market may be terminated. In addition, if Enova is unable to supply Navistar's requirements pursuant to the Agreement, then Navistar's obligation to exclusively purchase from Enova may be terminated. Although the supply agreement provides forecasted volumes, there is no assurance these goals will be met. The revenue we receive under the agreement will depend upon the number of drive systems ordered.
During the second quarter, Enova management visited First Auto Works of China (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. Enova has developed a customized, pre-transmission, solution for FAW. This system has been designed in parallel with FAW's development of a new transmission package, which they hope to aggressively market across Asia, and possibly export abroad. The "designed in" feature of our pre-transmission hybrid system indicates that Enova will continue to be heavily engaged with FAW in their efforts to market their hybrid solutions.
In the second quarter of 2008, The Company delivered additional prototype vehicles to our Asian-based OEM customer, who has, in turn, delivered them to two of their largest fleet customers. Enova has provided service training for these fleet owners, and continues to monitor the vehicles during their evaluation. We continue to mature this relationship, as we believe it will develop into viable business relationships.
During the second quarter of 2008, Enova, along with HHI, evaluated the relationship to determine its future role for both companies. Although integral to our development and financial stability in prior years, Enova is now is more established in the market as a fully functional, self-sufficient entity. To meet the anticipated needs of our core customers, we have developed resources to supply our products to the medium and heavy duty truck and bus market segment.

In February 2008, we announced a contract with Th!nk Global on the production of 1,000 Power Control Units in 2008. In the second quarter of 2008, Enova and Th!nk Global management convened in Torrance to discuss future pricing and other commercial terms. Subsequently, Enova determined this product was unlikely to be profitable under the negotiated conditions. Enova and Th!nk Global mutually agreed to support the relocation of this business to an alternative supplier selected by Th!nk Global. Th!nk Global has agreed to purchase certain production rights associated with the Power Control Unit.
In March 2008, the Company finalized its move into a 43,000 square foot facility located at 1560 W 190th Street, Torrance (the "lease"). The Lease term commenced on November 1, 2007, and expires on January 1, 2013. Our expansion into a new facility was determined an essential part of our movement into a production stage. The Company also began planning for a certification and audit of its standards in accordance with the International Organization for Standardization ("ISO"). We believe the receipt of an independent ISO certification will allow the Company to supplement its existing product and service characteristics of quality, environmental friendliness, safety, reliability, efficiency and versatility.
During the second quarter of 2008, we continued to develop and produce electric and hybrid electric drive systems and components for FAW, International Truck and Engine (IC Corp), Hyundai Motor Car, the US Military, Wright Bus of the United Kingdom, and Tomoe of Japan as well as several other domestic and international vehicle and bus manufacturers. We also were successful in introducing our technology to companies such as Concurrent Technology Corporation (CTC), PUES (Tokyo Research and Development), Verizon, and Navistar (International Truck and Engine, IC Corporation). We have been engaged to develop two different prototype transit buses for a new UK bus manufacturer. These vehicles will be delivered in the fourth quarter of 2008. Our various electric and hybrid-electric drive systems, power management and power conversion systems are being used in applications including several light, medium and heavy duty trucks, train locomotives, transit buses and industrial vehicles. In the second quarter of 2008, we completed the commissioning of the drive systems in 8 maintenance locomotives for the Light Transit Authority of Singapore, Malaysia. Enova supplied drive motors, chargers, and battery control units to Tomoe, who, in conjunction with the Hitachi Corporation, completed the testing and delivery of these locomotives. Enova and Tomoe will bid on additional orders later this year. There are no assurances purchase orders will be realized from this bidding.
Enova continues to receive greater recognition from both governmental and private industry with regards to both commercial and military application of its hybrid drive systems and fuel cell power management technologies. Although we believe that current negotiations with various parties may result in production contracts during 2008 and beyond, there are no assurances that such additional agreements will be realized.
Enova has incurred significant operating losses in the past. As of June 30, 2008, we had an accumulated deficit of approximately $122.4 million. We expect to incur additional operating losses until we achieve a level of product sales sufficient to cover our operating and other expenses. Critical Accounting Policies
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Estimates and assumptions include, but are not limited to, customer receivables, inventories, equity investments, fixed asset lives, contingencies and litigation. There have been no material changes in estimates or assumptions compared to our most recent Annual Report for the fiscal year ended December 31, 2007 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.
Inventory - Inventories are priced at the lower of cost or market utilizing 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.
Allowance for doubtful accounts - We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The assessment of the ultimate realization of accounts receivable including the current credit-worthiness of each customer is subject to a considerable degree to the judgment of our management. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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 adopted SFAS 123 (R) using the modified prospective method, which requires the application of the accounting standard as of January 1, 2006, the beginning of the Company's 2006 fiscal year. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") related to SFAS 123 (R). The Company applied the provisions of SAB 107 in adopting SFAS 123 (R). Revenue recognition - The Company is required to make judgments based on historical experience and future expectations, as to the reliability of shipments made to its customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB") No. 101 and 104, "Revenue Recognition," and related guidance. The Company makes these assessments based on the following factors: i) customer-specific information, ii) return policies, and iii) historical experience for issues not yet identified. Under FAS Concepts No. 5, revenues are not recognized until earned. The Company manufactures proprietary products and other products based on design specifications provided by its customers. Revenue from sales of products are generally recognized at the time title to the goods and the benefits and risks of ownership passes to the customer which is typically when products are shipped based on the terms of the customer purchase agreement. Revenue relating to long-term fixed price contracts is recognized using the percentage of completion method. Under the percentage of completion method, contract revenues and related costs are recognized based on the percentage that costs incurred to date bear to total estimated costs. Changes in job performance, estimated profitability and final contract settlements may result in revisions to cost and revenue, and are recognized in the period in which the revisions are determined. Contract costs include all direct materials, subcontract and labor costs and other indirect costs. General and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated loss is accrued. The aggregate of costs incurred and estimated earnings recognized on uncompleted contracts in excess of related billings is shown as a current asset, and billings on uncompleted contracts in excess of costs incurred and estimated earnings is shown as a current liability. 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.

RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2008 compared to Three and Six Months Ended
June 30, 2007
Second Quarter of Fiscal 2008 vs. Second Quarter of Fiscal 2007

                                                    Three Months Ended                            As a % of Revenues
                                                         June 30,                                      June 30,
                                         2008                2007            % Change           2008              2007
Revenues                             $  3,370,000        $  1,059,000              218 %           100 %              100 %
Cost of revenues                        3,736,000           1,794,000              108 %           111 %              169 %

Gross profit (loss)                      (366,000 )          (735,000 )            -50 %           -11 %              -69 %
Operating expenses
Research and development                  712,000             616,000               16 %            21 %               58 %
Selling, general &
administrative                          1,935,000           1,287,000               50 %            57 %              122 %

Total operating expenses                2,647,000           1,903,000               39 %            79 %              180 %

Gross operating loss                   (3,013,000 )        (2,638,000 )             14 %           -89 %             -249 %

Other income and (expense)
Interest and financing fees,
net                                        69,000              65,000                6 %             2 %                6 %
Equity in losses of
non-consolidated joint venture             (6,000 )           (29,000 )            -79 %             0 %               -3 %

Total other income, net                    63,000              36,000               75 %             2 %                3 %

Net loss                             $ (2,950,000 )      $ (2,602,000 )             13 %           -88 %             -246 %

First Six Months of Fiscal 2008 vs. First Six Months of Fiscal 2007

                                                     Six Months Ended                            As a % of Revenues
                                                         June 30,                                     June 30,
                                         2008                2007            % Change           2008             2007
Revenues                             $  5,648,000        $  2,602,000              117 %            100 %           100 %
Cost of revenues                        6,178,000           3,333,000               85 %            109 %           128 %

Gross profit (loss)                      (530,000 )          (731,000 )            -27 %             -9 %           -28 %
Operating expenses
Research and development                1,340,000             865,000               55 %             24 %            33 %
Selling, general &
administrative                          3,849,000           2,305,000               67 %             68 %            89 %

Total operating expenses                5,189,000           3,170,000               64 %             92 %           122 %

Gross operating loss                   (5,719,000 )        (3,901,000 )             47 %           -101 %          -150 %

Other income and (expense)
Interest and financing fees,
net                                       154,000             176,000              -13 %              3 %             7 %
Equity in losses of
non-consolidated joint venture            (58,000 )           (70,000 )            -17 %             -1 %            -3 %

Total other income, net                    96,000             106,000               -9 %              2 %             4 %

Net loss                               (5,623,000 )      $ (3,795,000 )             48 %           -100 %          -146 %

The sum of the amounts and percentages may not equal the totals for the period due to the effects of rounding.

Computations of percentage change period over period are based upon our results, as rounded and presented herein.
Revenue. Revenues increased by $3,046,000 or 117% for the six months ended June 30, 2008 to $5,648,000 as compared to $2,602,000 for the corresponding period in 2007. Production sales for the six months ended June 30, 2008 increased to $5,648,000 from $2,602,000 in the same period in 2007. Revenues for the three months ended June 30, 2008 increased to $3,370,000 or 218% from $1,059,000 for the corresponding period in 2007. Our research and development revenues for the six and three months ended June 30, 2008 and June 30, 2007 were zero, although we may realize research and development revenues in the future. The increase in revenues for both periods was attributed entirely to our increase in production sales. Furthermore, revenues were derived from contracts with The Tanfield Group Plc (Tanfield), Th!nk Global, First Auto Works of China (FAW), IC Corporation, and the Hawaii Center for Advanced Transportation Technologies (HCATT). Revenue associated with Th!nk Global's production rights as referenced in the Overview above were approximately $300,000. We continue to improve the awareness of our product and service

offerings with clients in part because of our past research and development efforts as well as our production efforts. However, based upon the order cancellation from Th!nk Global and a change in Tanfield's growth strategy discussed in the Overview above, our quarterly revenues for the remainder of 2008 may decline. Although we have seen indications for future production growth, there can be no assurances there will be continuing demand for our products and services.
Cost of Revenues. Cost of revenues consists of component and material, direct labor costs, integration costs and overhead related to manufacturing our products. Cost of revenues for the six and three months ended June 30, 2008 increased to $6,178,000 or 85% and $3,736,000 or 108%, respectively from $3,333,000 and $1,794,000, respectively for the same periods in 2007. Cost of revenues for the six and three months ended June 30, 2008 and the same period in 2007 were solely attributed to production cost of revenues. This is primarily attributable to the increase in sales for the named periods and increases in integration support costs as well as the continued identification of manufacturing efficiencies for incorporation in production runs.
Gross Margin. As a percentage of total net revenues, gross margins improved, for the six months ended June 30, 2008, to a negative 9% from a negative 28% for the same period in 2007. Gross margins also improved for the three months ended June 30, 2008 to a negative 11% from a negative 69% for the same period in 2007. Gross loss for the six months ended June 30, 2008 decreased to $530,000 from a gross loss of $731,000 for the same period in 2007. Gross loss for the three months ended June 30, 2008 also decreased to $366,000 from a gross loss of $735,000 for the same period in 2007. We have taken, and continue to take measures in maturing our supply chain. This includes the continued refinement of our production line resources in light of our new assembly line layout. We continue to take benefits from the maturity of these initiatives although we may . . .