This Report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements appear in a number of places in this Report and include statements regarding our plans, beliefs or current expectations; including those plans, beliefs and expectations of our officers and directors with respect to, among other things, the development of markets for our products, the adequacy of our cash balances and liquidity to meet future operating needs, and our ability to issue equity or debt securities. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed below in Part II, Item 5. Other Information.

Introduction

We generate revenue from two principal activities: 1) research, development and application engineering services that are paid for by our customers; and 2) the sale of motors, generators and electronic controls. The sources of engineering revenue typically vary from year to year and individual projects may vary substantially in their periods of performance and aggregate dollar value. Our product sales consist of both prototype low volume sales, which are generally sold to a broad range of customers, and annually recurring higher volume production.

Revenue from funded engineering activities for the quarter ended September 30, 2008 rose 1 percent to $586,384 versus $581,429 for the fiscal quarter ended September 30, 2007, due to higher levels of material purchases for billable programs. Product sales revenue for the fiscal quarter ended September 30, 2008 rose 20 percent to $1,690,947 versus $1,409,162 for the fiscal quarter ended September 30, 2007, primarily as a result of increased shipments of DC-to-DC converters and prototype propulsion motors and controllers.

During the quarter ended September 30, 2008 we allocated a higher amount of otherwise billable engineering resources to support our production engineering group's activities. As a result, production engineering expense for the second fiscal quarter increased to $485,369, versus $403,422 during the comparable quarter last fiscal year.

Net loss for the quarter ended September 30, 2008 was $1,538,111, or $0.06 per common share, versus a net loss of $1,139,894 or $0.04 per common share for the comparable quarter last year, primarily due to a change in the period of award for equity-based and incentive compensation to the second fiscal quarter this year versus the third fiscal quarter last year, increased production engineering expense associated with the continued expansion of this group and its activities and the impairment of an investment in commercial paper of Lehman Brothers.

Revenue from funded engineering activities for the six month period ended September 30, 2008 rose 8.5 percent to $1,189,868 versus $1,096,179 for the comparable period last year due to the improved application of engineering resources to billable programs during the six month period ended September 30, 2008. Product sales revenue for the six month period ended September 30, 2008 rose 22.6 percent to $2,880,818 versus $2,348,864 for the comparable period last year, primarily as a result of increased shipments of DC-to-DC converters and prototype propulsion motors and controllers.

Production engineering expense for the first half of the fiscal year decreased to $893,217, versus $949,455 during the comparable period last fiscal year primarily due to additional expenses incurred last fiscal year in conjunction with production launch activities for a former customer.

Net loss for the six month period ended September 30, 2008 was $2,537,826, or $0.10 per common share, versus a net loss of $2,268,645 or $0.09 per common share for the comparable period last year, primarily due to a change in the period of award for equity-based and incentive compensation to the second fiscal quarter this year versus the third fiscal quarter last year and the impairment of an investment in commercial paper of Lehman Brothers.

During the last half of our fiscal year 2008 there were three industry events that we believe may lead to an expansion of the market for hybrid electric products. In November 2007, International Truck and Engine Corporation, a Navistar Company announced that it was the first company to enter line production of hybrid electric commercial trucks, introducing the International® DuraStar™ Hybrid, a diesel electric medium-duty truck. In March 2008, Peterbilt Motors Company, a division of PACCAR Inc. announced plans for full production of its Model 330 and Model 335 medium-duty hybrid trucks at its manufacturing facility in Ste. Therese, Quebec, Canada in summer 2008 and Freightliner Trucks recently introduced its Business Class® M2e Hybrid truck. All of these truck manufacturers use the Eaton Corporation hybrid electric system and related electronic products. The automotive certified DC-to-DC converter manufactured by us for Eaton Corporation is expected to be on board many of these recently introduced hybrid trucks which we expect will contribute to higher levels of product sales in fiscal 2009 and beyond. Also in March 2008, Caterpillar, Inc. introduced the D7E crawler tractor incorporating an electric drive system for track-type tractors with an electric system that provides power to electric auxiliaries so that no engine belts are required. We believe that these industry developments signal the beginning of a potentially large-scale deployment of electric propulsion and related electronic products into markets other than mass-market passenger automobiles. We are also currently working with three automakers and eight smaller entrepreneurial vehicle developers on products for their electric and hybrid electric vehicles under development. Should these products receive broad customer acceptance over time, as we expect they will, potentially large opportunities will likely develop for our company and other similarly situated companies that have developed technologically advanced products in anticipation of the emergence of these market opportunities.

These industry developments as well as the potential production requirements of our existing customers will require us to invest a substantially greater amount of financial and human resources in fiscal 2009 and beyond on the commercial launch of products. Although our production engineering expense was lower in the first half of this fiscal year than for the comparable six month period last year, we expect to substantially increase the size of our production engineering group. We also expect to significantly increase the level of our capital expenditures for manufacturing equipment and tooling, and potentially for the expansion of our manufacturing facility in Frederick, Colorado. We believe these investments are necessary to support our strategy of aggressively rolling out automotive certified products to satisfy our customers' requirements as these new market opportunities emerge and expand.

As the markets for these advanced vehicles continue to emerge and expand into additional vehicle platforms over the next several years, we expect to experience potentially rapid growth in our revenue coincident with the introduction of electric products for our customers.

We believe our existing cash and short-term investments, which amounted to approximately $7.3 million at September 30, 2008, will be adequate to fund our anticipated growth for the fiscal year ended March 31, 2009, however, if our growth continues to accelerate, or is greater than what we currently anticipate, we may require additional capital.

Financial Condition

Cash and cash equivalents and short-term investments at September 30, 2008 were $7,261,473 and working capital (the excess of current assets over current liabilities) was $8,472,222 compared with $9,765,892 and $10,510,175, respectively, at March 31, 2008. The decrease in cash and short-term investments and working capital is primarily attributable to operating losses, higher levels of inventories, prepaid and other current assets, accounts receivable and investments in property and equipment.

Accounts receivable increased $190,616 to $1,494,755 at September 30, 2008 from $1,304,139 at March 31, 2008. The increase is primarily attributable to increased production billings versus the fourth quarter last fiscal year. Substantially all of our customers are large well-established companies of high credit quality. Accordingly, we have not established an allowance for bad debts at September 30, 2008 and similarly, no allowance for bad debts was deemed necessary at March 31, 2008.

Costs and estimated earnings on uncompleted contracts decreased $245,061 to $404,609 at September 30, 2008 versus $649,670 at March 31, 2008. The decrease is due to more favorable billing terms on certain contracts in process at September 30, 2008 versus March 31, 2008. Estimated earnings on contracts in process decreased to $84,583 or 2.5 percent of contracts in process of $3,383,424 at September 30, 2008 compared to estimated earnings on contracts in process of $377,822 or 11 percent of contracts in process of $3,396,292 at March 31, 2008. The decrease is attributable to lower expected margin on certain contracts in process at September 30, 2008.

Inventories increased $480,910 to $1,442,399 at September 30, 2008 principally due to purchases associated with higher levels of future scheduled product shipments. Raw materials, work-in-process and finished goods inventories increased by $169,393, $259,319 and $52,198, respectively.

Prepaid expenses and other current assets increased to $243,534 at September 30, 2008 from $119,647 at March 31, 2008 primarily due to the prepayment of insurance premium costs on our commercial insurance coverage.

We invested $398,669 and $511,991 for the acquisition of property and equipment during the quarter and six months ended September 30, 2008 compared to $236,388 and $364,351 during the comparable quarter and six months last fiscal year. The increase in capital expenditures is primarily due to increased purchases of manufacturing equipment, this quarter and six months versus the comparable quarter and six months last fiscal year.

Patent and trademark costs decreased $26,623 to $451,142 at September 30, 2008 versus $477,765 at March 31, 2008 primarily due to the systematic amortization of patent issuance costs.

Accounts payable decreased $12,109 to $728,418 at September 30, 2008 from $740,527 at March 31, 2008, primarily due to improved payment processing during the quarter.

Other current liabilities increased $79,226 to $451,511 at September 30, 2008 from $372,285 at March 31, 2008. The increase is primarily attributable to higher levels of customer deposits, accrued payroll and employee benefits and accrued legal fees.

Short-term deferred compensation under executive employment agreements increased $16,917 to $380,917 at September 30, 2008 from $364,000 at March 31, 2008 reflecting periodic accruals of future severance obligations under executive employment agreements.

Billings in excess of costs and estimated earnings on uncompleted contracts decreased $3,997 to $703,851 at September 30, 2008 from $707,848 at March 31, 2008 reflecting decreased billings on certain engineering contracts in process at September 30, 2008 in advance of the performance of the associated work versus March 31, 2008.

Long-term debt, less current portion decreased $55,780 to $361,143 at September 30, 2008 from $416,923 at March 31, 2008 reflecting scheduled principal repayments on the mortgage debt for our Frederick, Colorado facility.

Long-term deferred compensation under executive employment agreements increased $33,921 to $667,794 at September 30, 2008 from $633,873 at March 31, 2008 reflecting periodic accruals of future severance obligations under executive employment agreements.

Common stock and additional paid-in capital were $266,782 and $78,469,760, respectively, at September 30, 2008 compared to $265,267 and $77,819,041 at March 31, 2008. The increase in additional paid-in capital was primarily attributable to the recording of non-cash equity based compensation costs.

Results of Operations

Quarter Ended September 30, 2008

Operations for the second quarter ended September 30, 2008, resulted in a net loss of $1,538,111, or $0.06 per common share, compared to a net loss of $1,139,894, or $0.04 per common share for the comparable period last year. The increase in the current year net loss is primarily attributable to a change in the period of award for equity-based and incentive compensation to the second fiscal quarter this year versus the third fiscal quarter last year, increased production engineering expense associated with the continued expansion of this group and its activities and the impairment of an investment in commercial paper of Lehman Brothers.

Revenue from contract services increased $4,955, or 0.9 percent, to $586,384 at September 30, 2008 versus $581,429 for the comparable quarter last year. The increase is attributable to higher levels of material purchases for billable programs during the quarter ended September 30, 2008.

Product sales for the second quarter increased 20.0 percent to $1,690,947, compared to $1,409,162 for the comparable period last year. Power products segment revenue for the quarter ended September 30, 2008 increased to $835,483 from $784,019 for the comparable quarter last fiscal year due to increased shipments of DC-to-DC converters. Technology segment product revenue for the quarter ended September 30, 2008 increased 36.8 percent to $855,464, compared to $625,143 for the quarter ended September 30, 2007 due to increased shipments of prototype propulsion motors and controllers.

Gross profit margins for the quarter ended September 30, 2008 decreased nominally to 18.2 percent compared to 18.3 percent for the quarter ended September 30, 2007 primarily due to decreased gross profit margin on contract services. Gross profit on contract services decreased to 7.6 percent during the second quarter this fiscal year compared to 28.0 percent for the quarter ended September 30, 2007 due to lower margins on certain engineering contracts in process during the quarter ended September 30, 2008. Gross profit margin on product sales for the second quarter this year rose to 21.9 percent compared to a 14.3 percent for the second quarter last year. The improvement is primarily due to lower material costs associated with tooling and equipment investments and improved overhead absorption arising from higher production levels during the current quarter.

Research and development expenditures for the quarter ended September 30, 2008 increased to $149,847 compared to $128,175 for the quarter ended September 30, 2007. The increase is primarily due to increased levels of internally funded programs.

Production engineering costs were $485,369 for the second quarter versus $403,422 for the second quarter last fiscal year. The increase is attributable to higher levels of otherwise billable engineering resources allocated in support of our production engineering group's activities.

Selling, general and administrative expense for the quarter ended September 30, 2008 was $1,269,403 compared to $1,082,529 for the same quarter last year. The increase is attributable to higher levels of non-cash equity based compensation expense primarily attributable to a change in the period of grant, and higher levels of legal expense associated with an arbitration claim, versus the same quarter last fiscal year.

Interest income decreased to $49,322 for the quarter ended September 30, 2008 versus $120,683 for the same period last fiscal year. The decrease is attributable to lower yields, and lower levels of invested cash balances.

Interest expense decreased to $8,559 for the quarter ended September 30, 2008 compared to $10,353 for the comparable period last fiscal year. The decrease is due to lower average mortgage borrowings outstanding throughout the current quarter.

Six Months Ended September 30, 2008

Operations for the six month period ended September 30, 2008, resulted in a net loss of $2,537,826, or $0.10 per common share, compared to a net loss of $2,268,645, or $0.09 per common share for the comparable period last year. The increase in the current year net loss is primarily attributable to higher levels of equity based compensation recorded during the current six month period which is attributable to a change in the period of grant from the second half last fiscal year to the first half of this fiscal year.

Revenue from contract services increased $93,689, or 8.5 percent, to $1,189,868 for the six month period ended September 30, 2008 versus $1,096,179 for the comparable period last year. The increase is attributable to improved application of engineering resources to billable programs during the six month period ended September 30, 2008.

Product sales for the six month period ended September 30, 2008 increased 22.6 percent to $2,880,818, compared to $2,348,864 for the comparable period last year. Power products segment revenue for the six month period ended September 30, 2008 increased to $1,560,901 from $1,534,097 for the comparable period last fiscal year due to higher levels of DC-to-DC converter shipments offset by decreased shipment levels for auxiliary motors. Technology segment product revenue for the six month period ended September 30, 2008 increased $505,150 to $1,319,917, compared to $814,767 for the comparable period last year due to increased shipments of prototype propulsion motors and controllers.

Gross profit margins for the six month period ended September 30, 2008 increased to 15.0 percent compared to 11.4 percent for comparable period last year primarily due to increased gross profit margin on product sales. Gross profit margin on contract services decreased to 9.4 percent for the six month period ended September 30, 2008 compared to 19.8 percent for the comparable period last year due to lower margins on certain engineering contracts in process during the current six month period. Gross profit margin on product sales for the six month period ended September 30, 2008 rose to 17.3 percent compared to a 7.5 percent for the comparable period last year. The improvement is primarily due to lower material costs associated with tooling and equipment investments and improved overhead absorption arising from higher production levels during the current six month period.

Research and development expenditures for the six month period ended September 30, 2008 increased to $252,345 compared to $226,499 for the same period last year. The increase is primarily due to increased levels of internally funded programs.

Production engineering costs were $893,217 for the six month period ended September 30, 2008 versus $949,455 for the comparable six month period last year. The decrease is primarily due to additional expenses incurred last fiscal year in conjunction with production launch activities for a former customer.

Selling, general and administrative expense for the six month period ended September 30, 2008 was $2,029,727 compared to $1,712,365 for the same period last year. The increase is attributable to higher levels of non-cash equity based compensation expense which is attributable to a change in the period of grant from the second half last fiscal year to the first half of this fiscal year, and higher levels of legal expense associated with an arbitration claim.

Interest income decreased to $133,600 for the six month period ended September 30, 2008 versus $244,122 for the comparable period last year. The decrease is attributable to lower yields and lower levels of invested cash balances.

Interest expense decreased to $17,675 for the six month period ended September 30, 2008 compared to $21,253 for the comparable period last year. The decrease is due to lower average mortgage borrowings outstanding throughout the current quarter.

Liquidity and Capital Resources

Our cash balances and liquidity throughout the six month period ended September 30, 2008 were adequate to meet operating needs. At September 30, 2008, we had working capital (the excess of current assets over current liabilities) of $8,472,222 compared to $10,510,175 at March 31, 2008.

For the six month period ended September 30, 2008, net cash used in operating activities was $1,904,667 compared to net cash used in operating activities of $1,692,091 for the six month period ended September 30, 2007. The increase in cash used in operating activities for the six month period ended September 30, 2008 is primarily attributable to higher levels of operating losses and higher levels of inventories primarily offset by higher levels of equity based compensation.

Net cash provided by investing activities for the six month period ended September 30, 2008 was $1,494,739 compared to cash used of $1,686,786 for the comparable six month period last year. The change is attributable to higher levels of maturities of short-term investments this period versus the comparable period last year.

Net cash used in financing activities was $140,614 for the six month period ended September 30, 2008 versus cash provided by financing activities of $5,224,708 for the same period last fiscal year. The decrease is primarily attributable to the purchase of treasury stock and proceeds from the issuance of common stock during the first quarter last fiscal year versus none this year.

We expect to continue to invest substantially greater financial and human resources for the remainder of fiscal 2009 on the commercialization of our products in emerging markets, including a significant increase in the amount of capital expenditures for equipment and tooling. As a result of these activities our losses are expected to increase and our working capital requirements may increase substantially during the remainder of fiscal 2009. Although we expect to manage our operations and working capital requirements to minimize the future level of operating losses and working capital usage consistent with execution of our business plan, our planned working capital requirements may consume a substantial portion of our cash reserves at September 30, 2008. We expect to fund our operations over the next year from existing cash and short-term investment balances and from available bank financing, if any. We can, however, not provide any assurance that our existing financial resources will be sufficient to execute our business plan beyond next fiscal year. If our existing financial resources are not sufficient to execute our business plan, we may issue equity or debt securities in the future. In the event financing or equity capital to fund future growth is not available on terms acceptable to us, we will modify our strategy to align our operation with then available financial resources.

Contractual Obligations

The following table presents information about our contractual obligations and
commitments as of September 30, 2008:


                                                           Payments due by Period

                                               Less Than                             More than
                                    Total        1 Year     2 - 3 Years  4 - 5 Years  5 Years
Long-term debt obligations       $  470,994       109,851      361,143         -         -
Interest on long-term debt           34,113        29,887        4,226         -         -
obligations
Purchase obligations              1,329,755     1,329,755         -            -         -
Executive employment              1,048,711       380,917      654,000         -       13,794
agreements (1)
Total                           $ 2,883,573     1,850,410    1,019,369         -       13,794

(1) Includes severance pay obligations under executive employment agreements, but not annual cash compensation under the agreements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that effect the dollar values reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements contained in our annual report on Form 10-K for the fiscal year ended March 31, 2008 describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, allowance for doubtful accounts receivables, costs to complete contracts, and recoverability of inventories. Actual results could differ materially from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in preparation of the consolidated financial statements.

Accounts Receivable and Investments in Marketable Securities

Our trade accounts receivable and investments in marketable securities are subject to credit risks associated with the financial condition of our customers and their liquidity and the financial condition and liquidity of the companies or government agencies whose securities we own. We evaluate all customers and investment securities periodically to assess their financial condition and liquidity and set appropriate credit limits based on this analysis. As a result, the collectibility of accounts receivable and investment securities may change due to changing general economic conditions and factors associated with each customer's or investee's particular business. Because many of our customers are large well-established companies with excellent credit worthiness, we have not established a reserve at September 30, 2008 and March 31, 2008 for potentially uncollectible trade accounts receivable. It is reasonably possible that future events or changes in circumstances could cause the realizable value of our trade accounts receivable and/or investment securities to decline materially, resulting in material losses.

Inventories

We maintain raw material inventories of electronic components, motor parts and other materials to meet our expected manufacturing needs for proprietary products and for products manufactured to the design specifications of our customers. Some of these components may become obsolete or impaired due to bulk purchases in excess of customer requirements. Accordingly, we periodically assesses our raw material inventory for potential impairment of value based on then available information, expectations and estimates and establish impairment reserves for estimated declines in the realizable value of our inventories. The actual realizable value of our inventories may differ materially from these estimates based on future occurrences. It is reasonably possible that future events or changes in circumstances could cause the realizable value of our inventories to decline materially, resulting in additional material impairment losses.

Percentage of Completion Revenue Recognition on Long-term Contracts: Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts

We recognize revenue on development projects funded by our customers using the percentage-of-completion method. Under this method, contract services revenue is based on the percentage that costs incurred to date bear to management's best estimate of the total costs to be incurred to complete the project. Many of these contracts involve the application of our technology to customers' products and other applications with demanding specifications. Management's best estimates have sometimes been adversely impacted by unexpected technical challenges requiring additional analysis and redesign, failure of electronic components to operate in accordance with manufacturers' published performance specifications, unexpected prototype failures requiring the purchase of additional parts and a variety of other factors that may cause unforeseen delays and additional costs. It is reasonably possible that total costs to be incurred on any of the projects in process at September 30, 2008 could be materially different from management's estimates, and any modification of total project costs to be incurred could result in material changes in the profitability of affected projects or result in material losses on any affected projects.

New Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards . . .