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.

During the quarter and throughout the nine month period ended December 31, 2008 we experienced strong demand for our electric propulsion systems and related products due to an expansion in the number of all-electric and hybrid electric vehicle platforms being developed for potential introduction in the passenger automobile and truck markets.

In the passenger automobile market we have delivered products this year to three international automobile manufacturers, one of which has publicly announced their plan to introduce at least one all-electric or hybrid electric automobile by 2010. We are also supplying electric propulsion systems and/or generators to an additional eight entrepreneurial automobile developers, some of which have publicly announced plans to begin delivering limited quantities of automobiles to consumers in calendar 2009. In the truck market, we are delivering DC-to-DC converters to Eaton Corporation as part of their hybrid electric propulsion system which powers medium duty hybrid trucks including International Truck and Engine Corporation's DuraStar™ Hybrid, a diesel electric medium-duty truck, Peterbilt Motors Company's Model 330 and Model 335 medium-duty hybrid trucks and Freightliner Trucks Business Class® M2e Hybrid truck. We believe demand for our electric propulsion system products will remain strong for the foreseeable future as vehicle makers continue to focus on the development and introduction of electric and hybrid electric vehicles as part of the restructuring of the global automotive industry to provide a broader selection of highly fuel efficient vehicles to consumers.

Product sales revenue for the fiscal third quarter ended December 31, 2008 rose 94 percent to $2,080,982 versus $1,074,838 for the comparable quarter last fiscal year, reflecting increased shipments of DC-to-DC converters and propulsion motors and controllers.

Revenue from funded engineering activities for the quarter ended December 31, 2008 rose 24 percent to $792,613 versus $640,020 for the quarter ended December 31, 2007, primarily due to higher levels of material purchases for billable programs.

Gross profit margins on product sales for the quarter ended December 31, 2008 improved to 33 percent versus 12 percent for the comparable quarter last fiscal year resulting in over a five-fold increase in gross profit contribution dollars to $683,293 versus $126,501, respectively.

Production engineering expense for the third fiscal quarter this year increased to $447,269 versus $397,622 for the comparable quarter last fiscal year, reflecting the addition of engineering resources to our production engineering group.

Net loss for the quarter ended December 31, 2008 declined $542,895 to $764,101, or $0.03 per common share, versus a net loss of $1,306,996 or $0.05 per common share for the comparable quarter last year. The reduction in net loss is primarily attributable to higher levels of revenue and expanded gross profit margins on product sales.

Product sales revenue for the nine months ended December 31, 2008 rose 45 percent to $4,961,800 versus $3,423,702 for the comparable period last year, primarily as a result of increased shipments of DC-to-DC converters and prototype propulsion motors and controllers.

Revenue from funded engineering activities for the nine months ended December 31, 2008 rose 14 percent to $1,982,481 versus $1,736,199 for the nine months ended December 31, 2007, primarily due to higher levels of material purchases for billable programs.

Gross profit margins on product sales for the nine months ended December 31, 2008 improved to 24 percent versus 9 percent for the comparable period last fiscal year resulting in over a three-fold increase in gross profit contribution dollars to $1,180,405 versus $302,715, respectively.

Net loss for the nine month period ended December 31, 2008 declined to $3,301,927, or $0.12 per common share, versus a net loss of $3,575,641 or $0.14 per common share for the comparable period last year, due principally to increased revenue levels and improved gross profit margins.

Our liquidity for the quarter and nine month period was sufficient to meet our operating requirements. At December 31, 2008 we had cash and short-term investments totaling $6,793,735. Net cash used in operating activities and capital expenditures for the nine month period ended December 31, 2008 were $2,157,384 and $520,510, respectively.

The expansion in demand for our products may require us to invest a substantially greater amount of financial and human resources for the remainder of fiscal 2009 and beyond. Accordingly, we expect to further increase the size of our production engineering group, make additional capital expenditures for manufacturing equipment and tooling, and potentially expand our manufacturing facility in Frederick, Colorado. We believe these investments are necessary to support our strategy of aggressively introducing 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 will be adequate to fund our anticipated growth for at least the next twelve months, 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 December 31, 2008 were $6,793,735 and working capital (the excess of current assets over current liabilities) was $7,555,070 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 $104,550 to $1,408,689 at December 31, 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 December 31, 2008 and similarly, no allowance for bad debts was deemed necessary at March 31, 2008.

Costs and estimated earnings on uncompleted contracts decreased $232,566 to $417,104 at December 31, 2008 versus $649,670 at March 31, 2008. The decrease is due to more favorable billing terms on certain contracts in process at December 31, 2008 versus March 31, 2008. Estimated earnings on contracts in process decreased to $157,349 or 4 percent of contracts in process of $4,076,692 at December 31, 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 December 31, 2008.

Inventories increased $309,910 to $1,271,399 at December 31, 2008 principally due to purchases of raw materials and increased levels of work-in-process inventory arising from higher levels of future scheduled product shipments. Raw materials and work-in-process inventory increased $76,612, and $258,560, respectively. Finished goods inventory decreased $25,262 reflecting lower levels of auxiliary motors on hand at December 31, 2008 versus March 31, 2008.

Prepaid expenses and other current assets increased to $145,192 at December 31, 2008 from $119,647 at March 31, 2008 primarily due to the prepayment of insurance premium costs on our commercial insurance coverage.

We invested $153,099 and $520,510 for the acquisition of property and equipment during the quarter and nine months ended December 31, 2008 compared to $67,417 and $431,768 during the comparable quarter and nine months last fiscal year. The increase in capital expenditures is primarily due to increased purchases of manufacturing equipment for a dynamometer test cell and a motor assembly cell.

Patent and trademark costs decreased $39,700 to $438,065 at December 31, 2008 versus $477,765 at March 31, 2008 primarily due to the systematic amortization of patent issuance costs.

Accounts payable decreased $60,228 to $680,299 at December 31, 2008 from $740,527 at March 31, 2008, primarily due to improved payment processing during the quarter.

Other current liabilities increased $183,156 to $555,441 at December 31, 2008 from $372,285 at March 31, 2008. The increase is primarily attributable to higher levels of accrued legal fees and royalties.

Current portion of long-term debt increased $338,234 to $444,236 at December 31, 2008 from $106,002 at March 31, 2008 and long-term debt, less current portion, decreased $416,923 to zero at December 31, 2008 from $416,923 at March 31, 2008. Both changes are due to a scheduled balloon payment in November of 2009 on the mortgage for our Frederick, Colorado facility. We expect to extend the term of this mortgage debt prior to its maturity, however, we cannot assure you that an extension will be completed.

Short-term deferred compensation under executive employment agreements increased $25,375 to $389,375 at December 31, 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 $296,150 to $411,698 at December 31, 2008 from $707,848 at March 31, 2008 reflecting decreased billings on certain engineering contracts in process at December 31, 2008 in advance of the performance of the associated work versus March 31, 2008.

Long-term deferred compensation under executive employment agreements increased $37,881 to $671,754 at December 31, 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 $267,277 and $78,671,764, respectively, at December 31, 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 December 31, 2008

Operations for the third quarter ended December 31, 2008, resulted in a net loss of $764,101, or $0.03 per common share, compared to a net loss of $1,306,996, or $0.05 per common share for the comparable period last year. The reduction in net loss is primarily attributable to higher levels of product sales revenue and expanded gross profit margins on product sales.

Revenue from contract services increased $152,593, or 24 percent, to $792,613 at December 31, 2008 versus $640,020 for the comparable quarter last year. The increase is primarily attributable to higher levels of material purchases for billable programs during the quarter ended December 31, 2008.

Product sales for the third quarter increased $1,006,144 or 94 percent to $2,080,982, compared to $1,074,838 for the comparable period last year. Power products segment revenue for the quarter ended December 31, 2008 increased to $1,440,841 from $608,305 for the comparable quarter last fiscal year due to increased shipments of DC-to-DC converters and propulsion motors and controllers. Technology segment product revenue for the quarter ended December 31, 2008 increased 37 percent to $640,141, compared to $466,533 for the quarter ended December 31, 2007 due to increased shipments of prototype propulsion motors and controllers.

Gross profit margins for the quarter ended December 31, 2008 increased to 30 percent compared to 16 percent for the quarter ended December 31, 2007. Gross profit on contract services was 23 percent during the third quarter this fiscal year compared to 23 percent for the quarter ended December 31, 2007. Gross profit margin on product sales for the third quarter this year rose to 33 percent compared to 12 percent for the third quarter last year. The improvement is primarily due to lower material costs and improved overhead absorption arising from higher production levels during the current quarter.

Research and development expenditures for the quarter ended December 31, 2008 increased to $155,190 compared to $126,919 for the quarter ended December 31, 2007. The increase is primarily due to increased levels of internally funded programs.

Production engineering costs were $447,269 for the third quarter versus $397,622 for the third quarter last fiscal year. The increase is attributable to higher sample costs and the addition of engineering resources to our production engineering group.

Selling, general and administrative expense for the quarter ended December 31, 2008 was $1,055,463 compared to $1,188,852 for the same quarter last year. The decrease is attributable to lower levels of non-cash equity based compensation expense primarily attributable to a change in the period of grant, offset by higher levels of legal expense associated with an arbitration claim, versus the same quarter last fiscal year.

Interest income decreased to $37,941 for the quarter ended December 31, 2008 versus $120,016 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 $8,180 for the quarter ended December 31, 2008 compared to $10,028 for the comparable period last fiscal year. The decrease is due to lower average mortgage borrowings outstanding throughout the current quarter.

Nine Months Ended December 31, 2008

Operations for the nine month period ended December 31, 2008, resulted in a net loss of $3,301,927, or $0.12 per common share, compared to a net loss of $3,575,641, or $0.14 per common share for the comparable period last year. The decrease is principally due to increased revenue levels and improved gross profit margins.

Revenue from contract services increased $246,282, or 14 percent, to $1,982,481 for the nine month period ended December 31, 2008 versus $1,736,199 for the comparable period last year. The increase is primarily attributable to higher levels of material purchases for billable programs during the nine month period ended December 31, 2008.

Product sales for the nine month period ended December 31, 2008 increased $1,538,098 or 45 percent to $4,961,800, compared to $3,423,702 for the comparable period last year. Power products segment revenue for the nine month period ended December 31, 2008 increased to $3,001,742 from $2,142,402 for the comparable period last fiscal year due to increased shipments of DC-to-DC converters and propulsion motors and controllers. Technology segment product revenue for the nine month period ended December 31, 2008 increased $678,758 or 53 percent to $1,960,058, compared to $1,281,300 for the comparable period last year due to increased shipments of prototype propulsion motors and controllers.

Gross profit margins for the nine month period ended December 31, 2008 increased to 21 percent compared to 13 percent for comparable period last year primarily due to increased gross profit margin on product sales. Gross profit margin on contract services decreased to 15 percent for the nine month period ended December 31, 2008 compared to 21 percent for the comparable period last year due to lower margins on certain engineering contracts in process during the current nine month period. Gross profit margin on product sales for the nine month period ended December 31, 2008 rose to 24 percent compared to 9 percent for the comparable period last year. The improvement is primarily due to lower material costs and improved overhead absorption arising from higher production levels during the current nine month period.

Research and development expenditures for the nine month period ended December 31, 2008 increased to $407,535 compared to $353,418 for the same period last year. The increase is primarily due to increased levels of internally funded programs.

Production engineering costs were $1,340,486 for the nine month period ended December 31, 2008 versus $1,347,077 for the comparable nine 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 nine month period ended December 31, 2008 was $3,085,190 compared to $2,901,217 for the same period last year. The increase is attributable to higher levels of non-cash equity based compensation expense, and higher levels of legal expense associated with an arbitration claim.

Interest income decreased to $171,541 for the nine month period ended December 31, 2008 versus $364,138 for the comparable period last year. The decrease is attributable to lower yields and lower levels of invested cash balances.

Interest expense decreased to $25,855 for the nine month period ended December 31, 2008 compared to $31,281 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 nine month period ended December 31, 2008 were adequate to meet operating needs. At December 31, 2008, we had working capital (the excess of current assets over current liabilities) of $7,555,070 compared to $10,510,175 at March 31, 2008.

For the nine month period ended December 31, 2008, net cash used in operating activities was $2,157,384 compared to net cash used in operating activities of $2,113,101 for the nine month period ended December 31, 2007. The increase in cash used in operating activities for the nine month period ended December 31, 2008 is primarily attributable to higher levels of accounts receivable and inventories, decreased levels of billings in excess of costs on uncompleted contracts which were partially offset by lower operating losses and increased non-cash equity based compensation.

Net cash provided by investing activities for the nine month period ended December 31, 2008 was $2,414,454 compared to cash used of $617,806 for the comparable nine month period last year. The change is attributable to increased maturities of short-term investments this period versus the comparable period last year.

Net cash used in financing activities was $201,609 for the nine month period ended December 31, 2008 versus cash provided by financing activities of $5,204,459 for the same period last fiscal year. The decrease is primarily attributable to the purchase of treasury stock this fiscal year and proceeds from the issuance of common stock 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 and beyond on the commercialization of our products in emerging markets, including a potentially significant increase in the amount of capital expenditures for equipment and tooling. 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 future working capital requirements may consume a substantial portion of our cash reserves. 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 December 31, 2008:


                                                           Payments due by Period

                                               Less Than                             More than
                                    Total        1 Year     2 - 3 Years  4 - 5 Years  5 Years
Long-term debt obligations       $  444,236       444,236         -            -         -
Interest on long-term debt           25,937        25,937         -            -         -
obligations
Purchase obligations                787,831       787,831         -            -         -
Executive employment              1,061,129       389,375      654,000         -       17,754
agreements (1)
Total                           $ 2,319,133     1,647,379      654,000         -       17,754

(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, the recoverability of inventories and the fair value of financial and long-lived assets. 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 December 31, 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 December 31, 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.

Fair Value Measurements and Asset Impairment

Some of our assets and liabilities may be subject to analysis as to whether the asset or liability should be marked to fair value and some assets may be evaluated for potential impairment in value. Fair value estimates and judgments may be required by management for those assets that do not have quoted prices in active markets. These estimates and judgments may include fair value determinations based upon the extrapolation of quoted prices for similar assets and liabilities in active or inactive markets, for observable items other than the asset or liability itself, for observable items by correlation or other statistical analysis, or from our assumptions about the assumptions market participants would use in valuing an asset or liability when no observable market data is available. Similarly, management evaluates both tangible and intangible assets for potential impairments in value. In conducting this evaluation, management may rely on a number of factors to value anticipated future cash flows including operating results, business plans and present value techniques. Rates used to value and discount cash flows may include assumptions about interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management's judgment in applying them to the analysis of asset impairment. Changes in any or the . . .