General
We develop and sell devices that use "spintronics," a nanotechnology that relies on electron spin rather than electron charge to acquire, store, and transmit information. We manufacture high-performance spintronic products including sensors and couplers to revolutionize data sensing and transmission. We also receive contracts for research and development and are a licensor of spintronic magnetoresistive random access memory technology, commonly known as MRAM.

Application of Critical Accounting Policies and Estimates In accordance with SEC guidance, those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below.

Research and Development Contract Percentage of Completion Estimation We recognize research and development contract revenue and gross profit as work is performed, based on actual costs incurred. We apply the percentage-of-completion method to firm-fixed-price contracts. This requires us to make estimates of the percentage of completion of firm-fixed-price contracts. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known. This estimate has not affected our financial statements in the past three fiscal years. Increases in projected costs to complete contracts could materially impact our future results, however.

Product Warranty Estimation
We maintain a reserve for warranty claims based on the trend in the historical ratio of claims to sales, releases of new products and other factors. The warranty period for our products is generally one year. Although we believe the likelihood to be relatively low, claims experience could be materially different from actual results because of the introduction of new products, manufacturing changes that could impact product quality, or as yet unrecognized defects in products sold. As of March 31, 2009 and 2008 our reserve for estimated warranty claims was not material to our financial statements.

Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Where there is evidence that inventory could be disposed of at less than carrying value, the inventory is written down to the net realizable value in the current period. Additionally, we periodically examine our inventory in the context of sales trends, turnover, competition, and other market factors, and record provisions to inventory reserve when we determine certain inventory is unlikely to be sold. If reserved inventory is subsequently sold, corresponding reductions in inventory and inventory reserve are made. Our inventory reserve was $300,000 at March 31, 2009 and $280,000 at March 31, 2008.

Allowance for Doubtful Accounts Estimation We must make estimates of the uncollectibility of our accounts receivable. The most significant risk is the risk of sudden unexpected deterioration in financial condition of a significant customer that is not considered in the allowance. We specifically analyze accounts receivable, historical bad debts, and customer credit-worthiness when evaluating the adequacy of the allowance for doubtful accounts. Our results could be materially impacted if the financial condition of a significant customer deteriorated and related accounts receivable are deemed uncollectible. Our allowance for doubtful accounts was $15,000 at March 31, 2009 and 2008. Our allowance for doubtful accounts is a relatively small percentage of our accounts receivable because our revenues are primarily from large customers, distributors, and U.S. Government agencies, all of which we consider generally credit-worthy. Our allowance for doubtful accounts could increase in the future if larger portions of our sales come from small end-user customers.

Deferred Tax Assets Estimation
In determining the carrying value of our net deferred tax assets, we must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions to realize the benefit of these assets. We evaluate the realizability of the deferred assets quarterly and assess the need for valuation allowances or reduction of existing allowances quarterly.

As of March 31, 2009 our deferred tax assets were $667,729 compared to $453,405 as of March 31, 2008. Deferred tax assets included $136,587 in stock-based compensation deductions as of March 31, 2009 and $106,681 as of March 31, 2008. Our deferred tax assets are subject to an Internal Revenue Code
Section 382 limitation.

Results of Operations
The following table summarizes the percentage of revenue and year-to-year changes for various items for the last three fiscal years:

                                            Percentage of Revenue                  Year-to-Year Change
                                             Year Ended March 31                   Years Ended March 31
                                                                                2008 to            2007 to
                                        2009          2008      2007              2009               2008
Revenue
Product sales                           84.4 %         90.1 %      87.6 %          6.5   %           28.3  %
Contract research and development       15.6 %          9.9 %      12.4 %         80.8   %           (0.6 )%
Total revenue                          100.0 %        100.0 %     100.0 %         13.9   %           24.7  %
Cost of sales                           28.8 %         33.3 %      35.2 %         (1.6  )%           18.1  %
Gross profit                            71.2 %         66.7 %      64.8 %         21.6   %           28.3  %
Expenses
Selling, general, and administrative     9.3 %         10.5 %      11.9 %          0.9   %           10.7  %
Research and development                 5.2 %          7.2 %      13.2 %        (18.1  )%          (31.6 )%
Total expenses                          14.5 %         17.7 %      25.1 %         (6.9  )%          (11.7 )%
Income from operations                  56.7 %         49.0 %      39.8 %         31.9   %           53.5  %
Net interest and other income            5.0 %          5.0 %       3.9 %         14.0   %           59.6  %
Income before taxes                     61.7 %         54.0 %      43.7 %         30.2   %           54.1  %
Income tax provision                    19.9 %         19.0 %      14.7 %         19.3   %           61.5  %
Net income                              41.8 %         35.0 %      29.0 %         36.1   %           50.3  %

Total revenue for fiscal 2009 increased 14% to $23,372,269 compared to $20,528,812 for fiscal 2008, and increased 25% in fiscal 2008 compared to $16,460,830 for fiscal 2007. The increase in total revenue in fiscal 2009 was due to a 7% increase in product sales and an 81% increase in research and development revenue. The increase in total revenue in fiscal 2008 was due to increases in product sales. In fiscal 2009, total revenue increased 15% in the U.S. and 36% in Europe, partially offset by a 29% decrease in revenue from Asia. In fiscal 2008, total revenue increased 9% from the U.S., 68% from Europe, and 27% from Asia.

Product sales increased 7% to $19,715,311 compared to $18,505,650 in fiscal 2008. Fiscal 2008 product sales increased 28% from $14,425,632 in fiscal 2007. The increases in both years were due to both the addition of new customers and increased purchases by existing customers. Sales of parts for medical devices increased in fiscal 2009, while sales into other markets such as industrial control and factory automation decreased, in part, we believe, due to a worldwide manufacturing slowdown.

Contract research and development revenue increased 81% for fiscal 2009 compared to fiscal 2008, following a decrease of less than 1% for fiscal 2008 compared to fiscal 2007. The increase for fiscal 2009 compared to fiscal 2008 was due to new contracts. The increase in research and development revenue in fiscal 2009 may not be representative of future trends and there can be no assurance of additional or follow-on contracts for expired or completed contracts.

Gross profit margin increased to 71% of revenue for fiscal 2009 compared to 67% for fiscal 2008 and 65% for fiscal 2007. The increase in gross profit margin in fiscal 2009 from fiscal 2008 was due to higher margins on both product sales and research and development revenue as well as manufacturing efficiencies and a more favorable product sales mix. The increase in gross profit margin in fiscal 2008 from fiscal 2007 was due to a more profitable revenue mix consisting of a higher percentage of product sales. Increases in gross profit margin might not continue because we may not have additional opportunities to increase prices or decrease product costs. Furthermore, successfully implementing our long-term strategy of expanding into large markets such as consumer or automotive might result in increased revenue but decreased gross profit margin.

Selling, general, and administrative expense increased 1% for fiscal 2009 and 11% for fiscal 2008 compared to fiscal 2007. The increase for fiscal 2009 was primarily due to increased salaries and commissions, partially offset by a $78,303 decrease in legal fees and a $82,934 decrease in the effect of SFAS No.
123(R). The decrease in the effect of SFAS No. 123(R) for fiscal 2009 was primarily due to a decrease to 1,000 share options granted to each non-employee director on their reelection compared to 2,000 shares in the prior-year period in consideration of the addition of cash compensation for non-employee directors. The increase for fiscal 2008 was primarily due to increased expenses relating to commissions on product sales and incentive compensation, and a $33,236 increase in the effect of SFAS No. 123(R). The increase in the effect of SFAS No. 123(R) for fiscal 2008 was primarily due to a higher market stock price at the date of automatic grant of stock options to our non-employee directors on their reelection to our Board compared to the market stock price at the prior-year date of grant.

Research and development expense decreased 18% for fiscal 2009 compared to fiscal 2008 due to the completion of certain research and development projects and an increase in contract research and development obligations. Research and development expense decreased 32% for fiscal 2008 compared to fiscal 2007 due to the completion of certain research and development projects. These decreases may not be representative of future expense trends. Our research and development expense can fluctuate significantly depending on staffing, project requirements, and contract research and development obligations.

Net interest and other income increased 14% for fiscal 2009 to $1,176,010 compared to $1,031,225 for fiscal 2008. Net interest and other income increased 60% in fiscal 2008 compared to $646,234 for fiscal 2007. The increase for fiscal 2009 was primarily due to an increase in interest income from a larger portfolio of marketable securities. The increase for fiscal 2008 was primarily due to an increase in interest income from a larger portfolio of marketable securities and an increase in other income primarily due to $56,837 in net gains on sales of marketable securities.

The effective income tax rate in fiscal 2009 was 32% of income before taxes compared to 35% in fiscal 2008 and 34% in fiscal 2007. The decreased tax rate for fiscal 2009 compared to fiscal 2008 was primarily due to a larger portion of our interest income from federally tax-free securities and a lower state effective tax rate. Our tax rate was higher in fiscal 2008 compared to fiscal 2007 primarily due to our assessment for fiscal 2007 that it was more likely than not that we would realize certain deferred tax assets. Our tax rate can fluctuate due to a number of factors, including the mix between taxable and tax-exempt securities in our marketable securities and deductions related to disqualifying dispositions of our common stock. We did not pay significant cash taxes for fiscal 2007 because of stock-based compensation deductions. We exhausted our available stock-based compensation deductions during fiscal 2008 and began accruing and paying cash-tax obligations. The decrease in the effective tax rate in fiscal 2009 may not be representative of future trends because the effective tax rate can fluctuate from year to year due to a number of factors, some of which are outside our control.

Net income increased 36% for fiscal 2009 compared to fiscal 2008 due to increases in revenue, gross profit as a percentage of revenue, and interest income and decreases in total expenses and the effective income tax rate. Net income increased 50% in fiscal 2008 compared to fiscal 2007 due to increases in revenue, gross profit as a percentage of revenue, interest income, and a decrease in total expenses.

Liquidity and Capital Resources
Our primary source of working capital for fiscal years 2007 through 2009 was cash provided by operating activities related to product sales and research and development contract revenue. At March 31, 2009 we had $34,321,811 in cash plus long-term marketable securities compared to $24,736,874 at March 31, 2008. The $9,584,937 increase in cash and marketable securities was primarily due to $9,998,114 in net cash provided by operating activities.

Purchases of fixed assets decreased to $401,612 in fiscal 2009 compared to $817,596 in fiscal 2008. Purchases of fixed assets were $321,997 in fiscal 2007. Purchases in all three fiscal years were primarily for capital equipment to increase our production capacity and were financed with cash provided by operating activities. Our capital expenditures can vary significantly from year to year depending on our needs and equipment purchasing opportunities.

For the past three fiscal years, after purchasing fixed assets we invested excess cash provided by operating activities in long-term marketable securities. As of March 31, 2009 our marketable securities had remaining maturities between 13 and 52 months (see "Note 4 - Marketable Securities" for additional information). As our marketable securities mature, we currently plan to either use the proceeds to meet future capital needs or reinvest the proceeds in other marketable securities.

The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due:

                                                Payments Due by Period
Contractual obligations         Total       <1 Year    1-3 Years    3-5 Years    >5 Years
Operating lease obligations  $ 1,717,427   $ 244,387   $  499,348   $  775,506   $ 198,186
Purchase obligations             269,995     269,995            -            -           -
Total                        $ 1,987,422   $ 514,382   $  499,348   $  775,506   $ 198,186

Operating lease obligations are primarily for our facility lease. "Note 9 - Commitments and Contingencies" provides additional information about our lease obligations. Purchase obligations as of March 31, 2009 consisted of raw materials purchase commitments and fixed asset purchase commitments to increase manufacturing capacity. We expect to meet these contractual payment obligations from cash provided by operating activities. We plan to evaluate capital expenditures as needs and opportunities arise, and our future capital expenditures could vary significantly from expenditures in the past.

We believe our working capital and cash generated from operations will be adequate for our needs at least through fiscal 2010.

Foreign Currency Transactions
We have some limited revenue risks from fluctuations in values of foreign currency due to product sales abroad. Foreign sales are generally made in U.S. currency, and currency transaction gains or losses in the past three fiscal years were not significant.

Inflation
Inflation has not had a significant impact on our operations since our inception. Prices for our products and for the materials and labor going into those products are governed by market conditions. It is possible that inflation in future years could impact both materials and labor in the production of our products.

Off-Balance-Sheet Arrangements
Our off-balance sheet arrangements consist of purchase commitments and operating leases for our facility. We believe that our off-balance sheet arrangements do not have a material current or anticipated future effect on our profitability, cash flows, or financial position.