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, orders to be received under our supply agreement with Coda, our ability to comply with the necessary conditions to access the Department of Energy award, our ability to successfully expand our manufacturing facilities and the continued growth of the electric-powered vehicle industry. 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 ended September 30, 2009 there were several significant developments in our business that we believe will cause our rate of growth to accelerate over the next year and beyond. In July 2009, we completed a Supply Agreement with Coda Automotive to supply UQM® PowerPhase® electric propulsion systems to Coda Automotive's production partner, Harbin HaFei Automobile Industry Group Co. Ltd. ("HaFei"), Harbin, China, for a period of ten years. Hafei is one of the premier production companies in China for automobiles and automobile engines with an annual production capacity of 400,000 automobiles and 550,000 automobile engines. Initial shipments of production systems under the agreement are expected to begin later this fiscal year and ramp up prior to scheduled deliveries of Coda's affordable, full performance all-electric five-passenger sedan in the California market in mid 2010. Coda hopes to reach an annual run rate of 20,000 vehicles within six months of the introduction of the vehicle, which, if achieved, would result in annual revenue to us well in excess of $50 million. In August 2009, we were selected by the U.S. Department of Energy ("DOE") to receive a $45.1 million award under the American Recovery and Reinvestment Act to accelerate the manufacturing and deployment of electric vehicles, batteries and components in the United States. The award provides for a 50 percent cost-share by the Company raising the total value of the project to $90.2 million. Capital expenditures for facilities, tooling and manufacturing equipment and the qualification and testing of products associated with the launch of volume production for Coda Automotive are expected to qualify for reimbursement under the DOE program. In September 2009, we announced a collaboration with BorgWarner, a large international supplier of transmissions and other components to the automobile industry, on electric powertrain products for all-electric and hybrid-electric passenger automobiles. We initially are co-marketing our PowerPhase® electric propulsion system with BorgWarner's 31-03 eGearDrive™ transmission, the driveline developed for the Coda passenger vehicle, to customers worldwide. We expect BorgWarner's global presence will bring a higher level of visibility to our electric propulsion system products and result in new production opportunities.

As a result of these developments we expect to invest in excess of $10 million for facilities, tooling and manufacturing equipment to launch a high volume production cell for the electric propulsion system being supplied under the Coda Supply Agreement. Similarly, following the launch of deliveries under the Coda Supply Agreement, we expect to devote substantial financial resources to meet the working capital requirements associated with these production activities, potentially as much as $20 million. In order to fund these activities, shortly after the end of the quarter, on October 28, 2009, we completed a public offering of 8.625 million shares of our common stock resulting in net proceeds of approximately $32 million. Proceeds from the offering, together with our existing cash resources and funding available under the DOE program, are expected to be sufficient to fund our operations for at least the next eighteen months.

During the quarter ended September 30, 2009 we continued to experience the strong demand we have seen over the last several quarters 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 market. We have delivered electric propulsion systems and/or generators to seven 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 continuing to supply DC-to-DC converters to Eaton Corporation as part of their hybrid electric propulsion system which powers medium duty hybrid trucks manufactured by International Truck and Engine Corporation, Peterbilt Motors Company and Freightliner Trucks.

We believe demand for our electric propulsion system and generator 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 quarter and six month period ended September 30, 2009 rose 8.8 percent and 23.4 percent to $1,839,030 and $3,555,467, respectively, versus $1,690,947 and $2,880,818 for the comparable periods last fiscal year. The increases are due to stronger demand for electric propulsion systems and generators.

Revenue from funded engineering activities for the quarter and six month period ended September 30, 2009 declined 26.4 percent and 29.0 percent to $431,512 and $844,394, respectively, versus $586,384 and $1,189,868 for the comparable periods last fiscal year. The decrease is primarily due to the allocation of otherwise billable engineering resources to support production launch activities for the Coda program.

Gross profit margins on product sales for the quarter and six month period ended September 30, 2009 improved to 36.5 percent and 32.6 percent versus 21.9 percent and 17.3 percent for the comparable quarter and six month period last fiscal year resulting in an increase in gross profit contribution dollars to $671,519 and $1,159,303, from $370,676 and $497,112 respectively. The improvement is attributable to improved overhead absorption and reduced production costs.

Net loss for the quarter ended September 30, 2009 declined 67.8 percent to $496,037, or $0.02 per common share on total revenue of $2,270,542, versus a net loss of $1,538,111, or $0.06 per common share on total revenue of $2,277,331 for the comparable quarter last year. The reduction in net loss is primarily attributable to lower levels of non-cash equity based compensation expense arising from a change in the period of grant versus that for the last fiscal year, and expanded gross profit margins on higher levels of product sales.

Net loss for the six month period ended September 30, 2009 declined 55.7 percent to $1,125,153, or $0.04 per common share on total revenue of $4,399,861, versus a net loss of $2,537,826, or $0.10 per common share on total revenue of $4,070,686 for the comparable period last year. The reduction in net loss is primarily attributable to higher levels of revenue, expanded gross profit margins on product sales and lower levels of non-cash equity based compensation expense arising from a change in the period of grant versus that for the last fiscal year.

Our liquidity for the quarter and six month period ended September 30, 2009 was sufficient to meet our operating requirements. At September 30, 2009 we had cash and short-term investments totaling $5,302,172. In addition, cash proceeds from our public offering in October raised our cash and short-term investments to approximately $37 million. Net cash used in operating activities and capital expenditures for property and equipment for the six month period ended September 30, 2009 were $1,181,933 and $156,236, respectively.

As discussed above, we expect to invest in excess of $10 million for facilities, tooling and manufacturing equipment to launch a high volume production cell for the electric propulsion system being supplied under the Coda Supply Agreement. Similarly, following the launch of deliveries under the Coda Supply Agreement we expect to devote substantial financial resources to meet the working capital requirements associated with these production activities, potentially as much as $20 million. In order to fund these activities, shortly after the end of the quarter we completed a public offering of 8.625 million shares of our common stock resulting in net proceeds of approximately $32 million. Proceeds from the offering, together with our existing cash resources and funding available under the DOE program are expected to be sufficient to fund our operations for at least the next eighteen months.

As the markets for electrified 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. Should these expectations be realized, our existing cash and short-term investments may not be adequate to fund our anticipated growth and, as a result, we may need to raise additional capital to fund the higher than currently anticipated growth in our business.

Financial Condition

Cash and cash equivalents and short-term investments at September 30, 2009 were $5,302,172 and working capital (the excess of current assets over current liabilities) was $6,712,239 compared with $5,793,666 and $6,640,877, respectively, at March 31, 2009. The decrease in cash and short-term investments and working capital is primarily attributable to operating losses, higher levels of accounts receivable, prepaid and other current assets, partially offset by lower levels of inventories and cash received from the exercise of stock options under our equity incentive plan.

Accounts receivable increased $750,870 to $1,667,969 at September 30, 2009 from $917,099 at March 31, 2009. 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. Although we have not established an allowance for bad debts at September 30, 2009 and no allowance for bad debts was deemed necessary at March 31, 2009, in light of current economic conditions we may need to establish an allowance for bad debts in the future.

Costs and estimated earnings on uncompleted contracts decreased $305,761 to $337,337 at September 30, 2009 versus $643,098 at March 31, 2009. The decrease is due to more favorable billing terms on certain contracts in process at September 30, 2009 versus March 31, 2009. Estimated earnings on contracts in process decreased to $105,013 or 2.6 percent of contracts in process of $4,097,599 at September 30, 2009 compared to estimated earnings on contracts in process of $194,861 or 4.2 percent of contracts in process of $4,609,747 at March 31, 2009. The decrease is attributable to lower expected margin on certain contracts in process at September 30, 2009.

Inventories decreased $297,287 to $1,009,884 at September 30, 2009 principally due to lower levels of work-in-process and finished goods inventories. Raw materials, work-in-process and finished goods inventory decreased $208,703, $31,652, and $56,932, respectively, reflecting higher product shipment levels during the quarter.

Prepaid expenses and other current assets increased to $300,833 at September 30, 2009 from $117,768 at March 31, 2009 primarily due to the prepayment of insurance premium costs on our commercial insurance coverage.

We invested $121,443 and $156,236 for the acquisition of property and equipment during the quarter and six months ended September 30, 2009 compared to $148,234 and $367,411 during the comparable quarter and six months last fiscal year. The decrease in capital expenditures is primarily due to decreased purchases of manufacturing equipment during the first quarter versus the comparable quarter last year. As described above, we expect to increase the level of our capital expenditures substantially over the next twelve months as a result of the supply agreement with Coda Automotive.

Patent and trademark costs decreased $20,152 to $418,032 at September 30, 2009 versus $438,184 at March 31, 2009 primarily due to the systematic amortization of patent issuance costs.

Accounts payable decreased $200,411 to $450,718 at September 30, 2009 from $651,129 at March 31, 2009, primarily due to improved payment processing during the quarter.

Other current liabilities decreased $20,179 to $580,493 at September 30, 2009 from $600,672 at March 31, 2009. The decrease is primarily attributable to lower levels of accrued royalties and accrued payroll and employee benefits, offset by higher levels of customer prepayments at September 30, 2009.

Current portion of long-term debt decreased $55,780 to $361,143 at September 30, 2009 from $416,923 at March 31, 2009 reflecting scheduled principal repayments on the mortgage debt for our Frederick, Colorado facility.

Short-term deferred compensation under executive employment agreements increased $9,041 to $406,875 at September 30, 2009 from $397,834 at March 31, 2009 reflecting periodic accruals of future severance obligations under executive employment agreements.

Billings in excess of costs and estimated earnings on uncompleted contracts increased $35,360 to $106,727 at September 30, 2009 from $71,367 at March 31, 2009 reflecting increased billings on certain engineering contracts in process at September 30, 2009 in advance of the performance of the associated work versus March 31, 2009.

Long-term deferred compensation under executive employment agreements increased $9,772 to $685,487 at September 30, 2009 from $675,715 at March 31, 2009 reflecting periodic accruals of future severance obligations under executive employment agreements.

Common stock and additional paid-in capital were $271,565 and $79,827,868, respectively, at September 30, 2009 compared to $267,277 and $78,767,154 at March 31, 2009. The increase in common stock and additional paid-in capital was primarily attributable to share issuances under our employee stock purchase plan, equity incentive plan and upon the exercise of outstanding warrants.

Results of Operations

Operations for the second quarter ended September 30, 2009, resulted in a net loss of $496,037, or $0.02 per common share, compared to a net loss of $1,538,111, or $0.06 per common share for the comparable period last year. The reduction in net loss is primarily attributable to higher levels of product sales revenue, expanded gross profit margins on product sales and lower levels of non-cash equity based compensation expense arising from a change in the period of grant versus that for the last fiscal year.

Revenue from contract services decreased $154,872, or 26.4 percent, to $431,512 at September 30, 2009 versus $586,384 for the comparable quarter last year. The decrease is primarily due to the shifting of engineering resources to support production engineering, low volume production and internally-funded research and development activities.

Product sales for the second quarter increased $148,083 or 8.8 percent to $1,839,030, compared to $1,690,947 for the comparable period last year. Power products segment revenue for the quarter ended September 30, 2009 decreased to $509,716 from $835,483 for the comparable quarter last fiscal year due to decreased shipments of propulsion systems and actuator motors. Technology segment product revenue for the quarter ended September 30, 2009 increased 55.4 percent to $1,329,314, compared to $855,464 for the quarter ended September 30, 2008 due to increased shipments of prototype propulsion motors and controllers.

Gross profit margins for the quarter ended September 30, 2009 increased to 36.0 percent compared to 18.2 percent for the quarter ended September 30, 2008. Gross profit on contract services was 33.9 percent during the second quarter this fiscal year compared to 7.6 percent or the quarter ended September 30, 2008. The improvement is primarily due to lower project material content during the current quarter versus the comparable quarter last fiscal year. Gross profit margin on product sales for the second quarter this year rose to 36.5 percent compared to 21.9 percent for the second 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 versus the comparable quarter last year.

Research and development expenditures for the quarter ended September 30, 2009 decreased to $127,689 compared to $149,847 for the quarter ended September 30, 2008 reflecting reduced levels of cost-sharing on government research programs and on-going software research activities.

Production engineering costs were $587,881 for the second quarter versus $485,369 for the second 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 September 30, 2009 was $603,069 compared to $1,269,403 for the same quarter last year. The decrease is primarily attributable to lower levels of non-cash equity based compensation expense arising from a change in the period of grant versus that for the last fiscal year.

Interest income decreased to $11,487 for the quarter ended September 30, 2009 versus $49,322 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 $6,701 for the quarter ended September 30, 2009 compared to $8,559 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, 2009

Operations for the six month period ended September 30, 2009, resulted in a net loss of $1,125,153, or $0.04 per common share, compared to a net loss of $2,537,826, or $0.10 per common share for the comparable period last year. The reduction in net loss is primarily attributable to higher levels of product sales revenue, expanded gross profit margins on product sales and lower levels of non-cash equity based compensation expense arising from a change in the period of grant versus that for the last fiscal year.

Revenue from contract services decreased $345,474, or 29.0 percent, to $844,394 for the six month period ended September 30, 2009 versus $1,189,868 for the comparable period last year. The decrease is primarily due to the shifting of engineering resources to support production engineering, low volume production and internally-funded research and development activities.

Product sales for the six month period ended September 30, 2009 increased 23.4 percent to $3,555,467, compared to $2,880,818 for the comparable period last year. Power products segment revenue for the six month period ended September 30, 2009 decreased to $1,030,648 from $1,560,901 for the comparable period last fiscal year due to lower levels of DC-to-DC converter shipments and decreased shipment levels for actuator motors. Technology segment product revenue for the six month period ended September 30, 2009 nearly doubled to $2,524,819, compared to $1,319,917 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, 2009 increased to 32.3 percent compared to 15.0 percent for comparable period last year primarily due to increased gross profit margin on product sales. Gross profit margin on contract services increased to 31.1 percent for the six month period ended September 30, 2009 compared to 9.4 percent for the comparable period last year due to higher margins and lower project material content 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, 2009 rose to 32.6 percent compared to a 17.3 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, 2009 increased to $313,835 compared to $252,345 for the same period last year. The increase is primarily due to increased levels of internally funded programs.

Production engineering costs were $1,014,316 for the six month period ended September 30, 2009 versus $893,217 for the comparable six month period last 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 six month period ended September 30, 2009 was $1,242,847 compared to $2,029,727 for the same period last year. The decrease is attributable to lower levels of non-cash equity based compensation expense arising from a change in the period of grant versus that for the last fiscal year.

Interest income decreased to $26,772 for the six month period ended September 30, 2009 versus $133,600 for the comparable period last year. The decrease is attributable to lower yields and lower levels of invested cash balances.

Interest expense decreased to $13,904 for the six month period ended September 30, 2009 compared to $17,675 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, 2009 were adequate to meet operating needs. At September 30, 2009, we had working capital (the excess of current assets over current liabilities) of $6,712,239 compared to $6,640,877 at March 31, 2009.

For the six month period ended September 30, 2009, net cash used in operating activities was $1,181,933 compared to net cash used in operating activities of $1,904,667 for the six month period ended September 30, 2008. The decrease in cash used for the six month period ended September 30, 2009 is primarily attributable to lower operating losses and lower levels of non-cash equity based compensation which are partially offset by higher levels of accounts receivable, decreased levels of accounts payable and prepaid expenses and other current assets.

Net cash provided by investing activities for the six month period ended September 30, 2009 was $1,380,300 compared to cash provided of $1,494,739 for the comparable quarter last year. The change is attributable to lower levels of prepayments for and investments in property and equipment this six month period versus the comparable period last fiscal year.

Net cash provided by financing activities was $855,334 for the six month period ended September 30, 2009 versus cash used in financing activities of $140,614 for the same period last fiscal year. The change is primarily attributable to the issuance of common stock upon the exercise of stock options and warrants during the six month period this year.

We expect to invest in excess of $10 million for facilities, tooling and manufacturing equipment to launch a high volume production cell for the electric propulsion system being supplied under the Coda Supply Agreement. Similarly, following the launch of deliveries under the Coda Supply Agreement we expect to devote substantial financial resources to meet the working capital requirements associated with these production activities, potentially as much as $20 million. In order to fund these activities, shortly after the end of the quarter we completed a public offering of 8.625 million shares of our common stock resulting in net proceeds of approximately $32 million. Proceeds from the offering, together with our existing cash resources and funding available under the DOE program are expected to be sufficient to fund our operations for at least the next eighteen months.

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. As the markets for electrified 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. Should these expectations be realized, our existing cash and short-term investments may not be adequate to fund our anticipated growth and, as a result, we may need to raise additional capital to fund the higher than currently anticipated growth in our business. We can, however, not provide any assurance that our existing financial resources will be sufficient to execute our business plan beyond the next eighteen months. In the event bank financing or equity or debt capital to fund our expected growth is not available on terms acceptable to us, we will modify our strategy to align our operations with then available financial resources.

Contractual Obligations

 The following table presents information about our contractual obligations and
commitments as of September 30, 2009:




                                                              Payments due by Period

                                                  Less Than                             More than
                                       Total        1 Year     2 - 3 Years  4 - 5 Years  5 Years
Long-term debt obligations(2)       $  361,143       361,143         -            -         -
Interest on long-term debt               4,226         4,226         -            -         -
obligations
Purchase obligations                   808,988       808,988         -            -         -
Executive employment agreements      1,092,362       406,875      654,000         -       31,487
(1)
Total                              $ 2,266,719     1,581,232      654,000         -       31,487

(1)            Includes severance pay obligations under executive employment agreements, but not
               annual cash compensation under the agreements.
(2)            Represents a balloon payment on a facility mortgage.

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, 2009 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 . . .