Changes in the components of shareholders' equity during the quarter ended June 30, 2008 were as follows:

 

We issued four-year warrants to the placement agent for our November 2004 follow-on offering to acquire 360,000 shares of our common stock at an exercise price of $2.58 per share. Warrants to acquire 85,267 shares of common stock remain outstanding at June 30, 2008 and 2007, respectively.

TOC

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 June 30, 2008 rose 17 percent to $603,484 versus $514,750 for the fiscal quarter ended June 30, 2007, due to improved application of engineering personnel to billable programs. Product sales revenue for the fiscal quarter ended June 30, 2008 rose 27 percent to $1,189,871 versus $939,702 for the fiscal quarter ended June 30, 2007, primarily as a result of increased shipments of prototype propulsion motors and controllers.

During the quarter ended June 30, 2008 we allocated fewer otherwise billable engineering resources to support our production engineering group's activities. As a result, production engineering expense for the first quarter decreased to $407,848, versus $546,033 during the comparable quarter last fiscal year.

Net loss for the quarter ended June 30, 2008 was $999,715, or $0.04 per common share, versus a net loss of $1,128,751, or $0.05 per common share for the comparable quarter last year, reflecting higher levels of contract service revenue, product sales revenue, improved gross profit and reduced expenditures on production engineering activities.

During the last half of our fiscal year 2008 there were three significant industry events that we believe may lead to a significant 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 will be on board many of these recently introduced hybrid trucks which 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 five 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 quarter than for the comparable quarter last year, we expect to potentially double the size of our production engineering group and to significantly increase the level of our capital expenditures for manufacturing equipment and tooling, and potentially 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 $9.3 million at June 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.

Cash and cash equivalents and short-term investments at June 30, 2008 were $9,290,297 and working capital (the excess of current assets over current liabilities) was $9,552,977 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, and investments in property and equipment, offset by lower levels of accounts receivable.

Accounts receivable decreased $258,234 to $1,045,905 at June 30, 2008 from $1,304,139 at March 31, 2008. The decrease is primarily attributable to decreased 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 June 30, 2008 and similarly, no allowance for bad debts was deemed necessary at March 31, 2008.

Costs and estimated earnings on uncompleted contracts decreased $101,209 to $548,461 at June 30, 2008 versus $649,670 at March 31, 2008. The decrease is due to more favorable billing terms on certain contracts in process at June 30, 2008 versus March 31, 2008. Estimated earnings on contracts in process decreased to $307,963 or 8 percent of contracts in process of $3,683,806 at June 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 June 30, 2008.

Inventories increased $169,926 to $1,131,415 at June 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 $64,467, $105,042 and $417, respectively.

Prepaid expenses and other current assets increased to $255,533 at March 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 $113,322 for the acquisition of property and equipment during the quarter ended June 30, 2008 compared to $127,963 during the comparable quarter last fiscal year. The decrease in capital expenditures is primarily due to reduced purchases of manufacturing equipment, this quarter versus the comparable quarter last fiscal year.

Patent and trademark costs decreased $12,824 to $464,941 at June 30, 2008 versus $477,765 at March 31, 2008 primarily due to the systematic amortization of patent issuance costs.

Accounts payable increased $223,512 to $964,039 at June 30, 2008 from $740,527 at March 31, 2008, primarily due to increased levels of material purchases during the first quarter this year.

Other current liabilities increased $145,835 to $518,120 at June 30, 2008 from $372,285 at March 31, 2008. The increase is primarily attributable to higher levels of customer deposits and accrued legal fees.

Short-term deferred compensation under executive employment agreements was $368,334 at June 30, 2008 reflecting periodic accruals of future severance obligations under executive employment agreements.

Billings in excess of costs and estimated earnings on uncompleted contracts increased $52,384 to $760,232 at June 30, 2008 from $707,848 at March 31, 2008 reflecting accelerated billings on certain engineering contracts in process at June 30, 2008 in advance of the performance of the associated work versus March 31, 2008.

Long-term debt, less current portion decreased $27,640 to $389,283 at June 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 to $637,426 at June 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 $265,267 and $77,992,814, respectively, at June 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 under Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment ("SFAS 123(R)"). See also note 2 to the consolidated financial statements.

Operations for the first quarter ended June 30, 2008, resulted in a net loss of $999,715, or $0.04 per common share, compared to a net loss of $1,128,751, or $0.05 per common share for the comparable period last year. The decrease in the current year net loss is primarily attributable to higher levels of revenue, gross profit and decreased expenditures for production engineering activities.

Revenue from contract services increased $88,734, or 17 percent, to $603,484 at June 30, 2008 versus $514,750 for the comparable quarter last year. The increase is attributable to improved application of engineering resources to billable programs during the quarter ended June 30, 2008.

Product sales for the first quarter increased to $1,189,871, compared to $939,702 for the comparable period last year. Power products segment revenue for the quarter ended June 30, 2008 decreased to $721,486 from $750,078 for the comparable quarter last fiscal year due to decreased shipment levels for auxiliary motors offset by higher levels of DC-to-DC converter shipments. Technology segment product revenue for the quarter ended June 30, 2008 more than doubled to $468,385, compared to $189,624 for the quarter ended June 30, 2007 due to increased shipments of prototype propulsion motors and controllers.

Gross profit margins for the quarter ended June 30, 2008 increased to 10.8 percent compared to 2.0 percent for the quarter ended June 30, 2007 primarily due to increased gross profit margin on product sales. Gross profit on contract services increased to 11.2 percent during the first quarter this fiscal year compared to 10.4 percent for the quarter ended June 30, 2007 due to the improved application of engineering resources to billable programs. Gross profit margin on product sales for the first quarter this year was 10.6 percent compared to a negative 2.6 percent for the first quarter last year. The improvement is primarily due to improved overhead absorption arising from higher production levels during the current quarter.

Research and development expenditures for the quarter ended June 30, 2008 increased to $102,498 compared to $98,324 for the quarter ended June 30, 2007. The increase is primarily due to increased levels of internally funded programs.

Production engineering costs were $407,848 for the first quarter versus $546,033 for the first quarter last fiscal year. The decrease is attributable to lower levels of transferred engineering costs from the contract services engineering group.

Selling, general and administrative expense the quarter ended June 30, 2008 was $760,324 compared to $629,836 for the same quarter last year. The increase is attributable to higher levels of non-cash compensation expense arising from the expensing of stock options, and higher levels of legal expense associated with an arbitration claim, versus the same quarter last fiscal year.

Interest income decreased to $84,278 for the quarter ended June 30, 2008 versus $123,439 for the same period last fiscal year. The decrease is attributable to lower yields on invested cash balances.

Interest expense decreased to $9,116 for the quarter ended June 30, 2008 compared to $10,900 for the comparable period last fiscal year. The decrease is due to lower average mortgage borrowings outstanding throughout the current quarter.

Our cash balances and liquidity throughout the quarter ended June 30, 2008 were adequate to meet operating needs. At June 30, 2008, we had working capital (the excess of current assets over current liabilities) of $9,552,977 compared to $10,510,175 at March 31, 2008.

For the quarter ended June 30, 2008, net cash used in operating activities was $229,026 compared to net cash used in operating activities of $1,089,689 for the quarter ended June 30, 2007. The decrease in cash used for the quarter ended June 30, 2008 is primarily attributable to higher levels of accounts payable and other current liabilities and lower operating losses, offset by higher levels of inventories and equity-based compensation.

Net cash provided by investing activities for the quarter ended June 30, 2008 was $941,187 compared to cash used of $1,888,486 for the comparable quarter last year. The change is attributable to higher levels of maturities of short-term investments this quarter versus the comparable quarter last year.

Net cash used in financing activities was $25,733 for the quarter ended June 30, 2008 versus cash provided of $5,183,623 for the same period last fiscal year. The decrease is primarily attributable to proceeds from the issuance of common stock during the first quarter last fiscal year versus none this year.

We expect to invest substantially greater financial and human resources during 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 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 June 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.

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

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.

Our trade accounts receivable are subject to credit risks associated with the financial condition of our customers and their liquidity. We evaluate all customers 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 may change due to changing general economic conditions and factors associated with each customer's particular business. Because substantially all of our customers are large well-established companies with excellent credit worthiness, we have not established a reserve at June 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 to decline materially, resulting in material losses.

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.

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 June 30, 2008 could be materially different from management's estimates, and any modification of management's estimate 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.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008 the FASB issued FASB Staff Position (FSP) 157-2 Effective Date of FASB Statement No. 157. Under the terms of FSP 157-2, the provisions of SFAS 157 will be adopted by us for financial instruments on April 1, 2008, and when required for nonfinancial assets and nonfinancial liabilities on April 1, 2009 (except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis). The provisions of this standard adopted by us on April 1, 2008 did not have a material effect on our financial statements and we have not yet determined the impact on our financial statements of adopting the provisions related to nonfinancial assets and liabilities.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R) ("SFAS No. 158"). SFAS No. 158 requires an employer to recognize a plan's overfunded or underfunded status in its balance sheets and recognize the changes in a plan's funded status in comprehensive income in the year which the changes occur. These provisions of SFAS No. 158 were adopted last fiscal year. In addition, SFAS No. 158 requires an employer to measure plan assets and obligations that determine its funded status as of the end of its fiscal year, with limited exceptions. This provision of SFAS No. 158 is effective for our fiscal year ending March 31, 2009. The provisions that were effective last fiscal year did not have a material effect on our financial statements and the provisions effective for our fiscal year ending March 31, 2009 are not expected to have a material effect on our financial statements.

In February 2007 the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). This standard permits companies to choose to measure many financial instruments and certain other items at fair value, following the provisions of SFAS No. 157. SFAS No. 159 is effective for our fiscal year beginning April 1, 2008. The adoption of this standard did not have a material effect on our financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("FAS 141(R)") and Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements ("FAS 160"). These standards goals are to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of FAS 141(R) and FAS 160 are effective for our fiscal year beginning April 1, 2009. We have not yet determined the impact of adopting these standards.

In April 2008, the FASB issued FASB Staff Position (FSP) 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. We have not yet determined the impact of adopting this FASB Staff Position.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements.

SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The adoption of this standard will not have a material effect on our financial statements.

In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-3, Accounting for Lessees for Maintenance Deposits Under Lease Arrangements (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. We have not yet determined the impact on our financial statements of adopting this EITF.

TOC

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not use financial instruments to any degree to manage these risks and do not hold or issue financial instruments for trading purposes. All of our product sales, and related receivables are payable in U.S. dollars. We are not subject to interest rate risk on our debt obligations.

TOC

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2008 under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").

Based on their evaluation as of June 30, 2008, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by our management in the reports that it files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Our management is responsible for all aspects of the business, including the preparation of the consolidated financial statements in this annual report. Management prepared the consolidated financial statements using accounting principles generally accepted in the United States. Management has also prepared the other information in this annual report and is responsible for its accuracy and consistency with the consolidated financial statements.

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, including safeguarding of assets against unauthorized acquisition, use or disposition. This system is designed to provide reasonable assurance to management and the board of directors regarding preparation of reliable published financial statements and safeguarding of our assets. This system is supported with written policies and procedures and contains self-monitoring mechanisms. Appropriate actions are taken by management to correct deficiencies as they are identified. All internal control systems have inherent limitations, including the possibility of circumvention and overriding of controls, and, therefore, can provide only reasonable assurance as to the reliability of financial statement preparation and such asset safeguarding.

Management has assessed the effectiveness of our internal control over financial reporting as of June 30, 2008. In making this assessment, it used the criteria described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management believes that, as of June 30, 2008, our internal control over financial reporting is effective. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors who oversees the financial reporting process.

PART II-OTHER INFORMATION

TOC

In November 2007, we filed an arbitration claim with the American Arbitration Association against Phoenix MC, Inc., as successor by merger to Phoenix Motorcars, Inc. seeking damages in excess of $5.1 million for breach of contract. The claim is currently scheduled for hearing before an arbitration panel in the fall of 2008.

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, and based on current available information, the ultimate disposition of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flow, although adverse developments in these matters could have a material impact on a future reporting period.

TOC

The annual meeting of our shareholders was held on July 23, 2008. The following is a summary of the matters submitted to a vote of security holders and the results of the voting thereon:

TOC

Before investing in our securities you should carefully consider the following factors and other information in this document and the information incorporated by reference.

We have incurred significant net losses. For the quarter ended June 30, 2008 and 2007, our net loss was $999,715 and $1,128,751. Our net loss for each of the last three fiscal years were as follows:

We have had accumulated deficits as follows:

In the future we plan to make additional investments in product development and commercialization, which is likely to cause us to remain unprofitable.

Our net loss for the quarter ended June 30, 2008 was $999,715 versus a net loss for the comparable quarter last year of $1,128,751. At June 30, 2008, our cash and short-term investments totaled $9,290,297. If our losses continue, operations could consume some or all of our cash balances. We expect to make additional investments in human resources, manufacturing facilities and equipment, production and application engineering, among other things, in order to effectively compete in the emerging market for hybrid electric vehicles. We cannot assure, however, that our existing cash resources will be sufficient to complete our business plan. Should our existing cash resources be insufficient, we may need to secure additional funding. We cannot assure you, however, that funding will be available on terms acceptable to us, if at all.

Some of our technology has been developed under government funding by United States government agencies. In some cases, government agencies in the United States can require us to obtain or produce components for our systems from sources located in the United States rather than foreign countries. Our contracts with government agencies are also subject to the risk of termination at the convenience of the contracting agency and in some cases grant "march-in" rights to the government. March-in rights are the right of the United States government or the applicable government agency, under limited circumstances, to exercise a non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government to facilitate commercialization of technology developed with government funding. March-in rights can be exercised if we fail to commercialize the developed technology. The implementation of restrictions on our sourcing of components or the exercise of march-in rights by the government or an agency of the government could restrict our ability to commercialize our technology.

Some of our orders for the future delivery of products are placed under blanket purchase orders which are cancelable by our customers at any time prior to the issuance of non-cancelable product release orders which specify product delivery dates and quantities to be delivered.

In developing electric motors for use in vehicles and other applications, we face competition from very large domestic and international companies, including the world's largest automobile manufacturers. These companies have far greater resources to apply to research and development efforts than we have, and they may independently develop motors that are technologically more advanced than ours. These competitors also have much greater experience in and resources for marketing their products.

We believe our proprietary systems are suited for a wide range of hybrid electric vehicle platforms. We currently expect to make substantial investments in human resources, manufacturing facilities and equipment, production and application engineering, among other things, to capitalize on the anticipated expansion in demand for products related to this market area. However, our experience in this market area is limited. Our sales in this area will depend in part on the market acceptance of and demand for our proprietary propulsion systems and future products. We cannot be certain that we will be able to introduce or market our products, develop other new products or product enhancements in a timely or cost-effective manner or that our products will achieve market acceptance.

Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary technology. Although we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be successful in doing so. We have historically pursued patent protection in a limited number of foreign countries where we believe significant markets for our products exist or where potentially significant competitors have operations. It is possible that a substantial market could develop in a country where we have not received patent protection and under such circumstances our proprietary products would not be afforded legal protection in these markets. Further, our competitors may independently develop or patent technologies that are substantially equivalent or superior to ours. We cannot assure that additional patents will be issued to us or, if they are issued, as to the scope of their protection. Patents granted may not provide meaningful protection from competitors. Even if a competitor's products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action, it would divert funds and resources which otherwise could be used in our operations and we cannot assure that we would be successful in enforcing our intellectual property rights. In addition, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country where we may operate or sell our products in the future. If third parties assert technology infringement claims against us, the defense of the claims could involve significant legal costs and require our management to divert time and attention from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our results of operations may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.

Because some of our motors are designed to be used in vehicles, and because vehicle accidents can cause injury to persons and property, we are subject to a risk of claims for product liability. We carry product liability insurance of $1 million covering all of our products. If we were to experience a large insured loss, it might exceed our coverage limits, or our insurance carriers could decline to further cover us or raise our insurance rates to unacceptable levels, any of which could impair our financial position and results of operations.

TOC

Exhibits

31.1 Certification of Chief Executive Officer

31.2 Certification of Chief Financial Officer

32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

Reports on Form 8-K

None.