UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

[  ] Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission File Number 1-10869

(Exact name of registrant, as specified in its charter)

(Address of principal executive offices) (Zip code)

(Registrant's telephone number, including area code)

________________________________________________________

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X    No       

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.) (Check one):

Large accelerated filer                                               Accelerated filer     X                                      Non-accelerated filer         

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes        No   X   

The number of shares outstanding (including shares held by affiliates) of the registrant's common stock, par value $0.01 per share at July 23, 2007 was 26,582,250.

TABLE OF CONTENTS

ITEM 1.

FINANCIAL STATEMENTS

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

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UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited), Continued

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (unaudited)

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UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

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See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

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We have historically derived significant revenue from a few key customers. Revenue from Invacare Corporation totaled zero and $60,912 for the quarters ended June 30, 2007 and 2006, respectively, which was nil and 5 percent of total revenue, respectively. Revenue from Lippert Components, Inc. totaled $372,624 and $321,313 for the quarters ended June 30, 2007 and 2006, which was 26 percent and 25 percent of total revenue, respectively.

Trade accounts receivable from Invacare Corporation were 4 percent and 24 percent of total accounts receivable as of June 30, 2007 and March 31, 2007, respectively. Inventories consisting of raw materials, work-in-progress and finished goods for this customer totaled $241,161 and $99,958 as of June 30, 2007 and March 31, 2007, respectively. Trade accounts receivable from Lippert Components, Inc. were 17 percent and 7 percent of total accounts receivable as of June 30, 2007 and March 31, 2007, respectively. Inventories consisting of raw materials, work-in-progress and finished goods for this customer totaled $174,734 and $196,623 as of June 30, 2007 and March 31, 2007, respectively.

Contract services revenue derived from contracts with agencies of the U.S. Government and from subcontracts with U.S. Government prime contractors totaled $491,078 and $565,135 for the quarters ended June 30, 2007 and 2006, respectively. Accounts receivable from government-funded contracts represented 24 percent and 32 percent of total accounts receivable as of June 30, 2007 and March 31, 2007, respectively.

The Company currently has a full valuation allowance, as it is management's judgment that it is more-likely-than-not that net deferred tax assets will not be realized to reduce future taxable income.

We adopted the provision of FIN No. 48 "Accounting of Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109, on April 1, 2007. The adoption of FIN 48 resulted in no impact to our consolidated financial statements and we have no unrecognized tax benefits that would impact our effective rate.

We recognize interest and penalties related to uncertain tax positions in "Other," net. As of June 30, 2007, we made no provisions for interest or penalties related to uncertain tax positions.

The tax years 2002 through 2006 remain open to examination by both the Internal Revenue Service of the United States and by the various state taxing authorities where we file.

In January 2004, we committed to a plan to exit our contract electronics manufacturing business whose results were reported as the electronic products segment. In May 2004, we completed the divestiture of equipment and inventory of this business. We were the primary obligor on a lease for the facility previously occupied by this divested business. The facility was subleased at a rental rate below that provided for in the master lease. The master lease and sublease expired by their terms on March 31, 2007. We have recorded accounts receivable from discontinued operations of $30,700 reflecting rent payments earned but not yet paid under the sublease.

The operating results of this business for the quarters ended June 30, 2007 and 2006 have been reported separately as discontinued operations. Loss from discontinued operations includes interest expense on debt used to acquire manufacturing machinery and equipment but does not include allocations of general corporate overheads, which have been allocated to other business segments. Operating results of all prior periods presented have been adjusted to reflect the contract electronics manufacturing business as discontinued operations.

Net loss from the discontinued electronic products segment for the quarters ended June 30, 2007 and 2006 was zero and $2,112, respectively.

Liabilities and commitments of discontinued electronic products segment were zero and $13,847 at June 30, 2007 and March 31, 2007, respectively.

Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"), requires presentation of both basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is computed by dividing income or loss available to common stockholders by all outstanding and potentially dilutive shares during the periods presented, unless the effect is antidilutive. At June 30, 2007 and 2006, respectively, issued but not yet earned common shares of 136,035 and zero were being held in safekeeping by the Company. For the quarters ended June 30, 2007 and 2006, 29,668 and zero shares, respectively, were potentially includable in the calculation of diluted loss per share under the treasury stock method but were not included, because to do so would be antidilutive. At June 30, 2007 and 2006, options to purchase 2,761,030 and 2,869,759 shares of common stock, respectively, and warrants to purchase 157,267, and 157,267 shares of common stock, respectively, were outstanding. For the quarters ended June 30, 2007 and 2006, respectively, options and warrants for 1,077,705 and 701,412 shares were not included in the computation of diluted loss per share because the option or warrant exercise price was greater than the average market price of the common stock. In-the-money options and warrants determined under the treasury stock method to acquire 529,809 shares and 755,137 shares of common stock for the quarters ended June 30, 2007 and 2006, respectively, were potentially includable in the calculation of diluted loss per share but were not included, because to do so would be antidilutive.

At June 30, 2007, we have two reportable segments: technology and power products. Our reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different business strategies. The technology segment encompasses our technology-based operations including core research to advance our technology, application and production engineering and product development and job shop production of prototype components. The power products segment encompasses the manufacture and sale of motors and electronic controllers. As discussed in note 9, we discontinued our electronic products segment in fiscal year 2004, and accordingly, the financial results of this operation is no longer reported in continuing operations in all periods presented. Salaries of the executive officers and corporate general and administrative expense are allocated to our segments annually based on a variety of factors including revenue level of the segment, administrative time devoted to each segment by senior management, and square footage occupied by each segment. The percentages allocated to the technology segment and power products segment were 75 percent and 25 percent for the quarter ended June 30, 2007, and were 52 percent and 48 percent for the quarter ended June 30, 2006, respectively.

Intersegment sales or transfers, which were eliminated upon consolidation, were $176,000 and $28,072 for the quarters ended June 30, 2007 and 2006, respectively.

The technology segment leases office, production and laboratory space in a building owned by the power products segment based on a negotiated rate for the square footage occupied. Intercompany lease payments, were $42,390 and $46,041 for the quarters ended June 30, 2007 and 2006, respectively, and were eliminated upon consolidation.

The following table summarizes significant financial statement information for continuing operations of each of the reportable segments as of and for the quarter ended June 30, 2007:

The following table summarizes significant financial statement information for continuing operations of each of the reportable segments as of and for the quarter ended June 30, 2006:

Employment Agreements

We have entered into employment agreements with two of our officers, one of which expires on December 31, 2007 and one of which expires on December 31, 2010. The aggregate future compensation under these employment agreements, including future services payable on expected extensions thereof and potential retirement and severance payouts, is $1,944,498 at June 30, 2007. Of this amount, $149,325 and $404,391 has been recorded as short-term and long-term deferred compensation under executive employment agreements, respectively.

Litigation

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 there can be no assurance that adverse developments in these matters could not have a material impact on a future reporting period.

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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, 2007 declined to $514,750 versus $824,354 for the fiscal quarter ended June 30, 2006, due to the application of engineering personnel in production engineering activities. Product sales revenue for the fiscal quarter ended June 30, 2007 rose to $939,702 versus $476,978 for the fiscal quarter ended June 30, 2006, primarily as a result of shipments against volume production orders received during our previous fiscal year. We expect to ship a substantial portion of our backlog during fiscal 2008; however, shipments to Phoenix Motorcars, Inc. are occurring at a slower rate than we originally anticipated and shipments under their $9.25 million purchase order could continue beyond the end of our fiscal year. Nevertheless, we continue to expect revenue to increase significantly and gross profit margins on product sales to improve due to improved overhead absorption across all production products as Phoenix accelerates product releases under their purchase order. The anticipated reduction in operating losses from these factors will be partially offset by larger production engineering costs associated with the continuing production launch for Phoenix Motorcars, Inc. resulting in our expectation that operating losses for the current fiscal year will be below those for the previous fiscal year. As a result of this expected growth, and the working capital requirements associated with this growth, we completed a private placement of 1,250,000 shares of common stock to Heartland Value Fund and Turn of the Tide, a Wisconsin Limited Partnership. Net cash proceeds from the transaction were approximately $5.2 million. As a result, our cash and short-term investments increased to $11,873,392 at June 30, 2007 versus $7,934,005 at March 31, 2007.

During the quarter ended June 30, 2007 we allocated greater engineering resources to production engineering activities in support of the production launch for Phoenix Motorcars. As a result, expenditures on production engineering activities for the first quarter rose to $546,033, versus $248,372 during the first quarter last fiscal year.

Loss from continuing operations for the quarter ended June 30, 2007 was $1,128,751, or $0.05 per common share, versus a loss of $785,684, or $0.03 per common share for the comparable quarter last year, reflecting lower levels of contract service revenue and additional expenses from our growing investment in production engineering activities.

In May 2004, we divested a contract electronics manufacturing business. Operating losses from this business for all periods presented have been reclassified to discontinued operations and contributed nil per common share to our consolidated net loss for the quarters ended June 30, 2007 and 2006.

We believe our existing cash and short-term investments, which amounted to approximately $11.9 million at fiscal year end, will be adequate to fund our anticipated growth for the fiscal year ended March 31, 2008, 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, 2007 were $11,873,392 and working capital (the excess of current assets over current liabilities) was $13,050,168 compared with $7,934,005 and $8,909,577, respectively, at March 31, 2007. The increase in cash and short-term investments and working capital is primarily attributable to the completion of a private placement of 1,250,00 shares of common stock during the first quarter which resulted in net cash proceeds of approximately 5.2 million, offset by higher operating losses, higher levels of inventories, prepaid and other current assets, and investments in property and equipment.

Accounts receivable decreased $117,821 to $1,316,865 at June 30, 2007 from $1,434,686 at March 31, 2007. The increase is primarily attributable to decreased production billings. 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, 2007 and similarly, no allowance for bad debts was deemed necessary at March 31, 2007.

Costs and estimated earnings on uncompleted contracts decreased $89,730 to $98,183 at June 30, 2007 versus $187,913 at March 31, 2007. The decrease is due to more favorable billing terms on certain contracts in process at June 30, 2007 versus March 31, 2007. Estimated earnings on contracts in process increased to $176,061 or 7.0 percent of contracts in process of $2,489,283 at June 30, 2007 compared to estimated earnings on contracts in process of $155,436 or 7.5 percent of contracts in process of $2,071,818 at March 31, 2007. The decrease in estimated margins on contracts in process is attributable to reduced overhead absorption.

Inventories increased $253,738 to $1,153,623 at June 30, 2007 principally due to higher levels of scheduled product shipments and higher levels of raw material inventories associated with the sourcing of parts internationally. Raw materials and work-in-process inventories increased $262,211 and $84,256, respectively. Finished goods decreased by $92,729 primarily due to shipments of auxiliary motors during the quarter ended June 30, 2007.

Prepaid expenses and other current assets increased to $389,606 at March 31, 2007 from $279,343 at March 31, 2007 primarily due to the prepayment of insurance premium costs on our commercial insurance coverage.

We invested $127,963 for the acquisition of property and equipment during the quarter ended June 30, 2007 compared to $241,886 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 increased $16,675 to $498,978 at June 30, 2007 versus $482,303 at March 31, 2007 primarily due to the initiation of two new patent applications, offset by the systematic amortization of patent issuance costs.

Accounts payable decreased $171,502 to $811,429 at June 30, 2007 from $982,931 at March 31, 2007, primarily due to improved payment processing during the first quarter.

Other current liabilities decreased $73,395 to $271,557 at June 30, 2007 from $344,952 at March 31, 2007. The decrease is primarily attributable to lower levels of customer deposits and accrued royalties.

Short-term deferred compensation under executive employment agreements was unchanged at $149,325 at June 30, 2007 reflecting potential payouts to Mr. Rankin under his employment agreement that are potentially payable within one year should he elect to retire.

Liabilities and commitments of discontinued operations were zero at June 30, 2007 compared to $13,847 at March 31, 2007. The decrease is attributable to the expiration of the master lease for the facility previously occupied by our discontinued contract electronics business. See also Results of Discontinued Operations below and note 10 to the consolidated financial statements.

Billings in excess of costs and estimated earnings on uncompleted contracts increased $166,816 to $479,353 at June 30, 2007 from $312,537 at March 31, 2007 reflecting accelerated billings on certain engineering contracts in process at June 30, 2007 in advance of the performance of the associated work versus March 31, 2007.

Long-term debt, less current portion decreased $25,733 to $497,192 at June 30, 2007 from $522,925 at March 31, 2007 reflecting scheduled principal repayments on the mortgage debt for our Frederick, Colorado facility.

Long-term deferred compensation under executive employment agreements increased to $404,391 at June 30, 2007 from $396,214 at March 31, 2007 reflecting periodic accruals of future severance obligations under executive employment agreements.

Common stock and additional paid-in capital increased to $264,375 and $76,701,577, respectively, at June 30, 2007 compared to $251,769 and $71,376,462 at March 31, 2007. The increases were primarily attributable to the completion of a private placement of 1,250,000 shares of common stock during the first quarter this fiscal year and the recording of non-cash share based payments under Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment ("SFAS 123(R)"). See also note 2 to the consolidated financial statements.

Continuing operations for the first quarter ended June 30, 2007, resulted in a loss of $1,128,751, or $0.05 per common share, compared to a loss from continuing operations of $785,684, or $0.03 per common share for the comparable period last year. The increase in the current year loss from continuing operations is primarily attributable to higher expenditures for production engineering activities.

Revenue from contract services decreased $309,604, or 37.5 percent, to $514,750 at June 30, 2007 versus $824,354 for the comparable quarter last year. The decrease is attributable to the increased allocation of engineering resources to production engineering activities during the quarter ended June 30, 2007.

Product sales for the first quarter increased to $939,702, compared to $476,978 for the comparable period last year reflecting increased product revenue in both of the Company's business segments. Power products segment revenue for the quarter ended June 30, 2007 increased to $750,078 compared to $421,700 for the comparable quarter last fiscal year due to increased production levels for auxiliary motors and the launch of production of electric propulsion systems and DC-to-DC converters for Phoenix Motorcars. Technology segment product revenue for the quarter ended June 30, 2007 increased $134,346 to $189,624, compared to $55,278 for the quarter ended June 30, 2006 due to increased shipments of prototype propulsion motors and controllers.

Gross profit margins for the quarter ended June 30, 2007 decreased to 2.0 percent compared to 9.4 percent for the quarter ended June 30, 2006 primarily due to decreased gross profit margin on contract services. Gross profit on contract services decreased to 10.4 percent during the first quarter this fiscal year compared to 20.5 percent for the quarter ended June 30, 2006 due to the increased allocation of engineering resources to production engineering activities which had the effect of reducing overhead absorption on billable programs. Gross profit margin on product sales for the first quarter this year was a negative 2.6 percent compared to a negative 9.9 percent for the first quarter last year. The improvement is primarily due to improved overhead absorption due to higher production levels during the current quarter.

Research and development expenditures for the quarter ended June 30, 2007 increased to $98,324 compared to $95,151 for the quarter ended June 30, 2006. The increase is primarily due to increased levels of internally funded programs.

Production engineering costs were $546,033 for the first quarter versus $248,372 for the first quarter last fiscal year. The increase is attributable to production engineering activities related to the launch of high volume production for the Phoenix Motorcars all-electric sport utility truck program.

Selling, general and administrative expense the quarter ended June 30, 2007 was $629,836 compared to $672,517 for the same quarter last year. The decrease is attributable to lower levels of non-cash compensation expense arising from the expensing of stock options versus the same quarter last fiscal year.

Interest income rose to $123,439 for the quarter ended June 30, 2007 versus $120,652 for the same period last fiscal year. The increase is attributable to higher yields on invested cash balances.

Interest expense decreased to $10,900 for the quarter ended June 30, 2007 compared to $12,427 for the comparable period last fiscal year. The decrease is due to lower average mortgage borrowings outstanding throughout the current quarter.

In January 2004, we committed to a plan to exit our contract electronics manufacturing business whose results were reported as the electronic products segment. In May 2004, we completed the divestiture of equipment and inventory of this business. We were the primary obligor on a lease for the facility previously occupied by this divested business. The facility was subleased at a rental rate below that provided for in the in the master lease. The master lease and sublease expired by their terms on March 31, 2007. We have recorded accounts receivable from discontinued operations of $30,700 reflecting rent payments earned but not yet paid under the sublease.

The operating results of this business for the quarters ended June 30, 2007 and 2006 have been reported separately as discontinued operations. Loss from discontinued operations includes interest expense on debt used to acquire manufacturing machinery and equipment but does not include allocations of general corporate overheads, which have been allocated to other business segments. Operating results of all prior periods presented have been adjusted to reflect the contract electronics manufacturing as discontinued operations.

Loss from the discontinued electronic products segment for the quarters ended June 30, 2007 and 2006 was zero and $2,112, respectively. See also Note 10 to the consolidated financial statements.

Our cash balances and liquidity throughout the quarter ended June 30, 2007 were adequate to meet operating needs. At June 30, 2007, we had working capital (the excess of current assets over current liabilities) of $13,050,168 compared to $8,909,577 at March 31, 2007.

For the quarter ended June 30, 2007, net cash used in operating activities of continuing operations was $1,121,239 compared to net cash used in operating activities of continuing operations of $1,092,884 for the quarter ended June 30, 2006. The increase in cash used for the quarter ended June 30, 2007 is primarily attributable to higher operating losses, higher levels of inventories offset by noncash charges for depreciation and amortization and equity-based compensation and higher levels of accounts payable and other current liabilities.

Net cash used in investing activities of continuing operations for the quarter ended June 30, 2007 was $1,888,486 compared to $87,801 for the comparable quarter last year. The increase is attributable to higher levels of purchases of short-term investments, which was partially offset by a decrease in expenditures for capital equipment this quarter versus the comparable quarter last year.

Net cash provided by financing activities of continuing operations was $5,183,623 for the quarter ended June 30, 2007 versus $1,025,762 for the same period last fiscal year. The increase is attributable to the completion of a private placement in the first quarter this year.

We expect our working capital requirements to increase substantially during fiscal 2008 due to expected growth in our total revenue. 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 existing cash resources. In addition, we have begun, and expect to continue, to make substantial investments from our available cash resources in human resources, manufacturing facilities and equipment, production and application engineering, to launch production for Phoenix Motorcars. 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. 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, 2007:

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, 2007 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. During fiscal 2006 a large, well established customer filed for bankruptcy protection. As a result we charged-off $63,000 owed to us by the customer as a bad debt expense. Because substantially all of our customers are large well-established companies with excellent credit worthiness and our view that the bad debt expense associated with our customer's bankruptcy filing is an isolated, customer specific event, we have not established a reserve at June 30, 2007 and March 31, 2007 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, 2007 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 June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN No. 48"). FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN No. 48 were effective for us during the fiscal year beginning April 1, 2007, and did not have a material impact on our financial statements upon implementation. See also note 9 to the consolidated financial statements above.

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. The provisions of SFAS No. 157 are effective for us during the fiscal year beginning April 1, 2008. We have not yet determined the impact of adopting this standard.

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 effective for our fiscal year ending March 31, 2007. 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 for the fiscal year ended March 31, 2007 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 fiscal years beginning after November 15, 2007. We have not yet determined the impact of adopting this standard.

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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.

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We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2007 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 June30, 2007, 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.

PART II-OTHER INFORMATION

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 there can be no assurance that adverse developments in these matters could not have a material impact on a future reporting period.

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, 2007 and 2006, our net loss was $1,128,751 and $787,796. 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, 2007 was $1,128,751 versus a net loss for the comparable quarter last year of $787,796. At June 30, 2007, our cash and short-term investments totaled $11,873,392. 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.

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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

Report regarding completion of a private placement offering filed June 26, 2007.