This Report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements appear in a number of places in this Report and include statements regarding our plans, beliefs or current expectations, including those plans, beliefs and expectations of our officers and directors with respect to, among other things the development of markets for our products; the adequacy of our cash balances and liquidity to meet future operating needs, and our ability to issue equity or debt securities; and the effect of legal actions and claims that we are involved in. 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.

General

UQM Technologies, Inc., ("UQM") is a developer and manufacturer of energy efficient, power dense, electric motors, generators and power electronic controllers. Our primary focus is incorporating our advanced technology into products aimed at existing commercial markets and emerging markets for electrically propelled vehicles that are expected to experience rapid growth. We operate our business in two segments: 1) technology - which encompasses the further advancement and application of our proprietary motors, generators, power electronics and software; and 2) power products – which encompasses the manufacture of motors and generators. Our $0.01 par value common stock trades on the American, Chicago and Pacific stock exchanges under the symbol "UQM."

The Company’s revenue from continuing operations is derived from two principal sources: 1) funded contract research and development services performed for strategic partners, customers and the U.S. government directed toward either the advancement of our proprietary technology portfolio or the application of proprietary technology to customers’ products; and 2) the manufacture and sale of products engineered by us.

Our objective is to leverage our technology base and name recognition to develop and manufacture products for our customers that are superior in performance at competitive prices for sale into both existing commercial markets and potentially large emerging markets. To this end, we have initially focused our attention on four market areas which we believe have significant growth potential: 1) electric propulsion systems, generators and power electronic controllers for electric, hybrid electric and fuel cell electric vehicles; 2) electric propulsion systems and electronic controllers for small commercial vehicles; 3) vehicle auxiliaries including under-the-hood power accessories; and 4) distributed power generation products.

Today there are numerous well-established markets for products that incorporate electric motors, generators and power electronic controllers that are targets for replacement by our advantaged systems. Examples of existing vehicle markets that we believe present opportunities for the commercialization of its proprietary technology include electric wheelchairs, golf carts, forklift trucks and other warehouse vehicles, aircraft tugs, commercial floor cleaning equipment and other similar markets where the product application generally requires high torque and variable speed operation. In addition, there are many existing commercial products that may benefit from replacing their current motors, generators and/or power electronic controllers with smaller, lighter weight and more efficient UQM systems. One particular market of significance is the aerospace industry where we are currently manufacturing air conditioning fans and are pursuing additional applications including compressors, auxiliary power units and other aircraft motor-driven systems.

Examples of emerging markets include hybrid electric vehicles and, further in the future, hydrogen powered fuel cell electric vehicles. The market for hybrid electric vehicles has recently begun to emerge propelled by the success of the Toyota Prius hybrid electric passenger automobile, which was named Motor Trend Magazine’s "Car of the Year" for 2004, and is currently being manufactured at volumes of 15,000 vehicles per month. Other hybrid electric passenger vehicles available for purchase by consumers in the United States include Honda’s Insight, Civic and Accord passenger vehicles and the Ford Escape and Lexus RX400h sport utility vehicles. Nearly all of the hybrid electric propulsion systems for the automotive vehicle market are being provided by the OEM’s themselves, or by a limited number of large Tier I suppliers. Although we believe that there are opportunities for the application of our technology in the automobile market, it is likely that the OEM’s and their Tier I suppliers will continue to be the dominant providers of their hybrid electric propulsion systems.

The emergence of hybrid electric vehicles in the automobile market is driving vehicle makers in a wide range of other on-road and off-road markets to consider the strategic and competitive advantages of adopting hybrid electric technology. It is these other vehicle markets that are the primary focus of our company. Customers in these markets typically require hybrid electric propulsion systems of different size and power level than that required in automotive applications. These customers seldom have the internal resources to develop their own systems which we believe will create a breadth of future opportunities for our motor and generator products. In addition, regulators in the United States and Europe have adopted diesel emission mandates that require diesel engine manufacturers to reduce the level of emissions emitted from their engines beginning in 2007 with a further reduction required in 2010. Based on discussions with customers, we believe that the preferred solution for achieving compliance with the 2010 emission standards will be electric powered systems that we expect will create further opportunities for the commercialization of our proprietary products.

An additional emerging market that we believe holds substantial promise for the commercialization of our technology is the electrification of vehicle auxiliaries including under-the-hood components such as water, oil and fuel pumps, power steering systems, cooling fans and air conditioning compressors. In most existing conventional gasoline and diesel-powered vehicles, these under-the-hood components are powered by engine belts or gears and consequently restrict their operating speed directly to engine speed only. The electrification of these components provides numerous advantages including: 1) variable speed and power operation which improves efficiency and fuel economy; and 2) the ability to locate them strategically anywhere in the vehicle because an electric component does not require proximity to an engine driven belt or gear. We believe these attributes will lead to the further electrification of these components in both conventional as well as hybrid and fuel cell electric powered vehicles.

We are also pursuing applications of our generators and DC to AC electric power inverters in the distributed power generation market. This market is currently a niche market consisting primarily of wind turbines, photovoltaic systems and engine-based standby power generators but is expected to grow rapidly in the future as home owners, businesses and utilities pursue alternative strategies to meet electric power requirements that are not dependent on centralized power generation through the national electric power grid.

Substantially all of our research and development activities are the result of projects contracted with and funded by our customers, and in most cases, we retain all or substantially all of the intellectual property rights in the developed technology. Our research and development activities consist primarily of research to advance the state-of-the-art of our proprietary technology portfolio and the development of our proprietary motors and generators and their application to our customers products. Our ability to attract customer funding for these activities increases shareholder value by reducing the cost of advancing our technology portfolio and is indicative of the value customers place in gaining access to our proprietary technology for potential use in their products.

Fundamental to our strategy is the continual advancement of our proprietary motor, generator, power electronic controller and software technology portfolio and the maintenance of a high quality and competitive manufacturing capability for our products. Throughout this fiscal year, we have expanded our production engineering and manufacturing staff and capability as part of our strategy to accelerate the commercialization of our proprietary technology in existing markets and provide the infrastructure we believe will be necessary to exploit the opportunities for our technology to penetrate emerging markets over the next several years. Expenditures for these activities are reported in our financial statements as production engineering expense and amounted to $211,933 for the fiscal year ended March 31, 2005.

We have two principal operating companies: 1) UQM Technologies, Inc., located in Frederick, Colorado, which includes the Corporate Headquarters and Engineering and Product Development Center; and 2) wholly-owned subsidiary UQM Power Products, Inc.("UQM Power"), also located in Frederick, Colorado, which is an ISO quality certified manufacturer of permanent magnet electric motors and generators.

We also have a minority ownership position in EV Global Motors Company ("EV Global"), Windemere Eco Development Limited ("WED") and CD&M Electronics, Inc. (CD&M). The carrying value of these investments on our balance sheet has been reduced to zero because they are impaired under accounting principles generally accepted in the United States of America. EV Global, based in Los Angeles, is a developer and distributor of electric bicycles. WED is an environmentally sensitive development of Windemere Island in the Bahamas. CD&M is a privately held contract electronics manufacturing company.

Loss from continuing operations for the fiscal year ended March 31, 2005 was $1,814,695, or $0.09 per common share, on total revenue of $4,763,291 versus a loss from continuing operations last fiscal year of $1,422,315, or $0.07 per common share, on total revenue of $5,040,904 and a loss from continuing operations for the fiscal year ended March 31, 2003 of $933,507, or $0.05 per common share, on total revenue of $7,552,360. Net loss for the fiscal year ended March 31, 2005 was $1,868,896, or $0.09 per common share, versus a net loss of $4,786,953, or $0.25 per common share, last fiscal year and a net loss of $3,598,650, or $0.19 per common share, for the fiscal year ended March 31, 2003.

In November 2004 and October 2003, we completed follow-on offerings of 3,600,000 and 720,000 shares of our common stock to investors in North America and Europe. Net cash proceeds from the offerings were $6,767,465 and $2,127,400, respectively.

Technology Segment

Our technology segment encompasses the operations of our Engineering and Product Development Center which shares a 28,000 square foot facility located in Frederick, Colorado with our motor manufacturing operations which are reported in the power products segment. The Engineering and Product Development Center is equipped with research and development laboratories, prototype build and test facilities for electric motors, generators, power electronic controllers, software, and vehicle integration activities. The technology segment conducts customer funded and internally-funded research and engineering activities directed toward: 1) the development of new motors, generators, and power electronic controllers to meet the requirements of customers’ specific product applications; 2) integration of our motors, generators and power electronic controller into customers’ products; and 3) support of our power products segment and the low volume manufacture of motors, generators and power electronic controllers. During the fiscal year ended March 31, 2005, total technology segment revenue declined 7.5 percent to $3,089,114 versus revenue of $3,339,939 for the fiscal year ended March 31, 2004 and declined 2.2 percent versus revenue of $3,416,032 for the fiscal year ended March 31, 2003.

Technology segment operations for the fiscal year ended March 31, 2005 resulted in a loss from continuing operations of $1,869,518 compared to loss from continuing operations of $1,289,738 and $1,003,034 for the fiscal years ended March 31, 2004 and March 31, 2003, respectively. The loss from continuing operations in the current fiscal year is attributable to increased production engineering expenditures, internally-funded technology development, cost-overruns on development contracts, and lower levels of other income versus last fiscal year. Segment losses from continuing operations for the fiscal year ended March 31, 2004 versus the fiscal year ended March 31, 2003 rose primarily due to higher levels of internally funded technology development, cost-overruns on development contracts, and lower levels of other income.

Power Products Segment

Our power products segment encompasses the operations of our wholly-owned subsidiary, UQM Power. UQM Power shares a 28,000 square foot facility located in Frederick, Colorado with the technology segment. Prior to October 2003, UQM Power’s operations consisted of the volume manufacture of motors and the contract manufacture of gears and gear assemblies. Due to continuing weak demand in the gear markets we served, and industry trends toward greater sourcing of customer gear requirements overseas, we divested our non-core contract gear manufacturing business in 2003. As a result, the operating results of the discontinued gear business are reported as discontinued operations in the statement of operations for the fiscal year ended March 31, 2003.

Motor manufacturing operations consist of the volume manufacture of our proprietary permanent magnet motors. Power products segment operations for the fiscal year ended March 31, 2005 resulted in earnings from continuing operations of $54,823 on total revenue of $1,674,177, versus loss from continuing operations of $132,577 on total revenue of $1,700,965 for the fiscal year ended March 31, 2004 and earnings from continuing operations of $69,527 on total revenue of $4,136,328 for the fiscal year ended March 31, 2003. The decline in revenue for the year ended March 31, 2005 versus the two prior fiscal years is attributable to lower production volumes of wheelchair propulsion motors which was partially offset by revenue increases from the launch of production for fan blower motors used in air conditioning systems on military aircraft. In 2004, we received an order for the production of new wheelchair motors in the amount of $637,500, which was subsequently expanded by $596,700 with deliveries scheduled through November 2005. We do not expect to receive additional orders for new wheelchair motors from Invacare Corporation, although orders for field service and warranty rebuilt units are expected to continue for the foreseeable future.

Electronic Products Segment – Discontinued Operations

In January 2004, we formalized a plan to sell or close our wholly-owned subsidiary UQM Electronics, Inc., located in St. Charles, Missouri. This business consisted of the manufacture of thru-hole and surface mount electronic printed circuit board assemblies, wire harness assemblies, value-added component assemblies incorporating either printed circuit board assemblies, wire harness assemblies or both, and complete turn-key electronic product builds. On May 18, 2004, we completed the divestiture of the assets of this business for $0.9 million in cash and a 15 percent ownership interest in the purchaser. In addition, the purchaser executed a sublease on our St. Charles, Missouri manufacturing facility for the remaining term of our lease. The operations of UQM Electronics, Inc. are reported as discontinued operations in our statement of operations for the fiscal years ended March 31, 2005, 2004 and 2003. Discontinued operations for this business for the fiscal year ended March 31, 2005 resulted in a loss of $54,201, or nil per common share, versus a loss from discontinued operations of $3,364,638, or $0.18 per common share, for the fiscal year ended March 31, 2004 and a loss from discontinued operations of $2,480,172, or $0.13 per common share, for the fiscal year ended March 31, 2003.

Technology

Our technology base includes a number of proprietary technologies and patents relating to brushless permanent magnet motors, generators and power electronic controllers, together with software code to intelligently manage the operation of our systems. See also "Patents" below.

Attributes of our microprocessor-based digital power electronic controllers include high power operation (600 amps at 400 volts), four quadrant control (forward/reverse and motoring/generation), reduced switching losses (increasing efficiency, >98 percent), intelligent control and controller area network ("CAN") capability.

We also recently developed a new method of electronic control for our permanent magnet motor and generator systems, which further enhances their performance. The new method of control incorporates sophisticated techniques that extract power from substantially the entire electrical cycle of the motor, resulting in maximized power output and efficiency. These performance enhancements demonstrated an increased peak power output of 33 percent; continuous power output increases of nearly 100 percent and improved system efficiency at various operating points of from 2 to 8 percent. In addition, the new method of control includes enhanced user configurable functionality and increased data transmission and processing speeds, which improve feedback, prognostics and diagnostic capabilities, all of which enhance the durability and functionality of the systems.

Substantially all of our research and development activities are the result of projects contracted with and funded by customers, for which we typically retain intellectual property rights in the resulting technology developed. Customer funded development activities are recorded in our financial statements as contract services revenue and the associated development costs are shown as cost of contract services. For the fiscal years ended March 31, 2005, 2004 and 2003, revenues from customer funded research and development activities were $2,281,427, $2,747,833 and $2,985,639, respectively, and internally funded research and development expenditures were $171,918, $461,223 and $117,735, respectively.

In recent years, we have focused our research and development activities on the development of commercial products and production engineering activities to lower the cost of manufacture, as well as enhance the performance and capability of our systems, as opposed to basic research in the field. We believe our future growth is dependent, in part, on the continued advancement of our technology portfolio and our ability to commercialize our technology in additional product applications and markets. Accordingly, we expect to continue to pursue additional customer funded programs and to selectively invest in internally funded development projects to accomplish these objectives.

Competition

All of the markets in which we operate are highly competitive. The markets served by the technology segment are additionally characterized by rapid changes due to technological advances that can render existing technologies and products obsolete.

The technology segment has developed advanced electric propulsion systems and components which it hopes to market to vehicle Original Equipment Manufacturers and their Tier I suppliers throughout the world for use in electric, hybrid electric and fuel cell electric vehicles. In recent years, the market for hybrid electric automobiles has begun to emerge led by the introduction and market success of the Toyota Prius and the Honda Insight and Civic hybrid electric passenger cars. As a result, several automakers have introduced new hybrid vehicles this year including the Honda Accord passenger automobile and the Ford Escape and Lexus RX330h hybrid electric sport utility vehicles. In addition, other vehicle manufacturers in both on-road and off-road markets are expected to develop and introduce a variety of hybrid electric vehicles as the market acceptance of these vehicles continues to grow. In order to capitalize on this expanding demand, we anticipate that we will need to make substantial investments in human resources, manufacturing facilities and equipment, production and application engineering among other things, in order to compete successfully as this market emerges. We cannot assure you that we will be able to compete successfully in this market or any other market that now exists or may develop in the future. There are numerous companies developing products that do or soon will compete with our systems. Some of these companies possess significantly greater financial, personnel and other resources than we do, including established supply arrangements and volume manufacturing operations. We believe our principal competitors include Honda, Toyota, Hitachi, Toshiba, Siemens, Delphi and Ballard Power Systems.

The power products segment competes primarily in the automotive, heavy equipment, military, aerospace and medical products industries. Each of these industries is extremely competitive. We face substantial competition on a continuing basis from numerous competitors, many of whom possess longer operating histories, significantly greater financial resources and marketing, distribution and manufacturing capability. We believe our principal competitors include Advanced DC, Allied Motion, Emerson Electric, General Electric, Rockwell International, and Baldor.

Patents

We hold several groups or families of patents.

U.S. Patent Nos. 5,004,944; 5,311,092 and 5,319,844 disclose and claim an electromagnetic transducer and method of making the same. Corresponding applications have been filed and issued in several foreign countries. Some of the foreign patents have expired.

U.S. Patent No. 5,107,151 discloses and claims a switching circuit employing semi-conductor devices in series with an inductor to avoid commutation breakdown and extending the current range of switching by using IGBT devices. Corresponding applications have been filed in foreign countries, some of which have issued, and some of which have been abandoned.

U.S. Patent No. 5,592,731 and U.S. Patent No. 5,382,859 relate to a stator for high-power density electric motors and generators, and a method of constructing the same. Corresponding applications have been filed in foreign countries.

U.S. Patent No. 5,677,605 discloses and claims a brushless motor and drive system using phase timing advancement. Corresponding applications have been filed in foreign countries, some of which are issued, some of which have been abandoned, and some of which are pending.

U.S. Patent No. 5,982,063 discloses and claims an electric motor having an internal brake. Corresponding patent applications have been filed in foreign countries. Some of the foreign applications have issued, and others are still pending.

U.S. Patent Nos. 6,522,130 and 6,693,422 disclose and claim a method for controlling a brushless electric motor having a rotor, and relates to a method for sensing rotor position and detecting rotational speed. Corresponding applications have been filed and are pending in several foreign countries. The foreign applications have either issued or are still pending.

During 1994, we executed an agreement with Alcan Aluminium Limited ("Alcan") in which Alcan assigned to us all of its rights, title and interests in certain motor technology developed under a program funded by Alcan.   This agreement further provides that we shall pay to Alcan royalties of one-half of one percent on revenue derived from the manufacture and sale of products or processes embodying the related technology. Royalty payments under this agreement for the fiscal years ended March 31, 2005, 2004 and 2003 were $20,833, $23,208 and $33,185, respectively.

We also intend to rely on the unpatented proprietary know-how we have developed and now utilize in our products. We cannot provide assurance that others will not independently develop, acquire or obtain access to our technology. Although we protect our unpatented proprietary rights by executing confidentiality agreements with our management, employees and others with access to our technology, these measures may not be adequate to protect us from disclosure or misappropriation of our proprietary information.

Trademarks

We own three U.S. Trademark Registrations for "UNIQ" (International Class 7 for power transducers, Class 12 for utility land vehicles, and Class 16 for publications). The Class 12 trademark is subject to renewal in June 2006; the Class 7 trademark is subject to renewal in August 2006; and the Class 16 trademark is subject to renewal in February 2007.

We have registered the letters "UQM" in the U.S. Patent and Trademark Office. Counterpart applications have been filed in numerous countries throughout the world, most of which have granted registrations or indicated them to be allowable. Those trademarks are directed to the same trademark classes as the mark "UNIQ". The foreign trademark registrations and applications include major markets where we are doing business or establishing business contacts.

We have also registered the trademark "POWERPHASE" which we use in conjunction with certain of our propulsion systems. Corresponding applications for trademark registration were filed in 11 countries. The trademark is registered in the European Community and various other foreign countries.

Backlog

Our technology segment had unperformed service contracts from customers which will provide future revenue upon completion aggregating approximately $1.3 million and an order backlog for prototype motors and controllers of approximately $0.1 million at April 30, 2005 compared to $1.4 million and $0.3 million, respectively at April 30, 2004. All such service contracts are subject to amendment, modification or cancellation. We expect to complete all unperformed service contracts over the next sixteen months and ship motor and controller backlog products over the next two months.

Our power products segment had an order backlog of approximately $0.7 million at April 30, 2005 compared to $1.1 million at April 30, 2004. We expect to ship all backlog products within the next eleven months.

Customers and Suppliers

We have one significant customer, Invacare Corporation, which is a customer of our power products segment and accounted for revenue of $1,370,792, or 28.8 percent of consolidated total revenue in the fiscal year ended March 31, 2005 and $1,643,215, or 32.6 percent of consolidated total revenue, and $4,136,328, or 54.8 percent of consolidated total revenue, for the fiscal years ended March 31, 2004 and March 31, 2003, respectively. This customer also represented 36.5 percent, 14.1 percent and 22.5 percent of total accounts receivable at March 31, 2005, 2004, and 2003, respectively. Inventories consisting of raw materials, work-in-process and finished goods for Invacare Corporation were 24.9 percent, 9.5 percent and 8.7 percent of consolidated total inventories at March 31, 2005, 2004 and 2003, respectively. We expect sales of new production wheelchair propulsion motors to Invacare to phase-out by December 31, 2005.

Principal raw materials and components purchased by us include iron, steel, electronic components, magnet material and copper wire. Most of the above items are available from several suppliers. Certain components used by us are custom designs and if our current supplier no longer made them available to us, we could experience production delays.

U.S. Government Contracts

Revenue derived from contracts with agencies of the U.S. Government and from subcontracts with U.S. Government prime contractors was $1,271,781, or approximately 26.7 percent of our consolidated total revenue, for the year ended March 31, 2005, $1,011,818, or approximately 20.1 percent of consolidated total revenue, for the year ended March 31, 2004 and $1,162,967, or approximately 15.4 percent of consolidated total revenue, for the year ended March 31, 2003.

Some of our contracts with the U.S. Government provide for the reimbursement of costs on a 50 percent cost-sharing basis based on not-to-exceed billing rates negotiated between the U.S. Government and us. Other U.S. Government business is performed under firm fixed price contracts. On "cost-share" and "firm fixed price" contracts, we can incur an actual loss in the performance thereof if incurred costs exceed the contract amount. All of our U.S. Government contracts are subject to modification or cancellation at the convenience of the Government.

Employee and Labor Relations

As of April 30, 2005, we had 39 full-time employees. We have entered into employment contracts with two of our executive officers, which expire December 31, 2007. None of our employees are covered by a collective bargaining agreement. We believe our relationship with employees has been generally satisfactory.

 In addition to our full-time staff, we from time to time engage the services of outside consultants and contract labor to meet peak workload or specialized program requirements. We do not anticipate any difficulty in locating additional qualified engineers, technicians and production workers, if so required, to meet expanded research and development or manufacturing operations.

Risk Factors

The following factors, other information in this document and the information incorporated by reference should be carefully considered before investing in our securities.

We have incurred significant losses and may continue to do so.

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

Our operating losses and working capital requirements could consume our current cash balances.

Our net loss for the fiscal year ended March 31, 2005 was $1,868,896 versus a net loss for the comparable period last year of $4,786,953. At March 31, 2005, our cash and short-term investments totaled $7,987,477. If our losses continue they 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, which we expect will expand our operating losses and may require us to secure additional funding beyond our existing cash resources. We cannot assure, however, that funding will be available on terms acceptable to us, if at all. We also have a significant customer whose production requirements for one of their products is expected to decrease to zero by December 31, 2005. Revenue from this product during the fiscal year ended March 31, 2005 was $809,200 or 59 percent of the total revenue derived from this customer. If we are unable to find new sources of product revenue to replace the revenue we expect to lose from this significant customer, we could experience a material adverse change in our results of operations and financial condition.

Our government contracts can be cancelled with little or no notice and could restrict our ability to commercialize our technology.

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.

We face intense competition in our motor development and may be unable to compete successfully.

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.

If we fail to develop and achieve market acceptance for our products, our business may not grow.

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 receive market acceptance.

If we are unable to protect our patents and other proprietary technology, we will be unable to prevent third parties from using our technology, which would impair our competitiveness and ability to commercialize our products. In addition, the cost of enforcing our proprietary rights may be expensive and result in increased losses.

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.

Use of our motors in vehicles could subject us to product liability claims, and product liability insurance claims could cause an increase in our insurance rates or could exceed our insurance limits, which could impair our financial condition, results of operations and liquidity.

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.

This Report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements appear in a number of places in this Report and include statements regarding our plans, beliefs or current expectations, including those plans, beliefs and expectations of our officers and directors with respect to, among other things the development of markets for our products; the adequacy of our cash balances and liquidity to meet future operating needs, and our ability to issue equity or debt securities; and the effect of legal actions and claims that we are involved in. 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 for three principal customers during the fiscal year ended March 31, 2005 – Invacare Corporation, Ballard Power Systems, Inc. and Keith Products, Inc. For the previous two fiscal years, revenue derived from funded engineering activities was $2.7 and $3.0 million, respectively. In the fall of 2004 we completed a follow-on offering of our common stock which generated net proceeds of $6.8 million raising our available cash balances on hand upon completion of the offering to $8.0 million. We expect to use the proceeds to fund a modification in our business strategy that allows us to invest in selective customer projects that we believe will result in volume production and to expand our production engineering and business development groups in anticipation of the continued emergence of the market for hybrid electric vehicles. Hybrid electric vehicles require electric motors and generators of the type we design and manufacture, and we intend to aggressively pursue both this emerging market as well as conventional markets where electric motors and generators are currently in use. As a result of the reallocation of engineering resources to these activities, our revenue from funded research and development declined by approximately 17 percent to $2.3 million. Similarly, expenditures on production engineering activities for the fiscal year rose to $0.2 million versus zero in each of the preceding two fiscal years. Product sales revenue for the fiscal year rose modestly to $2.5 million versus $2.3 million last fiscal year driven by an increase in low volume product sales, which rose to $0.8 million from $0.6 million. Volume product sales remained flat at $1.7 million this fiscal year versus last fiscal year due to a stabilization in wheelchair motor sales after a steep decline in production of these units two years ago. However we continue to expect that sales of new production wheelchair motors will phase–out by the end of the third quarter of our next fiscal year, although sales of field service units are expected to continue indefinitely.

Loss from continuing operations for the current fiscal year rose to $1.8 million, or $0.09 per common share, versus $1.4 million, or $0.07 per common share, for our last fiscal year and $0.9 million, or $0.05 per common share, for the preceding fiscal year. The expansion in losses from two fiscal years ago to the current fiscal year is generally attributable to declining total revenue, lower gross profit margins on contract services, higher research and development expenditures in fiscal 2004 and higher expenditures for the launch of our production engineering group in fiscal 2005.

In May 2004, we divested a contract electronics manufacturing business that was not a core business activity. Operating losses from this business for all periods presented have been reclassified to discontinued operations and contributed $0.1 million, or nil per common share, $3.4 million, or $0.18 per common share, and $2.5 million, or $0.14 per common share, to our consolidated loss for the fiscal years ended March 31, 2005, 2004 and 2003, respectively.

We believe our existing cash and short-term investments, which amounted to approximately $8.0 million at fiscal year end, will be adequate to fund the modification in our business strategy described above, as well as, the the launch of new production products over the next several years.

Financial Condition

Cash and cash equivalents and short-term investments at March 31, 2005 were $7,987,477 and working capital (the excess of current assets over current liabilities) was $8,788,826 compared with $3,005,709 and $3,972,559, respectively, at March 31, 2004. The increase in cash and short-term investments and working capital is primarily attributable to proceeds from a follow-on offering completed in November 2004, which resulted in cash proceeds, net of offering costs, of $6,767,465.

Accounts receivable increased $398,421 to $911,416 at March 31, 2005 from $512,995 at March 31, 2004. The increase is primarily attributable to higher product sales revenue levels for wheelchair motors and slower collections during the fourth quarter of fiscal 2005 of the resulting accounts receivable. Historically, we have had nominal bad debt expense arising from uncollectible accounts receivable due to the high credit quality of our customers. Accordingly, no allowance for bad debts has been recorded at March 31, 2005 or 2004, respectively.

Costs and estimated earnings on uncompleted contracts increased $189,941 to $435,925 at March 31, 2005 versus $245,984 at March 31, 2004. The increase is due to less favorable billing terms on contracts in process at March 31, 2005 versus March 31, 2004. Estimated earnings on contracts in process declined to $190,619 or 5.4 percent of contracts in process of $3,534,389 at March 31, 2005 compared to estimated earnings on contracts in process of $305,943 or 12.2 percent of contracts in process of $2,500,059 at March 31, 2004. The decrease in estimated margins on contracts in process is attributable to anticipated cost overruns on certain engineering projects.

Inventories increased $219,735 to $648,173 principally due to higher levels of raw material, work-in-process and finished goods inventories which increased $144,070, $19,297 and $56,368, respectively. The increases in raw materials and work-in-process inventories are attributable to higher production levels of wheelchair propulsion motors. The increase in finished goods inventories is attributable to higher production levels of low volume motors and controllers that will be shipped in future periods.

Prepaid expenses increased to $109,640 at March 31, 2005 from $72,649 at March 31, 2004 primarily due to higher levels of prepaid software and patent maintenance costs at the end of the current fiscal year versus the prior fiscal year end.

Assets of discontinued operations was nil at March 31, 2005 compared to $1,226,943 at March 31, 2004 due to the completion of the divestiture of the equipment and inventory of our electronics products segment and the subsequent cessation of operations during the first quarter of fiscal year 2005. See also note 13 to the consolidated financial statements.

We invested $194,069 for the acquisition of property and equipment during the fiscal year compared to $147,388 last fiscal year. The increase in capital expenditures is primarily due to an investment in quality control equipment in our power products segment.

Accounts payable increased $285,533 to $678,007 at March 31, 2005 from $392,474 at March 31, 2004, primarily due to increased purchases of raw material.

Other current liabilities increased $11,488 to $269,746 at March 31, 2005 from $258,258 at March 31, 2004. The increase is primarily attributable to higher levels of accrued payroll and employee benefits, customer deposits, unearned revenue and accrued royalties.

Liabilities and commitments of discontinued operation were $154,287 at March 31, 2005 compared to $554,564 at March 31, 2004. The decrease was due to the completion of the divestiture of the equipment and inventory of our electronic products segment and subsequent cessation of operations during the first quarter of fiscal year 2005. The remaining March 31, 2005 balance represents legal fees associated with the Hussmann litigation (see also note 17 to the consolidated financial statements) and the current portion of the accrued lease obligations reflecting the estimated obligation for future lease payments on subleased facilities of our discontinued electronic products segment for which we are the primary obligor. See also note 13 to the consolidated financial statements.

Billings in excess of costs and estimated earnings on uncompleted contracts decreased $122,742 to $66,510 at March 31, 2005 from $189,252 at March 31, 2004 reflecting reduced levels of billings on engineering contracts during the fiscal year ended March 31, 2005 versus the prior fiscal year.

Long-term debt, less current portion decreased $135,508 to $810,915 at March 31, 2005 from $946,423 at March 31, 2004 reflecting principal repayments on the mortgage debt for our Frederick, Colorado facility.

Long-term accrued lease obligation was $57,051 at March 31, 2005 compared to $192,118 at March 31, 2004 reflecting the estimated obligation for future lease payments on subleased facilities of our discontinued electronic products segment for which we are the primary obligor. See also note 13 to the consolidated financial statements below.

Common stock and additional paid-in capital increased to $231,771 and $64,767,975, respectively, at March 31, 2005 compared to $195,726 and $58,025,631 at March 31, 2004. The increases were primarily attributable to completion of a follow-on offering of 3,600,000 shares of common stock to investors in North America and Europe. Net cash proceeds to the Company from the offering were $6,767,465.

Results of Continuing Operations

Continuing operations for the fiscal year ended March 31, 2005, resulted in a loss of $1,814,695, or $0.09 per common share, compared to a loss from continuing operations of $1,422,315, or $0.07 per common share, and $933,507, or $0.05 per common share, for the fiscal years ended March 31, 2004 and 2003, respectively. The increase in the current year loss from continuing operations is attributable to declining total revenue, lower gross profit margins on contract services, higher expenditures for the launch of our production engineering group, and the inclusion in the prior two fiscal years of gain on sale of Taiwan Joint Venture of $60,975, or nil per common share, and gain on sale of real estate of $322,139, or $0.02 per common share, in fiscal 2004 and 2003, respectively.

Revenue from contract services declined $466,406, or 17.0 percent, to $2,281,427 at March 31, 2005 compared to $2,747,833 for the fiscal year ended March 31, 2004. The decrease is primarily attributable to lower staff utilization on revenue generating programs due to cost overruns on certain engineering projects and the application of certain engineering personnel that would typically be billed to customers to our internally funded production engineering activities. Revenue from contract services decreased $237,806, or 8.0 percent, for the year ended March 31, 2004 compared to revenue for the year ended March 31, 2003 reflecting the application of engineering resources to internally funded research and development programs.

Product sales this fiscal year increased 8.2 percent to $2,481,864 compared to $2,293,071 for the year ended March 31, 2004. Product sales revenue for the fiscal year ended March 31, 2004 declined 49.8 percent from $4,566,721 for the year ended March 31, 2003 to $2,293,071. Power products segment revenue for the year ended March 31, 2005 decreased $26,788, or 1.6 percent, to $1,674,177 compared to $1,700,965 for fiscal year ended March 31, 2004 due to decreased shipments of wheelchair propulsion motors. We expect that sales of new production wheelchair propulsion motors will phase–out by the end of the third quarter of our next fiscal year, although sales of field service units are expected to continue indefinitely. Power products segment revenue for the fiscal year ended March 31, 2004 decreased to $1,700,965, or 58.9 percent, compared to $4,136,328 for fiscal year ended March 31, 2003 due to decreased shipments of wheelchair propulsion motors. Technology segment product revenue for the fiscal year ended March 31, 2005 increased $215,581, or 36.4 percent, to $807,687 compared to $592,106 for fiscal year ended March 31, 2004 due to increased shipments of propulsion systems for hybrid electric bus programs and the hybrid electric unmanned ground vehicle program. Technology segment product revenue for the fiscal year ended March 31, 2004 increased $161,713, or 37.6 percent, versus revenue for the fiscal year ended March 31, 2003 reflecting increased shipments of fuel cell air compressor drive motors and propulsion systems.

Gross profit margins for the fiscal year decreased to 5.7 percent compared to 17.2 and 15.3 percent for the fiscal years ended March 31, 2004 and 2003, respectively, primarily due to a decrease in gross profit margins on contract services. Gross profit on contract services was a negative 9.4 percent this fiscal year compared to 19.4 and 16.0 percent for the fiscal years ended March 31, 2004 and 2003, respectively. The decrease in contract services margins for the current fiscal year versus the fiscal year ended March 31, 2004 is attributable to decreased overhead absorption and cost overruns on certain engineering contracts this year versus the prior fiscal year period. The increase in contract services margins for the fiscal year ended March 31, 2004 versus the fiscal year ended March 31, 2003 is attributable to increased overhead absorption and lower levels of cost overruns on certain engineering contracts. Gross profit margin on product sales this fiscal year was 19.6 percent compared to 14.5 percent and 14.8 percent in the fiscal years ended March 31, 2004 and 2003, respectively. The increase in margins on product sales for this fiscal year versus the prior fiscal year is attributable to a more favorable product mix. The decrease in margins on product sales for the fiscal years ended March 31, 2004 versus the fiscal year ended March 31, 2003 resulted from decreased overhead absorption associated with lower revenue levels in our power products segment.

Research and development expenditures for the fiscal year ended March 31, 2005 decreased to $171,918 compared to $461,223 and $117,735 for the fiscal years ended March 31, 2004 and 2003, respectively. The decrease was primarily due to the completion of an internally funded development of a new microprocessor platform for our power electronics controls mid-fiscal year that was started in fiscal 2004. The increase in research and development expenditures for the fiscal year ended March 31, 2004 compared to the prior fiscal year is primarily due to an internally funded effort to develop a new micro-processor platform for our power electronic controls and an increase in cost-share type contracts.

Production engineering costs were $211,933 for the fiscal year ended March 31, 2005 versus zero for the prior two fiscal years. The increase is attributable to our strategy to increase our manufacturing capability and infrastructure, and consists primarily of salary and overhead costs for newly hired manufacturing management and staff personnel.

General and administrative expense this fiscal year was $1,686,409 compared to $1,799,472 and $2,245,182 for the fiscal years ended March 31, 2004 and 2003, respectively. The decrease for this fiscal year versus last fiscal year is primarily attributable to lower insurance premium costs. The decrease in general and administrative expenses for the fiscal year ended March 31, 2004 versus the fiscal year ended March 31, 2003 is primarily attributable to cost reduction activities at all business units throughout the year.

Impairment of long-lived assets for the fiscal years ended March 31, 2005 and March 31, 2004 were $39,748 and $30,523, respectively, and are attributable to the write-down of costs associated with abandoned patent applications. The impairment of long-lived assets for the fiscal year ended March 31, 2003 of $26,384 is primarily attributable to the impairment and disposal of obsolete equipment and abandoned patent applications.

Interest income rose to $97,188 for the current fiscal year compared to $26,362 and $28,035 for the fiscal years ended March 31, 2004 and 2003, respectively. The increase is attributable to higher levels of invested cash and higher yields on invested balances during the fiscal year versus the two prior fiscal years.

Interest expense decreased to $74,005 for the year ended March 31, 2005 compared to $84,193 and $62,266 for the fiscal years ended March 31, 2004 and 2003, respectively. The decrease is due to lower average mortgage borrowings outstanding throughout the fiscal year as compared to the prior fiscal year. The increase for fiscal year ended March 31, 2004 as compared to the prior fiscal year is primarily attributable to higher average mortgage borrowings throughout the fiscal year.

Gain on sale of real estate in the fiscal year ended March 31, 2003 of $322,139 is attributable to the recognition of gain from the sale of our previous corporate facility.

Results of Discontinued Operations

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 for which $0.9 million in cash and a 15 percent ownership interest in the purchaser. We did not record any value for the common stock of the purchaser received in this transaction due to uncertainty regarding our ability to realize economic value on the resale of our ownership interest. In addition, the purchaser executed a sublease on our St. Charles, Missouri manufacturing facility for the remaining term of our lease. However, we are the primary obligor on the lease and due to substantial doubt regarding the sublessee’s financial capability to meet its obligation under the sublease, we have recorded an estimate of the potential shortfall under our master lease should payments under the sublease obligation not be fully honored. At March 31, 2005 liabilities and commitments of discontinued operations totaled $211,338 of which $204,985 was associated with the lease commitment and $6,353 was accounts payable and other current liabilities.

In October 2001, we formalized a plan to close our contract gear manufacturing business, which was part of our mechanical products segment.

The operating results of these businesses for the years ended March 31, 2005, 2004 and 2003 have been reported separately as discontinued operations together with estimated losses on the disposal of division assets. 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 and contract gear manufacturing businesses as discontinued operations.

Loss from discontinued operations for the fiscal year ended March 31, 2005 was $54,201, or nil per common share, compared to a loss from discontinued operations of $3,364,638, or $0.18 per common share, and $2,665,143, or $0.14 per common share, for the fiscal years ended March 31, 2004 and 2003, respectively.

Liquidity and Capital Resources

Our cash balances and liquidity throughout the fiscal year ended March 31, 2005 were adequate to meet operating needs. At March 31, 2005, we had working capital (the excess of current assets over current liabilities) of $8,788,826 compared to $3,972,559 at March 31, 2004. The increase of $4,816,267 in working capital is primarily attributable to cash proceeds, net of offering costs, of $6,767,465 received from a follow-on offering of common stock completed in November 2004, higher levels of accounts receivable and inventories, and a reduction in liabilities of discontinued operations, which were partially offset by higher levels of accounts payable.

For the year ended March 31, 2005 net cash used in operating activities of continuing operations was $2,089,941 compared to net cash used in operating activities of $1,292,699 for the year ended March 31, 2004 and cash provided by operations of $134,462 for the fiscal year ended March 31, 2003. The increase in cash usage is primarily attributable to higher levels of operating losses, accounts receivables and inventories this fiscal year versus last fiscal year. The increase in cash used in operating activities for the year ended March 31, 2004 versus cash provided by operating activities for year ended March 31, 2003 was primarily due to higher levels of operating losses and lower levels of cash provided from collections of accounts receivable and the reduction of inventories.

Net cash used in investing activities of continuing operations for the fiscal year ended March 31, 2005 was $2,397,640 compared to cash provided by investing activities of $241,444 for the previous fiscal year. The change this fiscal year versus last fiscal year was primarily due to cash used for the purchase of short-term investment securities of $2,163,608. The increase in cash provided by investing activities for the year ended March 31, 2004 versus cash used in investing activities for year ended March 31, 2003 was due to the sale of our ownership interest in Taiwan UQM which provided cash proceeds of $445,275 and lower levels of capital expenditures for property and equipment, facility expansion and patent and trademark costs.

Net cash provided by financing activities of continuing operations was $6,668,343 for the fiscal year ended March 31, 2005 versus $2,032,800 for the preceding fiscal year. The increase is attributable to larger cash proceeds from the sale of common stock this year versus last year partially offset by reduced proceeds from bank borrowings during the current fiscal year. Net cash provided by financing activities for fiscal 2004 declined to $2,032,800 versus the fiscal 2003 level of $5,089,916 due to reduced proceeds from the sale of common stock and reduced proceeds from bank borrowings.

Our mortgage debt facility requires us to comply with certain financial covenants in order for the mortgage to continue to be available on a long-term basis. At March 31, 2005, we were in compliance with all financial covenants. In the event our operating results are not sufficient to maintain compliance with these cove