Industrialized and developing societies are demanding ever increasing amounts of power to fuel the rapidly growing number of automobiles, computers and other electronic devices. Societies are starting to look to and rely upon alternative power sources to address the limited fossil fuel resources and to combat the increasing cost, unreliability and environmental problems associated with conventional energy and power sources. Governments and private institutions worldwide have identified fuel cells as a promising alternative power source to address these problems and have begun to make significant investments directed toward the development and use of fuel cells.

In a 2003 fuel cell research report, Allied Business Intelligence, Inc., or ABI, estimated that the global market for all types of fuel cells would reach $325 million by 2005, $3.9 billion by 2009 and $18.6 billion by 2013. The growth in fuel cells will drive growth in the global MEA market, which according to ABI, is expected to reach $156 million by 2005, $1.9 billion by 2009 and $8.9 billion by 2013. According to ABI, the stationary market for all types of fuel cells is expected to grow from $318 million in 2005 to $7.5 billion by 2013.According to ABI, the automotive market for all types of fuel cells is expected to grow from $3 million in 2005 to $3.6 billion by 2013.

According to ABI, the commercial portable market for all types of fuel cells is expected to grow from $3 million in 2005 to $7.5 billion by 2013. While products incorporating portable fuel cells, such as cell phones and laptops, are being developed today, it is believed that the related MEA and fuel cell component demand will not be significant for several years. This is due in part to the low power requirements of portable fuel cell applications, which translate into substantially less MEA volume per fuel cell than in the stationary and automotive markets.

The key component of the Company’s MEAs are the Membranes, which are proton exchange membranes that do not require fluorine. Membranes have been designed for PEM fuel cell applications in the stationary and automotive markets. The key technologies underlying the Company’s Membranes are Monomer Design, Polymer Synthesis, and Membrane Fabrication.

To date, the Company has entered into strategic relationships with Sanyo and Nissan. In addition, the Company is the prime contractor in a U.S. Navy fuel cell demonstration project.

In March 2003, the Company entered into a contract with Sanyo to jointly develop an MEA assembly process using the Company’s Membranes for integration into Sanyo’s stationary fuel cell systems.

In March 2004, the Company entered into a testing and evaluation contract with Nissan. In September 2004, the Company entered into two contracts with Nissan, an engineering contract to customize the MEAs for integration into Nissan’s automotive fuel cells and a membrane and MEA purchase contract. In March 2005, the Company entered into a collaboration contract with Nissan to develop customized MEAs and a MEA assembly process for use in Nissan’s automotive fuel cells.

In March 2005, the Company was awarded a contract with the U.S. Navy to develop and demonstrate a PEM fuel cell power plant prototype that incorporates the Company’s MEAs within IdaTech’s fuel cell stacks and integrated fuel cell systems.

In April 2005, the Company entered into a subcontract with IdaTech, LLC, or IdaTech, to specify the work that IdaTech will perform in connection with the Company’s prime contract with the U.S. Navy. Under the subcontract, IdaTech agreed to provide the necessary personnel, facilities, equipment, materials, data, supplies and services to integrate MEAs within IdaTech’s fuel cell stacks and integrated fuel cell systems.

Cost of revenue increased $455,000 from $3,000 in fiscal year ended March 31, 2004 to $458,000 in fiscal year ended March 31, 2005.

Selling, general and administrative expenses increased $123,000 from $2.0 million in fiscal year ended March 31, 2004 to $2.1 million in fiscal year ended March 31, 2005.

Research and development expenses increased $345,000 from $1.1 million in fiscal year ended March 31, 2004 to $1.4 million in fiscal year ended March 31, 2005.

Interest and other income increased $83,000 from $15,000 in fiscal year ended March 31, 2004 to $98,000 in fiscal year ended March 31, 2005.