This paper designs and implements an electromechanical propulsion system for a 42-V battery-sourced integrated starter-alternator (ISA) using an indirect-field-oriented (IFO) controller with a speed sensor on the shaft of the machine. The design aspects of the ISA energy conversion system are discussed, with emphasis on the motor selection and comparison of various candidate machines, power electronics, motor controller development and its integration with the engine controller, and a strategy for charging and discharging the energy source. A boost converter powered by the 42-V battery charges three 1-F ultracapacitors to 300 V, thus running the motor drive system at 300 V. The designed 300-V motor drive system is compared with the 42-V drive system directly powered by the 42-V battery. To improve the performance of the propulsion system, two modifications are proposed in this paper. First, terminal-quantities-based accurate voltage and current model flux observers (CMFOs) are designed, which can be used for any off-the-shelf machine. Second, a current model flux-observer-based sensorless controller is presented, which eliminates the need for the speed sensor on the rotor shaft, thus reducing the cost as well as the maintenance of the drive system. The proposed terminal-quantities-based flux observers and sensorless controller form the core of direct and IFO controllers commonly used in any alternative energy vehicular application including the ISA. The designed voltage model flux observer is insensitive to the stator resistance, and the CMFO is insensitive to the rotor resistance and speed, thus overcoming the long-standing problems in the area of flux observer design. The experimental results obtained while driving the vehicle are presented to demonstrate the effectiveness of the prototype ISA and to investigate its performance requirements as a sensorless drive system. Finally, the performance of the proposed flux observers and sensorless controller is evaluated through experimental results on a prototype induction machine to evaluate their potential for implementing a sensorless ISA drive system.