This paper investigates machine re-rating and design for peak duty applications. Machine thermal response under short-term overloads is explored and shown to comprise four heating modes: subtransient, transition, transient and temperature creep. In peak duty applications, the maximum temperature rise is commonly attained in the first two modes. Thermal transients in these two modes are shown to be faster than a conventional exponential characteristic. Therefore, peak duty machines are subject to severe thermal cycling. Effects of thermal cycling on machine reliability are surveyed and possible improvements are discussed. The concepts are evaluated in a hybrid electric vehicle case study. Two electric machines with similar efficiencies at their rated power levels are compared. The results show that with careful design, machine size and ratings can be substantially reduced while supporting up to 75% headroom above continuous output capability.