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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended October 31, 2007,

or



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No. 0-49629



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Quantum
Fuel Systems Technologies Worldwide, Inc.

(Exact name of registrant as specified in its charter)



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|                         |  |                        
|------------------------ |  | -----------------------
|Delaware                 |  | 33-0933072             
|(State of Incorporation) |  | (IRS Employer I.D. No.)

17872 Cartwright Road, Irvine, CA 92614

(Address of principal executive offices) (Zip Code)

Registrants telephone number, including area code: (949) 399-4500



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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 (as defined in Rule 12b-2 of the Exchange Act).

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

Number of shares outstanding of each of the issuers classes of common stock, as of December 14, 2007:

77,552,399 shares of Common Stock, $.001 par value per share, and 999,969 shares of Series B Common Stock, $.001 par value per share.



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INDEX

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



|                                                                                                                   |  |   
|------------------------------------------------------------------------------------------------------------------ |  | --
|Part I. Financial Information                                                                                      |  | 3 
|                                                                                                                   | 
|Item 1. Financial Statements:                                                                                      |  | 3 
|                                                                                                                   | 
|Condensed consolidated balance sheets  April 30, 2007 and October 31, 2007 (unaudited)                            |  | 3 
|                                                                                                                   | 
|Condensed consolidated statements of operations (unaudited)  Three and six months ended October 31, 2006 and 2007 |  | 4 
|                                                                                                                   | 
|Condensed consolidated statements of cash flows (unaudited)  Three and six months ended October 31, 2006 and 2007 |  | 5 
|                                                                                                                   | 
|Notes to condensed consolidated financial statements (unaudited)  October 31, 2007                                |  | 6 
|                                                                                                                   | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 23
|                                                                                                                   | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 38
|                                                                                                                   | 
|Item 4. Controls and Procedures                                                                                    |  | 38
|                                                                                                                   | 
|Part II. Other Information                                                                                         |  | 39
|                                                                                                                   | 
|Item 1A. Risk Factors                                                                                              |  | 39
|                                                                                                                   | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                        |  | 40
|                                                                                                                   | 
|Item 5. Other Information                                                                                          |  | 40
|                                                                                                                   | 
|Item 6. Exhibits                                                                                                   |  | 40
|                                                                                                                   | 
|Signatures                                                                                                         |  | 41



2



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PART IFINANCIAL INFORMATION

Item 1. Financial Statements.

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                            |  |                |              |   |                  |   |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                            |  | April 30, 2007 |              |   | October 31, 2007 |  
|                                                                                                                                                                            |  |                |              |   | (unaudited)      |  
|ASSETS                                                                                                                                                                      |  |                |              |   |                  |   |              |  
|Current assets:                                                                                                                                                             |  |                |              |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                                                   |  | $              | 4,018,986    |   |                  | $ | 3,501,163    |  
|Accounts receivable, net                                                                                                                                                    |  |                | 20,092,696   |   |                  |   | 18,510,043   |  
|Inventories, net                                                                                                                                                            |  |                | 30,640,467   |   |                  |   | 27,190,575   |  
|Tooling and engineering                                                                                                                                                     |  |                | 127,170      |   |                  |   | 2,779,758    |  
|Prepaids and other current assets                                                                                                                                           |  |                | 1,579,928    |   |                  |   | 3,681,293    |  
|                                                                                                                                                                            |  |                |              |   |                  |   |              |  
|Total current assets                                                                                                                                                        |  |                | 56,459,247   |   |                  |   | 55,662,832   |  
|                                                                                                                                                                            |  |               
|Property and equipment, net                                                                                                                                                 |  |                | 18,700,342   |   |                  |   | 7,010,018    |  
|Restricted cash equivalents and marketable securities                                                                                                                       |  |                | 1,000,000    |   |                  |   | 1,000,000    |  
|Deferred loan fees                                                                                                                                                          |  |                | 1,543,195    |   |                  |   | 1,262,616    |  
|Intangible assets, net                                                                                                                                                      |  |                | 55,418,247   |   |                  |   | 8,098,077    |  
|Goodwill                                                                                                                                                                    |  |                | 33,850,468   |   |                  |   | 30,400,000   |  
|Deposits and other assets                                                                                                                                                   |  |                | 571,871      |   |                  |   | 2,167,784    |  
|                                                                                                                                                                            |  |                |              |   |                  |   |              |  
|Total assets                                                                                                                                                                |  | $              | 167,543,370  |   |                  | $ | 105,601,327  |  
|                                                                                                                                                                            |  |                |              |   |                  |   |              |  
|                                                                                                                                                                            |  |               
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  |                |              |   |                  |   |              |  
|Current liabilities:                                                                                                                                                        |  |                |              |   |                  |   |              |  
|Accounts payable                                                                                                                                                            |  | $              | 23,128,261   |   |                  | $ | 17,101,481   |  
|Accrued payroll obligations                                                                                                                                                 |  |                | 2,122,068    |   |                  |   | 1,932,333    |  
|Accrued interest                                                                                                                                                            |  |                | 731,503      |   |                  |   | 852,074      |  
|Notes payable                                                                                                                                                               |  |                | 2,205,292    |   |                  |   | 2,193,753    |  
|Deferred revenue                                                                                                                                                            |  |                | 1,897,728    |   |                  |   | 5,349,101    |  
|Accrued warranties                                                                                                                                                          |  |                | 1,064,562    |   |                  |   | 1,512,694    |  
|Other accrued liabilities                                                                                                                                                   |  |                | 3,659,969    |   |                  |   | 3,602,323    |  
|Current maturities of long-term debt                                                                                                                                        |  |                | 4,313,135    |   |                  |   | 53,971,420   |  
|                                                                                                                                                                            |  |                |              |   |                  |   |              |  
|Total current liabilities                                                                                                                                                   |  |                | 39,122,518   |   |                  |   | 86,515,179   |  
|                                                                                                                                                                            |  |               
|Long-term debt, net of current maturities                                                                                                                                   |  |                | 45,704,394   |   |                  |   |             |  
|Deferred income taxes                                                                                                                                                       |  |                | 4,942,472    |   |                  |   |             |  
|Other accrued liabilities                                                                                                                                                   |  |                | 140,804      |   |                  |   | 191,338      |  
|Commitments and contingencies                                                                                                                                               |  |                |              |   |                  |   |              |  
|Minority interests                                                                                                                                                          |  |                | 103,608      |   |                  |   | 482,684      |  
|                                                                                                                                                                            |  |               
|Stockholders equity:                                                                                                                                                       |  |                |              |   |                  |   |              |  
|Preferred stock, $.001 par value, 20,000,000 shares authorized; none issued and outstanding for each period                                                                 |  |                |             |   |                  |   |             |  
|Series B common stock, $.001 par value; 2,000,000 shares authorized; 999,969 issued and outstanding for each period                                                         |  |                | 1,000        |   |                  |   | 1,000        |  
|Common stock, $.001 par value; 248,000,000 shares authorized; 65,052,399 issued and outstanding at April 30, 2007 and 77,552,399 issued
and outstanding at October 31, 2007 |  |                | 65,052       |   |                  |   | 77,552       |  
|Additional paid-in-capital                                                                                                                                                  |  |                | 289,371,009  |   |                  |   | 308,850,961  |  
|Accumulated deficit                                                                                                                                                         |  |                | (211,605,770 | ) |                  |   | (290,588,313 | )
|Accumulated other comprehensive gain (loss)                                                                                                                                 |  |                | (301,717     | ) |                  |   | 70,926       |  
|                                                                                                                                                                            |  |                |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                                                  |  |                | 77,529,574   |   |                  |   | 18,412,126   |  
|                                                                                                                                                                            |  |                |              |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                                                  |  | $              | 167,543,370  |   |                  | $ | 105,601,327  |  
|                                                                                                                                                                            |  |                |              |   |                  |   |              |  

See accompanying notes to condensed consolidated financial statements.



3



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|------------------------------------------------------------------ |  | ------------------------------ | ----------- | - | ---------------------------- | - | ----------- | ---- |  | - | ------------ | - |  | - | ----------- | -
|                                                                   |  | Three Months Ended October 31, |             |   | Six Months Ended October 31, |  
|                                                                   |  | 2006                           |             |   | 2007                         |   |             | 2006 |  |   | 2007         |  
|Revenue:                                                           |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Net product sales                                                  |  | $                              | 32,611,334  |   |                              | $ | 20,807,502  |      |  | $ | 71,048,607   |   |  | $ | 47,312,635  |  
|Contract revenue                                                   |  |                                | 2,829,061   |   |                              |   | 5,146,134   |      |  |   | 6,335,187    |   |  |   | 9,077,236   |  
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Total revenue                                                      |  |                                | 35,440,395  |   |                              |   | 25,953,636  |      |  |   | 77,383,794   |   |  |   | 56,389,871  |  
|                                                                   |  |                                |             |  
|Costs and expenses:                                                |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Cost of product sales                                              |  |                                | 33,793,912  |   |                              |   | 21,485,352  |      |  |   | 70,673,580   |   |  |   | 47,289,910  |  
|Research and development                                           |  |                                | 4,866,419   |   |                              |   | 6,051,945   |      |  |   | 10,524,922   |   |  |   | 11,134,499  |  
|Selling, general and administrative                                |  |                                | 11,127,710  |   |                              |   | 9,091,219   |      |  |   | 21,909,667   |   |  |   | 19,455,038  |  
|Amortization of intangibles                                        |  |                                | 1,134,172   |   |                              |   | 418,962     |      |  |   | 2,268,355    |   |  |   | 1,536,302   |  
|Impairment of long-lived assets                                    |  |                                | 71,718,601  |   |                              |   |            |      |  |   | 71,718,601   |   |  |   | 58,900,000  |  
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Total costs and expenses                                           |  |                                | 122,640,814 |   |                              |   | 37,047,478  |      |  |   | 177,095,125  |   |  |   | 138,315,749 |  
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Operating loss                                                     |  |                                | (87,200,419 | ) |                              |   | (11,093,842 | )    |  |   | (99,711,331  | ) |  |   | (81,925,878 | )
|                                                                   |  |                                |             |  
|Interest expense, net                                              |  |                                | (982,897    | ) |                              |   | (1,406,319  | )    |  |   | (1,944,247   | ) |  |   | (2,723,255  | )
|Minority interest in losses of subsidiaries                        |  |                                | 258,979     |   |                              |   | 447,826     |      |  |   | 545,124      |   |  |   | 821,448     |  
|Other income (expense), net                                        |  |                                | 180,436     |   |                              |   | (4,114      | )    |  |   | 194,596      |   |  |   | (16,806     | )
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Loss from continuing operations before income taxes                |  |                                | (87,743,901 | ) |                              |   | (12,056,449 | )    |  |   | (100,915,858 | ) |  |   | (83,844,491 | )
|Income tax benefit (expense)                                       |  |                                | 158,369     |   |                              |   | (80,521     | )    |  |   | 279,808      |   |  |   | 4,861,951   |  
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Net loss from continuing operations                                |  |                                | (87,585,532 | ) |                              |   | (12,136,970 | )    |  |   | (100,636,050 | ) |  |   | (78,982,540 | )
|                                                                   |  |                                |             |  
|Loss from discontinued operations                                  |  |                                | (1,744,614  | ) |                              |   |            |      |  |   | (2,119,609   | ) |  |   |            |  
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Net loss                                                           |  | $                              | (89,330,146 | ) |                              | $ | (12,136,970 | )    |  | $ | (102,755,659 | ) |  | $ | (78,982,540 | )
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Per share data - basic and diluted:                                |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Loss from continuing operations                                    |  | $                              | (1.47       | ) |                              | $ | (0.15       | )    |  | $ | (1.74        | ) |  | $ | (1.05       | )
|Loss from discontinued operations                                  |  |                                | (0.03       | ) |                              |   |            |      |  |   | (0.04        | ) |  |   |            |  
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Net loss                                                           |  | $                              | (1.50       | ) |                              | $ | (0.15       | )    |  | $ | (1.78        | ) |  | $ | (1.05       | )
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Number of shares used in per share calculation - basic and diluted |  |                                | 59,452,121  |   |                              |   | 78,552,368  |      |  |   | 57,883,861   |   |  |   | 74,951,825  |  
|                                                                   |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



4



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



|                                                                                          |  |                              |              |   |      |   |             |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ------------ | - | ---- | - | ----------- | -
|                                                                                          |  | Six Months Ended October 31, |             
|                                                                                          |  | 2006                         |              |   | 2007 |  
|Cash flows from operating activities:                                                     |  |                              |              |   |      |   |             |  
|Net loss                                                                                  |  | $                            | (102,755,659 | ) |      | $ | (78,982,540 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                              |              |   |      |   |             |  
|Depreciation on property and equipment and amortization of intangibles                    |  |                              | 6,017,670    |   |      |   | 3,968,690   |  
|Share-based compensation charges                                                          |  |                              | 2,074,883    |   |      |   | 1,905,380   |  
|Deferred income taxes                                                                     |  |                              | (303,319     | ) |      |   | (4,942,472  | )
|Minority interest in losses of subsidiaries                                               |  |                              | (545,124     | ) |      |   | (821,449    | )
|Amortization of deferred loan fees and premium on convertible notes                       |  |                              |             |   |      |   | (300,959    | )
|Other non-cash items                                                                      |  |                              | 32,014       |   |      |   | 615,163     |  
|Impairment of long-lived assets                                                           |  |                              | 72,317,506   |   |      |   | 58,900,000  |  
|Changes in operating assets and liabilities:                                              |  |                              |              |   |      |   |             |  
|Accounts receivable                                                                       |  |                              | 9,494,178    |   |      |   | 1,603,590   |  
|Inventories                                                                               |  |                              | 2,334,956    |   |      |   | 3,535,000   |  
|Tooling and engineering                                                                   |  |                              | 1,455,468    |   |      |   | (2,066,524  | )
|Deposits and other assets                                                                 |  |                              | (166,499     | ) |      |   | (3,623,857  | )
|Accounts payable                                                                          |  |                              | 1,493,203    |   |      |   | (5,923,618  | )
|Deferred revenue                                                                          |  |                              | 638,063      |   |      |   | 4,286,496   |  
|Customer deposits and other accrued liabilities                                           |  |                              | (4,045,108   | ) |      |   | (643,604    | )
|                                                                                          |  |                              |              |   |      |   |             |  
|Net cash used in operating activities                                                     |  |                              | (11,957,768  | ) |      |   | (22,490,704 | )
|                                                                                          |  |                              |              |   |      |   |             |  
|                                                                                          |  |                             
|Cash flows from investing activities:                                                     |  |                              |              |   |      |   |             |  
|Purchases of property and equipment                                                       |  |                              | (4,301,903   | ) |      |   | (1,109,520  | )
|Proceeds from sale of property and equipment                                              |  |                              | 14,160       |   |      |   | 76,543      |  
|Acquisition transaction costs                                                             |  |                              | (43,280      | ) |      |   |            |  
|Purchases of marketable securities                                                        |  |                              | (4,602,584   | ) |      |   |            |  
|Proceeds from sales and maturities of marketable securities                               |  |                              | 1,913,137    |   |      |   |            |  
|                                                                                          |  |                              |              |   |      |   |             |  
|Net cash used in investing activities                                                     |  |                              | (7,020,470   | ) |      |   | (1,032,977  | )
|                                                                                          |  |                              |              |   |      |   |             |  
|                                                                                          |  |                             
|Cash flows from financing activities:                                                     |  |                              |              |   |      |   |             |  
|Payments on notes and other obligations                                                   |  |                              | (1,444,379   | ) |      |   | (195,011    | )
|Borrowings on revolving credit agreements                                                 |  |                              | 1,868,829    |   |      |   | 4,410,682   |  
|Proceeds from issuance of common stock, net of transaction fees                           |  |                              | 21,743,732   |   |      |   | 17,587,072  |  
|Proceeds from exercises of stock options                                                  |  |                              | 33,612       |   |      |   |            |  
|Contributions from minority interest holders                                              |  |                              | 292,682      |   |      |   | 1,200,525   |  
|                                                                                          |  |                              |              |   |      |   |             |  
|Net cash provided by financing activities                                                 |  |                              | 22,494,476   |   |      |   | 23,003,268  |  
|                                                                                          |  |                             
|Effect of exchange rate changes on cash                                                   |  |                              | 562          |   |      |   | 2,590       |  
|                                                                                          |  |                              |              |   |      |   |             |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                              | 3,516,800    |   |      |   | (517,823    | )
|Cash and cash equivalents at beginning of period                                          |  |                              | 9,012,610    |   |      |   | 4,018,986   |  
|                                                                                          |  |                              |              |   |      |   |             |  
|Cash and cash equivalents at end of period                                                |  | $                            | 12,529,410   |   |      | $ | 3,501,163   |  
|                                                                                          |  |                              |              |   |      |   |             |  

See accompanying notes to condensed consolidated financial statements.



5



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

October 31, 2007

1) Background and Basis of Presentation

Background

Quantum Fuel Systems Technologies Worldwide, Inc. and Subsidiaries (collectively referred to as Quantum or the Company) provide powertrain engineering, system integration, manufacturing and
assembly of packaged fuel systems and battery control systems and accessories for specialty vehicles and applications including fuel cells, hybrids, alternative fuels, hydrogen refueling, new body styles, mid-cycle vehicle product enhancements and
high performance engines and drive trains for Original Equipment Manufacturers (OEMs) and OEM dealer networks. The Company also designs, engineers and manufactures hybrid and fuel cell vehicles.

Prior to July 23, 2002, the Company was a wholly-owned division of IMPCO Technologies, Inc. (IMPCO). The Companys accumulated deficit
represents its operating results from the July 23, 2002 spin-off date to the date of the periods presented.

On March 3, 2005,
the Company completed its acquisition of Tecstar Automotive Group, formally known as Starcraft Corporation, a Tier One second stage manufacturer that designs, engineers and integrates specialty equipment products into motor vehicle applications (see
Note 2).

The businesses formerly known as Tarxien and Empire Coach under the Companys ownership were sold during fiscal 2007.
Historical results of the former Empire Coach business are reported as discontinued operations. Historical results of the former Tarxien business are reported as part of continuing operations as the Company continues as a significant customer.

On September 28, 2007, the Companys shareholders approved an increase in the number of authorized shares of common stock from
100.0 million to 250.0 million shares. Of the 250.0 million authorized shares of common stock, 2.0 million are designated as Series B common stock.

Basis of Presentation

The consolidated financial statements include the accounts of Quantum Fuel
Systems Technologies Worldwide, Inc. and its wholly-owned subsidiary, Tecstar Automotive Group, for the period subsequent to the merger completed on March 3, 2005. The consolidated financial statements also include the accounts of each of the
direct and indirect subsidiaries of Tecstar Automotive Group. Also included in the consolidated financial statements since March 24, 2006, are the accounts of Advanced Lithium Power Inc. (ALP), due to the nature of the Companys
controlling interest in ALP.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Recent Accounting Pronouncements

The Company adopted
Financial Accounting Standards Board (FASB) Interpretation No. 48 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109, (FIN 48) on May 1, 2007. FIN 48 clarifies the accounting and
reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income
tax returns. The Interpretation requires that the tax effects of a position be recognized only if it is more-likely-than-not to be sustained by the taxing authority as of the reporting date. If the tax position is not considered
more-likely-than-not to be sustained, then no benefits of the position are to be recognized.

There was no cumulative effect of
adopting FIN 48 to the May 1, 2007 retained earnings balance. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

Interest and penalties related to income tax liabilities will be included in pre-tax income. At May 1, 2007, the Companys tax returns related
to fiscal years ended April 30, 2003 through April 30, 2007 remain open to examination by the tax authorities. However, the Company has consolidated or acquired net operating losses beginning in the tax year ended September 27, 1998
that would cause the statute of limitations to remain open for the year in which the net operating loss was incurred.

Capital Resources

In July 2002, the Company received $15.0 million in cash in connection with its spin-off from IMPCO. In January 2003, the Company completed a public
equity offering of an aggregate of 4.0 million shares of the its common stock at a price of $2.25 per



6



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share, which yielded net proceeds of approximately $8.0 million after underwriting discounts and commissions and offering expenses. In October 2003, the
Company completed a public equity offering of an aggregate of 8.1 million shares of its common stock at a price of $8.00 per share, which yielded net proceeds of approximately $60.1 million after underwriting discounts and commissions and
offering expenses.

On June 29, 2006, the Company completed a private placement transaction which yielded proceeds of
$12.5 million from the sale of 4.4 million shares of its common stock at a price of $2.84 per share, which represented a 10% discount on the June 29, 2006 closing price of $3.15. On October 27, 2006, the Company completed a
private placement transaction which yielded proceeds of $10.0 million from the sale of 6.1 million shares of its common stock at a price of $1.64 per share, which represented a 20% discount on the October 27, 2006 closing price of $2.05.
The investors also received warrants in connection with the private placement transactions. In January and February 2007, the Company received $1.3 million from the exercise of a portion of the warrants issued in connection with the private
placement that closed on October 27, 2006.

In December 2006, the Company used approximately $15.0 million of proceeds from the sale
of its marketable securities portfolio and other cash equivalents to reduce the outstanding borrowings under credit facilities with a commercial bank. On January 31, 2007 the Company secured a new $30.6 million credit facility with an
asset-based lender and used $9.6 million of proceeds from the new facility to repay the remaining principal and accrued interest owed under commercial bank credit facilities. Outstanding borrowings under the new credit facility totaled $30.3 million
at October 31, 2007. On December 14, 2007, the Company and its lender signed a Waiver and Agreement (the Waiver) which (i) increased the availability under the Credit Facility from $30.6 million to $33.6 million through November 1,
2008, (ii) allows the Company to borrow $7.0 million over the calculated borrowing base through November 1, 2008 under the Revolver, and (iii) defers the scheduled principal amortization payments under the Term Note to March 15, 2008 (see Note 11).

On June 22, 2007, the Company completed a private placement transaction which yielded proceeds of $18.75 million from the sale of
12.5 million shares of its common stock at a price of $1.50 per share, which represented a 28% discount on the June 21, 2007 closing price of $2.09. The investors also received warrants to purchase 15.0 million shares of the
Companys common stock at an exercise price of $2.09 in connection with the transaction that can be exercised beginning on December 21, 2007 and expire in December 2014. The transaction triggered a reset of the conversion price of the
senior subordinated convertible note obligations from $2.36 to $1.35 per share and a reset of the exercise price of the A warrants issued in the private placement that the Company closed in October 2006 from $2.36 to $1.50 per share.

On July 16, 2007, the Company secured a $5.0 million unconditional commitment from its asset-based lender that allows the Company to
draw on the commitment at its option and also allows the lender to fund the commitment at the lenders option under certain defined structures. The option for either party expires on August 1, 2008. To date, the Company and its lender have
not exercised their options under the commitment.

On November 6, 2007 the Company received $5.0 million in proceeds from its lender
under a new term note provided in connection with ongoing negotiations for the lenders possible acquisition of Tecstar Automotive Group. The proceeds were received in exchange for a promissory note issued by Tecstar Automotive Group and
guaranteed by Quantum. The guarantee by Quantum will be released if the sale of Tecstar Automotive Group to the lender is completed. The November 6, 2007 note bears interest at 10.0% per annum and calls for quarterly principal amortization
payments of $1.0 million, commencing on August 1, 2008, with interest payable in arrears on the same days as the principal is payable.

Liquidity

The Company has incurred recurring operating losses and negative cash flows from operating activities. Although the Company has reduced
workforce levels and implemented certain other cost saving initiatives over the past year, the Company used $37.4 million and $22.5 million in cash for operating activities during the twelve-month period of fiscal 2007 and the first six months of
fiscal 2008, respectively.

Included in the Companys plans is the immediate need to reduce the
Tecstar business segment costs to levels commensurate with its expected revenues and a possible sale of the Tecstar business segment. On December 13, 2007, the Companys lender informed management that although it is not withdrawing at
this time from the transaction contemplated by the Term Sheet, the lender does not intend to move forward with the transaction unless the Company proposes an acceptable plan to further reduce the Tecstar business segments present cost
structure. The Company anticipates that any cost restructuring plan will be implemented either through negotiations with its creditors or by seeking the rights, remedies and protections available to the Tecstar business segment under the Bankruptcy
laws. The Company cannot provide any assurances that it will be able to develop a plan acceptable to the lender in a time frame acceptable to the Company, if at all. Nor can the Company provide any assurances that the lender will proceed with the
purchase of Tecstar even if such a restructuring plan is developed and implemented. The Company does not intend to provide any additional capital to its Tecstar business segment in the future and is currently assessing its options to reduce costs
and to reorganize the Tecstar business segments operations. The decision not to provide additional capital and to significantly reduce costs or reorganize, will limit Tecstars ability to pay its vendors, perform on its contracts,
continue existing programs, and pursue new programs and new customers.

In the event that a plan to further reduce costs cannot be
implemented by the end of the Companys fiscal third quarter or is not acceptable to facilitate a sale or additional financial support from the lender or another party, the Company anticipates that it will file for bankruptcy protection for its
Tecstar Automotive Group subsidiary for the purpose of liquidating the assets of the Tecstar business segment.



7



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Under a possible restructure plan financed by the lender or a liquidation plan of the Tecstar business
segment, the Company believes that its working capital at October 31, 2007, plus the additional $5.0 million in proceeds received from term notes issued in November 2007 and the additional $3.0 million in availability on the Revolver obtained
on December 14, 2007, taken together with the available committed funding of $5.0 million secured on July 16, 2007, is sufficient to fund operating activities of its Quantum Fuel Systems and Corporate business segments for at least the
next twelve months. However, an inability by the Company to timely implement a cost reduction plan acceptable to the lender and to consummate the sale of the Tecstar Automotive Group business segment or to raise sufficient capital to fund its
operations would have a material adverse affect on the Company and could impact its ability to continue as a going concern. In addition, if the Companys subsidiary, Tecstar Automotive Group, files for bankruptcy protection or if the Company
otherwise discontinues the business operations of its Tecstar Automotive Group business segment, the Company would be in default in certain of its material contracts including, without limitation, its Credit Agreement and $15.0 million Senior
Subordinated Convertible Promissory Notes. Although the lender continues to work with the Company in its efforts to restructure the Tecstar business segment as evidence by the lender granting waivers for certain debt compliance matters as of
December 14, 2007, due to the Companys need to implement a significant cost reduction plan acceptable to the lender or to file the Tecstar Automotive Group under bankruptcy protection, it is no longer considered remote that a material adverse
condition will not cause a default in the covenants of the Convertible Notes and Credit Agreement. Since there can be no assurances that the lender will not exercise its right to call the debt, the Company has reclassified the debt as current at
October 31, 2007. Furthermore, if the lender is unwilling to waive such default and calls the debt obligations, the Company would not be able to pay on those obligations unless it is able to adequately refinance those debt obligations. If the
Company is unable to obtain such refinancing, the Company would not be able to continue as a going concern.

Use of Estimates in the Preparation of
Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting period. These estimates include assessing the levels of liquidity needs of the Company over the next twelve months, collectibility of accounts receivable, estimates of
contract costs and percentage of completion, the use and recoverability of inventory, the carrying amounts and fair value of long-lived assets and goodwill, including estimates of future cash flows and market valuations associated with asset
impairment evaluations, the fair value of debt instruments, the realization of deferred taxes, useful lives for depreciation/ amortization periods of tangible and intangible assets and provisions for warranty claims, among others. The markets for
the Companys products are characterized by competition, technological development and new product introduction, all of which could impact the future realizability of the Companys assets. Actual results could differ from those estimates.

These consolidated financial statements are unaudited and have been prepared in accordance with the instructions of Form 10-Q and Article
10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal and recurring accruals, as well as the impairment of the long-lived assets) considered necessary for a fair presentation have been included. As discussed
further under Liquidity and in Note 2, the Company will be developing a plan during the third quarter of fiscal 2007 to significantly reduce costs at the Tecstar Automotive Group business segment level that may include seeking the rights,
remedies and protections available to the Tecstar business segment under the Bankruptcy laws that could result in a reorganization or a liquidation of the Tecstar business segment. The consolidated financial statements incorporated herein do not
consider any adjustments that might be required under the liquidation basis of accounting and have been prepared under the assumption that the Company is a going concern.

Revenue Recognition

The Company generally manufactures products based on specific orders from
customers. Revenue is recognized on product sales upon shipment or when the earnings process is complete and collectibility is reasonably assured. For product sales in connection with certain second stage manufacturing, consisting of assembly and
integration of fuel systems and specialty equipment products into motor vehicle applications, revenue is recognized upon completion of the integration activities when the vehicles are ready to be delivered to our customers in accordance with
contract terms. The Company includes the costs of shipping and handling, when incurred, in cost of goods sold.

Contract revenue for
customer funded research and development is principally recognized by the percentage of completion method in accordance with Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Generally, the Company estimates percentage complete by determining cost incurred to date as a percentage of total estimated cost at completion. For certain other contracts, percentage complete is determined by measuring progress
towards contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings process. For contracts measured under the estimated cost approach, the Company believes it can generally make dependable
estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to revisions as the contract progresses to completion. The Companys estimates of contract costs are based on expectations
of engineering development time and materials and other support costs. These estimates can change based on unforeseen technology and integration issues, but known risk factors and contract challenges are generally allowed for in the initial scope
and cost estimate of the program. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. In certain circumstances, specific contracts in which the Company cannot reliably
make estimates of total revenues and expenses are accounted for under the completed contract methodology. Under the completed contract methodology, all revenue and expenses attributable to the specific contract are deferred until the end of the
project (see Note 9).



8



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Reclassification

Certain reclassifications have been made to fiscal year 2007 amounts to conform to the fiscal year 2008 presentation.

2) Possible Sale/Restructure or Reorganization of Tecstar Business Segment

On October 29, 2007 the Company and its
asset-based lender signed a Term Sheet that summarized the principal terms of a proposed sale of the entire Tecstar Automotive Group business segment to the lender. In connection with the signing of the Term Sheet, the Companys lender provided
a $5.0 million term loan to Tecstar Automotive Group, which was guaranteed by Quantum, and received a promissory note in return (the November 2007 Term Note).

On December 13, 2007, the Companys lender informed management that although it is not withdrawing at this time from the transaction contemplated by the Term Sheet, the lender does not intend to move forward with
the transaction unless the Company proposes an acceptable plan to further reduce the Tecstar business segments present cost structure. The Company anticipates that any cost restructuring plan will be implemented either through negotiations
with its creditors or by seeking the rights, remedies and protections available to the Tecstar business segment under the Bankruptcy laws. The Company cannot provide any assurances that it will be able to develop a plan acceptable to the lender in a
time frame acceptable to the Company, if at all. Nor can the Company provide any assurances that the lender will proceed with the purchase of Tecstar even if such a restructuring plan is developed and implemented. If a definitive agreement or
additional financial support from the lender or another party, in connection with a restructure or reorganization, cannot be finalized in the near term, the Company anticipates that it may have to liquidate the Tecstar Automotive Group business
segment operations.

The Company previously disclosed that it had engaged a financial advisor to perform an assessment of strategic options
for its Tecstar Automotive Group, Inc. subsidiary and to solicit offers in the open market for a sale of that business segment. Based upon the results of this assessment and the range of fair value obtained in the solicitation process, the Company
determined that the net assets of the Tecstar business segment were impaired in the amount of approximately $58.9 million as of July 31, 2007. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the balance of goodwill of $3.5 million and intangible assets of $45.8 million in the segment have been written-off
in addition to a $9.6 million impairment charge recognized for property and equipment for the period ended July 31, 2007. As a result of the impairment of the Tecstar business segments intangible assets, the deferred tax liability
resulting from the temporary difference for amortization periods that exceeded the statutory carry forward period was eliminated with a corresponding tax benefit recognized in the amount of $4.9 million for the period ended July 31, 2007.

The Company performed an additional analysis for the second quarter of fiscal 2008 and at this time did not identify any further
impairment of its long-lived assets through October 31, 2007. Depending upon the outcome of a cost reduction plan still being developed by the Company, further impairments of Tecstar business segment assets may result from the actions to be
implemented.

If the Tecstar business segment were to be sold or liquidated, $18.7 million of net assets, excluding obligations under
long-term debt, would be disposed of, based on October 31, 2007 balances.

3) Restricted Cash Equivalents and Marketable Securities

Restricted cash equivalents consist of a collateralized interest bearing account for the benefit of General Motors Acceptance Corporation (GMAC) in
connection with financing of vehicle chassis for the operations of Regency Conversions, Inc. (Regency), a wholly-owned subsidiary of Tecstar Automotive Group.



9



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4) Accounts Receivable

Accounts receivable consist of the following:



|                                |  |                |            |   |                 |   |            |  
|------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30, 2007 |            |   | October 31,2007 |  
|Customer accounts billed        |  | $              | 18,940,800 |   |                 | $ | 18,727,667 |  
|Customer accounts unbilled      |  |                | 1,782,872  |   |                 |   | 739,322    |  
|Allowance for doubtful accounts |  |                | (630,976   | ) |                 |   | (956,946   | )
|                                |  |                |            |   |                 |   |            |  
|Accounts receivable, net        |  | $              | 20,092,696 |   |                 | $ | 18,510,043 |  
|                                |  |                |            |   |                 |   |            |  

5) Inventories

Inventories consist of the following:



|                                |  |                |            |   |                 |   |            |  
|------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30, 2007 |            |   | October 31,2007 |  
|Materials and parts             |  | $              | 31,133,107 |   |                 | $ | 26,942,040 |  
|Work-in-process                 |  |                | 912,505    |   |                 |   | 1,947,627  |  
|Finished goods                  |  |                | 3,016,378  |   |                 |   | 2,822,197  |  
|                                |  |                |            |   |                 |   |            |  
|                                |  |                | 35,061,990 |   |                 |   | 31,711,864 |  
|Less provision for obsolescence |  |                | (4,421,523 | ) |                 |   | (4,521,289 | )
|                                |  |                |            |   |                 |   |            |  
|Inventories, net                |  | $              | 30,640,467 |   |                 | $ | 27,190,575 |  
|                                |  |                |            |   |                 |   |            |  

6) Property and Equipment

As discussed in Note 2, an estimated impairment charge of $9.6 million for property and equipment associated with the Tecstar Automotive Group segment was recognized during the first quarter of fiscal 2008.

7) Goodwill and Other Intangible Assets

Goodwill

Acquisitions meeting business combinations criteria often give rise to goodwill. The Company utilizes the services of independent
valuation consultants to assist in allocating purchase price to acquired assets and liabilities assumed in connection with acquisition activities.

The Company completed acquisitions of Tecstar Automotive Group and Regency on March 3, 2005 and February 8, 2006, respectively. In accordance with SFAS No. 141, Business Combinations, the total estimated
consideration for the transactions was allocated to the tangible assets acquired and liabilities assumed based on their fair values at the dates of acquisition. In addition, certain identifiable intangible assets were recorded in connection with
contractual or other legal rights acquired. The excess of the cost of acquiring Tecstar Automotive Group and Regency over the net of the amounts assigned to their assets acquired and liabilities assumed, amounting to $102.1 million and $3.5 million,
respectively, was recognized as goodwill in connection with the acquisitions. Goodwill associated with the Tecstar Automotive Group acquisition was allocated 30% to the Quantum Fuel Systems business segment and 70% to the Tecstar Automotive Group
business segment. Goodwill associated with the Regency acquisition was allocated 100% to the Tecstar Automotive Group business segment.

During the second quarter of fiscal 2007, indicators of goodwill impairment were noted and goodwill was tested. These tests determined that goodwill in the Tecstar Automotive Group segment was impaired related to the acquisition of Tecstar
Automotive Group resulting in an impairment charge to write-off the entire balance of goodwill allocated to the segment with respect to the acquisition.

The goodwill arising from the Regency acquisition was considered fully impaired and written-off pursuant to a fair value assessment made as of July 31, 2007. The Company believes there are no indicators of
impairment for goodwill recorded in the Quantum Fuel Systems business segment.



10



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Goodwill is not subject to amortization. Changes in the carrying values of goodwill for the first six
months of fiscal 2008 are as follows:



|                                                 |  |                      |            |                         |   |            |        |  |   |            |  
|------------------------------------------------ |  | -------------------- | ---------- | ----------------------- | - | ---------- | ------ |  | - | ---------- | -
|                                                 |  | Quantum Fuel Systems |            | Tecstar AutomotiveGroup |   |            | Totals | 
|Balance as of April 30, 2007                     |  | $                    | 30,400,000 |                         | $ | 3,450,468  |        |  | $ | 33,850,468 |  
|Impairment charge related to Regency acquisition |  |                      |           |                         |   | (3,450,468 | )      |  |   | (3,450,468 | )
|                                                 |  |                      |            |                         |   |            |        |  |   |            |  
|Balance as of October 31, 2007                   |  | $                    | 30,400,000 |                         | $ |           |        |  | $ | 30,400,000 |  
|                                                 |  |                      |            |                         |   |            |        |  |   |            |  

Amortization and Impairment of Intangibles

The Company amortizes specifically identified intangible assets using the straight-line method over the estimated useful lives of the assets in accordance
with SFAS No. 142. Pursuant to an assessment of fair values for all intangible assets carried in the Tecstar Automotive Group business segment as of July 31, 2007 (see Note 2), intangible assets associated with Tecstar contracts and
customer relationships, Tecstar existing technology, Regency dealer network and trade names, and for Unique Performance Concepts, LLC (UPC) dealer network and trade names, were determined to be fully impaired and written off. Total impairment
charges for intangible assets recognized in the first quarter of fiscal 2008 amounted to $45.8 million.

Intangible assets consist of the
following:



|                                            |  |                      |  |               |            |   |                 |   |            |  
|------------------------------------------- |  | -------------------- |  | ------------- | ---------- | - | --------------- | - | ---------- | -
|                                            |  | EstimatedUseful Life |  | April 30,2007 |            |   | October 31,2007 |  
|Tecstar Automotive Group Segment:           |  |                      |  |               |            |   |                 |   |            |  
|Tecstar contracts and customer relationship |  |                      |  | $             | 41,344,221 |   |                 | $ |           |  
|Tecstar existing technology                 |  |                      |  |               | 236,666    |   |                 |   |           |  
|Regency dealer network and trade names      |  |                      |  |               | 4,809,175  |   |                 |   |           |  
|UPC dealer network and trade names          |  |                      |  |               | 128,720    |   |                 |   |           |  
|                                            |  |                      |  |               |            |   |                 |   |            |  
|Net carrying value                          |  |                      |  |               | 46,518,782 |   |                 |   |           |  
|                                            |  |                      |  |               |            |   |                 |   |            |  
|Quantum Fuel Systems Segment:               |  |                      |  |               |            |   |                 |   |            |  
|GM Strategic Alliance Agreement:            |  |                      |  |               |            |   |                 |   |            |  
|Gross carrying value                        |  | 120 months           |  |               | 16,479,358 |   |                 |   | 16,479,358 |  
|Accumulated amortization                    |  |                      |  |               | (7,798,977 | ) |                 |   | (8,628,865 | )
|                                            |  |                      |  |               |            |   |                 |   |            |  
|Net carrying value                          |  |                      |  |               | 8,680,381  |   |                 |   | 7,850,493  |  
|                                            |  |                      |  |               |            |   |                 |   |            |  
|ALP patents and technology:                 |  |                      |  |               |            |   |                 |   |            |  
|Gross carrying value                        |  | 192 months           |  |               | 234,997    |   |                 |   | 274,779    |  
|Accumulated amortization                    |  |                      |  |               | (15,913    | ) |                 |   | (27,195    | )
|                                            |  |                      |  |               |            |   |                 |   |            |  
|Net carrying value                          |  |                      |  |               | 219,084    |   |                 |   | 247,584    |  
|                                            |  |                      |  |               |            |   |                 |   |            |  
|Totals                                      |  |                      |  | $             | 55,418,247 |   |                 | $ | 8,098,077  |  
|                                            |  |                      |  |               |            |   |                 |   |            |  



11



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8) Equity Stake in Affiliate

On August 7, 2007, the Company and Fisker Coachbuild, LLC, launched a new venture, Fisker Automotive, Inc. to produce premium plug-in hybrid automobiles. Initial deliveries of a four-door sports sedan are
anticipated to commence in December 2009. Upon formation, the Company owned 62% of the issued and outstanding capital stock of Fisker Automotive. On November 21, 2007, Fisker Automotive sold $5.5 million of convertible preferred stock in a
Series A financing, which reduced the Companys ownership percentage to 47.5%. The preferred shareholders have voting rights that are similar to the common shareholders. The Company has the right to appoint two of Fisker Automotives five
members of the Board of Directors. Fisker Automotive will need to raise a substantial amount of additional capital in order to complete future phases of development, testing and tooling for the new vehicle platform, which will further reduce the
Companys ownership percentage in Fisker Automotive.

The Company accounts for its equity stake in Fisker Automotive under the equity
method of accounting in accordance with APB opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, (APB 18). Due to the temporary nature of its majority interest in Fisker Automotive, the Company also
accounted for its initial equity interest in Fisker Automotive under the equity method. Although Fisker Automotive is a variable interest entity as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R), the Company is not the primary beneficiary as defined by FIN46R.

Fisker Automotive has incurred an accumulated deficit of approx $1.4 million from inception through October 31, 2007 for design and development
activities for the new vehicle platform. The Company has not contributed any cash or other assets with an historical cost basis to the venture and has no obligation to fund deficit balances. As a result, the Companys initial investment balance
and balance as of October 31, 2007 is zero and there is no activity to be reported in the Companys condensed consolidated statement of operations for the second quarter of fiscal 2008.

9) Deferred Revenue

In certain circumstances,
specific contracts in which the Company cannot reliably make estimates of total revenues and expenses are accounted for under the completed contract methodology in accordance with SOP 81-1. Under the completed contract methodology, all revenue and
expenses attributable to the specific contract are deferred until the end of the project. Tecstar Automotive Group has performed certain design and construction services to set up a second stage production and assembly facility and provide
production support associated with Force Protection Industries Mine Resistant Ambush Protected (MRAP) military vehicle. This contract is being recognized under the completed contract methodology and is expected to be completed near the end of
the Companys fiscal year 2008. As of October 31, 2007, the Company has deferred expenses of $1.3 million that are reflected as part of tooling and engineering and $4.4 million of deferred revenues included on the accompanying condensed
consolidated balance sheet.

10) Warranties

The Company offers a warranty for all of its second stage manufacturing and alternative fuel products. The specific terms and conditions of those warranties vary depending on the platform and model year. Warranty is provided for under terms
similar to those offered by the OEM to its customers. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the
Companys warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim.

The Company generally disclaims all warranties on its prototype hydrogen fuel storage systems. At its discretion or under certain programs, the Company may provide for the replacement cost or perform additional tests of prototype component
parts subsequent to product delivery. The Company includes an estimate of these types of arrangements as part of its warranty liability. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary.

Changes in the Companys product warranty liability during the first six months of fiscal 2008 are as follows:



|                                    |  |   |           |  
|----------------------------------- |  | - | --------- | -
|Balance at April 30, 2007           |  | $ | 1,064,562 |  
|Warranties issued during the period |  |   | 689,900   |  
|Settlements made during the period  |  |   | (241,768  | )
|                                    |  |   |           |  
|Balance at October 31, 2007         |  | $ | 1,512,694 |  
|                                    |  |   |           |  



12



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11) Debt

Long-term debt consists of the following:



|                                                                                                                                                                                                      |  |                |            |   |                 |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | --------------- | - | ----------- | -
|                                                                                                                                                                                                      |  | April 30, 2007 |            |   | October 31,2007 |  
|Convertible notes, $15,000,000 face value; plus unamortized premium of $6,009,231 as of April 30, 2007; plus unamortized premium of
$5,427,693 and payment-in-kind of $308,219 as of October 31, 2007 |  | $              | 21,009,231 |   |                 | $ | 20,735,912  |  
|Term note                                                                                                                                                                                             |  |                | 10,000,000 |   |                 |   | 10,000,000  |  
|Revolving line of credit, asset-based lender                                                                                                                                                          |  |                | 15,895,626 |   |                 |   | 20,306,308  |  
|Promissory note payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $22,113 including interest at
5.38%, due May 1, 2013, unsecured                           |  |                | 1,374,188  |   |                 |   | 1,277,380   |  
|Obligation payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $27,750 including imputed interest at
5.5%, due May 1, 2013, unsecured                         |  |                | 1,718,380  |   |                 |   | 1,597,761   |  
|Other                                                                                                                                                                                                 |  |                | 20,104     |   |                 |   | 54,059      |  
|                                                                                                                                                                                                      |  |                |            |   |                 |   |             |  
|Long-term debt, current and non-current                                                                                                                                                               |  |                | 50,017,529 |   |                 |   | 53,971,420  |  
|                                                                                                                                                                                                      |  |               
|Less current maturities for scheduled payments and premium amortization                                                                                                                               |  |                | (4,313,135 | ) |                 |   | (6,736,206  | )
|Less remaining portion of debt classified as current                                                                                                                                                  |  |                |           |   |                 |   | (47,235,214 | )
|                                                                                                                                                                                                      |  |                |            |   |                 |   |             |  
|Long-term debt, non-current                                                                                                                                                                           |  | $              | 45,704,394 |   |                 | $ |            |  
|                                                                                                                                                                                                      |  |                |            |   |                 |   |             |  

The Company assumed $15.0 million in senior subordinated convertible note obligations (Convertible
Notes) in connection with the acquisition of Tecstar Automotive Group in March 2005 that were originally dated July 12, 2004 and scheduled to mature on July 1, 2009 with a fixed cash coupon rate of 8.5%. Upon assumption of the notes in
March 2005, the conversion price was adjusted to equal the Companys closing share price on the date of the assumption of $5.77 per share. The conversion price was subsequently amended to $2.36 in connection with the new credit facility
discussed below and later reset to $1.35 per share as a result of the private placement completed on June 22, 2007.

On
January 31, 2007, the Company entered into a $30.6 million Credit Agreement (Credit Agreement) with an asset-based lender affiliated with the Convertible Notes. The Credit Agreement provides for a $20.6 million revolving line of credit
(Revolver) and a $10.0 million term loan (Term Loan). The maturity date for the Revolver and Term Loan is January 31, 2010. Per the terms of the January 31, 2007 Credit Agreement, as amended through September 13, 2007, the maximum
principal amount that can be outstanding at any one time under the Revolver is limited to the lesser of (i) $20.6 million and (ii) the sum of (x) 85% of eligible accounts receivable and (y) the lesser of (i) 45% of eligible
inventory and (ii) $10.6 million. The annual interest rate on the outstanding borrowings under the Revolver and the Term Loan through September 30, 2007 was equal to the greater of (A) the prime rate plus 3.0% and (B) 10.0%.
Effective October 1, 2007, the annual interest rate for borrowings under the Revolver and the Term Loan changed to a fixed rate of 12.0%.

Repayment of the Term Loan was scheduled as follows: interest only until August 1, 2007; then monthly installments of principal on the first day of each month, commencing on August 1, 2007, in the amount of $0.25 million for the
period from August 1, 2007 through January 1, 2008 and in the amount of $0.4 million thereafter. No principal payments have been made on the Term Note and the lender has agreed to defer the scheduled principal payments until March 15,
2008 pursuant to the Waiver dated December 14, 2007 in exchange for an increase in the interest rate of 1% per annum per month beginning January 1, 2008 and an option for the lender to delay receipt of the principal payments for up to
six months. The Company retains the right to pay the principal in cash or common stock; however, if exchanged for common stock, the exchange price will be set equal to the lower of $1.50 per share or the volume weighted average price (VWAP) of the
common stock for the 20 days prior to the exchange. The Waiver also allows the Company to borrow $7.0 million over the calculated borrowing base under the Revolver and raised the maximum availability under the line by $3.0 million to $23.6 million
through November 1, 2008. In exchange for the lenders concession on the calculated borrowing base requirement, the interest rate on the portion of the outstanding borrowings that exceed the calculated borrowing base will accrue at 18.0%
and the lender will be entitled to exchange $7.0 million of the outstanding borrowings under the Revolver for shares of common stock at an exchange price of $1.50 per share through January 1, 2010. The calculated borrowing base for the Company
under the Revolver was approximately $18.7 million at October 31, 2007. The Credit Agreement also has a material adverse change provision which allows the lender to call the Convertible Notes and Credit Agreement in the event of a significant
deterioration in the business or the filing for bankruptcy protection of a subsidiary. The lender continues to work with the Company in its efforts to restructure the Tecstar business segment as evidence by the lender granting the aforementioned
waivers. Due to the recent discussions between the Company and its lender on December 13, 2007, and the Companys need to implement a significant cost reduction plan acceptable to the lender or to file the Tecstar Automotive Group under
bankruptcy protection, it is no longer considered remote that a material adverse condition will not cause a default in the covenants of the Convertible Notes and Credit Agreement. Since there can be no assurances that the lender will not exercise
its right to call the debt, the Company has reclassified the debt as current at October 31, 2007 in the accompanying balance sheet.

The
Companys obligations under the Credit Agreement are guaranteed by all of its domestic subsidiaries with the exception of Amstar, LLC and are secured by substantially all the Companys assets and the assets of its subsidiary guarantors.
Transaction fees associated with the execution of the Credit Agreement and reflected as deferred loan fees on the consolidated balance sheet at April 30 and October 31, 2007, are being amortized against interest expense over the three-year
life of the Credit Agreement.



13



---

In connection with the Credit Agreement and as an inducement to the holders of the Convertible Notes to
amend certain negative debt covenants contained in the Convertible Notes, Tecstar Automotive Group entered into an amendment to the Convertible Notes that substantially changed the terms of the original notes. As amended, the total annual interest
rate is 11.5% of which the cash coupon rate is 6.5% and a cash or payment-in-kind option for the borrower is 5.0%. The holders of the Convertible Notes have the right to extend the maturity date of the Convertible Notes for an additional three years
(if exercised, the payment-in-kind is thereafter lowered to 3.0%). The conversion price on the Convertible Notes was reset to $1.35 per share on June 22, 2007 in connection with the private placement after factoring in the dilutive effect of
the warrants provided in the private placement against the price of the stock issued of $1.50 per share.

As a result of the substantial
changes to the original Convertible Notes in January 2007, including the execution of a guaranty by the Company of the obligations under the Convertible Notes, there was an implied exchange of debt instruments as prescribed in Emerging Issues Task
Force (EITF) 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. In accordance with EITF 96-19, the original Convertible Notes, with an outstanding balance of $15.0 million just prior to the amendment,
were accounted for as an early extinguishment of debt and the amended Convertible Notes were accounted for as a new debt instrument and recorded at an estimated fair value of $21.3 million on the date of the transaction. The remaining difference
between the fair value and face value of the Convertible Notes of $5.4 million as of October 31, 2007 is being amortized against interest expense over the 62 month expected life of the notes to reflect the effective interest rate of the new
debt instrument. For purposes of disclosing the maturities of long-term scheduled debt payments below, the scheduled maturity date of July 1, 2009 is utilized as an assumption.

Incorporating the waiver received from the Companys lender on December 14, 2007, the Company is in compliance with all material covenants,
reporting and other requirements of the Credit Agreement and the Convertible Notes. In addition, the Company does not believe any material adverse effect or conditions in the business currently exist that would constitute a default under its credit
facilities; however, it is no longer considered remote that a material adverse condition will not cause a default in the covenants of the Convertible Notes and Credit Agreement within the next twelve months. See information regarding risks of a
future default under certain circumstances in Note 1, Liquidity.

The promissory note issued and the other obligation owed to a
former shareholder of Wheel to Wheel, Inc. (the predecessor to Wheel to Wheel, LLC) is guaranteed by a certain officer and a current director of the Company.

Maturities of long-term debt for each of the next five twelve month periods ending October 31 are as follows (exclusive of potential default on any debt covenant provisions):



|           |  |                   |            |                                            |   |                                   |  |   |           
|---------- |  | ----------------- | ---------- | ------------------------------------------ | - | --------------------------------- |  | - | ----------
|           |  | ScheduledPayments |            | Amortization ofPremium onConvertible Notes |   | Total Maturitiesof Long-Term Debt
|2008       |  |                   | 5,573,130  |                                            |   | 1,163,076                         |  |   | 6,736,206 
|2009       |  |                   | 20,603,196 |                                            |   | 1,163,076                         |  |   | 21,766,272
|2010       |  |                   | 20,920,671 |                                            |   | 1,163,076                         |  |   | 22,083,747
|2011       |  |                   | 540,995    |                                            |   | 1,163,076                         |  |   | 1,704,071 
|2012       |  |                   | 562,944    |                                            |   | 775,389                           |  |   | 1,338,333 
|Thereafter |  |                   | 342,791    |                                            |   |                                  |  |   | 342,791   
|           |  |                   |            |                                            |   |                                   |  |   |           
|           |  | $                 | 48,543,727 |                                            | $ | 5,427,693                         |  | $ | 53,971,420
|           |  |                   |            |                                            |   |                                   |  |   |           

12) Discontinued Operations  Empire Coach

In September 2005, the Company acquired a 51.0% interest in Tecstar Coachbuilders, LLC (formerly known as Empire Coach Enterprises, LLC, and herein
referred to as Empire Coach,), a second stage limousine manufacturer. On January 12, 2007, Empire Coach filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, Eastern District of Michigan. Empire Coach continued in
possession of its property and managed the business as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Act through the date of sale of its business to an unrelated third party on April 27, 2007 pursuant to an Asset
Purchase and Sales Agreement dated April 3, 2007. Empire Coach received $0.4 million in consideration for the sale of all its business assets to the buyer along with the buyer assuming the long-term facility lease and certain other liabilities.
Tecstar Automotive Group provided a guarantee for the obligations under the facility lease in connection with the origination of the lease in September 2005. This guarantee, scheduled to expire in February 2013 in connection with the end of the
lease term, continues to remain in place. The historical activities of Empire Coach are reported as discontinued operations in the accompanying condensed consolidated statements of operations. A summary of Empire Coachs operating activities is
as follows:



14



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|                                    |  |                                   |            |   |                                  |   |            |  
|----------------------------------- |  | --------------------------------- | ---------- | - | -------------------------------- | - | ---------- | -
|                                    |  | Three MonthsEndedOctober 31, 2006 |            |   | Six Months EndedOctober 31, 2006 |  
|Net product sales                   |  | $                                 | 1,175,922  |   |                                  | $ | 1,734,687  |  
|Costs and expenses:                 |  |                                   |            |   |                                  |   |            |  
|Cost of product sales               |  |                                   | 2,046,463  |   |                                  |   | 2,772,423  |  
|Selling, general and administrative |  |                                   | 225,696    |   |                                  |   | 433,496    |  
|Impairment of long lived assets     |  |                                   | 598,905    |   |                                  |   | 598,905    |  
|Interest expense                    |  |                                   | 49,472     |   |                                  |   | 49,472     |  
|                                    |  |                                   |            |   |                                  |   |            |  
|Total costs and expenses            |  |                                   | 2,920,536  |   |                                  |   | 3,854,296  |  
|                                    |  |                                   |            |   |                                  |   |            |  
|Loss from discontinued operations   |  | $                                 | (1,744,614 | ) |                                  | $ | (2,119,609 | )
|                                    |  |                                   |            |   |                                  |   |            |  

13) Share-Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment, (123R), which requires the
measurement and recognition of compensation expense for all share-based payment awards made to employees, directors and consultants, based on estimated fair values.

SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the awards portion that is ultimately expected to
vest is recognized as expense over the requisite service periods in the accompanying unaudited condensed consolidated financial statements for the first two quarters ended fiscal 2007 and 2008.

The Company has included the following amounts for share-based compensation cost in the accompanying unaudited condensed consolidated statement of
operations for the first six months of fiscal 2007 and 2008:



|                                    |  |                               |         |                             |   |           |  |      |           |  |   |          
|----------------------------------- |  | ----------------------------- | ------- | --------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                    |  | Three Months EndedOctober 31, |         | Six Months EndedOctober 31,
|                                    |  | 2006                          |         | 2007                        |   | 2006      |  | 2007
|Cost of product sales               |  | $                             | 31,246  |                             | $ | 25,757    |  | $    | 72,186    |  | $ | 54,257   
|Research and development            |  |                               | 92,988  |                             | $ | 84,734    |  |      | 218,767   |  | $ | 148,991  
|Selling, general and administrative |  |                               | 828,718 |                             | $ | 891,899   |  |      | 1,783,931 |  | $ | 1,702,132
|                                    |  |                               |         |                             |   |           |  |      |           |  |   |          
|Total share-based compensation      |  | $                             | 952,952 |                             | $ | 1,002,390 |  | $    | 2,074,884 |  | $ | 1,905,380
|                                    |  |                               |         |                             |   |           |  |      |           |  |   |          

The Company has one stock option plan, the 2002 Stock Incentive Plan (the Plan), which
provides that options to purchase shares of the Companys unissued common stock may be granted to directors, employees, associates and consultants. Options expire ten years after the date of grant or 30 days after termination of employment and
generally vest ratably at the rate of 25% on each of the first four anniversaries of the grant date. New shares are issued to satisfy stock option exercises under the Plan. Options awarded are generally granted with an exercise price equal to the
market price of the Companys stock at the date of grant.



15



---

Below is a summary of the options activity under the stock option plan for the first six months of fiscal
2008:



|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |  
|----------------------------------------------- |  | --------------- | - |  | ---------------------------- | ---- | --------------------------------------- | --- | ------------------------ | - | -
|                                                |  | Number ofShares |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingLife (In Years) |     | AggregateIntrinsic Value
|Options outstanding at April 30, 2007           |  | 5,771,194       |   |  | $                            | 4.30 |                                         |     |                          |   |  
|Granted                                         |  |                |   |  | $                            |     |                                         |     |                          |   |  
|Exercised                                       |  |                |   |  | $                            |     |                                         |     |                          |   |  
|Forfeited                                       |  | (200,625        | ) |  | $                            | 3.88 |                                         |     |                          |   |  
|Expired                                         |  | (234,125        | ) |  | $                            | 4.35 |                                         |     |                          |   |  
|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |  
|Options outstanding at October 31, 2007         |  | 5,336,444       |   |  | $                            | 4.32 |                                         | 7.2 |                          | $ | 
|Vested and expected to vest at October 31, 2007 |  | 4,836,493       |   |  | $                            | 4.42 |                                         | 6.7 |                          | $ | 
|Options exercisable at October 31, 2007         |  | 3,039,694       |   |  | $                            | 4.45 |                                         | 6.5 |                          | $ | 

On May 1, 2007, an additional 1,951,572 shares of common stock became available for future
grant under the Plan pursuant to an evergreen provision contained in the Plan. At October 31, 2007, there were 3,688,108 shares of common stock available for grant under the Plan.

The fair value of each share-based award is estimated on the grant date using the Black-Scholes option-pricing formula. Expected volatilities are based
on the historical volatility of the Companys stock price. The expected life of options granted subsequent to the adoption of SFAS 123R is derived based on the historical life of the Companys options. The risk-free rate for periods within
the expected life of the option is based on the U.S. Treasury interest rates in effect at the time of grant. The fair value of options granted was estimated using the following weighted-average assumptions:



|                                    |  |                               |   |                             |      |  |      |   |  |     
|----------------------------------- |  | ----------------------------- | - | --------------------------- | ---- |  | ---- | - |  | ----
|                                    |  | Three Months EndedOctober 31, |   | Six Months EndedOctober 31,
|                                    |  | 2006                          |   |                             | 2007 |  | 2006 |   |  | 2007
|Dividend yield                      |  | 0                             | % |                             | n/a  |  | 0    | % |  | n/a 
|Expected life - years               |  | 5.5                           |   |                             | n/a  |  | 5.5  |   |  | n/a 
|Risk-free interest rate             |  | 4.8                           | % |                             | n/a  |  | 4.8  | % |  | n/a 
|Expected volatility of common stock |  | 82.7                          |   |                             | n/a  |  | 82.7 |   |  | n/a 

A summary of the grant date fair value and intrinsic value information is as follows:



|                                                     |  |                               |         |                              |   |              |  |      |           |  |   |             
|---------------------------------------------------- |  | ----------------------------- | ------- | ---------------------------- | - | ------------ |  | ---- | --------- |  | - | ------------
|                                                     |  | Three Months EndedOctober 31, |         | Six Months Ended October 31,
|                                                     |  | 2006                          |         | 2007                         |   | 2006         |  | 2007
|Weighted average grant date fair value per share     |  | $                             | 1.97    |                              |   | none granted |  | $    | 1.97      |  |   | none granted
|Intrinsic value of options exercised                 |  | $                             |        |                              | $ |             |  | $    | 12,335    |  | $ |            
|Total fair value of options vested during the period |  | $                             | 499,909 |                              | $ | 986,532      |  | $    | 1,790,718 |  | $ | 1,694,694   

14) Warrants

In connection with the $18.75 million private placement transaction that was completed on June 22, 2007, investors received warrants to purchase 15.0 million shares of common stock at $2.09 per share, which
included 2.5 million shares provided to the October 2006 investors in exchange for those investors waiving certain rights obtained in the October 2006 private placement. The June 2007 private placement triggered a contractual reset of the
exercise price of the A warrants issued in October 2006 from $2.36 to $1.50 per share.

The warrants related to the
June 22, 2007 private placement were originally subject to shareholder approval of additional authorized shares that was outside the control of the Company as of the date of the private placement and as of the date the Company filed its
quarterly report for the first quarter ended July 31, 2007. Pursuant to Emerging Issues Task Force (EITF) 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, the
fair value of the warrants was subject to liability classification. Accordingly, the Company reported $16.8 million of the net proceeds from the June 2007 private placement, representing the estimated fair value of the warrants as of July 31,
2007, as unsubscribed stock purchase warrants in the



16



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condensed consolidated balance sheet as at July 31, 2007. Since no actively traded market for the warrants existed as of July 31, 2007, the fair
value of the warrants was determined using a Black-Scholes valuation model utilizing the following weighted average assumptions: volatility of 82.7%, term of warrants of 7.5 years, risk-free rate of 4.8% and no expected dividends. Expected
volatility was based on the historical volatility of the Companys stock price. On September 28, 2007 the additional authorized shares were approved by the shareholders and as a result, the fair value of the warrants was moved from its
initial classification as a liability to its permanent classification as an equity instrument. For the period from June 22, 2007 to July 31, 2007, and for the period from August 1, 2007 to September 28, 2007, the changes in the
fair value of the warrants was de minimis.

Warrant activity and warrants outstanding for the six month period ended October 31, 2007
is as follows:



|                              |  |               |      |                 |               |                                 |           |        |            |         |   |                                   |           
|----------------------------- |  | ------------- | ---- | --------------- | ------------- | ------------------------------- | --------- | ------ | ---------- | ------- | - | --------------------------------- | ----------
|Warrant Type                  |  | ExercisePrice |      | Expiration Date |               | Outstanding as ofApril 30, 2007 |           | Issued |            | Expired |   | Outstanding as ofOctober 31, 2007
|June 29, 2006 Warrants        |  | $             | 3.94 |                 | June 2011     |                                 | 880,506   |        |           |         |  |                                   | 880,506   
|October 31, 2006 A Warrants |  | $             | 1.50 |                 | April 2014    |                                 | 2,402,874 |        | 1,377,648  |         |  |                                   | 3,780,522 
|June 22, 2007 Warrants        |  | $             | 2.09 |                 | December 2014 |                                 |           |        | 15,000,000 |         |   |                                   | 15,000,000
|                              |  |               |      |                 |               |                                 |           |        |            |         |   |                                   |           
|                              |  |               |      |                 |               |                                 | 3,283,380 |        | 16,377,648 |         |  |                                   | 19,661,028
|                              |  |               |      |                 |               |                                 |           |        |            |         |   |                                   |           

15) Earnings (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share. Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average
number of common and common equivalent shares outstanding during the period.

The Company considers common equivalent shares from the
exercise of stock options and warrants in the instance where the shares are dilutive to net income of the Company by application of the treasury stock method. The effects of stock options and warrants were anti-dilutive for all periods presented.

The following table sets forth the computation of basic and diluted loss per share:



|                                                                                |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | - | ---------------------------- | - | ----------- | ---- |  | - | ------------ | - |  | - | ----------- | -
|                                                                                |  | Three Months Ended October 31, |             |   | Six Months Ended October 31, |  
|                                                                                |  | 2006                           |             |   | 2007                         |   |             | 2006 |  |   | 2007         |  
|Numerators for basic and diluted loss per share data - to common stockholders:  |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Loss from continuing operations                                                 |  | $                              | (87,585,532 | ) |                              | $ | (12,136,970 | )    |  | $ | (100,636,050 | ) |  | $ | (78,982,540 | )
|Loss from discontinued operations                                               |  | $                              | (1,744,614  | ) |                              | $ |            |      |  | $ | (2,119,609   | ) |  | $ |            |  
|Net loss                                                                        |  | $                              | (89,330,146 | ) |                              | $ | (12,136,970 | )    |  | $ | (102,755,659 | ) |  | $ | (78,982,540 | )
|Denominator for basic and diluted loss per share data - weighted-average shares |  |                                | 59,452,121  |   |                              |   | 78,552,368  |      |  |   | 57,883,861   |   |  |   | 74,951,825  |  
|Basic and diluted per share data:                                               |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Loss from continuing operations                                                 |  | $                              | (1.47       | ) |                              | $ | (0.15       | )    |  | $ | (1.74        | ) |  | $ | (1.05       | )
|Loss from discontinued operations                                               |  | $                              | (0.03       | ) |                              | $ |            |      |  | $ | (0.04        | ) |  | $ |            |  
|Net loss                                                                        |  | $                              | (1.50       | ) |                              | $ | (0.15       | )    |  | $ | (1.78        | ) |  | $ | (1.05       | )

For the first six months of fiscal 2008, options to purchase approximately 5.3 million and
warrants to purchase approximately 19.7 million shares of common stock, respectively, were excluded in the computation of diluted net loss per share, as the effect would be anti-dilutive. In addition, for the first six months of fiscal 2008,
senior subordinated notes payable convertible into approximately 11.3 million shares of common stock were excluded in the computation of diluted net loss per share, as the effect would be anti-dilutive.



17



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16) Income Taxes

From the date of the acquisition of Tecstar Automotive Group in March 2005 there was a deferred tax liability resulting from the amortization of identifiable assets for certain years that exceeded the statutory carry
forward period. As a result of the impairment of all intangible assets of the Tecstar Automotive segment as of July 31, 2007, the deferred tax liability was eliminated with a corresponding tax benefit recognized in the amount of $4.9 million.

The Company has established a valuation allowance for its deferred tax assets since based on the Companys lack of earnings history
and current evidence, it is unlikely that the assets will be fully realized.

17) Business Segment and Geographic Information

Business Segments

The Company classifies its business
operations into three reporting segments: Quantum Fuel Systems, Tecstar Automotive Group, and Corporate. The reportable segments other than Corporate represent strategic businesses that are managed separately and offer products and services that can
be differentiated. Corporate consists of general and administrative expenses incurred at the corporate level that are not allocated to the reportable segments.

The Quantum Fuel Systems business operations primarily consist of design, manufacture and supply of packaged fuel and battery control systems for a variety of automotive applications including fuel cell, hybrid, and
alternative fuel vehicles in the transportation, industrial, and military industries. This segment generates product revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control systems to OEMs, and the
installation of its hydrogen fuel cell products into OEM vehicles. Product revenues are also generated through the sale of compressed natural gas, and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion
engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate
and operate with their fuel cell and alternative fuel applications. General Motors comprised 79.6% and 65.2% of the total Quantum Fuel Systems segment revenue reported for the first six months of fiscal 2007 and 2008, respectively.

The Tecstar Automotive Group business operations are focused on the automotive supply industry and primarily consist of second stage manufacturing of
pick-up trucks, sport utility vehicles and vans. Vehicle chassis are received from the OEM and certain appearance items such as ground effects, wheels and badging are added to the chassis. The Tecstar Automotive Group also has engineering and design
capabilities for concept vehicles and distributes automotive accessories through a dealer network. General Motors comprised 51.6% and 49.5 % of the total Tecstar Automotive Group segment revenue reported for the first six months of fiscal 2007
and 2008, respectively.

Intangible assets associated with the Tecstar Automotive Group and Regency acquisitions, prior to the write-off of
the remaining unamortized balance as of July 31, 2007 as discussed in Note 7, were reported in the Tecstar Automotive Group business segment. Goodwill associated with the Tecstar Automotive Group acquisition was allocated 30% to the Quantum
Fuel Systems business segment and 70% to the Tecstar Automotive Group business segment. The goodwill allocated to the Tecstar Automotive Group was determined to be impaired and written-off in the second quarter of fiscal 2007. Goodwill associated
with the Regency acquisition was reported in the Tecstar Automotive Group business segment prior to its write-off as of July 31, 2007 as discussed in Note 7.

All research and development is expensed as incurred and is included in the respective business segments. Research and development expense includes both customer-funded research and development and Company-sponsored
research and development. Customer-funded research and development consists primarily of expenses associated with contract revenue. These expenses include applications development costs in the Company that are funded under customer contracts.

The chief operating decision maker allocates resources and tracks performance by the three reporting segments. The Company evaluates
performance based on profit or loss from operations before interest and income taxes.

Geographic Information

The Companys long-lived assets are primarily based in facilities in Texas, California, Michigan, Indiana, Missouri, and Ontario, Canada at
October 31, 2007. The Companys foreign assets, which are all located in Canada, represented 2% and 3% of the Companys consolidated total assets at April 30, 2007 and October 31, 2007, respectively.



18



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Financial Information by Business Segment

Financial information by business segment for continuing operations follows (in thousands):



|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|---------------------------- |  | ----------------------------- | ------- | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                             |  | Three Months EndedOctober 31, |         |   | Six months endedOctober 31, |  
|                             |  | 2006                          |         |   | 2007                        |   |         | 2006 |  |   | 2007    |  
|Product revenue              |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                             | 3,765   |   |                             | $ | 3,260   |      |  | $ | 8,326   |   |  | $ | 4,715   |  
|Tecstar Automotive Group     |  |                               | 28,846  |   |                             |   | 17,548  |      |  |   | 62,723  |   |  | $ | 42,598  |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                             | 32,611  |   |                             | $ | 20,808  |      |  | $ | 71,049  |   |  | $ | 47,313  |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Contract revenue             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                             | 1,477   |   |                             | $ | 2,916   |      |  | $ | 3,992   |   |  | $ | 4,970   |  
|Tecstar Automotive Group     |  |                               | 1,352   |   |                             |   | 2,230   |      |  |   | 2,343   |   |  | $ | 4,107   |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                             | 2,829   |   |                             | $ | 5,146   |      |  | $ | 6,335   |   |  | $ | 9,077   |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Operating Loss               |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                             | (3,771  | ) |                             | $ | (2,033  | )    |  | $ | (6,790  | ) |  | $ | (4,905  | )
|Tecstar Automotive Group (1) |  |                               | (79,797 | ) |                             |   | (5,995  | )    |  |   | (85,190 | ) |  | $ | (70,021 | )
|Corporate                    |  |                               | (3,632  | ) |                             |   | (3,066  | )    |  |   | (7,731  | ) |  | $ | (7,000  | )
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                             | (87,200 | ) |                             | $ | (11,094 | )    |  | $ | (99,711 | ) |  | $ | (81,926 | )
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Capital Expenditures         |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                             | 31      |   |                             | $ | 293     |      |  | $ | 109     |   |  | $ | 407     |  
|Tecstar Automotive Group     |  | $                             | 952     |   |                             |   | 411     |      |  |   | 4,090   |   |  |   | 703     |  
|Corporate                    |  | $                             | 76      |   |                             |   |        |      |  |   | 103     |   |  |   |        |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                             | 1,059   |   |                             | $ | 704     |      |  | $ | 4,302   |   |  | $ | 1,110   |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Depreciation                 |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                             | 1,045   |   |                             | $ | 533     |      |  | $ | 1,669   |   |  | $ | 977     |  
|Tecstar Automotive Group     |  |                               | 552     |   |                             |   | 159     |      |  |   | 1,353   |   |  |   | 1,449   |  
|Corporate                    |  |                               | 298     |   |                             |   | 3       |      |  |   | 728     |   |  |   | 7       |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                             | 1,895   |   |                             | $ | 695     |      |  | $ | 3,750   |   |  | $ | 2,433   |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Amortization of Intangibles  |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                             | 419     |   |                             | $ | 419     |      |  | $ | 837     |   |  | $ | 838     |  
|Tecstar Automotive Group     |  |                               | 715     |   |                             |   |        |      |  |   | 1,431   |   |  |   | 698     |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                             | 1,134   |   |                             | $ | 419     |      |  | $ | 2,268   |   |  | $ | 1,536   |  
|                             |  |                               |         |   |                             |   |         |      |  |   |         |   |  |   |         |  

---

|(1) | Operating loss for the Tecstar Automotive Group includes $71.7 million and $58.9 million in impairment charges related to long-lived assets for fiscal years 2007 and 2008,
respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

|                         |  |               |         |                 |   |        
|------------------------ |  | ------------- | ------- | --------------- | - | -------
|                         |  | April 30,2007 |         | October 31,2007
|Identifiable Assets      |  |               |         |                 |   |        
|Quantum Fuel Systems     |  | $             | 54,284  |                 | $ | 59,599 
|Tecstar Automotive Group |  |               | 104,922 |                 | $ | 39,807 
|Corporate                |  |               | 8,337   |                 | $ | 6,195  
|                         |  |               |         |                 |   |        
|Total assets             |  | $             | 167,543 |                 | $ | 105,601
|                         |  |               |         |                 |   |        
|Goodwill                 |  |               |         |                 |   |        
|Quantum Fuel Systems     |  | $             | 30,400  |                 | $ | 30,400 
|Tecstar Automotive Group |  |               | 3,450   |                 | $ |       
|                         |  |               |         |                 |   |        
|Total goodwill           |  | $             | 33,850  |                 | $ | 30,400 
|                         |  |               |         |                 |   |        

18) Minority Interests

Amstar

AM General LLC holds a minority interest equity position in the accounts of Amstar. As of
April 30, 2007 and October 31, 2007, Amstar had accumulated deficits of $0.7 million and $1.2 million, respectively.

In
connection with the start up of operations in February 2005, AM General provided their initial and only capital contribution to date of $50,000 to Amstar. AM General has no obligation to provide additional capital contributions to cover a deficit
equity position. Accordingly, the portion of the accumulated deficits that exceed AM Generals capital contribution has been allocated to the Company and as a result there is no balance to be reported as minority interest for the periods ended
April 30, 2007 and October 31, 2007 for AM General.

AM General advanced $0.25 million to Amstar on March 22, 2005, $0.75
million on May 16, 2005 and $0.75 million on August 15, 2005 in exchange for unsecured notes payable bearing interest at 5.5% fixed, 6.0% fixed and 6.5% variable based upon bank prime rate, respectively. The total advances of $1.75 million
are payable upon demand and are included as part of notes payable on the condensed consolidated balance sheet.

Unique Performance
Concepts

Unique Vehicle Concepts, Inc., owns a minority interest equity position of 49.9% in the accounts of UPC, a venture formed in
January 2006. As a result of losses applicable to the minority interest that have exceeded its net capital contributions, there is no amount reflected for minority interest on the consolidated balance sheet for UPC as of April 30, 2007 and
October 31, 2007. During November 2007, Unique Performance, Inc., an affiliate of the minority interest partner, filed for bankruptcy protection. As a result, the license agreement with the designer of the special edition vehicle manufactured
by UPC terminated the licensing agreement thus prohibiting production and sales of the vehicles manufactured by UPC. On November 6, 2007, the Board of Managers of UPC approved the orderly dissolution of the UPC. The Company believes that
Tecstar Automotive Group will be able to obtain a new license agreement that will allow it to resume production and sale of the vehicle under a new legal structure in the coming months.

Advanced Lithium Power

The Chief
Executive and other officers of ALP, along with other unaffiliated parties, hold minority equity interests in ALP. During fiscal 2007 and the first six months of fiscal 2008, ALP received a total of $0.6 million and $1.2 million in proceeds from
other unaffiliated parties in exchange for shares of common stock of ALP. The transactions increased the minority interest holdings from 64.5% as of the date of formation on March 24, 2006 to 79.4% as of April 30, 2007 and to 81.0% as of
October 31, 2007.

The net equity of ALP as of April 30, 2007 and October 31, 2007 was $26,000 and $0.3 million,
respectively. The minority interest position as of April 30, 2007 and October 31, 2007 amounted to $0.1 million and $0.5 million, respectively.



20



---

19) Comprehensive Income or Loss

The following table sets forth the reconciliation of net loss to comprehensive loss:



|                                                |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|----------------------------------------------- |  | ------------------------------ | ----------- | - | ---------------------------- | - | ----------- | ---- |  | - | ------------ | - |  | - | ----------- | -
|                                                |  | Three Months Ended October 31, |             |   | Six Months Ended October 31, |  
|                                                |  | 2006                           |             |   | 2007                         |   |             | 2006 |  |   | 2007         |  
|Comprehensive loss, net of tax:                 |  |                                |             |   |                              |   |             |      |  |   |              |   |  |   |             |  
|Net loss, as reported                           |  | $                              | (89,330,146 | ) |                              | $ | (12,136,970 | )    |  | $ | (102,755,659 | ) |  | $ | (78,982,540 | )
|Unrealized loss - available for sale securities |  | $                              | (33,889     | ) |                              |   |             |      |  | $ | (33,889      | ) |  |   |             |  
|Currency translation adjustments (1)            |  |                                | 155,942     |   |                              |   | 283,282     |      |  |   | (40,836      | ) |  |   | 372,640     |  
|Comprehensive loss, net of tax:                 |  | $                              | (89,208,093 | ) |                              | $ | (11,853,688 | )    |  | $ | (102,830,384 | ) |  | $ | (78,609,900 | )

---

|(1) | Assets and liabilities of the Companys Canadian operations are translated at rates of exchange in effect at the close of the period. Translation gains and losses are
accumulated within other comprehensive income or loss as a separate component of stockholders equity.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20) Contingencies

The Company is subject to various legal proceedings and claims that arise out of the normal course of its business. Management and the
Companys legal counsel periodically review the probable outcome of pending proceedings and the costs reasonably expected to be incurred. The Company accrues for these costs when it is probable that a liability has been incurred and the amount
of the loss can be reasonably estimated. In the opinion of management, any ultimate cost to the Company in excess of amounts accrued will not materially affect its consolidated financial position, results of operations or cash flows.

21) Restructuring Charges

During fiscal 2007,
the Company implemented certain cost reduction initiatives related to its Tecstar Automotive Group that included closure of its second stage assembly facility in Haslet, Texas and consolidation of two administrative facilities in the Detroit,
Michigan metropolitan area into one of the facilities. In addition, the corporate administrative functions of Tecstar Automotive Group, previously based in Goshen, Indiana were relocated to the Companys corporate headquarters in Irvine,
California. The total charges relating to these completed restructuring activities in fiscal 2007 amounted to $2.4 million.

A summary of
restructuring activities during the first six months of fiscal 2008 is as follows:



|                                        |  |                                   |       |                      |   |          |  |   |                                     |   |  |   |    
|--------------------------------------- |  | --------------------------------- | ----- | -------------------- | - | -------- |  | - | ----------------------------------- | - |  | - | ---
|                                        |  | Unpaid Balanceas of April 30,2007 |       | RestructuringCharges |   | Payments |  |   | Unpaid Balanceas of October 31,2007
|                                        |  | (in thousands)                   
|Lease termination fees                  |  | $                                 | 1,035 |                      | $ |         |  | $ | (1,003                              | ) |  | $ | 32 
|Employee termination benefits and other |  |                                   | 654   |                      |   |         |  |   | (291                                | ) |  |   | 363
|Total restructuring charges (1)         |  | $                                 | 1,689 |                      | $ |         |  | $ | (1,294                              | ) |  | $ | 395

---

|(1) | Accrued restructuring charges are reported in other accrued liabilities on the condensed consolidated balance sheet.
|--- | --------------------------------------------------------------------------------------------------------------------

22) Subsequent Event - Solar Cell Supply Agreement

On November 7, 2007 the Company entered into an agreement with Asola Advanced and Automotive Solar Systems GmbH (Asola) under which the Company agreed to purchase one-half of Asolas rights and obligations under a
certain long-term solar cell supply agreement to which Asola is a party. Asolas obligations under the long-term solar cell supply agreement, dated November 1, 2007, includes the required purchase by Asola of solar cells with a cumulative
power of 155 mega watts peak (MWp) for the period from January 1, 2008 through December 31, 2017 at predetermined fixed prices, with prepayments required by November 1, 2007 of 1.0 million euro, by September 1, 2008 of
3.0 million euro, and by September 1, 2009 of 5.0 million euro.

The Companys agreement to purchase one-half of
Asolas rights and obligations under Asolas long-term solar cell supply agreement provides the Company with the rights to purchase 77.5 MWp. In consideration for Asolas sale of one-half of its contract rights to the Company, the
Company paid Asola 1.0 million euro (US$1.4 million) on October 29, 2007 and agreed that it is



21



---

responsible for up to 1.5 million euro of the prepayment due in 2008 and responsible for up to 2.5 million euro of the prepayment due in 2009. The
Company anticipates that Asola will generate cash flows sufficient to cover a portion of the prepayments; however, if there is insufficient cash available within Asola operations, the Company will coordinate raising funds specifically for Asola in
an effort to cover the short-fall.

The Company believes these agreements secure a ten-year supply of silicon photovoltaic solar cells that
the Company and Asola anticipate to utilize for the manufacture of solar modules for commercial, residential, and automotive applications in both Europe and the United States. In addition to the purchase of one-half of the rights and obligations
under Asolas long-term solar supply agreement, the Company entered into a binding letter of intent to acquire a 24.99% share of Asola that the Company anticipates to complete during the second half of fiscal 2008.

The Companys unconditional obligations to purchase solar cells from Asola and provide its share of prepayments to Asola over the next five years
are as follows:



|                                  |  |           
|--------------------------------- |  | ----------
|Twelve months ending
December 31: |  | Euros:    
|2008                              |  | 2,421,000 
|2009                              |  | 5,844,000 
|2010                              |  | 8,110,000 
|2011                              |  | 15,720,000
|2012                              |  | 15,220,000
|                                  |  |           
|Total                             |  | 47,315,000
|                                  |  |           



22



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|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward-Looking Statements

Some of the information in this report and in the documents that we
incorporate by reference contains forward-looking statements that involve risks and uncertainties. These forward-looking statements come within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and are subject to the safe harbor created by those sections. These statements relate to, among other things: our plans to sell subsidiary businesses; our market and business strategies; our plans to
develop and commercialize our products; our ability to provide engineering and manufacturing services to our customers; our ability to integrate acquisitions and realize expected synergies thereof; our plans to expand our customer base; our ability
to establish and maintain necessary strategic relationships; our ability to maintain our competitive advantage; our ability to secure the necessary certification of our products and comply with applicable standards; our ability to establish and
effectively operate our manufacturing sites; our ability to attract and retain necessary employees; our ability to protect our intellectual property; our position in our markets; government support of hydrogen vehicles and establishing
infrastructure to support them; and the future growth of the fuel cell vehicle industry and specialty automotive equipment industries. All statements included in this annual report and the documents that we incorporate by reference, other than those
that are historical, are forward-looking statements. These statements include words such as may, could, will, should, assume, expect, anticipate, plan,
intend, believe, predict, estimate, forecast, outlook, potential, or continue, or the negative of these terms, and other comparable terminology. Actual
results could differ materially from those anticipated in these forward-looking statements as a result of a number of risks and other factors, including those described below, elsewhere in this quarterly report and in the other filings we make from
time to time with the SEC.

The following risks and other factors could cause actual results, and actual events that occur, to differ
materially from those contemplated by the forward-looking statements:

Risks Related to Liquidity and Capital Resources:



| |  |  | An inability by us to quickly and effectively reduce costs, restructure, reorganize, sell or close the Tecstar business segment in the near term would significantly
hinder our ability to raise additional capital in the future and could impact our ability to continue as a going concern.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A possible bankruptcy filing for the Tecstar Automotive Group subsidiary will constitute a default in certain of our material contracts including, without
limitation, our Credit Agreement and $15 million Senior Subordinated Convertible Notes. If such debt obligations are called, this would materially impact our ability to continue as a going concern and might require us to seek protections under the
bankruptcy laws.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The daily closing price of our common stock has recently traded below $1.00 per share and our market capitalization has declined to levels that are impacting our
ability to continue in compliance with NASDAQ listing requirements. An inability to maintain compliance with NASDAQ listing requirements would result in our delisting and could materially impact our ability to raise capital resources that may be
needed for future operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We anticipate that we may need to raise additional financing to take advantage of strategic business opportunities, to complete product and application development,
to expand operations, or to fund future operating activities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may not be able to obtain waivers of our defaults in the future from our lender if we do not meet either the terms of our existing waiver or future requirements
associated with our amended credit facilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have a history of operating losses and negative cash flow that may continue into the foreseeable future.
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Recent financing activities may limit our ability to raise additional equity financing through private placement transactions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Future sales of substantial amounts of our common stock could affect its market price.
| | - |  | --------------------------------------------------------------------------------------



| |  |  | The market price and trading volume of our common stock may be volatile.
| | - |  | ------------------------------------------------------------------------

Other Risks Related to our Business:



| |  |  | We depend on our sales to and contracts with General Motors for a substantial portion of our revenue.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Our Quantum Fuel Systems business revenue depends to a significant extent on our relationship with General Motors and General Motors commitment to the
commercialization of fuel cell vehicles.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our revenue is highly concentrated among a small number of customers.
| | - |  | ---------------------------------------------------------------------



| |  |  | Our business depends on the growth of the specialty vehicle and hydrogen economy markets.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Realization of the benefits we expected from our acquisitions of Tecstar Automotive Group and Regency Conversions may not occur.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Over the past year, we have recorded material charges to reduce the carrying value of certain long-lived assets of the Tecstar Automotive Group business segment to
their estimated fair values. Additional charges may be required in the future if the fair value of the remaining long-lived assets decline as a result of a restructuring or liquidation of the Tecstar business segment.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could become subject to stockholder litigation associated from our merger with, or a possible sale or restructure of, Tecstar Automotive Group.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could become subject to stockholder litigation associated with prior restatements of our financial statements.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | The cyclical nature of automotive production and sales, particularly those of General Motors, could adversely affect our Tecstar Automotive Group business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



23



---

| |  |  | We may never be able to introduce commercially viable hydrogen products and systems.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | A mass market for hydrogen fuel cell products and systems may never develop or may take longer to develop than anticipated.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Evolving customer design requirements, product specifications and testing procedures could cause order delays or cancellations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher gasoline prices, higher interest rates and/or decreases in the level of disposable consumer income could adversely affect the demand for the products of our
Tecstar Automotive Group business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to design and manufacture fuel systems for fuel cell, hydrogen and hybrid applications that can be integrated into OEM products will be critical to our
business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We depend on third-party suppliers for the supply of materials and components for our products.
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | The terms and enforceability of many of our strategic partner relationships are uncertain.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | We currently face and will continue to face significant competition.
| | - |  | --------------------------------------------------------------------



| |  |  | We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our failure to obtain or maintain the right to use certain intellectual property may negatively affect our business.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | We have limited experience manufacturing fuel systems for fuel cell and hydrogen applications on a commercial basis.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | We may not meet our product development and commercialization milestones.
| | - |  | -------------------------------------------------------------------------



| |  |  | Our business could suffer if we fail to attract and maintain key personnel.
| | - |  | ---------------------------------------------------------------------------



| |  |  | We may be adversely affected by labor disputes.
| | - |  | -----------------------------------------------



| |  |  | We may be subject to warranty claims, and our provision for warranty costs may not be sufficient.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Our business may be subject to product liability claims or product recalls, which could be expensive and could result in a diversion of managements attention.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our insurance may not be sufficient.
| | - |  | ------------------------------------



| |  |  | Our business may become subject to future product certification regulations, which may impair our ability to market our products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Failure to comply with applicable environmental and other laws and regulations could adversely affect our business and harm our results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New technologies could render our existing products obsolete.
| | - |  | -------------------------------------------------------------



| |  |  | Changes in environmental policies could hurt the market for our products.
| | - |  | -------------------------------------------------------------------------



| |  |  | The development of uniform codes and standards for hydrogen fuel cell vehicles and related hydrogen refueling infrastructure may not develop in a timely fashion.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our future operating results may fluctuate, which could result in a lower price for our common stock.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | If we fail to maintain adequate internal controls we may not be able to produce reliable financial reports in a timely manner or prevent financial fraud.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Past acquisitions and any future acquisitions, joint ventures, strategic alliances or other similar transactions may not be successful.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our recent acquisitions and any future acquisitions could harm our operating results and share price.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | The disposition of businesses that do not fit with our evolving strategy can be highly uncertain.
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Provisions of Delaware law and of our amended and restated certificate of incorporation and amended and restated bylaws may make a takeover or change in control
more difficult.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This list of factors above is not intended to be exhaustive. Reference should also be made to the
factors set forth from time to time in our SEC reports, including but not limited to those set forth in the sections entitled Risk Factors in our Annual Report on Form 10-K for the year ended April 30. All forward-looking statements
in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update or revise any of these forward-looking statements even if experience or future changes show that the
indicated results or events will not be realized.



All-forward
looking statements contained in this quarterly report are made only as of the date hereof. We are under no obligation-and we expressly disclaim any such obligation-to update or alter our forward looking statements, whether as a result of new
information, future events or otherwise. You should not place undue reliance on forward-looking statements.



24



---

Overview

We provide powertrain engineering, system integration, manufacturing and assembly of packaged fuel systems and battery control systems and accessories for specialty vehicles and applications including fuel cells, hybrids, alternative fuels,
hydrogen refueling, new body styles, mid-cycle vehicle product enhancements and high performance engines and drive trains for Original Equipment Manufacturers (OEMs) and OEM dealer networks. We are uniquely positioned to integrate advanced fuel
system and electric drive and battery system technologies for fuel cell and hybrid vehicles based on our years of experience in vehicle-level design, vehicle electronics and system integration. We also design, engineer and manufacture hybrid and
fuel cell vehicles.

Our combined business includes automotive supply operations, primarily consisting of second stage manufacturing of
specialty equipment for General Motors pick-up trucks and sport utility vehicles (SUVs), engineering and design capabilities for concept vehicles, capabilities for prototype vehicle builds, and distribution of automotive accessories through
OEM dealer networks.

We classify our business operations into three reporting segments: Quantum Fuel Systems, Tecstar Automotive Group,
and Corporate. The reportable segments other than Corporate represent strategic businesses that are managed separately and offer products and services that can be differentiated. Corporate consists of general and administrative expense incurred at
the corporate level that is not directly attributable to any of the other operating segments.

The Quantum Fuel Systems business operations
primarily consist of design, manufacture and supply of packaged fuel and electric drive and battery system technologies for use in fuel cell, hybrid, hydrogen and alternative fuel vehicles. This segment generates product revenues through the sale of
hydrogen fuel storage, fuel delivery, and electronic control systems to OEMs, and the installation of its systems into OEM vehicles. Product revenues are also generated through the sale of compressed natural gas (CNG), propane (LPG), and hydrogen
fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the
OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and operate with their fuel cell or hybrid applications.

The Tecstar Automotive Group segment is comprised of virtually all of the business activities acquired via the merger with Tecstar Automotive Group in March 2005, and subsequent specialty vehicle business acquisitions. The Tecstar
Automotive Group primarily consists of second stage manufacturing of specialty equipment for General Motors pick-up trucks and SUVs, engineering and design capabilities for concept vehicles, and distribution of conversion vehicles and
automotive accessories through OEM dealer networks. This segment engineers and validates appearance items and performance packages to OEM standards and completed systems carry the full OEM warranty and are distributed directly by the OEM to
automotive dealerships. The Tecstar Automotive Group is also involved in other special programs such as designing and constructing second stage production and assembly operations for other companies involved in non-traditional consumer automotive
markets, such as military vehicles.

The chief operating decision maker allocates resources and tracks performance by the three reporting
segments, and evaluates performance based on profit or loss from operations before interest and income taxes.

Recent Developments

Possible Sale/Restructure of Tecstar Business Segment

On October 29, 2007 we and our asset-based lender signed a Term Sheet that summarized the principal terms of a proposed sale of the entire Tecstar Automotive Group business segment to the lender. In connection
with the signing of the Term Sheet, our lender provided a $5.0 million term loan to Tecstar Automotive Group, which was guaranteed by Quantum, and received a promissory note in return (the November 2007 Term Note).

On December 13, 2007, our lender informed management that although it is not withdrawing at this time from the transaction contemplated by the Term
Sheet, the lender does not intend to move forward with the transaction unless we propose an acceptable plan to further reduce the Tecstar business segments present cost structure. We anticipate that any cost restructuring plan will be
implemented either through negotiations with Tecstars creditors or by seeking the rights, remedies and protections available to the Tecstar business segment under the Bankruptcy laws. We cannot provide any assurances that we will be able to
develop a plan acceptable to the lender in a time frame acceptable to us, if at all. Nor can we provide any assurances that the lender will proceed with the purchase of Tecstar even if such a restructuring plan is developed and implemented. If a
definitive agreement, in connection with a restructure or reorganization, cannot be finalized in the near term, we anticipate that we may have to liquidate the Tecstar Automotive Group business segment operations.

We previously disclosed that we had engaged a financial advisor to perform an assessment of strategic options for our Tecstar Automotive Group, Inc.
subsidiary and to solicit offers in the open market for a sale of that business segment. Based upon the results of this assessment and the range of fair value obtained in the solicitation process, we determined that the net assets of the Tecstar
business segment were impaired in the amount of approximately $58.9 million as of July 31, 2007. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, and SFAS
No. 144, Accounting for the



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Impairment or Disposal of Long-Lived Assets, the balance of goodwill of $3.5 million and intangible assets of $45.8 million in the segment have been
written-off in addition to a $9.6 million impairment charge recognized for property and equipment for the period ended July 31, 2007. As a result of the impairment of the Tecstar business segments intangible assets, the deferred tax
liability resulting from the temporary difference for amortization periods that exceeded the statutory carry forward period was eliminated with a corresponding tax benefit recognized in the amount of $4.9 million for the period ended July 31,
2007.

We performed an additional analysis for the second quarter of fiscal 2008 and at this time did not identify any further impairment
of our long-lived assets through October 31, 2007. Depending upon the outcome of a cost reduction plan still being developed by us, further impairments of Tecstar business segment assets may result from the actions to be implemented.

If our Tecstar business segment were to be sold or liquidated, $18.7 million of net assets, excluding obligations under long-term debt, would be disposed
of, based on October 31, 2007 balances.

Equity Stake in Affiliate

On August 7, 2007, we and our partner, Fisker Coachbuild, LLC, launched a new venture, Fisker Automotive, Inc. to produce premium plug-in hybrid
automobiles. Initial deliveries of a four-door sports sedan are anticipated to commence in December 2009. Upon formation, we owned 62% of the issued and outstanding capital stock of Fisker Automotive. On November 21, 2007, Fisker Automotive
sold $5.5 million of convertible preferred stock in a Series A financing, which reduced our ownership percentage to 47.5%. The preferred shareholders have voting rights that are similar to the common shareholders. We have the right to appoint two of
Fisker Automotives five members of the Board of Directors. Fisker Automotive will need to raise a substantial amount of additional capital in order to complete future phases of development, testing and tooling for the new vehicle platform,
which will further reduce our ownership percentage in Fisker Automotive.

We account for our equity stake in Fisker Automotive under the
equity method of accounting in accordance with APB opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, (APB 18). Due to the temporary nature of our majority interest in Fisker Automotive, we also
accounted for our initial equity interest in Fisker Automotive under the equity method. Although Fisker Automotive is a variable interest entity as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R), we are not the primary beneficiary as defined by FIN46R.

Fisker Automotive has incurred an accumulated deficit of approx $1.4 million from inception through October 31, 2007 for design and development activities for the new vehicle platform. We have not contributed any
cash or other assets with an historical cost basis to the venture and we have no obligation to fund deficit balances. As a result, our initial investment balance and balance as of October 31, 2007 is zero and there is no activity to be reported
in our condensed consolidated statement of operations for the second quarter of fiscal 2008.

Solar Cell Supply Agreement

On November 7, 2007 we entered into an agreement with asola Advanced and Automotive Solar Systems GmbH (Asola) under which
we agreed to purchase one-half of Asolas rights and obligations under a certain long-term solar cell supply agreement to which Asola is a party. Asolas obligations under the long-term solar cell supply agreement, dated November 1,
2007, includes the required purchase by Asola of solar cells with a cumulative power of 155 mega watts peak (MWp) for the period from January 1, 2008 through December 31, 2017 at predetermined fixed prices, with prepayments required by
November 1, 2007 of 1.0 million euro, by September 1, 2008 of 3.0 million euro, and by September 1, 2009 of 5.0 million euro.

Our agreement to purchase one-half of Asolas rights and obligations under Asolas long-term solar cell supply agreement provides us with the rights to purchase 77.5 MWp. In consideration for Asolas
sale of one-half of its contract rights to us, we paid Asola 1.0 million euro (US$1.4 million) on October 29, 2007 and agreed that we are responsible for up to 1.5 million euro of the prepayment due in 2008 and responsible for up to
2.5 million euro of the prepayment due in 2009. We anticipate that Asola will generate cash flows sufficient to cover a portion of the prepayments; however, if there is insufficient cash available within Asola operations, we will coordinate
raising funds specifically for Asola in an effort to cover the short-fall.

We believe these agreements secure a ten-year supply of silicon
photovoltaic solar cells that we and Asola anticipate to utilize for the manufacture of solar modules for commercial, residential, and automotive applications in both Europe and the United States. In addition to the purchase of one-half of the
rights and obligations under Asolas long-term solar supply agreement, we entered into a binding letter of intent to acquire a 24.99% share of Asola that we anticipate to complete during the second half of fiscal 2008.

Quantum Fuel Systems Segment

Our Quantum Fuel Systems segment supplies our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since
1997, we have sold approximately 20,000 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our gaseous fuel systems and hydrogen
products for fuel cell applications to major OEMs through funded research and development contracts and on a prototype and production intent basis. These fuel cell and hydrogen products are not currently



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manufactured in high volumes and will require additional product development; however, we believe that a commercial market will begin to develop for these
products over the next five to seven years. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen products using our systems on a commercial basis.

A number of domestic and international automotive and industrial manufacturers are developing alternative clean power systems using fuel cells, hybrid
systems or clean burning gaseous fuels in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. Our products for these markets consist primarily of fuel storage, fuel delivery, electronic vehicle control systems
and battery control systems, as well as system integration of our products into fuel cell, hybrid, and alternative fuel vehicles, and hydrogen refueling products, which includes the complete design of fuel cell and hybrid vehicles to demonstrate our
advanced fuel systems expertise.

In May 2007, we were awarded a $4.9 million contract to develop a diesel hybrid electric version of our
Alternative Mobility Vehicle (AMV) Aggressor. This program is a follow on to our successful Aggressor vehicle, a high performance light-duty off-road fuel cell hybrid vehicle developed for TARDEC. The objective of this
program is to develop a second-generation high-performance light-duty off-road hybrid electric vehicle platform based on the results of and feedback from the U.S. Armys testing and evaluation of the Aggressor. The propulsion system for this
next phase of AMV development will focus on a JP-8 fuel-compatible diesel internal combustion engine based, battery dominant, series hybrid electric system, which would provide a cost-effective, near-term solution as fuel cell technology matures.
The target mission profile is long range reconnaissance. Pre-production prototypes will be developed and built for testing and evaluation by selected commands to assess mission suitability, supportability, performance objectives, and guidance on
final vehicle configuration.

In August, 2007, we received a $3.9 million purchase order from General Motors for 65 additional hydrogen
fuel storage systems to be used in General Motors Chevrolet Equinox Fuel Cell vehicle program, bringing the total orders we have received under the program to 175 storage systems.

In September 2007, we received a letter from General Motors nominating us as their hydrogen storage vessel supplier for their next generation of hydrogen
storage systems under their fuel cell vehicle program. On November 21, 2007 we received initial purchase orders totaling $4.2 million for the program.

In November 2007, we began providing preliminary concept development services for a production intent hybrid-electric vehicle for our affiliate Fisker Automotive under a $1.0 million arrangement. We anticipate
expanding our services beyond this initial arrangement to develop the powertrain and software control systems for the new vehicle platform over the next twelve months.

Our Quantum Fuel Systems segment revenues and cash flows are dependent on the advancement of OEM fuel cell technologies and our OEM customers internal plans, spending levels and timing for pre-production
development programs and commercial production. This segment depends on the industry-wide growth of the hydrogen, fuel cell, hybrid and alternative fuel markets, which in turn is dependent on regulations, laws, hydrogen availability and refueling,
technology advancements, and consumer adoption of alternative fuel and hydrogen technologies on a commercial scale.

Our fuel storage and
propulsion systems must be able to withstand rigorous testing as individual components and as part of the propulsion on the vehicle. Our system as a whole, including the tank, regulator, control systems, electronics and fuel lines, need to comply
with OEM vehicle requirements and applicable safety standards. Our systems are generally designed, validated and certified for short-term life, approximately three years, and are produced in accordance with requirements specified by our OEM
customers. We currently have programs with OEMs to design, validate and certify systems for longer durability and for vehicles designed for commercialization.

Our Quantum Fuel Systems business is generally related to fuel cell, hybrid and alternative fuel vehicle development programs and product sales, which vary directly with the program timing and production schedules of
our OEM customers. The market for these vehicles is sensitive to general economic conditions, government agency and commercial fleet spending and consumer preferences. The rate at which our customers sell fuel cell or alternative fuel vehicles
depends on their marketing strategy, as well as company specific inventory and incentive programs. Any significant reduction or increase in production of these vehicles by our OEM customers may have a material effect on our business. Our CNG program
with General Motors was completed in November 2006. We anticipate that future programs for CNG applications will be in international markets, specifically Europe, China and India. In April, 2007, we signed a memorandum of understanding to establish
a cooperative joint venture with a major automaker in China for the development and commercialization of hybrid and alternative fuel vehicles, manufacture of gaseous fuel components, and integration of advanced propulsion systems. We also recently
signed an agreement for the marketing, sales, and distribution in India of its leading alternative fuel vehicle products and systems for compressed natural gas (CNG), blends of natural gas and hydrogen, and liquid petroleum gas (LPG). We are
currently in discussions with other China-based automotive OEMs and other parties in Europe to modify existing components and systems to meet specific vehicle applications for those markets.

Our industry is also dependent upon a limited number of third party suppliers of materials and components for our products. Any quality problems or
supply shortages with respect to these components could negatively impact our business. In the past, we have



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experienced pressure on the availability of high-strength fiber from our primary supplier, and we are looking for alternative suppliers to fulfill our needs
in the event of any potential shortages. Any issues with respect to the availability of raw materials such as high-strength fiber could negatively impact our ability to develop and manufacture fuel storage systems for our customers.

On March 24, 2006, we obtained a 35.5% stake (since diluted to 19% as of October 31, 2007) in Vancouver, British Columbia-based Advanced
Lithium Power Inc. (ALP), a newly formed company whose primary asset is intellectual property. ALP is developing state-of-the-art lithium ion battery and control systems that control state-of-charge and provide for thermal management, resulting in
high-performance energy storage. ALPs technology has significant opportunities and applications in hybrid electric vehicles, fuel cell vehicles, uninterruptible power supplies, and energy storage for renewable energy, such as solar
photovoltaic applications. ALP has initiated a comprehensive testing program to demonstrate and validate the application of its lithium ion battery systems for hybrid and plug-in hybrid electric vehicles. The testing program includes industry
standard test protocols established by the United States Advanced Battery Consortium (USABC), Society of Automotive Engineers (SAE), and Underwriters Laboratories (UL). In addition to these industry standards, ALP and Quantum have developed and are
implementing additional test procedures for the battery pack to ensure safety under extreme, beyond-industry-standard operating conditions of the battery pack.

Tecstar Automotive Group Segment

Our Tecstar Automotive Group segment engineers and integrates specialty equipment
products into motor vehicle applications, primarily General Motors pick-up trucks and sport utility vehicles. Our accessory packages are typically for new OEM body styles, mid-cycle enhancements, specialty products, and high-performance
engines and drivetrains. We also have engineering, design and prototype vehicle build capabilities focused on powertrain projects and complete vehicle concepts, such as military vehicle and high-performance and racing engines for cars, boats and
motorcycles, and complete race cars.

We engineer and validate certain appearance items to OEM standards, primarily for General
Motors pick-up trucks and sport utility vehicles. We receive vehicle chassis from the OEM and add these parts through a process called second-stage manufacturing. The chassis are provided by the OEM on a drop-ship basis and are not
included as part of our product sales. After completing the final appearance assembly work, the vehicles are placed back into the normal OEM distribution stream. The vehicles carry the full OEM warranty and are marketed directly by the OEM through
its dealerships. We engineer and design concept vehicles and distribute automotive parts, OEM-quality automotive accessories, and specialty conversion vehicles through a dealer network.

The sales of specialty equipment and second stage manufacturing services are directly impacted by the size of the automotive industry and the relative
market share of the major OEMs. Second stage assembly programs typically range from two to five years over the life of the OEM chassis and are fulfilled under short-term purchase orders, as is standard in the industry. We provide a limited product
warranty to the OEM, which is substantially the same as the OEM warranty provided to the OEMs retail customers. OEMs periodically reduce production or close plants for model changeovers that adversely affect operating results of industry
participants. Sales may be adversely affected if OEMs perform such second stage manufacturing programs themselves and do not outsource the business.

Most of our second stage assembly programs with General Motors expired in April 2006 for model year 2006. The 2007 model year vehicles produced by General Motors represent a model changeover and are not anticipated to
include our specialty equipment products on significant platforms until the 2008 or future model years. Certain other second stage assembly programs that continued into fiscal 2007 and fiscal 2008 included a sport utility vehicle platform and a
pick-up truck platform along with related accessory and service parts. These remaining second stage assembly programs expired through July 2007. We also have a full-size van platform that began production during the fourth quarter of fiscal 2006 and
a mid-sized truck platform that was in production from December 2006 through July 2007. We are in discussions with General Motors on targeted second stage vehicle platforms, vehicles and accessory parts programs, and introductory timing. Any
extended transitional period in redesigning a performance package for these new model year vehicles by General Motors, or a decision by General Motors not to award us future programs, would likely continue to have a material adverse effect on our
business if not replaced with other OEM programs or revenues from aftermarket programs, dealer network programs, dual-invoice programs or other strategic initiatives.

In August 2007, we entered into an agreement with Ford Motor Company for the production of the 450-horsepower 2008 Ford F-150 Foose Edition pickup truck. Under this agreement, Ford and Tecstar will produce the 2008
Ford F-150 Foose Edition pickup for sale beginning in January 2008. The Ford F-150 Foose Edition is based on the Ford F-150 FX2 Sport model that brings street-truck appeal to the FX4 off-road model.

The Tecstar Automotive Group is also involved in other special programs such as designing and constructing second stage production and assembly
operations for other companies involved in non-traditional consumer automotive markets. In August 2005, January 2007 and August 2007, we were contracted by Force Protection Industries to assist in the engineering, design and production support
for Force Protections Mine Resistant Ambush Protected (MRAP) Military vehicle.



During November 2007, our minority interest partner in the Unique Performance Concepts venture filed for bankruptcy protection. In addition, the license agreement with the designer of the special edition vehicle
terminated the agreement thus halting production and sales of the vehicles. We believe we will be able to renew the license agreement under a new legal structure and we intend to move production of the special edition vehicles to another of our
facilities and begin selling the special edition vehicles in the coming months.



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Financial Operations Overview

In managing our business, our management uses several non-financial factors to analyze our performance. For example, we assess the extent to which current programs are progressing in terms of timing and deliverables
and the success to which our systems are interfacing with our customers fuel cell applications. We also assess the degree to which we secure additional programs or new programs from our current or new OEM customers and the level of government
funding we receive for hydrogen-based systems and storage solutions. We also evaluate the number of new second-stage manufacturing programs we obtain and the units shipped as part of current and new programs.

For the first six months of fiscal 2007 and 2008, consolidated revenue related to sales of our products to and contracts with General Motors and its
affiliates represented 56% and 52%, respectively, of our total revenue for these periods.

We recognize revenue for product sales upon
shipment or when goods and systems are assembled on the vehicles and prepared and deliverable to our customers in accordance with our contract terms and collectibility is reasonably assured. Contract revenue is principally recognized based on the
percentage of completion method. Revenues on certain other contracts are recognized on a time and materials basis as costs are incurred.

We expense all research and development when incurred. Research and development expense includes both customer-funded research and development and company-sponsored research and development. Customer-funded research and development consists
primarily of expenses associated with contract revenue. These expenses include application development costs we funded under customer contracts. We will continue to require significant research and development expenditures over the next several
years in order to commercialize our products for hydrogen fuel cell and alternative fuel applications.

General Motors Relationship

Our strategic alliance with General Motors became effective upon our spin-off from IMPCO. We believe that our strategic alliance
with General Motors will advance and commercialize, on a global basis, the integration of our gaseous storage and handling systems into fuel cell systems used in the transportation markets. Under the alliance, Quantum and General Motors will
co-develop technologies that are designed to accelerate the commercialization of fuel cell applications. Additionally, General Motors will endorse Quantum as a recommended provider of hydrogen storage, hydrogen handling and associated electronic
controls. This strategic alliance expands the relationship that has been in place between General Motors and Quantum (as IMPCOs Automotive OEM Division) since 1993, through which we provided packaged natural gas and propane fuel systems for
General Motors alternative fuel vehicle products.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles and are included elsewhere in this report. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, inventories, goodwill and intangible asset impairment
valuations, warranty and recall obligations, long-term service contracts, and contingencies and litigation, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.

Management considers an accounting estimate to be critical if:



| |  |  | it requires assumptions to be made that were uncertain at the time the estimate was made; and
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| |  |  | changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
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Our management has discussed the development and selection of these critical accounting policies and estimates with the
audit committee of our board of directors, and the audit committee has reviewed the disclosure presented below relating to them. We believe the critical accounting policies described below affect the more significant judgments and estimates used in
the preparation of our consolidated financial statements:



| |  |  | We generally manufacture products based on specific orders from customers. Revenue is recognized on product sales upon shipment or when the earnings process is
complete and collectibility is reasonably assured. For product sales in connection with second stage manufacturing, consisting of assembly and integration of specialty equipment products into motor vehicle applications, revenue is recognized upon
completion of the integration activities when the vehicles are
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| | ready to be delivered to our customers in accordance with contract terms. The Company includes the costs of shipping and handling, when incurred, in cost of
goods sold. We generally recognize revenue and profit as work progresses on long-term, fixed price contracts for product application development using the percentage-of-completion method. Generally, we estimate percentage complete by determining
cost incurred to date as a percentage of total estimated cost at completion. For certain other contracts, percentage complete is determined by measuring progress towards contract deliverables if it is determined that this methodology more closely
tracks the realization of the earnings process. For contracts measured under the estimated cost approach, we believe we can generally make dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue
and profit are subject to revisions as the contract progresses to completion. Our estimates of contract costs are based on expectations of engineering development time and materials and other support costs. These estimates can change based on
unforeseen technology and integration issues, but known risk factors and contract challenges are generally allowed for in the initial scope and cost estimate of the program. Our historical final contract costs have usually approximated the initial
estimates and any unforeseen changes in the estimates have not normally resulted in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become
known. In certain circumstances, specific contracts in which we cannot reliably make estimates of total revenues and expenses are accounted for under the completed contract methodology. Under the completed contract methodology, all revenue and
expenses attributable to the specific contract are deferred until the end of the project.
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| |  |  | We conduct a major portion of our business with a limited number of customers. For the past fiscal year and for the foreseeable future, General Motors has
represented, and is expected to continue to represent, a significant portion of our sales and outstanding accounts receivable. Credit is extended based upon an evaluation of each customers financial condition, with terms consistent with those
present throughout the industry. Typically, we do not require collateral from customers. We have recorded an allowance for uncollectible accounts receivable based on past experience and certain circumstances surrounding the composition of total
accounts receivable. To the extent we increase this allowance in a period, we must include an expense in the statement of operations. If commercial conditions differ from managements estimates, an additional write-off may be required.
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| |  |  | We provide for the estimated cost of product warranties at the time revenue is recognized based on past experience and expectations of future costs to be incurred.
Our Tecstar Automotive Group segment provides product warranties to OEMs under terms similar to those offered by the OEMs to their customers, which are generally three years. Our Quantum Fuel Systems segment provides product warranties in certain
circumstances depending on the platform and model year. For prototype components and systems that are not production intent, warranties are generally not provided. While we engage in product quality programs and processes, including actively
monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates,
material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
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| |  |  | We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. As part of our estimate, we rely upon future planned design configurations and projected alternative usage of certain components estimated by engineering. We also consider
estimated demand for service and warranty parts based on historical information. If actual usage rates or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
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| |  |  | We record our acquisitions in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. In
determining the fair value of the assets acquired and liabilities assumed in connection with our acquisitions, we consider the evaluations of independent valuation consultants and other estimates.
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| |  |  | We periodically evaluate for impairment our long-lived assets, particularly our goodwill and intangible assets relating to the acquisition of Tecstar Automotive
Group and the intangible asset relating to the strategic alliance with General Motors. Our identifiable finite-lived intangible assets are amortized over their estimated useful lives. Goodwill is not amortized, but is evaluated periodically for any
impairment in the carrying value. We review our long-lived assets, which include property and equipment, goodwill and identifiable finite-lived intangible assets, for impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business, including a potential sale of subsidiary assets at levels below current carrying values;
significant negative industry or economic trends; and a significant decline in our stock price for a sustained period. During the second quarter of fiscal 2007 and first quarter of fiscal 2008, certain indicators of impairment led us to perform
impairment tests of our goodwill, intangible assets and other long-lived assets. Based upon the results of these tests, we determined that impairments existed. The amount of impairment recorded was based upon the difference between the fair value of
the long-lived assets and their carrying values. Goodwill and long-lived asset impairment assessments are generally determined based on fair value techniques, including determining the estimated future discounted and undiscounted cash flows over the
remaining useful life of the
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| | asset. Those models require estimates of future revenue, profits, capital expenditures and working capital for each reporting unit. We estimate these amounts
by evaluating historical trends, current budgets, operating plans, and industry averages. Discounted cash flows are calculated using a discount rate determined by management to be commensurate with the risk inherent in the current business model.
Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results. If these estimates or their related assumptions change in the future, we might be required
to record additional impairment charges. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
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| |  |  | We evaluate whether modifications to existing debt instruments result in substantial changes as defined by EITF 96-19, Debtors Accounting for a
Modification or Exchange of Debt Instruments. Significant management judgment is required and we use the assistance of independent valuation consultants to assist in these determinations and to estimate the fair value of the original and
amended debt instruments as part of our evaluation. Different judgments could yield different results. If we determine that a substantial change has occurred with respect to the modifications, we treat the transaction as an extinguishment of the
original debt and recognize a gain or loss on the debt retirement.
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| |  |  | We account for stock compensation expense under SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires all share-based payments, including
grants of stock options and restricted stock, to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option is estimated on the date of grant using an
option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payments. The Black-Scholes model meets the requirements of SFAS No. 123R but the fair
values generated by the model may not be indicative of the actual fair values of our stock-based awards as it does not consider certain factors important to stock-based awards, such as continued employment, periodic vesting requirements and limited
transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate
and expected dividends. We estimate the expected volatility and estimated life of our stock options at grant date based on historical data trended into the future. The risk-free interest rate assumption is the Constant Maturity Treasury rate on
government securities with a remaining term equal to the expected term of the option. The dividend yield assumption is based on our history and expectation of dividend payouts. The fair value of our restricted stock is based on the fair market value
of our common stock on the date of grant. Stock-based compensation expense recognized in our financial statements is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense is reduced for estimated
forfeitures based on historical experience. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We evaluate the assumptions used to value
stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. To the extent that we grant additional equity securities to employees or we assume unvested securities in
connection with any acquisitions, our stock-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.
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| |  |  | As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the
determination of the net operating loss carry-forward that has resulted from our cumulative net operating loss since our spin-off from IMPCO. In addition, we have estimated the temporary differences resulting from our merger with Tecstar Automotive
Group as of and subsequent to the March 3, 2005 acquisition date. These differences result in an overall net deferred tax asset position before any valuation allowances are considered. We must assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we generally
include an expense or benefit within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. We have recorded a valuation allowance on our deferred tax assets due to uncertainties related to our ability to fully utilize these assets, primarily consisting of net operating losses and credits
which may be carried forward before they expire, and that are subject to certain limitations. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation
allowance, which could materially impact our financial position and results of operations. At July 31, 2007, the temporary differences that resulted from our merger with Tecstar Automotive Group were eliminated in connection with our impairment
of all intangible assets associated with the segment. The elimination resulted in a tax benefit that was recognized in the amount of $4.9 million for the first six months of fiscal 2008. As of October 31, 2007, our net deferred tax assets have
been offset in full by a valuation allowance.
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Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the
accounting for uncertainties in income taxes recognized in an enterprises financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the
appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate
settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. As such, we adopted the provisions as of the beginning of our current fiscal year effective May 1, 2007. There was no cumulative effect
to the retained earnings balance and we do not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 are effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the
provisions of FAS 157.

In February 2007, the FASB issued SFAS No. 159, The Fair Option for Financial Assets and Financial
Liabilities  including an amendment of FASB Statement No. 115, (FAS 159), which allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value
option for an eligible item is elected, unrealized gains and losses for that item shall be reported in current earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw
comparison between the different measurement attributes the company elects for similar types of assets and liabilities. This statement is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of
the provisions of FAS 159.

Results of Operations

First two quarters of fiscal 2007 and 2008

Net revenues and operating loss for our business
segments for the first two quarters of fiscal 2007 and 2008 were as follows:



|                             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|---------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                             |  | Three Months Ended October 31, |         |   | Six months ended October 31, |  
|                             |  | 2006                           |         |   | 2007                         |   |         | 2006 |  |   | 2007    |  
|Product revenue              |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                              | 3,765   |   |                              | $ | 3,260   |      |  | $ | 8,326   |   |  | $ | 4,715   |  
|Tecstar Automotive Group     |  |                                | 28,846  |   |                              |   | 17,548  |      |  |   | 62,723  |   |  | $ | 42,598  |  
|                             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                              | 32,611  |   |                              | $ | 20,808  |      |  | $ | 71,049  |   |  | $ | 47,313  |  
|                             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Contract revenue             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                              | 1,477   |   |                              | $ | 2,916   |      |  | $ | 3,992   |   |  | $ | 4,970   |  
|Tecstar Automotive Group     |  |                                | 1,352   |   |                              |   | 2,230   |      |  |   | 2,343   |   |  | $ | 4,107   |  
|                             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                              | 2,829   |   |                              | $ | 5,146   |      |  | $ | 6,335   |   |  | $ | 9,077   |  
|                             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Operating Loss               |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems         |  | $                              | (3,771  | ) |                              | $ | (2,033  | )    |  | $ | (6,790  | ) |  | $ | (4,905  | )
|Tecstar Automotive Group (1) |  |                                | (79,797 | ) |                              |   | (5,995  | )    |  |   | (85,190 | ) |  | $ | (70,021 | )
|Corporate                    |  |                                | (3,632  | ) |                              |   | (3,066  | )    |  |   | (7,731  | ) |  | $ | (7,000  | )
|                             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                        |  | $                              | (87,200 | ) |                              | $ | (11,094 | )    |  | $ | (99,711 | ) |  | $ | (81,926 | )
|                             |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  

Overall revenue decreased $9.4 million from $35.4 million in the second quarter of fiscal 2007 to
$26.0 million in the second quarter of fiscal 2008 and decreased $21.0 million from $77.4 million in the first half of fiscal 2007 to $56.4 million in the first half of fiscal 2008. This decrease is mainly due to declines in our Tecstar Automotive
Group segment product revenues of $11.3 million in the second quarter of fiscal 2008 and $20.1 million in the second half of fiscal 2008 as a result of a reduction of second stage assembly programs with General Motors as well as lower volume of
service parts to support these programs.

Overall operating loss decreased $76.1 million, from $87.2 million in the second quarter of
fiscal 2007 to $11.1 million in the second quarter of fiscal 2008 and decreased $17.8 million from $99.7 million in the first half of fiscal 2007 to $81.9 million in the first half of fiscal 2008. The decline in the second quarter of fiscal 2008 was
primarily due to an impairment charge of long-lived assets of $71.7 million recognized in the second quarter of fiscal 2007. The current year impairment charge of $58.9 million resulted from indications related to a review performed by a financial
advisor that we hired to assess strategic options for the Tecstar Automotive



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Group segment. Based on this assessment and the range of values obtained in the solicitation process, an impairment charge was recognized to reduce the book
value of the segment to its estimated fair value. Excluding the impairment charges for both years, the operating loss decreased by $4.4 million from the second quarter of fiscal 2007 compared to the second quarter of fiscal 2008 primarily due to
improved product and contract margins in our Quantum Fuel Systems segment and lower operating expenses in each of our three business segments.

Quantum Fuel Systems Segment

Product sales for the Quantum Fuel Systems segment decreased $0.5 million, or 13%, from
$3.8 million in the second quarter of fiscal 2007 to $3.3 million in the second quarter of fiscal 2008 and decreased $3.6 million, or 43%, from $8.3 million in the first half of fiscal 2007 to $4.7 million in the first half of fiscal 2008. The
decrease in the first half of fiscal 2008 is mainly due to the end of sales associated with General Motors program for pick-up trucks equipped with our bi-fuel and compressed natural gas fuel systems in November 2006. Product sales during the
second quarter and first half of fiscal 2008 primarily consist of hydrogen fuel storage systems to be used in General Motors fuel cell vehicle program and sales of hydrogen-fueled Toyota Prius hybrid vehicles. We expect higher levels of
product sales for the remainder of fiscal 2008 as we increase production of hydrogen fuel storage systems under our purchase order with General Motors and anticipated higher sales of hydrogen hybrid vehicles.

Cost of product sales for the Quantum Fuel Systems segment decreased $1.4 million, or 36%, from $3.9 million in the second quarter of fiscal 2007 to $2.5
million in the second quarter of fiscal 2008 and decreased $3.6 million, or 47%, from $7.7 million in the first half of fiscal 2007 to $4.1 million in the first half of fiscal 2008. The decrease is mainly due to the lower overall sales volume in the
segment and reductions in variable overhead costs.

Gross profits on product sales for the Quantum Fuel Systems segment increased $0.9
million from a negative $0.1 million in the second quarter of fiscal 2007 to a positive $0.8 million in the second quarter of fiscal 2008 and remained unchanged at positive $0.6 million for the first half of fiscal 2007 and 2008. The increase in the
second quarter is mainly attributable to the improved margins on the Prius and hydrogen fuel storage systems shipped in fiscal 2008 compared with the compressed natural gas fuel systems shipped in fiscal 2007.

Contract revenue for the Quantum Fuel Systems segment increased $1.4 million, or 93%, from $1.5 million in the second quarter of fiscal 2007 to $2.9
million in the second quarter of fiscal 2008 and increased $1.0 million, or 25%, from $4.0 million in the first half of fiscal 2007 to $5.0 million in the first half of fiscal 2008. Contract revenue is derived primarily from system development and
application engineering of our products under funded General Motors and other OEM contracts, and other funded contract work with the U.S. military and other government agencies. Contract revenue is recognized as work progresses on fixed price
contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. Recognized revenue is subject to revisions as the contracts progress to completion. We anticipate contract revenues to be
higher in the second half of fiscal 2008 compared to the second half of fiscal 2007 as a result of new hydrogen development programs with our OEM customers, powertrain development work for the Fisker Automotive hybrid-electric vehicle and expanding
military programs.

Research and development expense associated with development contracts increased $0.1 million, or 6%, from $1.8 million
in the second quarter of fiscal 2007 to $1.9 million in the second quarter of fiscal 2008 and decreased $0.8 million, or 20%, from $4.0 million in the first half of fiscal 2007 to $3.2 million in the first half of fiscal 2008 . The decrease is
primarily related to a lower cost structure in the current year. Internally funded research and development expense for the Quantum Fuel Systems segment increased by $0.2 million, or 12%, from $1.7 million in the second quarter of fiscal 2007
to $1.9 million in the second quarter of fiscal 2008 and decreased $0.3 million, or 7%, from $4.1 million in the first half of fiscal 2007 to $3.8 million in the first half of fiscal 2008.

Selling, general and administrative expenses for the Quantum Fuel Systems segment increased $0.2 million, or 17%, from $1.2 million in the second quarter
of fiscal 2007 to $1.4 million in the second quarter of fiscal 2008 and increased $0.1 million, or 4%, from $2.5 million in the first half of fiscal 2007 to $2.6 million in the first half of fiscal 2008. Selling, general and administrative expenses
as a percentage of total Quantum Fuel Systems segment operating costs and expenses was 17% for the second quarter of fiscal 2008 compared to 13% for the second quarter of fiscal 2007 and was 18% for the first half of fiscal 2008 compared to 13% for
the first half fiscal 2007 due to higher cost of product sales in the prior year.

Amortization of intangibles for the Quantum Fuel Systems
segment relates to the Corporate Alliance Agreement with General Motors. The expense in the second quarter of fiscal year 2008 was the same as in the second quarter of fiscal 2007 and amounted to $0.4 million and the expense in the first half of
fiscal year 2008 was the same in as the first half of fiscal 2007 and amounted to $0.8 million.

Operating loss for the Quantum Fuel
Systems segment decreased $1.8 million, or 47%, from $3.8 million in the second quarter of fiscal 2007 to $2.0 million in the second quarter of fiscal 2008 and decreased $1.9 million, or 28%, from 6.8 million in the first half of fiscal 2007 to
$4.9 million in the first half of fiscal 2008. This improvement mainly relates to higher margins earned on customer programs due to the shift in product mix over the last year. We expect the Quantum Fuel Systems segment to incur continued operating
losses in the remaining two quarters of fiscal 2008, although at declining levels due to anticipated higher production volumes and contract revenues.



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Tecstar Automotive Group Segment

Activity in the Tecstar Automotive Group segment relates primarily to operations acquired in connection with the acquisitions of Tecstar Automotive Group
on March 3, 2005 and of Regency on February 8, 2006. Tecstar Automotive Group product sales include OEM-level specialty equipment and vehicle accessories, known as styling parts and performance products, that are added to OEM pick-up
trucks, SUVs and vans through a second stage assembly process and distributed through OEMs or a dealer network.

Overall revenues for the
Tecstar Automotive Group decreased $10.4 million, or 34%, from $30.2 million in the second quarter of fiscal 2007 to $19.8 million in the second quarter of fiscal 2008 and decreased $18.4 million, or 28%, from $65.1 million in the first half of
fiscal 2007 to $46.7 million in the first half of fiscal 2008. This decrease is mainly due to lower overall purchases from General Motors and affiliated dealerships in fiscal 2008 as compared to the previous year. We believe the declining demand at
the consumer level for trucks and SUVs offered by General Motors over the past couple of years has significantly contributed to the reduced purchases by General Motors for our automotive specialty equipment products as well as the
discontinuance of several large vehicle programs with General Motors.

Product sales for the Tecstar Automotive Group decreased $11.3
million, or 39%, from $28.8 million in the second quarter of fiscal 2007 to $17.5 million in the second quarter of fiscal 2008 and decreased $20.1 million, or 32%, from $62.7 million in the first half of fiscal 2007 to $42.6 million in the first
half of fiscal 2008. Product sales include second stage assembly revenues that are associated with second stage automotive manufacturing facilities located in Louisiana, Missouri, Texas and Indiana in the United States and in Ontario, Canada. All of
these facilities are located near General Motors assembly plants. Second stage assembly revenues decreased from $14.0 million in the second quarter of fiscal 2007 to $8.6 million in the second quarter of 2008. Product sales for automotive OEM
accessory parts distributed through OEM distribution channels and dealer networks decreased from $12.3 million in the second quarter of fiscal 2007 to $6.4 million for the second quarter of fiscal 2008. Other revenues totaled $2.5 million and $2.6
million for the second quarters of fiscal 2007 and 2008, respectively. We expect product sales to continue to be negatively impacted by these trends, but anticipate higher product revenues in the second half of fiscal 2008 as a result of new the
Ford F-150 program and other assembly part programs.

Cost of product sales for the Tecstar Automotive Group decreased $11.0 million, or
37%, from $29.9 million in the second quarter of fiscal 2007 to $18.9 million in the second quarter of fiscal 2008 and decreased $19.7 million, or 31%, from $62.9 million in the first half of fiscal 2007 to $43.2 million in the first half of fiscal
2008. Cost of product sales primarily represents the cost of raw material, labor and assembly facility overhead required in the second stage manufacturing process and material costs related to parts distribution. Gross profit on product sales was
negative $1.4 million or negative 8% of sales for the second quarter of fiscal 2008 as compared to negative $1.1 million or negative 4% of sales for the second quarter of fiscal 2007 and was negative $0.6 for the first half of fiscal 2008 compared
to negative $0.2 million for the first half of fiscal 2007.

Contract revenue for the Tecstar Automotive Group increased $0.8 million, or
57%, from $1.4 million in the second quarter of 2007 to $2.2 million in the second quarter of 2008 and increased $1.8 million, or 78%, from $2.3 million in the first half of fiscal 2007 to $4.1 million in the first half of fiscal 2008. Contract
revenue is primarily associated with design and engineering services for concept vehicles. The increase in fiscal 2008 is primarily related to engineering services provided to Force Protection, Inc. for assistance in Force Protections Mine
Resistant Ambush Protection (MRAP) armored vehicle programs with the U.S. military. Research and development expense associated with cost of contract revenue increased $0.8 million, or 57%, from $1.4 million in the second quarter of fiscal 2007 to
$2.2 million in the second quarter of fiscal 2008 and increased $1.7 million, or 71%, from $2.4 million in the first half of fiscal 2007 to $4.1 million in the first half of fiscal 2008 as a result of the expanded research and development activities
performed. We expect contract revenues in the third quarter to remain near the second quarter levels and then to increase incrementally by approximately $10 million near the end of the fourth quarter as a result of the anticipated completion of a
specific contract to engineer, design and provide production support for Force Protections MRAP military vehicle platform. Revenue and direct expenses under this Force Protection contract are being accounted for under the completed contract
methodology in accordance with Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Through October 31, 2007, we have deferred $1.3 million in direct costs
attributable to this Force Protection contract that will be recognized upon the completion of the project.

Selling, general and
administrative expenses for the Tecstar Automotive Group decreased $1.6 million, or 26%, from $6.2 million in the second quarter of fiscal 2007 to $4.6 million in the second quarter of fiscal 2008 and decreased $1.8 million, or 15%, from $11.7
million in the first half of fiscal 2007 to $9.9 million in the first half of fiscal 2008. These expenses represent those costs that directly support the business segment and consist mainly of selling and administrative salaries, business
development costs, insurance and travel related costs. The decrease in the current year is primarily due to the realization of cost reductions pursuant to initiatives implemented during fiscal 2007.



There was no amortization of intangibles in the second quarter of fiscal 2008
as compared to $0.7 million in the second quarter of fiscal 2007 and there was a $0.7 million decrease in intangible amortization from $1.4 million in the first half of fiscal 2007 to $0.7 million in the first half of fiscal 2008. This was due
to the write-off of the entire unamortized balance of intangible assets at July 31, 2007. Prior amortization related primarily to specifically identified customer related intangibles and existing technology acquired by Quantum in the
acquisitions of Tecstar Automotive Group and also included dealer network and other intangible assets acquired in the



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acquisition of Regency and the start up of Unique Performance Concepts. Due to the write-off of the entire unamortized balance of intangible assets as of
July 31, 2008 for this segment, we do not expect to record any amortization expense for this segment for the remainder of fiscal 2008.

The operating loss for the Tecstar Automotive Group segment was $6.0 million for the second quarter of fiscal 2008, as compared to a loss of $8.1 million, excluding the non-cash impairment charges of $71.7 million, for the second quarter of
fiscal 2007 and was $11.1 million, excluding the non-cash impairment charges of $58.9 million, for the first half of fiscal 2008 compared with $13.5 million, excluding the non-cash impairment charges of $71.7 million, for the first half of fiscal
2007. We expect our Tecstar Automotive Group segment to continue incurring losses during the second half of fiscal 2008 but lower than the first half of fiscal 2008 as a result of revenues expected to be recognized on the Force Protection and Ford
Programs.

Corporate

Corporate
expenses decreased by $0.5 million, or 14%, from $3.6 million in the second quarter of fiscal 2007 to $3.1 million in the second quarter of fiscal 2008 and decreased $0.7 million, or 9%, from $7.7 million in the first half of fiscal 2007 to $7.0
million in the first half of fiscal 2008. Corporate expenses as a percentage of total consolidated revenues for the second quarter of fiscal 2008 and fiscal 2007 was 12% and 10%, respectively, and for the first half of fiscal 2008 was approximately
the same as the first half of fiscal 2007 and amounted to 12% and 10 %, respectively.

Non-Reporting Segment Results

Interest Expense. Interest expense, net of interest income, amounted to $1.4 million in the second quarter of fiscal 2008 as compared to $1.0
million in the second quarter of fiscal 2007. Net interest expense amounted to $2.7 million in the first half of fiscal 2008 as compared to $1.9 million in the first half of fiscal 2007. Interest expense primarily relates to debt obligations that
were assumed in connection with the Tecstar Automotive Group acquisition in March 2005 and the Regency acquisition in February 2006 along with debt obligations related to credit facilities with an asset-based lender executed on January 31, 2007
that replaced all credit facilities with Comerica Bank. The increase in interest expense is attributable to higher interest rates and higher levels of borrowing as compared to the first half of the previous fiscal year.

Minority Interest in Losses of Subsidiaries.During the second quarter of fiscal years 2007 and 2008, our net losses were reduced by $0.3 million
and $0.4 million, respectively, and during the first half of fiscal years 2007 and 2008, our losses were reduced by $0.5 million and $0.8 million, respectively, for the portion of losses incurred by our consolidated subsidiaries that were allocated
to minority equity interests. For fiscal 2008, the allocation relates to the minority holders of Advanced Lithium Power Inc. (ALP). For fiscal 2007, the allocation primarily related to the minority holders of Unique Performance Concepts, LLC and
ALP.

Income Taxes.During the first half of fiscal years 2007 and 2008, we realized tax benefits of approximately $0.3 and $4.9
million, respectively. The benefit realized in the current year resulted from the elimination of the temporary difference between the book basis and tax basis related to intangible assets recorded in connection with the Tecstar Automotive Group
acquisition that were written off as of July 31, 2007. A valuation allowance has been established for our net deferred tax assets as of October 31, 2007 due to our lack of earnings history. As a result of the elimination of the deferred
tax liability at the end of our fiscal first quarter, we had a tax expense of $0.1 million in the second quarter and anticipate being in a tax expense position for the remainder of fiscal 2008; however, we expect these levels to be minor.

Loss from Discontinued Operations. As a result of the sale of the Empire Coach business in April 2007, we now classify the
historical operations of the business from the date of our original acquisition of Empire Coach in September 2005 to the date of the disposal of the business as discontinued operations. Accordingly, certain reclassifications have been made to fiscal
year 2007 amounts to conform to the fiscal 2008 presentation. Operating losses from the discontinued Empire Coach business amounted to $1.7 million and $2.1 million for the second quarter and first half of fiscal 2007, respectively.

Liquidity and Capital Resources

Cash Flow Activities

Net cash used in operating activities for the first half of fiscal 2008 was $22.5 million as compared to $12.0 million during the
first half of fiscal 2007. The cash used during the first half of fiscal 2008 is primarily due to a net loss of $19.7 million before the non-cash effects of long lived asset impairments, depreciation and amortization, stock compensation charges, and
other items. The cash used in operations also decreased by $2.8 million as a result of changes in operating assets and liabilities primarily due to reductions in accounts payable and other accrued liabilities. We expect levels of cash used in
operations to decline for the remainder of fiscal 2008 as compared to levels incurred during the first half as we realize improved margins on new programs and additional cost savings.



Net cash used in investing activities during the first half of fiscal 2008
decreased to $1.0 million as compared to net cash used of $7.0 million during the first half of fiscal 2007. Cash used in fiscal 2007 primarily related to net purchases of marketable securities of $2.7 million and purchases of property and equipment
of $4.3 million. The cash used in fiscal 2008 related to purchases of property and equipment.



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Net cash provided by financing activities during the first half of fiscal 2008 was $23.0 million as
compared to $22.5 million during the first half of fiscal 2007. Cash provided during fiscal 2008 was principally from the sale of our common stock. We sold 12.5 million shares of our stock to investors in a private placement in June 2007 that
provided $17.6 million in net proceeds. We also borrowed $4.4 million on our revolving credit facility to fund operating activities and received $1.2 million in contributions from minority interest holders of our subsidiary ALP.

Capital Resources

In July 2002, we received
$15.0 million in cash in connection with our spin-off from IMPCO. In January 2003, we completed a public equity offering of an aggregate of 4,025,000 shares of our common stock at a price of $2.25 per share, which yielded net proceeds of
approximately $8.0 million after underwriting discounts and commissions and offering expenses. In October 2003, we completed a public equity offering of an aggregate of 8,050,000 shares of our common stock at a price of $8.00 per share, which
yielded net proceeds of approximately $60.1 million after underwriting discounts and commissions and offering expenses.

On June 29,
2006, we completed a private placement transaction which yielded proceeds of $12.5 million from the sale of 4,403,000 shares of our common stock at a price of $2.84 per share, which represented a 10% discount on the June 29, 2006 closing price
of $3.15. On October 27, 2006, we completed a private placement transaction which yielded proceeds of $10.0 million from the sale of 6,098,000 shares of our common stock at a price of $1.64 per share, which represented a 20% discount on the
October 27, 2006 closing price of $2.05. The investors also received warrants in connection with the private placement transactions. In January and February 2007, we received $1.3 million from the exercise of a portion of the warrants issued in
connection with the private placement that closed on October 27, 2006.

In December 2006, we used approximately $15.0 million of
proceeds from the sale of our marketable securities portfolio and other cash equivalents to reduce the outstanding borrowings under credit facilities with a commercial bank. On January 31, 2007 we secured a new $30.6 million credit facility
with an asset-based lender and used $9.6 million of proceeds from the new facility to repay the remaining principal and accrued interest owed under commercial bank credit facilities. Outstanding borrowings under the new credit facility totaled $30.3
million at October 31, 2007. On December 14, 2007, we and our lender signed a Waiver and Agreement (the Waiver) which (i) increased the availability under the Credit Facility from $30.6 million to $33.6 million through November 1,
2008, (ii) allows the Company to borrow $7.0 million over the calculated borrowing base through November 1, 2008 under the Revolver, and (iii) defers the scheduled principal amortization payments under the Term Note to March 15, 2008.

On June 22, 2007, we completed a private placement transaction which yielded proceeds of $18.75 million from the sale of 12.5 million shares of
its common stock at a price of $1.50 per share, which represented a 28% discount on the June 21, 2007 closing price of $2.09. The investors also received warrants to purchase 15.0 million shares of our common stock at an exercise price of
$2.09 in connection with the transaction that can be exercised beginning on December 21, 2007 and expire in December 2014.

On
July 16, 2007, we secured a $5.0 million unconditional commitment from our asset-based lender that allows us to draw on the commitment at our option and also allows the lender to fund the commitment at the lenders option under certain
defined structures. The option for either party expires on August 1, 2008. To date, we and our lender have not exercised the option under the commitment.

On November 6, 2007 we received $5.0 million in proceeds from our lender under a new term note provided in connection with ongoing negotiations for the lenders proposed acquisition of Tecstar Automotive
Group. The proceeds were received in exchange for a promissory note issued by Tecstar Automotive Group and guaranteed by Quantum. The guarantee by Quantum will be released if the proposed sale of Tecstar Automotive Group to the lender is completed.
The note bears interest at 10.0% per annum and calls for quarterly principal amortization payments of $1.0 million, commencing on August 1, 2008, with interest payable in arrears on the same days as the principal is payable.

Our obligations under the Credit Agreement are guaranteed by all of its domestic subsidiaries with the exception of Amstar, LLC and are secured by
substantially all of our assets and the assets of our subsidiary guarantors. Transaction fees associated with the execution of the Credit Agreement and reflected as deferred loan fees on the consolidated balance sheet at April 30 and
October 31, 2007, are being amortized against interest expense over the three-year life of the Credit Agreement.

In connection with
the Credit Agreement and as an inducement to the holders of the Convertible Notes to amend certain negative debt covenants contained in the Convertible Notes, Tecstar Automotive Group entered into an amendment to the Convertible Notes that
substantially changed the terms of the original notes. As amended, the total annual interest rate is 11.5% of which the cash coupon rate is 6.5% and a cash or payment-in-kind option for the borrower is 5.0%. The holders of the Convertible Notes have
the right to extend the maturity date of the Convertible Notes for an additional three years (if exercised, the payment-in-kind is thereafter



36



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lowered to 3.0%). The conversion price on the Convertible Notes was reset to $1.35 per share on June 22, 2007 in connection with the private placement
after factoring in the dilutive effect of the warrants provided in the private placement against the price of the stock issued of $1.50 per share.

As a result of the substantial changes to the original Convertible Notes in January 2007, including the execution of a guaranty by Quantum of the obligations under the Convertible Notes, there was an implied exchange of debt instruments as
prescribed in Emerging Issues Task Force (EITF) 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. In accordance with EITF 96-19, the original Convertible Notes, with an outstanding balance of $15.0
million just prior to the amendment, were accounted for as an early extinguishment of debt and the amended Convertible Notes were accounted for as a new debt instrument and recorded at an estimated fair value of $21.3 million on the date of the
transaction. The remaining difference between the fair value and face value of the Convertible Notes of $5.4 million as of October 31, 2007 is being amortized against interest expense over the 62 month expected life of the notes to reflect the
effective interest rate of the new debt instrument. For purposes of disclosing the maturities of long-term scheduled debt payments below, the scheduled maturity date of July 1, 2009 is utilized as an assumption.

Incorporating the waiver received from our lender on December 14, 2007, we are in compliance with all material covenants, reporting and other
requirements of the Credit Agreement and the Convertible Notes.

Liquidity

The ratio of current assets to current liabilities declined from 1.4:1 as of April 30, 2007 to 0.6:1 as of October 31, 2007. During the first
half of fiscal 2007, our total working capital decreased by $48.2 million, from a positive $17.3 million at April 30, 2007 to a negative $30.9 million at October 31, 2007. The decline was attributable to the classification of our debt
as all current as of October 31, 2007 in the amount of $54.0 million, as compared to $4.3 million of debt classified as current as of April 30, 2007. We presently classify all of our debt as current as it is no longer considered remote that a
material adverse condition will not cause a default in the covenants under the credit facilities within the next twelve months.

Our
principal sources of liquidity at October 31, 2007 included cash and cash equivalents of $3.5 million and restricted cash equivalents of $1.0 million. The restricted cash equivalents are collateralized for the benefit of General Motors
Acceptance Corporation (GMAC) in connection with financing of vehicle chassis for Regencys operations.

We have incurred recurring
operating losses and negative cash flows from operating activities. Although we have reduced workforce levels and implemented certain other cost saving initiatives over the past year, we have used $37.4 million and $22.5 million in cash for
operating activities during the twelve-month period of fiscal 2007 and the first six months of fiscal 2008, respectively.

Included in our
plans is the immediate need to reduce the Tecstar business segment costs to levels commensurate with its expected revenues and a possible sale of the Tecstar business segment. On December 13, 2007, our lender informed us that although it is not
withdrawing at this time from the transaction contemplated by the Term Sheet, the lender does not intend to move forward with the transaction unless we propose an acceptable plan to further reduce the Tecstar business segments present cost
structure. We anticipate that any cost restructuring plan will be implemented either through negotiations with creditors or by seeking the rights, remedies and protections available to our Tecstar business segment under the Bankruptcy laws. We
cannot provide any assurances that we will be able to develop a plan acceptable to the lender in a time frame acceptable to us, if at all. Nor can we provide any assurances that the lender will proceed with the purchase of Tecstar even if such a
restructuring plan is developed and implemented. We do not intend to provide any additional capital to our Tecstar business segment in the future and we currently are assessing our options to reduce costs and to reorganize the Tecstar business
segments operations. The decision not to provide additional capital and to significantly reduce costs or reorganize, will limit Tecstars ability to pay its vendors, perform on its contracts, continue existing programs, and pursue new
programs and new customers.

In the event that a plan to further reduce costs cannot be implemented by the end of our fiscal third quarter
or is not acceptable to facilitate a sale or additional financial support from the lender or another party, we anticipate that we will file for bankruptcy protection for our Tecstar Automotive Group subsidiary for the purpose of liquidating the
assets of the Tecstar business segment.

Under a possible restructure plan financed by the lender or a liquidation plan of the Tecstar
business segment, we believe that our working capital at October 31, 2007, plus the additional $5.0 million in proceeds received from term notes issued in November 2007 and the additional $3.0 million in availability on the Revolver obtained on
December 14, 2007, taken together with the available committed funding of $5.0 million secured on July 16, 2007, is sufficient to fund operating activities of our Quantum Fuel Systems and Corporate business segments for at least the next
twelve months. However, an inability by us to timely implement a cost reduction plan acceptable to the lender and to consummate the sale of the Tecstar Automotive Group business segment or to raise sufficient capital to fund its operations would
have a material adverse affect on us and could impact our ability to continue as a going concern. In addition, if our subsidiary, the Tecstar Automotive Group, files for bankruptcy protection or if we otherwise discontinue the business operations of
our Tecstar Automotive Group business segment, we would be in default in certain of our material contracts including, without limitation, our Credit Agreement and $15.0 million Senior Subordinated Convertible Promissory Notes. Although the lender
continues to work with us in our efforts to restructure the Tecstar business segment as evidence by the lender granting waivers for certain debt compliance matters as of December 14, 2007, due to our need to implement a significant cost reduction
plan acceptable to the lender or to file the Tecstar Automotive Group under bankruptcy protection, it is no longer considered remote that a material adverse condition will not cause a default in the covenants of the Convertible Notes and Credit
Agreement. Since there can be no assurances that the lender will not exercise its right to call the debt, we have reclassified the debt as current at October 31, 2007.

Our long-term cash requirements depend on numerous factors. Our Quantum Fuel Systems segment is dependent on factors such as the advancement of OEM fuel cell technologies, development and commercialization timing of
our products, customer



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funding of application development programs, and other industry-wide growth factors. Our Tecstar Automotive Group segment is dependent on factors such as
model year changeover of vehicle platforms by General Motors, economic conditions, including levels of disposable consumer income, the availability and price of gasoline, the level of interest rates, and the availability of consumer financing. Our
cash and levels of borrowing are also impacted by the timing of Tecstar Automotive Groups once-a-month cash collections on product sales to General Motors. Competition and a reliance on a few customers, particularly General Motors, are
additional factors that may impact our future operations.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates due to our financing, investing and cash management activities. Specifically, we are at risk
due to the variable nature of our amended $33.6 million in credit facilities with an asset-based lender. A 1% increase in the interest rate could result in an annual increase in interest expense of up to approximately $336,000, assuming the maximum
amount was outstanding on the credit facilities during an entire year.

To date, we have not used any derivative financial instruments for
the purpose of reducing our exposure to adverse fluctuations in interest rates. We are not a party to leveraged derivatives nor do we hold or issue financial investments for speculative purposes.

We are exposed to risk from fluctuating currency exchange rates, primarily the U.S. dollar against the Canadian dollar. We face transactional currency
exposures that arise when our foreign subsidiaries enter into transactions denominated in currencies other than their own local currency. We also face currency exposure that arises from translating the results of our Canadian operations to the U.S.
dollar. Net foreign currency transaction gains were negligible for the first half of fiscal 2008.

Off Balance Sheet Disclosures

Consigned Inventories

Our wholly-owned subsidiary,
Regency, obtains vehicle chassis for its specialized vehicle products directly from OEMs under converter pool agreements. Chassis are obtained from the OEMs based on orders from customers, and to a lesser extent, for unallocated orders. Although
each OEM agreement has different terms and conditions, the agreements generally provide that the OEM will provide a supply of chassis to be maintained from time to time at Regencys facility under the conditions that Regency will store such
chassis and will not move, sell or otherwise dispose of such chassis, except under the terms of the agreement. The OEM does not transfer the certificate of origin to Regency and, accordingly, Regency accounts for the chassis as consigned inventory
belonging to the OEM. Under these agreements, Regency is required to pay a finance charge on the chassis inventory equal to a fixed rate of zero to 2.0% for the first 90 days and a variable rate of prime plus 1.0% for days 91 and thereafter. The
finance charges incurred on consigned chassis inventory, included in interest expense in the consolidated statement of income, aggregated $0.5 million for the first half of fiscal 2008. Chassis inventory, accounted for as consigned inventory to
Regency by the OEMs, aggregated approximately $15.3 million at October 31, 2007. Typically, chassis are converted and delivered to the customers within 90 days of the receipt of the chassis by Regency.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.
|------- | -----------------------------------------------------------

Information required by Item 305 of Regulation S-K relating to quantitative and qualitative disclosures about market risks appear under the heading Quantitative and Qualitative Disclosures About Market Risk in Item 2
of Part I hereof, and is incorporated herein by this reference.



|Item 4. | Controls and Procedures.
|------- | ------------------------



| | (a) | Disclosure Controls and Procedures
| | --- | ----------------------------------

As of the end
of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material information required to be included in this report.



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| | (b) | Design of Internal Control Over Financial Reporting
| | --- | ---------------------------------------------------

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the
United States.

Our internal control over financial reporting includes policies and procedures that:



| |  |  | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurances that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Changes in Internal Control Over Financial Reporting
| | --- | ----------------------------------------------------

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

PART IIOTHER INFORMATION



|Item 1A. | Risk Factors.
|-------- | -------------

The following risks related to
liquidity and capital resources could cause actual results, and actual events that occur, to differ materially from those contemplated by forward-looking statements contained in this report:

An inability to eliminate losses associated with the Tecstar business segment in the near term could have a material impact on our ability to continue
as a going concern.

We have incurred recurring operating losses and negative cash flows from operating activities. Although we have
reduced workforce levels and implemented certain other cost saving initiatives over the past year, we used $37.4 million and $22.5 million in cash for operating activities during the twelve-month period of fiscal 2007 and the first half of fiscal
2008, respectively. An inability by us to effectively reduce costs, restructure, reorganize, sell or close the Tecstar business segment in the near term would significantly hinder our ability to raise additional capital in the future and could
impact our ability to continue as a going concern.

A possible bankruptcy filing for the Tecstar Automotive Group subsidiary would
constitute a default in certain of our material contracts including, without limitation, our Credit Agreement and $15 million Senior Subordinated Convertible Notes, and, if such debt obligations are called, would impact our ability to continue as a
going concern.

If we file for bankruptcy protection for or otherwise discontinue the business operations of our Tecstar Automotive
Group subsidiary, we will be in default in certain of our material contracts including, without limitation, our Credit Agreement and $15 Million Senior Subordinated Convertible Promissory Notes. If our lender is unwilling to waive such default and
calls the debt obligations, we would not be able to pay on those obligations unless we are able to adequately refinance those debt obligations. If we are unable to obtain such refinancing, we would not be able to continue as a going concern and
might require us to seek protection under the bankruptcy laws.

The daily closing price of our common stock has recently traded below
$1.00 per share and our market capitalization has declined to levels that are impacting our ability to continue in compliance with NASDAQ listing requirements. An inability to maintain compliance with NASDAQ listing requirements would result in our
delisting and could materially impact our ability to raise capital resources that may be needed for future operations.

We must comply
with NASDAQs continued listing requirements in order to maintain our listing on NASDAQs Global Market. NASDAQs continued listing standards include requirements addressing the number of shares publicly held, market value of publicly
held shares, stockholders equity, number of round lot holders, and minimum bid price. If we are unable to maintain compliance with any one or more of these standards and are unable to submit to NASDAQ an acceptable plan of compliance or to
achieve compliance, then such failure would result in our delisting. If we are subject to delisting, this could materially impact our ability to raise capital resources that may be needed for future operations.

Recent financing activities may limit our ability to raise additional equity financing through private placement transactions.

Under NASDAQ rules and regulations, certain transactions involving a companys sale of its common stock require prior shareholder approval if the
number of shares sold or potentially sold is 20% or more of the companys then issued and outstanding shares of common stock. In addition, under certain circumstances NASDAQ may aggregate the number of shares of common stock that are sold in
more than one transaction in calculating whether the number of shares sold or potentially sold meets the 20% threshold. On June 22, 2007, we closed a private placement transaction pursuant to which we sold 12,500,000 shares of our common stock,
which number of shares amounted to approximately 19.2% of our then issued and outstanding shares of common stock. As a result of such issuance, our ability to raise additional capital through the sale of our common stock in a transaction other than
a public offering may be limited for a period of time.



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We may not be able to obtain waivers of defaults in the future from our lender if we do not meet
either the terms of our existing waiver or future requirements associated with our amended credit facilities.

We received a waiver of
defaults from our lender on December 14, 2007 related to our non-compliance with certain scheduled principal reductions on the Term Note and outstanding borrowings under the Revolver that exceeded our calculated borrowing base. We may not be
able to obtain waivers of defaults in the future if we do not meet either the terms of our existing waiver or future requirements associated with our amended credit facilities. A failure to maintain compliance with the requirements of the credit
facilities along with our lender not agreeing to a waiver for the non-compliance would cause the outstanding borrowings under the credit facilities to be in default and payable on demand which would have a material adverse effect on us and impact
our ability to continue as a going concern.

Future sales of substantial amounts of our common stock could affect its market price.

Future sales of substantial amounts of our common stock in the public market, including shares issued upon exercise of options and
warrants, in anticipation of a possible sale of all or a substantial part of our Tecstar Automotive Group subsidiary, or perceptions that such sales of common stock could occur, may adversely affect the prevailing market price of our
common stock. To the extent that holders of a significant number of our shares choose to liquidate investments in anticipation of a possible sale of all or a substantial part of our Tecstar Automotive Group subsidiary, sales of such shares
could have a negative impact upon the price of our common stock, particularly in the short-term.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

The Company did
not make the Term Note principal amortization payments under the Credit Facility with our asset-based lender due on the first day of each month from August 1, 2007 through and including December 1, 2007, totaling $1.25 million in the aggregate. On
December 14, 2007, the Company and its lender signed a Waiver and Agreement (the Waiver) which confirmed the lenders waiver of any defaults arising from the non-payment of the referenced principal amortization payments and
increased availability under the Credit Facility from $30.6 million to $33.6 million through November 1, 2008, allows the Company to borrow $7.0 million over the calculated borrowing base through November 1, 2008 under the Revolver, and defers the
scheduled principal amortization payments under the Term Note to March 15, 2008. See the related disclosures reported in this quarterly report in Part I, Item 1, Notes 1 and 11, and in Part II, Item 5, which are incorporated herein by this
reference.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

Our Annual Meeting of Stockholders was held on September 28, 2007. The stockholders re-elected Alan P. Niedzwiecki, Dale L. Rasmussen and Jeffrey P. Beitzel as Class III directors for a term of three years or until their respective
successors are duly elected and qualified. The number of shares voting as to the election of Alan P. Niedzwiecki was: 53,572,752 shares for and 7,624,834 shares withheld. The number of shares voting as to the election of Dale
L. Rasmussen was: 53,493,883 shares for and 7,703,703 shares withheld. The number of shares voting as to the election of Jeffrey P. Beitzel was: 55,458,996 shares for and 5,738,590 shares withheld.

The stockholders were also asked to approve an Amendment to our Certificate of Incorporation to increase the number of authorized shares
of common stock from 100,000,000 to 250,000,000. This proposal was passed with voting as follows: 52,027,306 shares for, 8,922,315 shares against and 247,965 shares abstaining.

The stockholders also ratified the selection of Ernst & Young LLP as the Companys independent auditors for the fiscal year ending
April 30, 2008 with voting as follows: 58,282,524 shares for; 2,728,962 shares against; and 186,100 shares abstaining.



|Item 5. | Other Information
|------- | -----------------

On December 14, 2007, we
executed a Waiver and Agreement (the Waiver) with our lender that waived certain defaults under the amended Credit Facility dated January 31, 2007. The Waiver deferred the scheduled principal payments on our $10.0 million term loan
until March 15, 2008 and raised the maximum availability under the line by $3.0 million to $23.6 million through November 1, 2008. The Waiver was provided to us in exchange for an increase in the interest rate of 1% per annum per
month beginning January 1, 2008 and an option for the lender to delay receipt of the principal payments for up to six months. We retain the right to pay the term loan principal in cash or common stock; however, if exchanged for common stock,
the exchange price will be set equal to the lower of $1.50 per share or the volume weighted average price (VWAP) of the common stock for the 20 days prior to the exchange. The waiver also allows us to borrow $7.0 million over the calculated
borrowing base under the revolving line of credit in exchange for the interest rate on the portion of the outstanding borrowings that exceed the calculated borrowing base to accrue at 18.0% and the lender will be entitled to exchange $7.0 million of
the outstanding borrowings under the Revolver for shares of common stock at an exchange price of $1.50 per share through January 1, 2010.



|Item 6. | Exhibits.
|------- | ---------

The Exhibits included as part of this
report are listed in the attached Exhibit Index, which is incorporated herein by this reference.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.

Date: December 17, 2007



QUANTUM FUEL SYSTEMS TECHNOLOGIESWORLDWIDE, INC.By:

/s/ WILLIAM B. OLSONWilliam B. Olson, Chief Financial Officer and TreasurerAuthorized Signatory and Principal Financial Officer




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EXHIBIT INDEX

Form 10-Q For Period Ended October 31, 2007.



|     |  |                                                                                                                                                                                                                                                            
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amended and Restated Certificate of Incorporation of the Registrant, dated March 3, 2005 (incorporated herein by reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K
that was filed with the SEC on March 9, 2005).                    
|     | 
|3.2  |  | Certificate of Amendment of Certificate of Incorporation, dated September 28, 2007.                                                                                                                                                                        
|     | 
|10.1 |  | Lease Termination Agreement by and between Registrant and Cartwright Real Estate Holdings, LLC dated October 17, 2007 (incorporated herein by reference to Exhibit 10.1 of Registrants
Current Report on Form 8-K filed with the SEC on October 23, 2007).
|     | 
|10.2 |  | First Amendment to Credit Agreement, dated September 13, 2007.                                                                                                                                                                                             
|     | 
|10.3 |  | The Executive Nonqualified Excess Plan (Deferred Compensation Plan) of Quantum Fuel Systems Technologies Worldwide, Inc. dated November 1, 2007, Service Agreement.                                                                                        
|     | 
|10.4 |  | The Executive Nonqualified Excess Plan Adoption Agreement.                                                                                                                                                                                                 
|     | 
|10.5 |  | The Executive Nonqualified Excess Plan Trust Agreement.                                                                                                                                                                                                    
|     | 
|10.6 |  | Waiver and Agreement by and between Registrant and WB QT, LLC dated December 14, 2007.                                                                                                                                                                     
|     | 
|31.1 |  | Certification of the Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                       
|     | 
|31.2 |  | Certification of the Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                       
|     | 
|32.1 |  | Certification of the Chief Executive Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.                                                                                                                             
|     | 
|32.2 |  | Certification of the Chief Financial Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.                                                                                                                             



42