##### Table of Contents

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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 July 31, 2005, 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.    Yesx    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yesx    No ̈



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 September 2, 2005:



51,866,113
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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##### Table of Contents

INDEX



QUANTUM FUEL SYSTEMS TECHNOLOGIES
WORLDWIDE, INC.



|                                                                                                        |  |                                                                                       |  |   
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Part I.                                                                                                 |  | Financial Information                                                                 |  | 1 
|                                                                                                        |  |                                                                                      
|Item 1.                                                                                                 |  | Financial Statements                                                                  |  | 1 
|                                                                                                        | 
|Condensed consolidated balance sheets  April 30, 2005 and July 31, 2005 (unaudited)                    |  | 1                                                                                    
|                                                                                                        | 
|Condensed consolidated statements of operations (unaudited)  Three months ended July 31, 2004 and 2005 |  | 2                                                                                    
|                                                                                                        | 
|Condensed consolidated statements of cash flows (unaudited)  Three months ended July 31, 2004 and 2005 |  | 3                                                                                    
|                                                                                                        | 
|Notes to condensed consolidated financial statements (unaudited)  July 31, 2005                        |  | 4                                                                                    
|                                                                                                        |  |                                                                                      
|Item 2.                                                                                                 |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18
|                                                                                                        |  |                                                                                      
|Item 3.                                                                                                 |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 31
|                                                                                                        |  |                                                                                      
|Item 4.                                                                                                 |  | Controls and Procedures                                                               |  | 32
|                                                                                                        |  |                                                                                      
|Part II.                                                                                                |  | Other Information                                                                     |  | 32
|                                                                                                        |  |                                                                                      
|Item 5.                                                                                                 |  | Other Information                                                                     |  | 32
|                                                                                                        |  |                                                                                      
|Item 6.                                                                                                 |  | Exhibits                                                                              |  | 33
|                                                                                                        | 
|Signatures                                                                                              |  | 34                                                                                   
|                                                                                                        | 
|Exhibit Index                                                                                           |  | 35                                                                                   







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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Financial Statements



QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                        |  |                |             |   |               |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                                                                                                                        |  | April 30, 2005 |             |   | July 31, 2005 |  
|                                                                                                                                                                        |  | (Note 1)       |             |   | (Unaudited)   |  
|ASSETS                                                                                                                                                                  |  |                |             |   |               |   |             |  
|Current assets:                                                                                                                                                         |  |                |             |   |               |   |             |  
|Cash and cash equivalents                                                                                                                                               |  | $              | 11,736,688  |   |               | $ | 5,549,477   |  
|Marketable securities held-to-maturity                                                                                                                                  |  |                | 32,101,357  |   |               |   | 28,152,486  |  
|Accounts receivable, net                                                                                                                                                |  |                | 24,100,272  |   |               |   | 33,716,257  |  
|Inventories, net                                                                                                                                                        |  |                | 24,383,684  |   |               |   | 29,967,917  |  
|Tooling and engineering                                                                                                                                                 |  |                | 1,917,184   |   |               |   | 1,513,070   |  
|Refundable income taxes                                                                                                                                                 |  |                | 2,721,381   |   |               |   | 1,539,874   |  
|Other current assets                                                                                                                                                    |  |                | 791,871     |   |               |   | 869,486     |  
|                                                                                                                                                                        |  |                |             |   |               |   |             |  
|Total current assets                                                                                                                                                    |  |                | 97,752,437  |   |               |   | 101,308,567 |  
|                                                                                                                                                                        |  |               
|Property and equipment, net                                                                                                                                             |  |                | 20,280,405  |   |               |   | 20,373,859  |  
|Marketable securities held-to-maturity                                                                                                                                  |  |                | 4,001,182   |   |               |   | 3,237,390   |  
|Intangible assets, net                                                                                                                                                  |  |                | 16,731,930  |   |               |   | 15,614,986  |  
|Goodwill                                                                                                                                                                |  |                | 138,004,271 |   |               |   | 137,621,398 |  
|Other assets                                                                                                                                                            |  |                | 891,555     |   |               |   | 897,956     |  
|                                                                                                                                                                        |  |                |             |   |               |   |             |  
|Total assets                                                                                                                                                            |  | $              | 277,661,780 |   |               | $ | 279,054,156 |  
|                                                                                                                                                                        |  |                |             |   |               |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  |                |             |   |               |   |             |  
|Current liabilities:                                                                                                                                                    |  |                |             |   |               |   |             |  
|Accounts payable                                                                                                                                                        |  | $              | 31,734,310  |   |               | $ | 28,526,831  |  
|Accrued payroll obligations                                                                                                                                             |  |                | 2,234,049   |   |               |   | 1,931,537   |  
|Accrued interest                                                                                                                                                        |  |                | 457,408     |   |               |   | 201,282     |  
|Notes payable                                                                                                                                                           |  |                | 250,000     |   |               |   | 1,000,000   |  
|Deferred revenue                                                                                                                                                        |  |                | 52,889      |   |               |   | 732,300     |  
|Accrued warranties                                                                                                                                                      |  |                | 1,258,119   |   |               |   | 1,219,075   |  
|Other accrued liabilities                                                                                                                                               |  |                | 2,285,595   |   |               |   | 1,533,951   |  
|Current maturities of long-term debt                                                                                                                                    |  |                | 525,215     |   |               |   | 516,768     |  
|                                                                                                                                                                        |  |                |             |   |               |   |             |  
|Total current liabilities                                                                                                                                               |  |                | 38,797,585  |   |               |   | 35,661,744  |  
|                                                                                                                                                                        |  |               
|Long-term debt, net of current maturities                                                                                                                               |  |                | 19,656,162  |   |               |   | 32,202,196  |  
|Commitments and contingencies                                                                                                                                           |  |                |             |   |               |   |             |  
|Minority interest                                                                                                                                                       |  |                |            |   |               |   |            |  
|                                                                                                                                                                        |  |               
|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; 98,000,000 shares authorized; 51,735,257 issued and outstanding at April 30, 2005 and 51,863,613 issued and
outstanding at July 31, 2005 |  |                | 51,735      |   |               |   | 51,864      |  
|Additional paid-in-capital                                                                                                                                              |  |                | 254,680,716 |   |               |   | 255,132,717 |  
|Accumulated deficit                                                                                                                                                     |  |                | (35,543,418 | ) |               |   | (43,692,422 | )
|Unearned compensation - restricted stock awards                                                                                                                         |  |                |            |   |               |   | (297,917    | )
|Accumulated other comprehensive income (loss)                                                                                                                           |  |                | 18,000      |   |               |   | (5,026      | )
|                                                                                                                                                                        |  |                |             |   |               |   |             |  
|Total stockholders equity                                                                                                                                              |  |                | 219,208,033 |   |               |   | 211,190,216 |  
|                                                                                                                                                                        |  |                |             |   |               |   |             |  
|Total liabilities and stockholders equity                                                                                                                              |  | $              | 277,661,780 |   |               | $ | 279,054,156 |  
|                                                                                                                                                                        |  |                |             |   |               |   |             |  



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



|                                                                   |  |                             |            |   |      |   |            |  
|------------------------------------------------------------------ |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                   |  | Three Months Ended July 31, |           
|                                                                   |  | 2004                        |            |   | 2005 |  
|Revenue:                                                           |  |                             |            |   |      |   |            |  
|Net product sales                                                  |  | $                           | 3,358,003  |   |      | $ | 43,273,992 |  
|Contract revenue                                                   |  |                             | 2,996,944  |   |      |   | 4,098,352  |  
|                                                                   |  |                             |            |   |      |   |            |  
|Total revenue                                                      |  |                             | 6,354,947  |   |      |   | 47,372,344 |  
|                                                                   |  |                            
|Costs and expenses:                                                |  |                             |            |   |      |   |            |  
|Cost of product sales                                              |  |                             | 2,663,193  |   |      |   | 40,441,322 |  
|Research and development                                           |  |                             | 3,711,415  |   |      |   | 6,626,699  |  
|Selling, general and administrative                                |  |                             | 2,199,104  |   |      |   | 7,051,312  |  
|Amortization of intangibles                                        |  |                             | 414,944    |   |      |   | 1,116,944  |  
|                                                                   |  |                             |            |   |      |   |            |  
|Total costs and expenses                                           |  |                             | 8,988,656  |   |      |   | 55,236,277 |  
|                                                                   |  |                             |            |   |      |   |            |  
|Operating loss                                                     |  |                             | (2,633,709 | ) |      |   | (7,863,933 | )
|                                                                   |  |                            
|Interest income                                                    |  |                             | 208,585    |   |      |   | 290,433    |  
|Interest expense                                                   |  |                             |           |   |      |   | (575,283   | )
|Income tax provision                                               |  |                             | (800       | ) |      |   | (221       | )
|                                                                   |  |                             |            |   |      |   |            |  
|Net loss                                                           |  | $                           | (2,425,924 | ) |      | $ | (8,149,004 | )
|                                                                   |  |                             |            |   |      |   |            |  
|Net loss per share - basic and diluted                             |  | $                           | (0.08      | ) |      | $ | (0.15      | )
|                                                                   |  |                             |            |   |      |   |            |  
|Number of shares used in per share calculation - basic and diluted |  |                             | 31,686,322 |   |      |   | 52,844,605 |  
|                                                                   |  |                             |            |   |      |   |            |  



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



|                                                                            |  |                             |             |   |      |   |             |  
|--------------------------------------------------------------------------- |  | --------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                            |  | Three Months Ended July 31, |            
|                                                                            |  | 2004                        |             |   | 2005 |  
|Operating activities:                                                       |  |                             |             |   |      |   |             |  
|Net loss                                                                    |  | $                           | (2,425,924  | ) |      | $ | (8,149,004  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |             |   |      |   |             |  
|Depreciation and amortization                                               |  |                             | 1,252,354   |   |      |   | 2,686,119   |  
|Non-cash stock compensation charge                                          |  |                             |            |   |      |   | 27,083      |  
|Changes in operating assets and liabilities:                                |  |                             |             |   |      |   |             |  
|Accounts receivables                                                        |  |                             | (1,293,924  | ) |      |   | (9,599,285  | )
|Inventories                                                                 |  |                             | (25,913     | ) |      |   | (5,600,237  | )
|Tooling and engineering                                                     |  |                             |            |   |      |   | (41,886     | )
|Refundable income taxes                                                     |  |                             |            |   |      |   | 1,181,507   |  
|Other assets                                                                |  |                             | 477,248     |   |      |   | (146,190    | )
|Accounts payable                                                            |  |                             | (135,627    | ) |      |   | (2,880,145  | )
|Other liabilities                                                           |  |                             | (477,553    | ) |      |   | (227,094    | )
|                                                                            |  |                             |             |   |      |   |             |  
|Net cash used in operating activities                                       |  |                             | (2,629,339  | ) |      |   | (22,749,132 | )
|                                                                            |  |                             |             |   |      |   |             |  
|Investing activities:                                                       |  |                             |             |   |      |   |             |  
|Purchases of property and equipment                                         |  |                             | (692,200    | ) |      |   | (1,178,668  | )
|Acquisition transaction costs                                               |  |                             |            |   |      |   | (403,011    | )
|Purchases of marketable securities                                          |  |                             | (10,173,096 | ) |      |   | (6,845,956  | )
|Maturities of marketable securities                                         |  |                             | 11,516,212  |   |      |   | 11,558,619  |  
|                                                                            |  |                             |             |   |      |   |             |  
|Net cash provided by investing activities                                   |  |                             | 650,916     |   |      |   | 3,130,984   |  
|                                                                            |  |                             |             |   |      |   |             |  
|Financing activities:                                                       |  |                             |             |   |      |   |             |  
|Payments on capital lease obligations                                       |  |                             |            |   |      |   | (10,381     | )
|Proceeds from issuance of note payable                                      |  |                             |            |   |      |   | 750,000     |  
|Payments on notes and obligations payable                                   |  |                             |            |   |      |   | (123,216    | )
|Borrowings on revolving credit agreement                                    |  |                             |            |   |      |   | 12,671,184  |  
|Proceeds from exercises of stock options                                    |  |                             | 79,900      |   |      |   | 127,130     |  
|                                                                            |  |                             |             |   |      |   |             |  
|Net cash provided by financing activities                                   |  |                             | 79,900      |   |      |   | 13,414,717  |  
|                                                                            |  |                            
|Effect of exchange rate changes on cash                                     |  |                             |            |   |      |   | 16,220      |  
|                                                                            |  |                             |             |   |      |   |             |  
|Net decrease in cash and cash equivalents                                   |  |                             | (1,898,523  | ) |      |   | (6,187,211  | )
|Cash and cash equivalents at beginning of period                            |  |                             | 15,728,901  |   |      |   | 11,736,688  |  
|                                                                            |  |                             |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                  |  | $                           | 13,830,378  |   |      | $ | 5,549,477   |  
|                                                                            |  |                             |             |   |      |   |             |  
|Supplemental schedule of non-cash activity:                                 |  |                             |             |   |      |   |             |  
|Reclassification of capitalized costs:                                      |  |                             |             |   |      |   |             |  
|Property and equipment                                                      |  | $                           |            |   |      | $ | 446,000     |  
|Tooling and engineering                                                     |  |                             |            |   |      |   | (446,000    | )
|Issuance of shares of restricted stock:                                     |  |                             |             |   |      |   |             |  
|Additional paid-in capital                                                  |  |                             |            |   |      |   | 325,000     |  
|Unearned compensationrestricted stock awards                               |  |                             |            |   |      |   | (325,000    | )



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



July 31, 2005



1) Background and Basis of Presentation



Background



Quantum Fuel Systems Technologies Worldwide, Inc. and its subsidiaries
(collectively referred to as Quantum or the Company) provide powertrain engineering, system integration, manufacturing and assembly of packaged fuel systems and specialty equipment for automotive 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 consumers of aftermarket parts
and accessories. 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). On this date, IMPCO distributed the stock of the Company to stockholders of IMPCO based on a
distribution ratio of one share of the Companys common stock for every share of IMPCO common stock outstanding on the record date. The Companys accumulated deficit represents its operating results from the distribution date to the date
of the periods presented.



On March 3, 2005, the Company completed its
acquisition of Starcraft Corporation (Starcraft) in a tax-free stock-for-stock exchange. Pursuant to the terms set forth in the merger agreement, the Company operates Starcraft as a wholly-owned subsidiary (see Note 2). Management refers
to the operations acquired via the merger with Starcraft as the Tecstar Automotive Group.



Basis of Presentation



The accompanying
condensed consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and
operating results for the interim periods. The condensed consolidated balance sheet at April 30, 2005 has been derived from the audited financial statements of the Company at that date. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto, together with managements discussion and analysis of financial condition and the results of operations, contained in the Companys Annual Report on Form 10-K for
the fiscal year ended April 30, 2005. The results of operations for the three months ended July 31, 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year ending April 30, 2006.



The condensed consolidated financial statements include the accounts of Quantum Fuel Systems
Technologies Worldwide, Inc. and its wholly-owned subsidiary Starcraft (for the period subsequent to the merger completed on March 3, 2005). Through the Companys merger with Starcraft, the condensed consolidated financial statements also
include the wholly-owned subsidiaries of Starcraft, which consist of Tecstar Partners, LLC, Tecstar, L.P., Tecstar Manufacturing Canada Limited, Tarxien Automotive Products Limited, Classic Acquisition Company, LLC, Wheel to Wheel, LLC, and Wheel to
Wheel Powertrain, LLC. Also acquired in connection with the merger are the operating activities of two business ventures, Amstar, LLC (Amstar) and PowerTrain Integration, LLC, in which the Company holds equity ownership positions of 50%
and 51%, respectively. The accounts of both of these ventures are included in the Companys consolidated financial statements for the period subsequent to the merger.



Amstar 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). Tecstar L.P. has a 50% equity position in Amstar with AM General LLC holding the remaining 50% equity position.
Amstars operations are similar in nature to Tecstar Automotive Groups primary business of second stage manufacturing for automotive applications. Tecstar L.P. acts as a guarantor for certain facility lease and other agreements of Amstar
and has been determined to be Amstars primary beneficiary. The accounts of Amstar are consolidated by the Company as required by FIN 46R. The Company accounts for AM Generals equity position as minority interest (see Note 15).



All significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior period balances in order to conform to the current period presentation.



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##### Table of Contents

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 collectability of accounts receivable, the use and recoverability of inventory, impairment of long-lived assets
and goodwill, the realization of deferred tax assets, useful lives for depreciation/amortization periods of tangible and intangible assets, provisions for warranty claims and accruals for self-insured risks, 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.



Revenue Recognition



The Company generally manufactures products based on specific orders from customers. Revenue
is recognized on product sales when goods are shipped in accordance with the Companys shipping terms and collectability is reasonably assured. 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. Amounts expected to be realized on contracts are
based on the Companys estimates of total contract value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts. Percentage of completion is determined based on costs incurred as a
percentage of total estimated costs at completion. During the later part of the first quarter of fiscal 2006, the Company became aware of increased estimates of future material and other supporting costs in connection with a hydrogen internal
combustion engine development program and certain other hydrogen fuel delivery and storage system contracts. The increases in total expected contract costs were accounted for as a change in estimate in accordance with Accounting Principles Board
Opinion No. 20, Accounting Changes. The portion of contract revenue recognizable and net loss for the segment was negatively impacted by approximately $1.0 million as a result of the revised estimates of total expected project costs. The
overall revenue under contract was not affected as a result of this change in estimate and the Company expects that the $1.0 million will be recognized in future periods as work progresses on the contracts.



2) Acquisition of Starcraft Corporation



On March 3, 2005, the Company acquired all outstanding shares of stock of Starcraft
Corporation (Starcraft) pursuant to an Agreement and Plan of Merger as of November 23, 2004 (the Merger Agreement) in a transaction accounted for as a purchase in accordance with SFAS No. 141, Business
Combinations. Pursuant to the Merger Agreement, each share of Starcraft common stock that was outstanding at the effective time of the merger was converted into the right to receive 2.341 shares of Quantum common stock. Total Quantum shares
issued in connection with the merger amounted to approximately 21.0 million shares and represented approximately 40% of the total Quantum shares outstanding immediately following the completion of the merger.



Under the purchase method of accounting, the total estimated consideration for the
transaction was $146.4 million and consists of the exchange of Starcraft shares for the Companys common stock valued at $134.6 million, cash payments for Starcraft stock options and directors shares of $7.2 million, direct transaction
fees and expenses of $3.5 million, and a separation agreement with Starcrafts chairman of the board valued at $1.1 million. As a result, the Company recorded $137.6 million in goodwill and assigned $5.2 million to intangible assets, primarily
existing customer contracts and intellectual property.



The long-term
indebtedness of Starcraft remained outstanding following the merger, including Starcrafts 8.5% unsecured senior subordinated convertible promissory notes due July 1, 2009 in the aggregate principal amount of $15.0 million and approximately
$8.8 million in other indebtedness. In connection with the merger, the Company assumed the obligation to issue its common stock upon conversion of the Starcraft Convertible Notes at a conversion price of $5.77.



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##### Table of Contents

Starcraft is a Tier One second-stage manufacturer that designs, engineers and integrates specialty equipment products
into motor vehicle applications, primarily General Motors pick-up trucks and sport utility vehicles. In addition, Starcraft manufactures and distributes aftermarket automotive parts and products to wholesale and retail customers, and provides
engineering development services to customers in the automotive industry. Management refers to the operations acquired via the merger with Starcraft as the Tecstar Automotive Group.



During the three months ended July 31, 2005, the estimate of total consideration for the transaction decreased by $0.1 million and the
estimate for goodwill increased by $0.4 million. The Company has not yet obtained all information related to the acquisition, primarily related to the final completion of the income tax returns as of the acquisition date and final transaction costs.
The final allocation is anticipated to be completed during the remainder of fiscal 2006. The components of the consideration paid for Starcraft and the purchase price allocation of the acquired business are based upon independent appraisals and
managements estimates.



The operating results of Starcraft have been
included in the Companys consolidated financial statements from the date of the acquisition. The unaudited pro forma financial data set forth below gives effect to the Companys merger with Starcraft as if the acquisition had been
completed on May 1, 2004. The pro forma financial data includes adjustments to eliminate the operating revenues and expenses associated with Starcrafts kit and parts business that was transferred to the outgoing chairman of Starcraft,
incremental changes in amortization expense resulting from fair value adjustments to amortizable intangible assets, and an increase in the number of shares used in per share calculations as a result of shares issued in connection with the
transaction. The unaudited pro forma financial data excludes those adjustments made to allocate the purchase consideration to Starcrafts assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition.



|                                    |  |                                           |        |   |                       |   |        |  
|----------------------------------- |  | ----------------------------------------- | ------ | - | --------------------- | - | ------ | -
|                                    |  | Three Months Ended July 31, 2004          |       
|                                    |  | As Reported                               |        |   | Pro Forma (unaudited) |  
|                                    |  | (in thousands, except per share amounts ) |       
|Net revenue                         |  | $                                         | 6,355  |   |                       | $ | 47,410 |  
|Operating loss                      |  | $                                         | (2,634 | ) |                       | $ | (3,247 | )
|Net loss applicable to common stock |  | $                                         | (2,426 | ) |                       | $ | (3,184 | )
|Net loss per share:                 |  |                                           |        |   |                       |   |        |  
|Basic                               |  | $                                         | (0.08  | ) |                       | $ | (0.06  | )
|Diluted                             |  | $                                         | (0.08  | ) |                       | $ | (0.06  | )
|Number of shares:                   |  |                                           |        |   |                       |   |        |  
|Basic                               |  |                                           | 31,686 |   |                       |   | 52,682 |  
|Diluted                             |  |                                           | 31,686 |   |                       |   | 52,682 |  



The pro forma financial information is
presented for informational purposes only and is not indicative of what the actual consolidated results of operations might have been had the transaction occurred on May 1, 2004.





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3) Marketable Securities



Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that all
applicable investments be classified as trading securities, available-for-sale securities or held-to-maturity securities. The Company has determined that its investment portfolio is held-to-maturity and is therefore carrying marketable securities at
amortized cost.



At July 31, 2005, the Companys marketable securities
held-to-maturity consist of the following:



|                            |  |                |            |                  |   |        |  |            |         |  |   |           
|--------------------------- |  | -------------- | ---------- | ---------------- | - | ------ |  | ---------- | ------- |  | - | ----------
|                            |  |                |            | Gross Unrealized |   |       
|                            |  | Amortized Cost |            | Gains            |   | Losses |  | Fair Value
|Short-Term                  |  |                |            |                  |   |        |  |            |         |  |   |           
|Certificates of deposit     |  | $              | 2,220,597  |                  | $ |       |  | $          |        |  | $ | 2,220,597 
|Commercial paper            |  |                | 298,633    |                  |   |       |  |            |        |  |   | 298,633   
|Asset backed securities     |  |                | 1,584,385  |                  |   |       |  |            | 31,877  |  |   | 1,552,508 
|Corporate bonds             |  |                | 15,463,960 |                  |   |       |  |            | 53,685  |  |   | 15,410,275
|U.S. government securities  |  |                | 8,584,911  |                  |   |       |  |            | 55,054  |  |   | 8,529,857 
|                            |  |                |            |                  |   |        |  |            |         |  |   |           
|                            |  |                | 28,152,486 |                  |   |       |  |            | 140,616 |  |   | 28,011,870
|                            |  |                |            |                 
|Long-Term                   |  |                |            |                  |   |        |  |            |         |  |   |           
|Asset backed securities     |  |                |           |                  |   |       |  |            |        |  |   |          
|Corporate bonds             |  |                | 971,993    |                  |   |       |  |            | 13,337  |  |   | 958,656   
|U.S. government securities  |  |                | 2,265,397  |                  |   |       |  |            | 25,628  |  |   | 2,239,769 
|                            |  |                |            |                  |   |        |  |            |         |  |   |           
|                            |  |                | 3,237,390  |                  |   |       |  |            | 38,965  |  |   | 3,198,425 
|                            |  |                |            |                  |   |        |  |            |         |  |   |           
|Total marketable securities |  | $              | 31,389,876 |                  | $ |       |  | $          | 179,581 |  | $ | 31,210,295
|                            |  |                |            |                  |   |        |  |            |         |  |   |           



At July 31, 2005, marketable
securities held-to-maturity classified as long-term have maturity dates ranging from August 2006 to October 2007.



4) Accounts Receivable



Accounts receivable consist of the following:



|                                |  |                |            |   |               |   |            |  
|------------------------------- |  | -------------- | ---------- | - | ------------- | - | ---------- | -
|                                |  | April 30, 2005 |            |   | July 31, 2005 |  
|Customer accounts billed        |  | $              | 22,840,496 |   |               | $ | 32,249,246 |  
|Customer accounts unbilled      |  |                | 2,503,671  |   |               |   | 2,667,212  |  
|Allowance for doubtful accounts |  |                | (1,243,895 | ) |               |   | (1,200,201 | )
|                                |  |                |            |   |               |   |            |  
|Accounts receivable, net        |  | $              | 24,100,272 |   |               | $ | 33,716,257 |  
|                                |  |                |            |   |               |   |            |  





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5) Inventories



Inventories consist of the following:



|                                |  |                |            |   |               |   |            |  
|------------------------------- |  | -------------- | ---------- | - | ------------- | - | ---------- | -
|                                |  | April 30, 2005 |            |   | July 31, 2005 |  
|Materials and parts             |  | $              | 23,858,343 |   |               | $ | 28,847,423 |  
|Work-in-process                 |  |                | 806,772    |   |               |   | 946,001    |  
|Finished goods                  |  |                | 1,864,401  |   |               |   | 2,130,681  |  
|                                |  |                |            |   |               |   |            |  
|                                |  |                | 26,529,516 |   |               |   | 31,924,105 |  
|Less provision for obsolescence |  |                | (2,145,832 | ) |               |   | (1,956,188 | )
|                                |  |                |            |   |               |   |            |  
|Inventories, net                |  | $              | 24,383,684 |   |               | $ | 29,967,917 |  
|                                |  |                |            |   |               |   |            |  



6) Property and Equipment



Property and equipment consist of the following:



|                                               |  |                |             |   |               |   |             |  
|---------------------------------------------- |  | -------------- | ----------- | - | ------------- | - | ----------- | -
|                                               |  | April 30, 2005 |             |   | July 31, 2005 |  
|Land                                           |  | $              | 211,000     |   |               | $ | 211,000     |  
|Buildings                                      |  |                | 1,233,192   |   |               |   | 1,233,192   |  
|Dies, molds and patterns                       |  |                | 3,018,290   |   |               |   | 3,519,258   |  
|Machinery and equipment                        |  |                | 14,620,712  |   |               |   | 14,980,646  |  
|Office furnishings and equipment               |  |                | 13,066,431  |   |               |   | 12,977,910  |  
|Automobiles and trucks                         |  |                | 787,953     |   |               |   | 861,046     |  
|Leasehold improvements                         |  |                | 4,603,834   |   |               |   | 4,687,595   |  
|Capitalized machinery and equipment            |  |                | 623,358     |   |               |   | 623,358     |  
|Construction in progress                       |  |                | 581,347     |   |               |   | 1,314,741   |  
|                                               |  |                |             |   |               |   |             |  
|                                               |  |                | 38,746,117  |   |               |   | 40,408,746  |  
|Less accumulated depreciation and amortization |  |                | (18,465,712 | ) |               |   | (20,034,887 | )
|                                               |  |                |             |   |               |   |             |  
|Net property and equipment                     |  | $              | 20,280,405  |   |               | $ | 20,373,859  |  
|                                               |  |                |             |   |               |   |             |  





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##### Table of Contents

7) Goodwill and Other Intangible Assets



As discussed in Note 2, the Company completed its acquisition of Starcraft on March 3, 2005. In accordance with SFAS No. 141, the total
estimated consideration for the transaction was allocated to the tangible assets acquired and liabilities assumed based on their fair values at the date 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 Starcraft over the net of the amounts assigned to their assets acquired and liabilities assumed, amounting to $137.6 million based upon revised estimates, is
recognized as goodwill.



The Company also has an intangible asset representing
the fair value of common stock issued to General Motors Corporation (General Motors) in connection with a strategic alliance that became effective upon the distribution of the Company by IMPCO.



SFAS No. 142 requires that recognized intangible assets be amortized over their useful lives
and that goodwill is not subject to amortization. The intangible assets consisting of customer contracts and existing technology acquired in the acquisition of Starcraft are amortized using the straight-line method over their estimated
weighted-average useful lives of nineteen months and twenty-nine months, respectively. The intangible asset recorded in connection with the Corporate Alliance Agreement with General Motors is being amortized over the ten-year term of the strategic
alliance with General Motors ending July 22, 2012.



Intangible assets consist
of the following:



|                                 |  |                |            |   |               |   |            |  
|-------------------------------- |  | -------------- | ---------- | - | ------------- | - | ---------- | -
|                                 |  | April 30, 2005 |            |   | July 31, 2005 |  
|GM Strategic Alliance Agreement: |  |                |            |   |               |   |            |  
|Gross carrying value             |  | $              | 16,479,358 |   |               | $ | 16,479,358 |  
|Accumulated amortization         |  |                | (4,479,428 | ) |               |   | (4,894,372 | )
|                                 |  |                |            |   |               |   |            |  
|Net carrying value               |  |                | 11,999,930 |   |               |   | 11,584,986 |  
|                                 |  |               
|Customer contracts:              |  |                |            |   |               |   |            |  
|Gross carrying value             |  | $              | 3,100,000  |   |               | $ | 3,100,000  |  
|Accumulated amortization         |  |                | (322,000   | ) |               |   | (805,000   | )
|                                 |  |                |            |   |               |   |            |  
|Net carrying value               |  |                | 2,778,000  |   |               |   | 2,295,000  |  
|                                 |  |               
|Existing technology:             |  |                |            |   |               |   |            |  
|Gross carrying value             |  | $              | 2,100,000  |   |               | $ | 2,100,000  |  
|Accumulated amortization         |  |                | (146,000   | ) |               |   | (365,000   | )
|                                 |  |                |            |   |               |   |            |  
|Net carrying value               |  |                | 1,954,000  |   |               |   | 1,735,000  |  
|                                 |  |                |            |   |               |   |            |  
|                                 |  | $              | 16,731,930 |   |               | $ | 15,614,986 |  
|                                 |  |                |            |   |               |   |            |  



The goodwill and intangible assets are
reviewed on an annual basis for impairment or on a more frequent basis if events or circumstances change that might indicate that impairment exists. At July 31, 2005, the Company believes that no event or circumstance currently exists that would
indicate impairment of these long-lived assets.





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##### Table of Contents

8) 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 three months of fiscal 2006 are as follows:



|                                    |  |   |           |  
|----------------------------------- |  | - | --------- | -
|Balance at April 30, 2005           |  | $ | 1,258,119 |  
|Warranties issued during the period |  |   | 30,488    |  
|Settlements made during the period  |  |   | (69,532   | )
|                                    |  |   |           |  
|Balance at July 31, 2005            |  | $ | 1,219,075 |  
|                                    |  |   |           |  





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9) Long-term Debt



Long-term debt consists of the following:



|                                                                                                                                                                                                                     |  |                |            |   |               |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                                                                                                                                     |  | April 30, 2005 |            |   | July 31, 2005 |  
|Senior subordinated convertible notes                                                                                                                                                                                |  | $              | 15,000,000 |   |               | $ | 15,000,000 |  
|Domestic bank revolving lines of credit                                                                                                                                                                              |  |                |           |   |               |   | 12,671,184 |  
|Canadian revolving line of credit                                                                                                                                                                                    |  |                |           |   |               |   |           |  
|Mortgage note payable to bank, due in monthly installments of $15,000 including interest at the banks prime rate (effective rate of
6.25% at July 31, 2005), due September 2006, collateralized by related building |  |                | 1,255,712  |   |               |   | 1,229,353  |  
|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                                          |  |                | 1,736,462  |   |               |   | 1,693,275  |  
|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                                        |  |                | 2,169,084  |   |               |   | 2,115,414  |  
|Various capital lease obligations due in total monthly installments aggregating $2,837 including interest ranging from 12% to 19%, with
maturities through June 2006                                                 |  |                | 20,119     |   |               |   | 9,738      |  
|                                                                                                                                                                                                                     |  |                |            |   |               |   |            |  
|                                                                                                                                                                                                                     |  |                | 20,181,377 |   |               |   | 32,718,964 |  
|                                                                                                                                                                                                                     |  |               
|Less current maturities                                                                                                                                                                                              |  |                | (525,215   | ) |               |   | (516,768   | )
|                                                                                                                                                                                                                     |  |                |            |   |               |   |            |  
|Long-term debt                                                                                                                                                                                                       |  | $              | 19,656,162 |   |               | $ | 32,202,196 |  
|                                                                                                                                                                                                                     |  |                |            |   |               |   |            |  



Effective July 13, 2004, Starcraft
issued $15,000,000 in principal amount of unsecured senior subordinated convertible notes in a private placement to accredited investors. The notes bear interest at 8.5% and mature in July 2009, with semi-annual interest payments payable on January
1 and July 1 of each year. Per terms of the notes, as modified by the merger agreement with Starcraft, the interest payments can be made in either cash or shares of the Companys common stock, at the Companys discretion. As modified, the
notes are convertible, subject to certain conditions, into 2,599,653 shares of the Companys common stock at a conversion price of $5.77.



As of July 31, 2005, the Company had $30.0 million and $5.0 million revolving credit agreements with domestic and Canadian lenders. Advances under these credit agreements
were limited to a specific percentage of eligible receivables and inventories of the Tecstar Automotive Group. The advances bore interest subject to a pricing matrix with ranges of 0.75% below the prime rate to 0.25% above the prime rate dependent
upon a ratio of the Tecstar Automotive Groups funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The credit facilities were scheduled to expire on November 1, 2006. Availability under the
domestic and Canadian revolving credit agreements were limited to $26.1 million and $1.1 million, respectively, as of July 31, 2005. The lenders under the original credit facilities had waived the requirement to calculate covenants since the close
of the merger with Starcraft.



The Company was in compliance with reporting
requirements of the revolving credit facilities and the unsecured senior subordinated convertible notes as of July 31, 2005.



On September 9, 2005, Starcraft and the lead domestic and Canadian financial institution lender amended the existing revolving credit agreements. Under the terms of the
Amended and Restated Credit Agreement (the Amended Credit Facility), maximum availability under the domestic credit line was reduced to $20.0 million and the Canadian credit line remained at $5.0 million. The previous limitation on
availability of the lines to a specific percentage of eligible receivables and inventories of the Tecstar Automotive Group was eliminated under the Amended Credit Facility. Advances under the Amended Credit Facility bear interest at the greater of
prime rate minus 0.75% or the federal funds rate plus 1.00%. There is also a Euro currency based rate option as defined in the agreement. The Amended Credit Facility expires on September 1, 2008. Advances under the Amended Credit Facility are
secured by substantially all of Tecstar Automotive Groups assets and require the Company to meet certain covenants, including a minimum ratio for the Companys unencumbered consolidated cash and marketable securities to the revolving
commitment under the Amended Credit Facility, along with minimum net worth levels for the Tecstar Automotive Group. Quantum acts as a guarantor under the Amended Credit Facility.



The Company is responsible for commitment fees on the unused portion of the Amended Credit Facility of 0.1875%. There were no outstanding
letters of credit issued under the revolving credit facilities as of July 31, 2005 or September 9, 2005.



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##### Table of Contents

The promissory note and the obligation to a former shareholder of Wheel to Wheel, Inc. (the predecessor to Wheel to
Wheel, LLC) are guaranteed by certain officers and a current director of the Company.



10) Stock Based Compensation



Stock Options



On July 12, 2005 the Company granted an additional 1,010,000 options under the 2002 Stock
Incentive Plan. The exercise price of the options granted equaled the market price of the underlying stock on the date of the grant.



In April 2003, the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The Company elected to continue to account for stock-based compensation plans using
the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and related interpretations. No compensation expense is recorded under
APB No. 25 because the exercise price of the Companys employee common stock options equals the market price of the underlying common stock on the grant date. If the Company had elected to recognize compensation cost based on the estimated fair
value of the options granted at the grant date as prescribed by SFAS No. 148, net loss and loss per share would have been increased to the pro forma amounts shown below:



|                                                                                                                                                |  |                             |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                |  | Three Months Ended July 31, |           
|                                                                                                                                                |  | 2004                        |            |   | 2005 |  
|Net loss, as reported                                                                                                                           |  | $                           | (2,425,924 | ) |      | $ | (8,149,004 | )
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                             | (605,588   | ) |      |   | (1,175,851 | )
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Pro forma net loss                                                                                                                              |  | $                           | (3,031,512 | ) |      | $ | (9,324,855 | )
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Net loss per share, as reported - basic and diluted                                                                                             |  | $                           | (0.08      | ) |      | $ | (0.15      | )
|Stock-based employee compensation cost per share                                                                                                |  |                             | (0.02      | ) |      |   | (0.03      | )
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Pro forma net loss per share-basic and diluted                                                                                                  |  | $                           | (0.10      | ) |      | $ | (0.18      | )
|                                                                                                                                                |  |                             |            |   |      |   |            |  
|Number of shares used in the calculation of pro forma per share                                                                                 |  |                             | 31,686,322 |   |      |   | 52,844,605 |  
|                                                                                                                                                |  |                             |            |   |      |   |            |  



The estimated fair value of the
options is amortized to expense over the options vesting period for pro forma disclosures. The net income per share pro forma for the effects of SFAS No. 123, as amended by SFAS No. 148, is not indicative of the effects on reported
net income/loss for future years.



In December 2004, FASB issued SFAS No. 123
(revised 2004), Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123, supersedes APB No. 25 and amends SFAS No. 95, Statement of Cash Flows. In April 2005,



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##### Table of Contents

FASB delayed the initial adoption of SFAS No. 123R to annual periods that begin after June 15, 2005. As such, the Company
plans to adopt the provisions of SFAS No. 123R in fiscal 2007 beginning May 1, 2006. The Company is currently analyzing which method will be the most appropriate to estimate fair value of stock-based compensation upon adoption of SFAS No. 123R. The
Company anticipates that fair value estimates will be consistent with pro forma disclosures reported above if the Company determines it will use the Black-Scholes option-pricing model.



Restricted Stock



On May 1, 2005, the Company issued a total of 91,806 shares of restricted stock to the Chairman of the Board of Directors, the Chief Executive Officer and the Chief
Financial Officer of the Company. The value of these shares, measured on the date of award based upon the closing price of Quantums common stock of $3.54, was $325,000 and is being recorded as compensation expense ratably over the three year
restricted period until they vest in full on May 1, 2008. As of July 31, 2005, $297,917 of remaining unearned compensation is reported as part of stockholders equity on the consolidated balance sheet.



Shares Available for Grant



On May 1, 2005, an additional 1,552,057 shares of common stock became available for future
grant under the 2002 Stock Incentive Plan pursuant to an evergreen provision contained in the plan.



11) Warrants



In connection with the spin-off from IMPCO, the Company issued warrants to purchase an aggregate of 300,000 shares of the Companys common stock to holders of outstanding IMPCO warrants as of the distribution
date, July 23, 2002. The Company issued these warrants at an exercise price of $5.83 per share with a term expiring in January 2006. No warrants were exercised during the first quarter of fiscal years 2005 and 2006. At July 31, 2005, 245,444 of
these warrants remain outstanding.



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##### Table of Contents

12) 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 July 31, |           
|                                                                        |  | 2004                        |            |   | 2005 |  
|Numerator:                                                              |  |                             |            |   |      |   |            |  
|Net loss                                                                |  | $                           | (2,425,924 | ) |      | $ | (8,149,004 | )
|Numerator for basic loss per shareto common stockholders               |  | $                           | (2,425,924 | ) |      | $ | (8,149,004 | )
|Numerator for diluted loss per shareto common stockholders             |  | $                           | (2,425,924 | ) |      | $ | (8,149,004 | )
|                                                                        |  |                            
|Denominator for basic loss per shareweighted-average shares            |  |                             | 31,686,322 |   |      |   | 52,844,605 |  
|Denominator for diluted loss per shareadjusted weighted-average shares |  |                             | 31,686,322 |   |      |   | 52,844,605 |  
|Basic loss per share                                                    |  | $                           | (0.08      | ) |      | $ | (0.15      | )
|                                                                        |  |                             |            |   |      |   |            |  
|Diluted loss per share                                                  |  | $                           | (0.08      | ) |      | $ | (0.15      | )
|                                                                        |  |                             |            |   |      |   |            |  



13) Income Taxes



Income taxes for the three months ended July 31, 2005 were computed using the effective tax
rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The Company has established a valuation allowance against its net deferred tax asset since based on the Companys lack of
earnings history and current evidence, it is unlikely that the asset will be realized.



14



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##### Table of Contents

14) Business Segment and Geographic Information



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 expense incurred at the corporate
level.



The Quantum Fuel Systems business operations primarily consist of
design, manufacture and supply of packaged fuel systems for use in alternative fuel vehicles and fuel cell applications. 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 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. Prior to the acquisition of the Tecstar Automotive Group (formally Starcraft), the Quantum Fuel Systems business was reported in three separate segments
which were aligned consistent with how previous operating performance was tracked. The amounts reported for the first quarter of fiscal 2005 have been restated to reflect the new presentation.



The Tecstar Automotive Group is comprised of virtually all of the business activities
acquired via the merger with Starcraft. This segments business operations are focused on the automotive supply industry and primarily consist of second stage manufacturing of pick-up trucks and sport utility vehicles for General Motors.
Vehicle chassis are received from General Motors 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. Goodwill and intangible assets associated with the merger are reported in the Tecstar Automotive Group business segment.



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 funded under customer contracts.



For the
first quarter of fiscal 2006, consolidated revenue related to sales of our products to and contracts with General Motors and its affiliates represented 70.4% and 88.9% of total revenue for the Quantum Fuel Systems segment and the Tecstar Automotive
Group segment, respectively.



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.



The Companys long-lived assets are primarily based in facilities in Texas, California, Michigan, Louisiana, Indiana, and Ontario,
Canada.



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##### Table of Contents

Net revenues and operating loss for the Companys business segments are as follows:



|                         |  |                            |        |   |      |   |        |  
|------------------------ |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                         |  | Three Months EndedJuly 31, |       
|                         |  | 2004                       |        |   | 2005 |  
|                         |  | (in thousands)             |       
|Revenue                  |  |                            |        |   |      |   |        |  
|Quantum Fuel Systems     |  | $                          | 6,355  |   |      | $ | 4,381  |  
|Tecstar Automotive Group |  |                            |       |   |      |   | 42,991 |  
|Corporate                |  |                            |       |   |      |   |       |  
|                         |  |                            |        |   |      |   |        |  
|Total                    |  | $                          | 6,355  |   |      | $ | 47,372 |  
|                         |  |                            |        |   |      |   |        |  
|Operating Loss           |  |                            |        |   |      |   |        |  
|Quantum Fuel Systems     |  | $                          | (1,376 | ) |      | $ | (4,153 | )
|Tecstar Automotive Group |  |                            |       |   |      |   | (1,261 | )
|Corporate (1)            |  |                            | (1,258 | ) |      |   | (2,450 | )
|                         |  |                            |        |   |      |   |        |  
|Total                    |  | $                          | (2,634 | ) |      | $ | (7,864 | )
|                         |  |                            |        |   |      |   |        |  

---

|(1) | Represents corporate expenses not allocated to any of the reporting segments.
|--- | -----------------------------------------------------------------------------



Identifiable assets for the Companys business segments are as follows:



|                                     |  |                |         |               |   |        
|------------------------------------ |  | -------------- | ------- | ------------- | - | -------
|                                     |  | April 30, 2005 |         | July 31, 2005
|                                     |  | (in thousands)
|Identifiable Assets                  |  |                |         |               |   |        
|Quantum Fuel Systems                 |  | $              | 29,331  |               | $ | 28,295 
|Tecstar Automotive Group             |  |                | 194,513 |               |   | 208,400
|Corporate                            |  |                | 2,007   |               |   | 2,110  
|                                     |  |                |         |               |   |        
|Total identifiable assets            |  |                | 225,851 |               |   | 238,805
|Assets not specifically identifiable |  |                | 51,811  |               |   | 40,249 
|                                     |  |                |         |               |   |        
|Total assets                         |  | $              | 277,662 |               | $ | 279,054
|                                     |  |                |         |               |   |        



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##### Table of Contents

15) Minority Interest



AM General LLC holds a minority interest equity position in the accounts of Amstar, an enterprise that was acquired in connection with the merger with Starcraft. As of
April 30 and July 31, 2005, Amstar has incurred accumulated deficits of $212,756 and $307,450, 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 there is no balance to be reported as minority interest
as of and for the three month period ended July 31, 2005.



AM General advanced
$250,000 to Amstar on March 22, 2005 and $750,000 on July 19, 2005 in exchange for unsecured notes payable bearing interest at 5.5% and 6.5%, respectively. The advances are payable upon demand and are presented as notes payable on the consolidated
balance sheet.



16) Customer Arrangement



On June 16, 2005, the Company and General Motors entered into a binding arrangement that
requires GM to purchase wheel and tire assemblies prior to their distribution to GM dealers in the amount of $5,698,269. As of July 31, 2005, none of these parts had been shipped. Revenue and the associated cost of product sales under this
arrangement are deferred until certain criteria for revenue recognition are met, including a specific shipping schedule for the wheel and tire assemblies.



17) 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.



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##### Table of Contents

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



Forward-Looking Statements



This Report, including the Managements Discussion and Analysis that follows, contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not historical facts but rather are based on current expectations, estimates, and projections about our industry, our
beliefs, and assumptions. These statements relate to, among other things: our market and business strategies; our plans and expectations regarding the development and commercialization of our products; our expectations regarding future research and
development expenditures; our efforts to integrate the operations of Starcraft with our operations; our beliefs and plans with respect to our strategic alliance with General Motors; our expectations regarding the timing of future product shipments;
our expectations regarding certain measures of our financial performance during the remainder of fiscal 2006; and our beliefs regarding the adequacy of our available working capital. All statements included in this Report, other than those that are
historical, are forward-looking statements. We also use words such as anticipate, expect, intend, plan, believe, seek, estimate, and variations of these words and
similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict,
and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.



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



| |  |  | our revenues are derived primarily from General Motors and our business depends to a great extent on our relationship with General Motors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our second stage assembly agreements and our bi-fuel and compressed natural gas fuel systems agreement with General Motors extend through July 2006. If General Motors were to cease
doing business with us or significantly reduce or delay its purchases from us, and we are unable to replace the potential lost sales with agreements with other OEMs, our business, financial condition and results of operations could be materially
adversely affected;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General Motors has publicized its interest to put significant pressures on its suppliers to reduce costs, including General Motors intention to change suppliers if suppliers
do not comply;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we have a history of operating losses and negative cash flow that may continue into the foreseeable future without growth in the hydrogen economy and growth in our Tecstar
Automotive Group business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we expect our merger with Starcraft to result in benefits to the combined company, but we may not realize those benefits due to challenges associated with integrating the operations
and employees of the companies, which potentially could lead to an impairment of goodwill;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to achieve profitability of the combined company within the timeframe expected;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | our financial results could suffer if the goodwill and other intangible assets acquired in our merger with Starcraft become impaired, or as a result of costs associated with our
merger with Starcraft;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we could become subject to stockholder litigation associated with our merger with Starcraft;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our second-stage vehicle assembly operations is primarily focused on SUV and pick up truck vehicles which are dependent on the automotive and specialty vehicle markets in the United
States. These markets are influenced by and our sales may be negatively impacted by a number of factors including the level of disposable consumer income, OEM plant shutdowns, model year changeovers, atypical weather for any sales region, interest
rates, gasoline prices, and OEM programs affecting price and supply;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our business depends on the growth of the hydrogen economy and the fuel cell market, which in turn is dependent on government regulations, hydrogen availability, consumer adoption
of our technologies, and refueling technology advancements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our business depends upon General Motors and other OEMs commitment to the commercialization of fuel cell vehicles;
| | - |  | --------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | users of gaseous alternative fueled or fuel cell powered vehicles may not be able to obtain fuel conveniently and affordably, which may adversely affect the demand for our products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to design and manufacture fuel systems for fuel cell, hydrogen and hybrid applications that can be integrated into the products of OEMs will be critical to our business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our financial results can be impacted by our ability to estimate engineering and material costs associated with development programs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | we may experience delays in the delivery of high-strength fiber from our suppliers due to shortages of this material;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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



| |  |  | we depend on relationships with strategic partners, and the terms and enforceability of many of these relationships are not certain;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the market for fuel cell vehicles, hybrids and other alternative fuel vehicles may be sensitive to general economic conditions or consumer preferences;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we currently face and will continue to face significant competition;
| | - |  | --------------------------------------------------------------------



| |  |  | we depend on our intellectual property, and our failure to obtain, protect, and maintain the right to use certain intellectual property could adversely affect our future growth and
success;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we have limited experience manufacturing fuel systems for fuel cell and hybrid on a commercial basis, and as a result, we may experience process and technical difficulties that
cause product shipments to be delayed;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may need to raise additional capital in the future to achieve commercialization of our products and technologies and to develop facilities for mass production of these products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 affected by skilled labor shortages and labor disputes at OEM facilities;
| | - |  | -----------------------------------------------------------------------------------



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



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



| |  |  | new technologies could render our existing products obsolete;
| | - |  | -------------------------------------------------------------



| |  |  | failure to comply with OEM vehicle requirements, safety standards and applicable environmental and other laws and regulations could adversely affect our business and harm our
results of operations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future sales of substantial amounts of our common stock could affect its market price;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the market price and trading volume of our common stock may be volatile;
| | - |  | ------------------------------------------------------------------------



| |  |  | 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 section entitled Risk Factors in our Annual Report on Form 10-K for the year ended April 30,
2005. 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.



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##### Table of Contents

Overview



We provide powertrain engineering, system integration, manufacturing and assembly of packaged fuel systems and specialty equipment for automotive 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 OEMs and OEM dealer networks. We are uniquely positioned to integrate advanced fuel
system and electric drive 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.



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 systems for use in fuel cell, hydrogen and alternative
fuel vehicles. 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 fuel cell products into OEM vehicles. Product revenues are
also generated through the sale of compressed natural gas (CNG), 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 OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and operate with their fuel cell and alternative fuel applications. Prior to the
acquisition of the Tecstar Automotive Group (formerly Starcraft Corporation), the Quantum Fuel Systems business was reported in three separate segments that were aligned consistent with how previous operating performance was tracked. The amounts
reported for the first quarter of fiscal 2005 have been restated to reflect the new presentation.



The Tecstar Automotive Group segment is comprised of virtually all of the business activities acquired via the merger with Starcraft, which was completed in March 2005, and primarily consist 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 automotive accessories through OEM dealer networks.



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.



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 18,300 fuel systems for alternative fuel vehicles, primarily to General Motors Corporation and its affiliates (General Motors), which in turn have sold substantially all of these
vehicles to its customers. We also provide our gaseous fuel systems and hydrogen refueling 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 refueling products are not currently 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 years. We
believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen refueling products using our systems on a commercial basis.



A number of automotive and industrial manufacturers are developing alternative clean power systems using fuel cells 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 and electronic 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.



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##### Table of Contents

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 fuel cell 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 fuel cell technologies on a commercial scale.



Our fuel storage systems must be able to withstand rigorous testing as individual components
and as part of the fuel system on the vehicle. The fuel system as a whole, including the tank, regulator and fuel lines, need to comply with OEM vehicle requirements and applicable safety standards. Our hydrogen storage and delivery systems may
encounter technology and design challenges, durability constraints and issues with technology application into the vehicles. In early September 2005, Toyota Motor Company announced a recall of 14 fuel cell vehicles containing our hydrogen fuel
storage systems due to the discovery of a hydrogen leak in the system in one vehicle. We are currently working with Toyota to determine the cause of the malfunction.



A significant portion of our Quantum Fuel Systems business is generally related to alternative fuel and fuel cell vehicle sales, which vary
directly with the 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 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 year, we have 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.



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 designed for new OEM body styles, mid-cycle enhancements, specialty products, and high-performance engines and drivetrains. We also have engineering and design capabilities focused on
powertrain projects and complete vehicle concepts, such as 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 SUVs. 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 and
OEM-quality automotive accessories 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. Approximately 89% of Tecstar Automotive Groups sales for the first quarter of fiscal 2006 were made to General Motors.



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##### Table of Contents

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 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 quarters of fiscal 2005 and 2006,
consolidated revenue related to sales of our products to and contracts with General Motors and its affiliates represented 49.2% and 87.1%, respectively, of our total revenue for these periods. For the first quarters of fiscal years 2005 and 2006,
revenue related to sales of our products to and contracts with Toyota represented 16.5% and 0.3%, respectively, of our total revenue for those periods.



We recognize revenue for product sales when goods are shipped in accordance with our shipping terms and collectability is reasonably assured. Contract revenue is
recognized based on the percentage of completion method.



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 fuel cell applications.



General Motors
Relationship



Our strategic alliance with General Motors became
effective upon our spin-off from IMPCO Technologies, Inc. We believe that our strategic alliance with General Motors will enable us to 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 provide packaged natural gas and propane fuel systems for General Motors alternative fuel vehicle products.



In connection with our strategic alliance, immediately following our spin-off from IMPCO, we issued to General Motors an aggregate of
3,513,439 shares of our Series A common stock, representing 19.9% (since diluted to 8.5% as of July 31, 2005) of our total outstanding equity following such issuance, for consideration of a nominal cash contribution and access to certain of General
Motors proprietary information. Under the alliance, we have committed to spend $4.0 million annually for specific research and development projects directed by General Motors to speed the commercialization of our fuel cell related products.
Since this commitment was waived or partially waived by General Motors for calendar years 2002, 2003 and 2004, we anticipate that the commitment will be waived or partially waived in the future. We and General Motors agreed upon a Directed Research
and Development Statement of Work that covered the period from May 15, 2004 though May 14, 2005. The statement of work outlined specific tasks for the advancement of compressed fuel storage technologies enabling improved performance. Total spending
under the statement of work approximated $1.8 million and was funded under the Quantum Fuel Systems segment. We are currently in discussions with General Motors regarding a new directed research and development statement of work. We plan to use
jointly created technologies in certain aspects of our business but will be required to share revenue with General Motors on fuel cell system-related products that are sold to General Motors or third parties.



Beginning July 24, 2005 for non-automotive applications and July 24, 2008 for automotive
applications, we are obligated to provide revenue sharing payments to General Motors based on a percentage of gross revenue derived from our sale of gaseous storage handling and control products for fuel cell systems. The revenue sharing payments
will equal 5% of applicable gross revenue through July 23, 2015, 4% for the ten-year period ending July 23, 2025, 3% for the ten-year period ending July 23, 2035, and 2% for the ten-year period ending July 23, 2045. On July 23, 2045, we will also be
obligated to provide a final revenue sharing payment to General Motors equal to the present value of future revenue sharing payments that would otherwise be payable to General Motors on an annual basis assuming an income stream to General Motors of
2% of our gross revenues in perpetuity. During the first quarter of fiscal 2006, no applicable sales of applications developed under the strategic alliance were made.



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##### Table of Contents

Pursuant to the terms of our Amended and Restated Certificate of Incorporation, upon the completion of our January 2003
public offering, all of the outstanding 3,513,439 shares of Series A common stock held by General Motors converted on a one-for-one basis into Quantum common stock. We also issued an additional 999,969 shares of our non-voting Series B common stock
to General Motors pursuant to General Motors anti-dilution rights. As a result of the conversion of the Series A common stock, General Motors no longer has anti-dilution rights.



We recorded the value of the shares issued to General Motors as an intangible asset at fair market value on the date of their respective
issuance. We are amortizing this intangible asset over the ten-year term of the strategic alliance with General Motors, subject to periodic evaluation for impairment.



Separation from IMPCO



We were incorporated under the laws of the State of Delaware on October 13, 2000, as a wholly-owned subsidiary of IMPCO. IMPCO conducted our business through various
departments, first as a division (the Automotive OEM Division) and most recently as a subsidiary (Quantum Fuel Systems Technologies Worldwide, Inc.). On July 23, 2002, IMPCO completed the distribution and spin-off of our company by distributing to
IMPCO stockholders one share of Quantum common stock for every share of IMPCO common stock held on the record date. Prior to the distribution, we entered into several agreements with IMPCO with respect to, among other things, intellectual property
and a number of ongoing commercial relationships. The pricing terms for goods and services covered by the commercial agreements reflected negotiated prices. These agreements expire at various times through July 23, 2007.



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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 assets, 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
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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. Shipments are generally made by common carrier after receiving authorization from the customer, and
revenue is recognized upon shipment under FOB factory terms. We recognize revenue and profit as work progresses on long-term, fixed price contracts for product application development using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. We follow this method because 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. Except as discussed below, our historical final contract costs have approximated the initial
estimates and any unforeseen changes in the estimates have not 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.
During the first quarter of fiscal 2006, unforeseen changes in total expected costs and profit estimates for certain ongoing projects unfavorably impacted revenue recognition as discussed below under Results of Operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We conduct a major portion of our business with a limited number of customers. For the past year, the first quarter of fiscal 2006, and for the foreseeable future, General Motors
and its subsidiaries have represented, and are 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We provide for the estimated cost of product warranties at the time revenue is recognized based on past experience. 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. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component
suppliers, our warranty
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded our acquisition of Starcraft in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. We have not
obtained all information necessary to determine the final consideration paid in connection with the transaction. In determining the fair value of the assets acquired and liabilities assumed, we considered the evaluations of independent appraisers
and other estimates. These estimates may change before the final allocation is recorded later in fiscal 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We periodically evaluate for impairment our long-lived assets, particularly our goodwill and intangible assets relating to the acquisition of Starcraft 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 includes 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; significant negative industry or economic trends; and a significant decline in our stock price for a sustained period.
An impairment would be recognized based on the difference between the fair value of the asset and its carrying value. Future events could cause us to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting
impairment loss could have a material adverse impact on our financial condition and results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 carryforward 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 Starcraft as of and subsequent to the March
3, 2005 acquisition date. These differences result in a net deferred tax asset. 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 increase this allowance in a period, we must include an expense 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 net deferred tax assets. We have recorded a valuation allowance due to uncertainties related
to our ability to utilize the net deferred tax 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, 2005, our net deferred tax
assets have been offset in full by a valuation allowance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R requires the
expensing of unvested stock options. In April 2005, the FASB delayed the initial adoption of SFAS No. 123R to annual periods that begin after June 15, 2005. As such, we plan to adopt the provisions of SFAS No. 123R in fiscal 2007 beginning May 1,
2006. Currently, we account for stock options using the intrinsic value method of reporting prescribed by Accounting Principles Board Opinion (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, and provide footnote disclosure of the compensation expense associated with stock options. We are currently analyzing which method will be the most appropriate to estimate fair value of stock-based compensation upon adoption of SFAS
No. 123R. We anticipate that fair value estimates will be consistent with pro forma disclosures reported in Note 10 to the condensed consolidated financial statements if we determine we will use the Black-Scholes option-pricing model.



In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
151, Inventory Cost. SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (scrap). SFAS No. 151 requires that those items be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. As such, we plan to adopt these provisions for the annual reporting period beginning May 1, 2006.
We are currently evaluating the impact that SFAS No. 151 will have on our consolidated financial statements.



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Results of Operations



Three months ended July 31, 2004 and 2005



Net revenues and operating loss for our business segments for the three months ended July 31, 2004 and 2005 were as follows:



|                         |  |                            |        |   |      |   |        |  
|------------------------ |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                         |  | Three Months EndedJuly 31, |       
|                         |  | 2004                       |        |   | 2005 |  
|                         |  | (in thousands)             |       
|Revenue                  |  |                            |        |   |      |   |        |  
|Quantum Fuel Systems     |  | $                          | 6,355  |   |      | $ | 4,381  |  
|Tecstar Automotive Group |  |                            |       |   |      |   | 42,991 |  
|Corporate                |  |                            |       |   |      |   |       |  
|                         |  |                            |        |   |      |   |        |  
|Total                    |  | $                          | 6,355  |   |      | $ | 47,372 |  
|                         |  |                            |        |   |      |   |        |  
|Operating Loss           |  |                            |        |   |      |   |        |  
|Quantum Fuel Systems     |  | $                          | (1,376 | ) |      | $ | (4,153 | )
|Tecstar Automotive Group |  |                            |       |   |      |   | (1,261 | )
|Corporate (1)            |  |                            | (1,258 | ) |      |   | (2,450 | )
|                         |  |                            |        |   |      |   |        |  
|Total                    |  | $                          | (2,634 | ) |      | $ | (7,864 | )
|                         |  |                            |        |   |      |   |        |  

---

|(1) | Represents corporate expenses not allocated to any of the reporting segments.
|--- | -----------------------------------------------------------------------------



Net revenue increased $41.0 million from $6.4 million in the first quarter of fiscal 2005 to $47.4 million in the first quarter of fiscal 2006. This increase in
overall revenue is a result of the inclusion of Tecstar Automotive Groups operations in our consolidated results since the date of our acquisition of Starcraft on March 3, 2005, which was partially offset by a $2.0 million decrease in revenue
from our Quantum Fuel Systems segment from $6.4 million in the first quarter of fiscal 2005 to $4.4 million in the first quarter of fiscal 2006.



Overall operating loss increased $5.3 million, from $2.6 million in the first quarter of fiscal 2005 to $7.9 million in the first quarter of fiscal 2006 mainly due to
increased operating losses incurred in our Quantum Fuel Systems segment as a result of lower product sales and contract revenues, the addition of Tecstar Automotive Group operations which had an operating loss of $1.3 million, and a $1.2 million
increase in corporate expenses.



Quantum Fuel Systems Segment



Product sales decreased $1.4 million, or 41.2%, from $3.4 million in
the first quarter of fiscal 2005 to $2.0 million in the first quarter of fiscal 2006. Product sales during fiscal 2005 consisted of our hydrogen fuel metering and fuel storage systems for Toyota Motor Corporations fuel cell SUV platform and
bus platform and sales associated with General Motors pick-up trucks equipped with our bi-fuel and compressed natural gas fuel systems. Sales related to hydrogen fuel metering and fuel storage systems for fuel cell vehicle applications were
$1.1 million during the first quarter of fiscal 2005 and $0 during the first quarter of fiscal 2006 as a result of the completion and shipment during the fourth quarter of fiscal 2005 of all units ordered under the current generation of
Toyotas fuel cell SUV and bus platforms. We expect shipments on anticipated orders of hydrogen fuel metering and fuel storage systems under Toyotas fuel cell bus platform to begin near the second half of fiscal 2006. Sales related to
compressed natural gas fuel systems were $2.3 million during the first quarter of fiscal 2005 and declined $0.3 million, or 13.0%, to $2.0 million in the first quarter of fiscal 2006.



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Cost of product sales in the Quantum Fuel Systems segment decreased $0.2 million, or 7.4%, from $2.7 million in the first
quarter of fiscal 2005 to $2.5 million in the first quarter of fiscal 2006. The decrease was due to lower volumes of hydrogen related product sales and partially offset by increases in per unit material and overhead costs of our compressed natural
gas products.



Gross profits on product sales decreased $1.2 million from a
positive $0.7 million in the first quarter of fiscal 2005 to a negative $0.5 million in the first quarter of fiscal 2006. Lower volume on product sales and increased material and overhead costs per unit resulted in the negative gross profit realized
during the first quarter of fiscal 2006.



Contract revenue for the Quantum Fuel
Systems segment decreased $0.6 million, or 20.0%, from $3.0 million in the first quarter of fiscal 2005 to $2.4 million in the first quarter of fiscal 2006. Contract revenue is derived primarily from system development and application engineering of
our products under funded General Motors, Toyota 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. During the latter part of the first quarter of fiscal 2006,
we became aware of increased estimates of future material and other supporting costs in connection with a hydrogen internal combustion engine development program and certain other hydrogen fuel delivery and storage system contracts. Research and
development expense associated with development contracts increased $1.0 million, or 66.7%, from $1.5 million in the first quarter of fiscal 2005 to $2.5 million in the first quarter of fiscal 2006 as a result of expanded hydrogen-based programs for
the development of fuel delivery systems on behalf of automotive OEM customers, aerospace programs and government funded programs. Although expenses increased during the current period, the portion of contract revenue recognizable and operating loss
for the segment was negatively impacted by approximately $1.0 million as a result of the revised estimates of total expected project costs. The overall revenue under contract was not affected as a result of this change in estimate and we expect that
the $1.0 million will be recognized in future periods as work progresses on the contracts.



Internally funded research and development expense for the Quantum Fuel Systems segment decreased by $0.1 million, or 4.5%, from $2.2 million in the first quarter of fiscal 2005 to $2.1 million in the first quarter of
fiscal 2006. The decrease in the first quarter of fiscal 2006 is mainly attributable to a greater emphasis on utilizing internal resources for customer specific projects as compared to the first quarter of fiscal 2005.



Selling, general and administrative expenses increased $0.1 million or 10.0% from $1.0
million in the first quarter of fiscal 2005 to $1.1 million in the first quarter of fiscal 2006, primarily due to a higher level of support required to carry out the expanded customer specific project activities. Selling, general and administrative
expenses as a percentage of total Quantum Fuel Systems segment operating costs and expenses was 12.8% for both the first quarter of fiscal 2006 and the first quarter of fiscal 2005.



Amortization of intangibles for the Quantum Fuel Systems segment relates to the Corporate Alliance Agreement with General Motors. The
expense in the first quarter of fiscal year 2006 was the same as in the first quarter of fiscal 2005 and amounted to $0.4 million.



Operating loss for the Quantum Fuel Systems segment increased to $4.2 million in the first quarter of fiscal 2006 compared to an operating loss of $1.4 million in the
first quarter of fiscal 2005 primarily as a result of lower revenue recognition on development contracts and lower product shipments as compared to the first quarter of fiscal 2005. We expect the Quantum Fuel System segment to incur continued
operating losses during the remaining quarters of fiscal 2006, but at lower levels than experienced during the current quarter.



Tecstar Automotive Group Segment



All activity in the Tecstar Automotive Group segment relates to operations acquired in connection with the merger with Starcraft on March 3, 2005. The operating results
of the Tecstar Automotive Group have been included in our consolidated financial results since the date of the acquisition. 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 and SUVs through a second-stage assembly process or distributed through an OEM dealer network.



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Product sales for the Tecstar Automotive Group totaled $41.2 million during the first quarter of fiscal 2006.
Second-stage assembly revenues were $23.5 million and are mainly associated with second stage automotive manufacturing facilities located in Louisiana, Texas and Indiana in the United States and in Ontario, Canada. All of these facilities are
located near GM assembly plants. Substantially all product sales for this business segment are to General Motors. Product sales in the first quarter of fiscal 2006 for automotive OEM accessory parts distributed through dealer networks were $15.5
million and other revenues totaled $2.2 million.



Cost of product sales for the
Tecstar Automotive Group were $37.9 million in the first quarter of fiscal 2006 and primarily represent 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 $3.3 million or 8.0% of sales.



Contract revenue for the Tecstar Automotive Group was $1.8 million for the first quarter of fiscal 2006 and is primarily associated with design and engineering services for concept vehicles. Research and development expense associated with
cost of contract revenue was $2.1 million.



Selling, general and administrative
expenses for the Tecstar Automotive Group were $3.6 million or 8.4% of total segment revenue. 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.



Amortization of
intangibles was $0.7 million and represents the amortization of specifically identified customer contracts and existing technology acquired by Quantum in the merger with Starcraft. Amortization expense is expected to be approximately $2.8 million
for the full fiscal year 2006.



Operating loss for the Tecstar Automotive Group
segment was $1.3 million for the first quarter of fiscal 2006. We expect that Tecstar Automotive Group revenues for fiscal year 2006 will be higher than its fiscal year 2005 pro forma revenues of approximately $183.4 million and further anticipate
that the Tecstar Automotive Group segment will generate operating income for the full fiscal year 2006 as a result of introductions of new special edition platforms, the distribution of OEM-level parts for a new vehicle platform that began in
February 2005, and the continuation of second stage revenues under existing programs extending through July 2006.



Corporate



Corporate expenses increased by $1.2 million, or 92.3%, from $1.3 million in the first quarter of fiscal 2005 to $2.5 million in the first quarter of fiscal 2006 primarily as a result of supporting the addition of the
Tecstar Automotive Group segment operations. Corporate expenses as a percentage of total revenues decreased to 5.3% in the first quarter of fiscal 2006 as compared to 20.3% in the first quarter of fiscal 2005. We expect this ratio to remain
relatively constant during the remainder of fiscal 2006 due to a higher anticipated revenue base as compared to fiscal 2005.



Non-Reporting Segment Results



Interest Income and Expense. Interest income increased by $81,000, or 38.8%, from $209,000 in the first quarter of fiscal 2005 to $290,000 in the first quarter of
fiscal 2006. The increase is primarily a result of higher yields earned due to increases in the federal funds rate over the course of the last year. Interest expense amounted to $575,000 for the first quarter of fiscal 2006 as compared to $0 in the
first quarter of the previous year. Interest expense relates to debt obligations that were assumed in connection with the Starcraft merger on March 3, 2005 that had a total outstanding principal balance of $32.7 million as of July 31, 2005.



Provision for Income Taxes.Provision for income taxes remained minor
due to our net losses during the first quarter of both fiscal years. A full valuation allowance has been established for our net deferred tax assets due to our lack of earnings history. We anticipate that the provision for income taxes over the
remainder of fiscal 2006 will remain minor as we expect to continue incurring net losses.



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Liquidity and Capital Resources



Our principal sources of liquidity at July 31, 2005 included cash and cash equivalents of $5.5 million, short-term marketable securities of
$28.2 million, long-term marketable securities of $3.2 million, and revolving lines of credit with domestic and Canadian lenders totaling $35.0 million that were assumed in connection with our acquisition of Starcraft.



As of July 31, 2005, we had $30.0 million and $5.0 million revolving credit agreements with
domestic and Canadian lenders pursuant to credit facilities originally dated January 16, 2004. The advances bore interest subject to a pricing matrix with ranges of 0.75% below the prime rate to 0.25% above the prime rate dependent upon a ratio of
the Tecstar Automotive Groups funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The credit facilities were scheduled to expire on November 1, 2006. Availability under the domestic and Canadian
revolving credit agreements were limited to $26.1 million and $1.1 million, respectively, as of July 31, 2005. The lenders under the original credit facilities had waived the requirement to calculate covenants since the close of the merger with
Starcraft. The Company was in compliance with reporting requirements of the revolving credit facilities and the unsecured senior subordinated convertible notes as of July 31, 2005.



On September 9, 2005, Starcraft and the lead domestic and Canadian financial institution lender amended the existing revolving credit
agreements. Under the terms of the Amended and Restated Credit Agreement (the Amended Credit Facility), maximum availability under the domestic credit line was reduced to $20.0 million and the Canadian credit line remained at $5.0
million. The previous limitation on availability of the lines to a specific percentage of eligible receivables and inventories of the Tecstar Automotive Group was eliminated under the Amended Credit Facility. Advances under the Amended Credit
Facility bear interest at the greater of prime rate minus 0.75% or the federal funds rate plus 1.00%. There is also a Euro currency based rate option as defined in the agreement. The Amended Credit Facility expires on September 1, 2008. Advances
under the Amended Credit Facility are secured by substantially all of Tecstar Automotive Groups assets and require the Company to meet certain covenants, including a minimum ratio for the Companys unencumbered consolidated cash and
marketable securities to the revolving commitment under the Amended Credit Facility, along with minimum net worth levels for the Tecstar Automotive Group. Quantum acts as a guarantor under the Amended Credit Facility.



We assumed a total of $23.8 million of long-term debt at the close of the Starcraft merger on
March 3, 2005. Scheduled maturities of long-term debt payable for the full fiscal year 2006 are $0.5 million, including $0.1 million paid in the first quarter. The revolving lines of credit had outstanding balances totaling $12.7 million as of July
31, 2005.



We believe that our available working capital will be adequate to
meet our liquidity needs for at least the next twelve months. As of July 31, 2005, we had no material commitments for capital expenditures.



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 funding of application development programs, and other industry-wide growth factors. The Tecstar Automotive Group segment is dependent on factors such as 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. For example, borrowings under the revolving lines of credit at the end of our fourth quarter of fiscal 2005 were lower than at the end of our first quarter
primarily as a result of an early payment from General Motors that was scheduled for early May 2005. Competition and a reliance on a few customers, particularly General Motors, are additional factors that may impact our future operations.



In July 2002, we received $15.0 million 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 $8.0 million, all of which has been used for working capital purposes.
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 $60.1 million. In July 2004, Starcraft completed the private placement of
$15.0 million of unsecured senior subordinated convertible notes. The notes bear interest at 8.5% and mature in July 2009 with semi-annual interest payments payable on January 1 and July 1 of each year. Per the terms of the notes, as modified by the
merger agreement with Starcraft, the interest payments can be made in either cash or shares of our common stock, at our discretion. In connection with the merger, we assumed the obligation to issue shares of Quantum common stock upon conversion of
the notes at a conversion price of $5.77. The scheduled July 1, 2005 semi-annual interest payment was made in cash.



We may require additional financing to complete product and application development, develop facilities for commercialization and mass production of our products and
systems, and to take advantage of strategic opportunities. These additional sources of financing may include bank borrowings or public or private offerings of equity or debt securities. We cannot assure you that such additional sources of financing
will be available on acceptable terms, if at all. We have also agreed that, subject to limited exceptions, we will not issue any stock in a private placement transaction without the prior written consent of General Motors.



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Net cash used in operating activities was $22.7 million during the first quarter of fiscal 2006 as compared to $2.6
million in the first quarter of fiscal 2005. The increase in cash used in operating activities primarily resulted from increases in accounts receivable and inventory of $9.6 million and $5.6 million, respectively, and a net loss of $8.1 million
incurred in the first quarter of fiscal 2006. The increase in accounts receivable was mainly due to the timing of collections on product sales to General Motors. Tecstar Automotive Group normally receives a large cash collection from General Motors
once a month that covers a substantial portion of its segment product sales. Over the course of the first quarter of fiscal 2006, only two large monthly payments were received due to the earlier than expected collection of a payment scheduled for
May that was received during the last week in April. This timing resulted in a significant increase in accounts receivable during the first quarter of fiscal 2006. The increase in inventory was due to higher levels of raw materials and wheel and
tires assemblies on hand as a result of lower than expected product shipments in the Tecstar Automotive Group during the quarter. In connection with the higher levels of inventory on hand, we entered into an arrangement for the purchase of wheel and
tire assemblies by General Motors prior to their distribution to GM dealers. Revenue in the amount of $5.7 million and the associated cost of goods sold under this arrangement will be deferred until a specific shipping schedule is established for
the wheel and tire assemblies.



Net cash provided by investing activities
during the first quarter of fiscal 2006 was $3.1 million as compared to $0.7 million during the first quarter of fiscal 2005. The net cash provided in the current fiscal year is mainly a result of maturities on our marketable securities exceeding
the levels of reinvestment in longer-term securities by $4.7 million. Purchases of equipment and leasehold improvements were $1.2 million for the first quarter of fiscal 2006 as compared to $0.7 million for the prior fiscal year.



Net cash provided by financing activities during the first quarter of fiscal 2006 was $13.4
million as compared to $0.1 million during the first quarter of fiscal 2005. Cash provided during fiscal 2006 was principally from borrowings of $12.7 million on the domestic revolving credit facility we assumed in connection with the Starcraft
acquisition in March 2005. We also received $0.8 million of proceeds in connection with promissory notes issued to the minority interest partner associated with our consolidated subsidiary Amstar LLC.



The ratio of current assets to current liabilities was 2.5:1 at April 30, 2005 and 2.8:1 at
July 31, 2005. During the first quarter of fiscal 2006, our total working capital increased by $6.6 million, from $59.0 million at the end of fiscal 2005 to $65.6 million at July 31, 2005.



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, our cash and marketable securities are subject to fluctuations in interest rates. Based on our cash and marketable securities balance at July 31, 2005, a 1% decrease in interest rates would result in
reduced annual interest income of approximately $370,000.



We are also at risk
due to the variable nature of our $35.0 million in revolving credit facilities and our mortgage note related to one of our Troy, Michigan facilities. A 1% increase in the interest rate could result in an annual increase in interest expense of up to
approximately $350,000, assuming the maximum amount was outstanding on the credit facilities during an entire year. A 1% increase would result in approximately $12,000 of additional interest expense related to the mortgage note.



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 aggregated approximately $110,000 for the first quarter of fiscal 2006.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



Information relating to quantitative and qualitative disclosures about market risk appear under the heading Quantitative and Qualitative Disclosures About Market Risk in Item 2 hereof, and are incorporated
herein by reference.



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Item 4. 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. 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.



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



PART IIOTHER INFORMATION



Item 5. Other Information



The following
disclosure would otherwise be filed on Form 8-K under the heading Item 1.01. Entry Into a Material Definitive Agreement:



|(a) | In connection with his appointment to the board of directors on July 28, 2005, we entered into an indemnification agreement with Paul E. Grutzner. The indemnification agreement is
substantially similar to the form of indemnification agreement that we have previously entered into with our existing executive officers and directors, which provide for the maximum indemnity available to directors and officers under Section 145 of
the Delaware General Corporation Law and our amended and restated certificate of incorporation, as well as certain additional procedural protections. These indemnification agreements may require us, among other things, to indemnify our executive
officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any
expenses incurred by the executive officers or directors as a result of any proceeding against them as to which they could be indemnified and to obtain directors and officers insurance if available on reasonable terms. For further
information on the terms of these indemnification agreements, reference is made to the form of Indemnification Agreement filed as Exhibit 10.21 to our Registration Statement on Form S-1 (No. 333-101668), filed on December 5, 2002, which is
incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following disclosure would
otherwise be filed on Form 8-K under the heading Item 1.01. Entry Into a Material Definitive Agreement and Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant:



|(b) | On September 9, 2005, Starcraft and the lead domestic and Canadian financial institution lender amended Starcrafts existing revolving credit agreements. Under the terms of the
Amended and Restated Credit Agreement (the Amended Credit Facility), maximum availability under the domestic credit line was reduced to $20.0 million and the Canadian credit line remained at $5.0 million. The previous limitation on
availability of the lines to a specific percentage of eligible receivables and inventories of the Tecstar Automotive Group was eliminated under the Amended Credit Facility. Advances under the Amended Credit Facility bear interest at the greater of
prime rate minus 0.75% or the federal funds rate plus 1.00%. There is also a Euro currency based rate option as defined in the agreement. The Amended Credit Facility expires on September 1, 2008. Advances under the Amended Credit Facility are
secured by substantially all of Tecstar Automotive Groups assets and require the Company to meet certain covenants, including a minimum ratio for the Companys unencumbered consolidated cash and marketable securities to the revolving
commitment under the Amended Credit Facility, along with minimum net worth levels for the Tecstar Automotive Group. Quantum acts as a guarantor under the Amended Credit Facility.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 6. Exhibits.



|              |  |                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                     
|10.1*         |  | Employment Agreement, dated May 1, 2005, by and between the Registrant and Alan P. Niedzwiecki (incorporated herein by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K that was filed with the SEC on May 5, 2005).    
|              | 
|10.2*         |  | Employment Agreement, dated May 1, 2005, by and between the Registrant and W. Brian Olson (incorporated herein by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K
that was filed with the SEC on May 5, 2005).         
|              | 
|10.3*         |  | Employment Agreement, dated May 1, 2005, by and between the Registrant and Glenn D. Moffett (incorporated herein by reference to Exhibit 10.3 of the Registrants Current Report on Form
8-K that was filed with the SEC on May 5, 2005).       
|              | 
|10.4*         |  | Form of Restricted Stock Award Agreement under the Registrants 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 of the Registrants Current Report on
Form 8-K that was filed with the SEC on May 5, 2005).         
|              | 
|10.5*         |  | Consulting Agreement, dated May 1, 2005, by and between the Registrant and Dale L. Rasmussen (incorporated herein by reference to Exhibit 10.5 of the Registrants Current Report on Form
8-K that was filed with the SEC on May 5, 2005).      
|              | 
|10.6*         |  | Employment Agreement, dated July 12, 2005, by and between the Registrant and Kenneth R. Lombardo (incorporated herein by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K that was filed with the SEC on July 18, 2005).
|              | 
|10.7*         |  | Quantum Fuel Systems Technologies Worldwide, Inc. 2002 Stock Incentive Plan, as amended.                                                                                                                                                        
|              | 
|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.                                                                                                                  

---

|* | The referenced exhibit is a compensatory contract, plan or arrangement.
|- | -----------------------------------------------------------------------



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##### Table of Contents

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: September 9, 2005



QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.By:

/S/ WILLIAM B. OLSONWilliam B. Olson, Chief Financial Officer and Treasurer [Authorized Signatory and Principal Financial Officer]




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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                     
|10.1*         |  | Employment Agreement, dated May 1, 2005, by and between the Registrant and Alan P. Niedzwiecki (incorporated herein by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K that was filed with the SEC on May 5, 2005).    
|              | 
|10.2*         |  | Employment Agreement, dated May 1, 2005, by and between the Registrant and W. Brian Olson (incorporated herein by reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K
that was filed with the SEC on May 5, 2005).         
|              | 
|10.3*         |  | Employment Agreement, dated May 1, 2005, by and between the Registrant and Glenn D. Moffett (incorporated herein by reference to Exhibit 10.3 of the Registrants Current Report on Form
8-K that was filed with the SEC on May 5, 2005).       
|              | 
|10.4*         |  | Form of Restricted Stock Award Agreement under the Registrants 2002 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 of the Registrants Current Report on
Form 8-K that was filed with the SEC on May 5, 2005).         
|              | 
|10.5*         |  | Consulting Agreement, dated May 1, 2005, by and between the Registrant and Dale L. Rasmussen (incorporated herein by reference to Exhibit 10.5 of the Registrants Current Report on Form
8-K that was filed with the SEC on May 5, 2005).      
|              | 
|10.6*         |  | Employment Agreement, dated July 12, 2005, by and between the Registrant and Kenneth R. Lombardo (incorporated herein by reference to Exhibit 10.1 of the Registrants Current Report on
Form 8-K that was filed with the SEC on July 18, 2005).
|              | 
|10.7*         |  | Quantum Fuel Systems Technologies Worldwide, Inc. 2002 Stock Incentive Plan, as amended.                                                                                                                                                        
|              | 
|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.                                                                                                                  

---

|* | The referenced exhibit is a compensatory contract, plan or arrangement.
|- | -----------------------------------------------------------------------



35