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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended October 31, 2003, 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



---



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes  x     No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes  x    No ̈



Number of
shares outstanding of each of the issuers classes of common stock, as of December 9, 2003:



30,374,528 shares of Common Stock, $.001 par value per share, and 999,969 shares of Series B Common Stock, $.001 par value per share.



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INDEX



QUANTUM FUEL SYSTEMS TECHNOLOGIES
WORLDWIDE, INC.



|                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------
|Part I.    Financial Information                                                                                   
|Item 1.    Financial Statements                                                                                    
|Condensed balance sheets  April 30, 2003 and October 31, 2003 (unaudited)                                         
|Condensed statements of operations (unaudited)  Three and six months ended October 31, 2002 and October 31, 2003  
|Condensed statements of cash flows (unaudited)  Three and six months ended October 31, 2002 and October 31, 2003  
|Notes to condensed financial statements (unaudited)  October 31, 2003                                             
|Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations                   
|Item 3.    Quantitative and Qualitative Disclosures About Market Risk                                              
|Item 4.    Controls and Procedures                                                                                 
|Part II.    Other Information                                                                                      
|Item 2.    Changes in Securities and Use of Proceeds Item 4.    Submission of Matters to a Vote of Security Holders
|Item 6.    Exhibits and Reports on Form 8-K                                                                        
|Signatures                                                                                                         
|Certifications                                                                                                     
|Exhibit Index                                                                                                      





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PART IFINANCIAL INFORMATION



Item 1. Financial Statements



QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED BALANCE SHEETS

April 30, 2003 and October 31, 2003



|                                                                                                                      |  | April 30, 2003 |            |   | October 31, 2003 |  
|--------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ---------------- | -
|                                                                                                                      |  |                |            |   | (unaudited)      |  
|ASSETS                                                                                                                |  |                |            |   |                  |  
|Current assets:                                                                                                       |  |                |            |   |                  |  
|Cash and cash equivalents                                                                                             |  | $              | 11,538,873 |   |                  | $
|Accounts receivable, less allowance for doubtful accounts                                                             |  |                | 5,501,923  |   |                  |  
|Other receivables                                                                                                     |  |                | 70,702     |   |                  |  
|Inventories:                                                                                                          |  |                |            |   |                  |  
|Raw materials and parts                                                                                               |  |                | 4,812,341  |   |                  |  
|Work-in-process                                                                                                       |  |                | 29,896     |   |                  |  
|Finished goods                                                                                                        |  |                | 2,961,685  |   |                  |  
|Less inventory reserves                                                                                               |  |                | (1,778,020 | ) |                  |  
|                                                                                                                      |  |                |            |   |                  |  
|Total inventories                                                                                                     |  |                | 6,025,902  |   |                  |  
|Other current assets                                                                                                  |  |                | 364,385    |   |                  |  
|                                                                                                                      |  |                |            |   |                  |  
|Total current assets                                                                                                  |  |                | 23,501,785 |   |                  |  
|Equipment and leasehold improvements:                                                                                 |  |                |            |   |                  |  
|Dies, molds and patterns                                                                                              |  |                | 2,917,795  |   |                  |  
|Machinery and equipment                                                                                               |  |                | 9,149,263  |   |                  |  
|Office furnishings and equipment                                                                                      |  |                | 7,558,287  |   |                  |  
|Automobiles and trucks                                                                                                |  |                | 101,144    |   |                  |  
|Leasehold improvements                                                                                                |  |                | 2,521,888  |   |                  |  
|Construction in process                                                                                               |  |                | 276,048    |   |                  |  
|                                                                                                                      |  |                |            |   |                  |  
|                                                                                                                      |  |                | 22,524,425 |   |                  |  
|Less accumulated depreciation and amortization                                                                        |  |                | 11,640,393 |   |                  |  
|                                                                                                                      |  |                |            |   |                  |  
|Net equipment and leasehold improvements                                                                              |  |                | 10,884,032 |   |                  |  
|Intangible asset, net of accumulated amortization of $1,159,878 and $1,989,765 at April 30, 2003 and October 31,
2003 |  |                | 15,319,480 |   |                  |  
|Other assets                                                                                                          |  |                | 1,246,984  |   |                  |  
|                                                                                                                      |  |                |            |   |                  |  
|Total assets                                                                                                          |  | $              | 50,952,281 |   |                  | $
|                                                                                                                      |  |                |            |   |                  |  



See
accompanying notes to condensed financial statements.





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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED BALANCE SHEETS

April 30, 2003 and October 31, 2003

(Continued)



|                                                                                                                                                                                                           |  | April 30, 2003 |             |   | October 31, 2003 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ---------------- | -
|                                                                                                                                                                                                           |  |                |             |   | (unaudited)      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                       |  |                |             |   |                  |  
|Current liabilities:                                                                                                                                                                                       |  |                |             |   |                  |  
|Accounts payable                                                                                                                                                                                           |  | $              | 4,036,960   |   |                  | $
|Accrued payroll obligations                                                                                                                                                                                |  |                | 950,164     |   |                  |  
|Accrued warranties                                                                                                                                                                                         |  |                | 1,120,754   |   |                  |  
|Other accrued expenses                                                                                                                                                                                     |  |                | 1,755,340   |   |                  |  
|Current maturities of capital leases                                                                                                                                                                       |  |                | 138,794     |   |                  |  
|                                                                                                                                                                                                           |  |                |             |   |                  |  
|Total current liabilities                                                                                                                                                                                  |  |                | 8,002,012   |   |                  |  
|                                                                                                                                                                                                           |  |               
|Commitments and contingencies                                                                                                                                                                              |  |                |            |   |                  |  
|                                                                                                                                                                                                           |  |               
|Stockholders equity:                                                                                                                                                                                      |  |                |             |   |                  |  
|Preferred stock, $.001 par value, 20,000,000 shares authorized at April 30, 2003 and October 31, 2003; 0 issued and outstanding at
April 30, 2003 and October 31, 2003                                     |  |                |            |   |                  |  
|Series A common stock, $.001 par value, 12,000,000 shares authorized at April 30, 2003 and October 31, 2003; 0 issued and
outstanding at April 30, 2003 and October 31, 2003                               |  |                |            |   |                  |  
|Series B common stock, $.001 par value, 6,000,000 shares authorized at April 30, 2003 and October 31, 2003; 999,969 issued and
outstanding at April 30, 2003 and October 31, 2003                          |  |                | 1,000       |   |                  |  
|Common stock, $.001 par value, 42,000,000 authorized at April 30, 2003 and October 31, 2003; 21,680,475 issued and outstanding at
April 30, 2003 and 30,370,175 issued and outstanding at October 31, 2003 |  |                | 21,680      |   |                  |  
|Additional paid-in capital                                                                                                                                                                                 |  |                | 56,437,797  |   |                  |  
|Accumulated deficit                                                                                                                                                                                        |  |                | (13,510,208 | ) |                  |  
|                                                                                                                                                                                                           |  |                |             |   |                  |  
|Total stockholders equity                                                                                                                                                                                 |  |                | 42,950,269  |   |                  |  
|                                                                                                                                                                                                           |  |                |             |   |                  |  
|Total liabilities and stockholders equity                                                                                                                                                                 |  | $              | 50,952,281  |   |                  | $
|                                                                                                                                                                                                           |  |                |             |   |                  |  



See
accompanying notes to condensed financial statements.





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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED STATEMENTS OF OPERATIONS

Unaudited

Three and six months ended October 31, 2002 and 2003



|                                                |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|----------------------------------------------- |  | ------------------------------ | ---------- | - | ---------------------------- | -
|                                                |  | 2002                           |            |   | 2003                         |  
|Net revenue:                                    |  |                                |            |   |                              |  
|Product sales                                   |  | $                              | 3,807,100  |   |                              | $
|Contract revenue                                |  |                                | 1,794,827  |   |                              |  
|                                                |  |                                |            |   |                              |  
|Total revenue                                   |  |                                | 5,601,927  |   |                              |  
|Costs and expenses:                             |  |                                |            |   |                              |  
|Cost of product sales                           |  |                                | 5,131,371  |   |                              |  
|Research and development                        |  |                                | 3,745,944  |   |                              |  
|Selling, general and administrative             |  |                                | 2,340,653  |   |                              |  
|                                                |  |                                |            |   |                              |  
|Total costs and expenses                        |  |                                | 11,217,968 |   |                              |  
|Operating loss                                  |  |                                | (5,616,041 | ) |                              |  
|Interest expense (income), net                  |  |                                | (35,851    | ) |                              |  
|Other expense (income)                          |  |                                | (330,120   | ) |                              |  
|Provision for income taxes                      |  |                                | 800        |   |                              |  
|                                                |  |                                |            |   |                              |  
|Net loss applicable to common stock             |  | $                              | (5,250,870 | ) |                              | $
|                                                |  |                                |            |   |                              |  
|Net loss per share:                             |  |                                |            |   |                              |  
|Basic                                           |  | $                              | (0.30      | ) |                              | $
|                                                |  |                                |            |   |                              |  
|Diluted                                         |  | $                              | (0.30      | ) |                              | $
|                                                |  |                                |            |   |                              |  
|Number of shares used in per share calculation: |  |                                |            |   |                              |  
|Basic                                           |  |                                | 17,655,475 |   |                              |  
|                                                |  |                                |            |   |                              |  
|Diluted                                         |  |                                | 17,655,475 |   |                              |  
|                                                |  |                                |            |   |                              |  



See
accompanying notes to condensed financial statements.





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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED STATEMENTS OF CASH FLOWS

Unaudited

Six months ended October 31, 2002 and 2003



|                                                                            |  | Six Months Ended October 31, |            
|--------------------------------------------------------------------------- |  | ---------------------------- | -----------
|                                                                            |  | 2002                         |            
|Cash flows from operating activities:                                       |  |                              |            
|Net loss                                                                    |  | $                            | (10,306,265
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |            
|Depreciation and amortization                                               |  |                              | 2,169,442  
|Non-cash stock compensation charge                                          |  |                              |           
|Changes in operating assets and liabilities:                                |  |                              |            
|Receivables                                                                 |  |                              | 150,857    
|Inventories                                                                 |  |                              | 1,536,579  
|Other assets                                                                |  |                              | (211,607   
|Accounts payable                                                            |  |                              | (634,945   
|Accrued liabilities                                                         |  |                              | 332,364    
|                                                                            |  |                              |            
|Net cash used in operating activities                                       |  |                              | (6,963,575 
|                                                                            |  |                              |            
|Investing activities:                                                       |  |                              |            
|Purchases of equipment and leasehold improvements                           |  |                              | (667,371   
|Proceeds from sale of property and equipment                                |  |                              | 92,000     
|                                                                            |  |                              |            
|Net cash used in investing activities                                       |  |                              | (575,371   
|                                                                            |  |                              |            
|Financing activities:                                                       |  |                              |            
|Payments on capital lease obligations                                       |  |                              | (94,420    
|Net advances from IMPCO                                                     |  |                              | 2,713,405  
|Issuance of Series A common stock                                           |  |                              | 3,513      
|Issuance of common stock                                                    |  |                              |           
|Exercise of stock options                                                   |  |                              |           
|Contribution from IMPCO Technologies upon distribution                      |  |                              | 15,000,000 
|Additional costs related to equity offering                                 |  |                              |           
|                                                                            |  |                              |            
|Net cash provided by financing activities                                   |  |                              | 17,622,498 
|                                                                            |  |                              |            
|Net increase in cash                                                        |  |                              | 10,083,552 
|Cash and cash equivalents at beginning of period                            |  |                              | 177,414    
|                                                                            |  |                              |            
|Cash and cash equivalents at end of period                                  |  | $                            | 10,260,966 
|                                                                            |  |                              |            
|Supplemental schedule of non-cash activity:                                 |  |                              |            
|Issuance of Series A common stock recorded as intangible asset              |  | $                            | 14,229,428 
|Assumption of line of credit by IMPCO Technologies                          |  |                              | 8,625,000  
|Conversion of owners net investment to stockholders equity                |  |                              | 31,831,129 
|Issuance of warrants                                                        |  |                              | 103,461    



See
accompanying notes to condensed financial statements.





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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS



October 31, 2003



1) BASIS OF PRESENTATION



On July 23, 2002, IMPCO Technologies, Inc. (IMPCO) completed the
distribution and spin-off of Quantum Fuel Systems Technologies Worldwide, Inc. (the Company) to its stockholders. The Company is focusing on enabling technologies for alternative propulsion and energy in emerging global markets. The Company provides
hydrogen and compressed natural gas (CNG) handling and storage system technologies to manufacturers of fuel cell and internal combustion engines.



On the date of the distribution and spin-off, 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. In addition, IMPCO contributed $15 million in cash to the Company and assumed the Companys debt facility of $8.6 million on the date of
distribution. Furthermore, as discussed in Note 8, immediately following the spin-off the Company issued 3,513,439 shares of its Series A common stock to General Motors (GM) in connection with a strategic alliance between the Company and GM. The
Companys accumulated deficit at October 31, 2003 of $17,314,654 represents its operating results from the distribution date to October 31, 2003.



The financial statements include the Company, as well as certain assets, liabilities, and related operations that were transferred to the Company (the Contribution) from
IMPCO. The financial statements include the historical operations transferred to the Company by IMPCO (the Companys Businesses). The Contribution was completed prior to the distribution and resulted in a recapitalization of the Company.



The accompanying condensed 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 financial statements
should be read in conjunction with the 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, 2003. The results of operations for the three and six months ended October 31, 2003 are not necessarily indicative of the results that may be expected for the entire year ending April 30, 2004.



Certain reclassifications have been made to prior period balances in order to conform to the
current period presentation.



2) EQUITY OFFERING



On October 24, 2003, the Company completed a public equity offering of 7,000,000 shares of
common stock at a price of $8.00 per share for $56.0 million in gross proceeds. The Company also granted the underwriters a 30-day option to purchase up to an additional 1,050,000 shares of common stock at the public offering price, less the
underwriting discount, to cover any over-allotments. On October 31, 2003, the Company sold 1,050,000 additional shares of common stock pursuant to the underwriters over-allotment option at a price of $8.00 per share for $8.4 million in gross
proceeds.



3) EARNINGS PER SHARE



The Company computes net income (loss) per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin (SAB) No. 98. 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.



Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. The Company initially issued 1,000 shares to IMPCO for nominal consideration. Prior to the spin-off, the Company declared a
stock split to increase the number of shares outstanding to match the number of shares outstanding of IMPCOs common stock. In July 2002, IMPCOs Board of Directors declared a 1-for-1 stock dividend whereby every shareholder of IMPCO
Common Stock received a corresponding share of the Companys common stock. On July 24, 2002, the Company issued 3,513,439 shares of Series A common stock to General Motors. 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. For the three and six months ended October 31, 2003, options to purchase 893,064 shares of common
stock and 400,000 warrants to acquire common stock, respectively, were excluded from the computation of diluted net income per share, as the effect would be anti-dilutive.





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



|                                                                            |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---------------------------- | -
|                                                                            |  | 2002                           |            |   | 2003                         |  
|Numerator:                                                                  |  |                                |            |   |                              |  
|Net loss                                                                    |  | $                              | (5,250,870 | ) |                              | $
|Numerator for basic earnings per shareloss to common stockholders          |  | $                              | (5,250,870 | ) |                              | $
|Numerator for diluted earnings per shareloss to common stockholders        |  | $                              | (5,250,870 | ) |                              | $
|Denominator:                                                                |  |                                |            |   |                              |  
|Denominator for basic earnings per shareadjusted weighted-average shares   |  |                                | 17,655,475 |   |                              |  
|Denominator for diluted earnings per shareadjusted weighted-average shares |  |                                | 17,655,475 |   |                              |  
|                                                                            |  |                                |            |   |                              |  
|Basic earnings per share                                                    |  | $                              | (0.30      | ) |                              | $
|                                                                            |  |                                |            |   |                              |  
|Diluted earnings per share                                                  |  | $                              | (0.30      | ) |                              | $
|                                                                            |  |                                |            |   |                              |  



4) BUSINESS SEGMENT INFORMATION



The Company classifies its business operations into four reporting
segments: the Alternative Fuels division, Fuel Cell Systems division, Advanced Research & Product Development and Corporate Expenses. The Alternative Fuels division generates revenues through the sale of compressed natural gas (CNG) and propane
(LPG) fuel storage, fuel delivery and electronic control systems to OEMs, primarily General Motors, and the installation of its products into OEM vehicles. The Alternative Fuels division also 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 certain of their alternative fuel vehicles. The Fuel Cell Systems division generates revenues through the sale of fuel
cell-related fuel storage, fuel delivery and electronic control systems to OEMs, and the installation of its products into OEM vehicles. The Fuel Cell Systems division also 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 certain of their fuel cell applications. The chief operating decision maker allocates resources and tracks performance by the four reporting
segments.



All research and development is expensed as incurred. Research and
development expense includes both customer-funded research and development and Company-sponsored research and development. For segment reporting purposes, research and development expense is allocated to the Alternative Fuels and Fuel Cell Systems
segments when the expense can be identified with those segments. Advanced Research & Product Development is a sub-category of research and development expense and represents company-sponsored research and development that is not allocated to the
Alternative Fuels or Fuel Cell Systems reporting segments. 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.



The Company recognizes revenue for product sales when
goods are shipped in accordance with the Companys shipping terms and collectability is reasonably assured. Contract revenues are recognized based on the percentage of completion method. Corporate expenses represent a sub-category of selling,
general and administrative expense. Corporate expenses consist of general and administrative expense incurred at the corporate level.



The Company evaluates performance based on profit or loss from operations before interest and income taxes.



All of the Companys product revenues are generated from alternative fuel systems and fuel cell-related hydrogen storage systems for
automotive OEM applications. The Companys revenue from unaffiliated customers is derived from within the United States. All of the Companys long-lived assets are based in its offices in Sterling Heights, Michigan; Irvine, California; and
Lake Forest, California.





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Net revenues and operating income/(loss) for the Companys business segments for the three and six months ended
October 31, 2002 and 2003 are as follows:



|                                        |  | Revenues                       |       
|--------------------------------------- |  | ------------------------------ | ------
|                                        |  | Three Months Ended October 31, |       
|                                        |  | 2002                           |       
|                                        |  | (In thousands)                 |       
|Alternative Fuels                       |  | $                              | 3,386 
|Fuel Cell Systems                       |  |                                | 2,216 
|Advanced Research & Product Development |  |                                |      
|Corporate Expenses                      |  |                                |      
|                                        |  |                                |       
|Total                                   |  | $                              | 5,602 
|                                        |  |                                |       
|                                        | 
|                                        |  | Operating Income (Loss)        |       
|                                        |  | Three Months Ended October 31, |       
|                                        |  | 2002                           |       
|                                        |  | (in thousands)                 |       
|Alternative Fuels                       |  | $                              | (2,749
|Fuel Cell Systems                       |  |                                | (806  
|Advanced Research & Product Development |  |                                | (404  
|Corporate Expenses(1)                   |  |                                | (1,657
|                                        |  |                                |       
|Total                                   |  | $                              | (5,616
|                                        |  |                                |       



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



Identifiable assets for the Companys business segments at April 30, 2003 and October 31, 2003 are as follows:



|                                        |  | Identifiable Assets
|--------------------------------------- |  | -------------------
|                                        |  | April 30,2003      
|                                        |  | (In thousands)     
|Alternative Fuels                       |  | $                  
|Fuel Cell Systems                       |  |                    
|Advanced Research & Product Development |  |                    
|Corporate Expenses                      |  |                    
|                                        |  |                    
|Total identifiable assets               |  |                    
|Assets not specifically identifiable    |  |                    
|                                        |  |                    
|Total assets                            |  | $                  
|                                        |  |                    



5) 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, which was July 23, 2002. The Company issued these warrants at an exercise price of $5.83 with a term expiring in
January 2006.



The Company issued a warrant to purchase 100,000 shares of the
Companys common stock to a consulting firm on August 27, 2002 for services related to investor relations. This warrant was issued at an exercise price of $5.10 with a four-year term. The Company valued the warrant at fair value (in accordance
with FASB Statement No. 123, Accounting for Stock Based Compensation) based on a Black-Scholes fair value calculation. The warrant was valued at date of grant and was re-measured at fair value at each subsequent reporting period, and
changes in value were recorded over the performance period. The Company has recorded an expense of approximately $16,000 for the first six months of fiscal year 2004 in connection with the issuance of this warrant.



6) STOCK OPTION PLANS



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





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##### Table of Contents

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. Under APB No. 25, because the exercise price of the Companys employee stock options
equals the market price of the underlying stock at the date of grant, no compensation expense is recognized. 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 MonthsEndedOctober 31,             |        |   | Six MonthsEndedOctober 31, |  
|------------------------------------------------ |  | ---------------------------------------- | ------ | - | -------------------------- | -
|                                                 |  | 2002                                     |        |   | 2003                       |  
|                                                 |  | (In thousands, except per share amounts) |       
|Reported net loss                                |  | $                                        | (5,251 | ) |                            | $
|Stock-based employee compensation cost           |  |                                          | (485   | ) |                            |  
|                                                 |  |                                          |        |   |                            |  
|Pro forma net loss                               |  | $                                        | (5,736 | ) |                            | $
|                                                 |  |                                          |        |   |                            |  
|Loss per sharebasic and diluted                 |  |                                          |        |   |                            |  
|Reported net loss per share                      |  | $                                        | (0.30  | ) |                            | $
|Stock-based employee compensation cost per share |  |                                          | (0.02  | ) |                            |  
|                                                 |  |                                          |        |   |                            |  
|Pro forma net loss per sharebasic and diluted   |  | $                                        | (0.32  | ) |                            | $
|                                                 |  |                                          |        |   |                            |  



On May 1, 2003, an additional 650,414
shares of common stock became available for future grant under the 2002 Stock Incentive Plan pursuant to an evergreen provision contained in the plan.



7) INCOME TAXES



Income taxes for the three and six months ended October 31, 2003 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 full valuation allowance for deferred income tax assets due to the lack of earnings history.



8) INTANGIBLE ASSET



In connection with the Companys strategic alliance with General Motors, the Company issued 3,513,439 shares of its Series A common stock to General Motors on July
24, 2002. This issuance has been recorded at the estimated fair market value on the date of the distribution of approximately $14.2 million, in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation, and EITF 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services. The intangible asset was recorded in accordance with the
consensus reached by the Emerging Issues Task Force during their November 2001 meeting with respect to EITF 00-18, Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other than Employees.



Pursuant to the terms of the Companys Amended and Restated Certificate of
Incorporation, upon the completion of the Companys January 2003 public equity offering, all of the 3,513,439 shares of the Companys outstanding Series A common stock held by General Motors converted automatically into shares of the
Companys common stock on a one-for-one basis, and the Company issued to General Motors an aggregate of 999,969 shares of its non-voting Series B common stock. The issuance of the Series B common stock has been recorded as additional
consideration related to the strategic alliance between the companies at the estimated fair market value on the date of the public offering of approximately $2.2 million. As a result, the intangible asset recorded in connection with the
Companys issuance of Series B common stock to General Motors was increased by $2.2 million.



The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.142, Goodwill and Other Intangible Assets, effective May 1, 2002. SFAS 142 requires that intangible assets
other than goodwill be amortized over their useful lives. Accordingly, the Company is amortizing the intangible asset, subject to periodic evaluations for impairment, over the ten-year term of the Corporate Alliance Agreement with General Motors.



On May 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Accordingly, the intangible asset will be reviewed on an annual basis for impairment or on a more
frequent basis if events or circumstances change that might indicate that impairment exists. In accordance with the requirements of SFAS 144, the Company believes that no event or circumstance currently exists that would indicate impairment of this
asset. The amortization expense during the first six months of fiscal year 2004 was approximately $830,000.



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9) WARRANTIES



The Company offers a warranty for all of its alternative fuel products. The specific terms and conditions of those warranties varies depending on the platform and model
year. For most products the Company provides a limited warranty, including parts and labor, extending 3 years or 36,000 miles, whichever is achieved first. 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 installed units, historical and anticipated rates of warranty claims, and cost per
claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.



Changes in the Companys product warranty liability during the first six months of fiscal year 2004 are as follows (in thousands):



|Balance at April 30, 2003                                                                 |  | $ | 1,121 |  
|----------------------------------------------------------------------------------------- |  | - | ----- | -
|Warranties issued during the period                                                       |  |   | 146   |  
|Settlements made during the period                                                        |  |   | 36    |  
|Changes in liability for pre-existing warranties during the period, including expirations |  |   | (69   | )
|                                                                                          |  |   |       |  
|Balance at October 31, 2003                                                               |  | $ | 1,234 |  
|                                                                                          |  |   |       |  



10) TERMINATION OF COMBINATION WITH
GLOBAL THERMOELECTRIC



Combination with Global Thermoelectric. On
April 8, 2003, we entered into a Combination Agreement with Global Thermoelectric Inc. (Global) to combine Global with our company in a share-for-share exchange pursuant to a Plan of Arrangement submitted to the Court of Queens
Bench of Alberta, Canada for approval. On July 14, 2003, Global announced that it had received a competing proposal from FuelCell Energy, Inc (FuelCell). On July 31, 2003, upon reviewing the terms of the competing proposal and after full
consideration of the possible alternative terms that could have been offered by us, our board of directors concluded that it was not in the best interest of Quantum or its stockholders to propose any adjustments or improvements to the terms and
conditions of the transaction contemplated by the Combination Agreement between us and Global. On August 4, 2003, we announced that Global had terminated the Combination Agreement with us as a result of the proposed combination between Global and
FuelCell. As a result of the termination of the Combination Agreement, we received a US$2 million break-up fee from Global on August 4, 2003. This fee was netted against the accumulated transaction costs of approximately $2,127,000, which resulted
in a $127,000 charge to earnings during the three months ended July 31, 2003.



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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 that involve risks and uncertainties. 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. We 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. These risks and uncertainties include, but are not limited to, the following: we have a history of operating losses and negative cash flow and anticipate that we will continue to incur operating losses for the foreseeable future; if we
fail to achieve and to maintain profitability in the future, investors could lose confidence in the value of our stock, which could cause it to decline; we may need to raise additional capital in order to complete our commercialization plans; we may
be required to indemnify IMPCO for taxes arising in connection with the spin-off, and the tax characteristics of the spin-off may interfere with our ability to engage in desirable strategic transactions and issue our equity securities; the market
price and trading volume of our common stock may be volatile; we may never be able to introduce commercially viable fuel storage, fuel delivery or electronic control products for fuel cell systems; a mass market for fuel storage, fuel delivery and
electronic control systems for fuel cells may never develop or may take longer to develop than we anticipate; our revenue depends to a great extent on our relationships with and revenues from a small number of customers; our revenue depends to a
great extent on General Motors and Toyota Motor Corporation and their commitment to the commercialization of fuel cell and alternative fuel automotive markets; our business depends on the growth of the fuel cell and alternative fuel markets; 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; we currently face and will continue to face significant competition,
which could result in a decrease in our revenue; our business may be subject to product liability claims or product recalls, which could be expensive and could result in a diversion of managements attention; our insurance may be insufficient;
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; we depend on our intellectual property, and our failure
to protect our intellectual property rights could adversely affect our future growth and success; if third parties claim that our products infringe their intellectual property rights, we may be forced to expend significant financial resources and
management time and our operating results would suffer; we depend on relationships with strategic partners, and the terms and enforceability of many of these relationships are not certain; we have limited experience manufacturing fuel cell-related
systems on a commercial basis; we may not meet our product development or commercialization milestones; we depend on third-party suppliers for the supply of key materials and components for our products; we could lose or fail to attract the
personnel necessary to run our business; we may be affected by skilled labor shortages and labor disputes at OEM facilities; our business could be harmed if we fail to meet OEM specifications; we may be subject to increased warranty claims due to
longer warranty periods; changes in environmental policies could hurt the market for our products; and the development of uniform codes and standards for hydrogen fuel cell vehicles and related hydrogen refueling infrastructure may not develop in a
timely fashion. This list of factors 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, 2003. All forward-looking statements in this report are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no
obligation to update or revise any of its forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.



Overview



We design, manufacture and supply integrated fuel systems to OEMs for use in alternative fuel vehicles and fuel cell applications. Our fuel systems enable cars, trucks
and buses powered by internal combustion engines to operate on hydrogen, natural gas or propane. Our advanced enabling products for fuel cell systems are used in transportation and industrial vehicles, stationary and portable power generation, and
hydrogen refueling products for the infrastructure to support fuel cell vehicles. Our advanced fuel systems comprise the storage, monitoring, control and injection of gaseous fuels to improve efficiency, enhance power output, and reduce pollutant
emissions from internal combustion engines and fuel cell systems.



We supply
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 over 16,500 fuel systems for alternative fuel vehicles, primarily to General
Motors, which in turn has sold substantially all of those 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 basis. These fuel cell and hydrogen refueling products are not currently used on a commercial basis and will require additional product development over the next five years; however, we believe that a commercial market will begin
to develop for these products in 2004 to 2005. 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.



We classify our business operations into four reporting segments: the Alternative Fuels
division, Fuel Cell Systems division, Advanced Research & Product Development and Corporate Expenses. The Alternative Fuels division generates revenue through the sale of compressed natural gas (CNG) and propane (LPG)
fuel storage, fuel delivery and electronic control systems to OEMs, primarily General Motors, and



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the installation of our products into OEM vehicles. The Alternative Fuels division also generates contract revenue by providing engineering design and
support to OEMs so that our fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their alternative fuel vehicles. The Fuel Cell Systems division generates revenue through the sale of compressed hydrogen
storage, fuel delivery and electronic control systems to OEMs and the installation of our products into OEM fuel cell vehicles and hydrogen refueling systems. The Fuel Cell Systems division also generates contract revenue by providing engineering
design and support to OEMs so that our fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their fuel cell applications.



For the six months ended October 31, 2002 and 2003, revenue related to sales of our products to and contracts with General Motors and its
affiliates represented 70.7% and 37.6% of our total revenue for these periods. For the six months ended October 31, 2002 and 2003, revenue related to sales of our products to and contracts with Toyota represented 18.5% and 44.5% of our total
revenue.



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.



Corporate Expenses represents a sub-category of selling, general and administrative expense. Corporate Expenses consist of general and administrative expense incurred at
the corporate level.



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. For segment reporting purposes, research and development expense is allocated to the Alternative Fuels and Fuel
Cell Systems segments when the expense can be identified with those segments. Advanced Research & Product Development is a sub-category of research and development expense and represents company-sponsored research and development that is not
allocated to the Alternative Fuels or Fuel Cell Systems reporting segments. 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. We believe that our strategic alliance with General Motors will advance and commercialize, on a global basis, the integration of our gaseous storage and handling systems into fuel cell systems used in the
transportation markets. Under the alliance, Quantum and General Motors will co-develop technologies that are designed to accelerate the commercialization of fuel cell applications. Additionally, General Motors will endorse Quantum as a recommended
provider of hydrogen storage, hydrogen handling and associated electronic controls. This strategic alliance expands the relationship that has been in place between General Motors and Quantum (as IMPCOs Automotive OEM Division) since 1993,
through which we provide integrated 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% 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 provide minimum amounts of annual funding to projects approved under the alliance. Each party will retain the ownership of its existing technology and will jointly own technology that is jointly created under the alliance. We will be free 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.



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 will amortize this intangible asset over the ten-year term of the strategic alliance with General Motors, subject to periodic evaluations 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, which was July 5, 2002.
Prior to the distribution, we entered into several agreements with IMPCO with respect to, among other things, intellectual property, interim services and a number of ongoing commercial relationships. The interim services agreement provided for
specified charges generally intended to allow the providing company to fully recover the allocated direct costs of providing the services, plus all out-of-pocket costs and expenses, but without any profit. The pricing terms for goods and services
covered by the commercial agreements reflected negotiated prices.



Our
financial statements, which are discussed below, reflect the historical financial position, results of operations and cash flows of the business transferred to us from IMPCO as part of the distribution. The financial information included herein,
however, may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been a stand-alone company during the periods
prior to July 23, 2002.



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Combination with Global Thermoelectric . On April 8, 2003, we entered into a Combination Agreement with Global
Thermoelectric Inc. (Global) to combine Global with our company in a share-for-share exchange pursuant to a Plan of Arrangement submitted to the Court of Queens Bench of Alberta, Canada for approval. On July 14, 2003, Global
announced that it had received a competing proposal from FuelCell Energy, Inc (FuelCell). On July 31, 2003, upon reviewing the terms of the competing proposal and after full consideration of the possible alternative terms that could have
been offered by us, our board of directors concluded that it was not in the best interest of Quantum or its stockholders to propose any adjustments or improvements to the terms and conditions of the transaction contemplated by the Combination
Agreement between us and Global. On August 4, 2003, we announced that Global had terminated the Combination Agreement with us as a result of the proposed combination between Global and FuelCell. As a result of the termination of the Combination
Agreement, we received a US$2 million break-up fee from Global on August 4, 2003. This fee was netted against the accumulated transaction costs of approximately $2,127,000, which resulted in a $127,000 charge to earnings during the three months
ended July 31, 2003.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States and are included elsewhere in this report. The preparation of these 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, our intangible asset, 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.



We believe the following
critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements:



| | 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 can make reasonably 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. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring
and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material
usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We conduct a major portion of our business with a limited number of customers. For the past year and for the foreseeable future, General Motors Corporation (and subsidiaries of
General Motors) and Toyota Motor Corporation 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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | As part of the process of preparing our 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 spin-off. 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
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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 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. 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 October 31, 2003, our net deferred tax assets have been offset in full by a valuation allowance.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We evaluate our long-lived assets, particularly our intangible asset relating to the strategic alliance with General Motors, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. We review our long-lived assets, which includes property, plant and equipment 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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations



Three and six months ended October 31, 2002 and 2003



Net revenues and operating income/(loss) for our business segments for the three and six months ended October 31, 2002 and 2003 were as
follows:



|                                        |  | Revenues                       |       
|--------------------------------------- |  | ------------------------------ | ------
|                                        |  | Three Months Ended October 31, |       
|                                        |  | 2002                           |       
|                                        |  | (in thousands)                 |       
|Alternative Fuels                       |  | $                              | 3,386 
|Fuel Cell Systems                       |  |                                | 2,216 
|Advanced Research & Product Development |  |                                |      
|Corporate Expenses                      |  |                                |      
|                                        |  |                                |       
|Total                                   |  | $                              | 5,602 
|                                        |  |                                |       
|                                        | 
|                                        |  | Operating Income (Loss)        |       
|                                        |  | Three Months Ended October 31, |       
|                                        |  | 2002                           |       
|                                        |  | (in thousands)                 |       
|Alternative Fuels                       |  | $                              | (2,749
|Fuel Cell Systems                       |  |                                | (806  
|Advanced Research & Product Development |  |                                | (404  
|Corporate Expenses(1)                   |  |                                | (1,657
|                                        |  |                                |       
|Total                                   |  | $                              | (5,616
|                                        |  |                                |       

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



Net revenues increased $1.1 million, or 19.6%, from $5.6 million in the second quarter of fiscal year 2003 to $6.7 million in the second quarter of fiscal year 2004.
Net revenues increased $4.4 million, or 43.1%, from $10.2 million in the first half of fiscal year 2003 to $14.6 million in the first half of fiscal year 2004.



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Operating losses decreased by $3.5 million, or 62.5%, from $5.6 million in the second quarter of fiscal year 2003 to $2.1
million in the second quarter of fiscal year 2004. Operating losses decreased $6.4 million, or 62.7%, from $10.2 million in the first half of fiscal year 2003 to $3.8 million in the first half of fiscal year 2004. The decrease in loss was
attributable to a $2.9 million decrease in the operating loss of the Alternative Fuels segment, a $1.9 million operating profit as compared to a $1.4 million operating loss in the prior year for the Fuel Cell Systems segment, and a $1.2 million
decrease in the loss of the Corporate Expenses segment, partially offset by a $1.0 million increase in the operating loss of the Advanced Research & Product Development segment.



Alternative Fuels. Product sales for the Alternative Fuels segment decreased by $0.6 million, or 16.7%, from $3.0 million in the
second quarter of fiscal year 2003 to $2.4 million in the second quarter of fiscal year 2004. Product sales decreased $0.5 million, or 8.6%, from $5.8 million in the first half of fiscal year 2003 to $5.3 million in the first half of fiscal year
2004. Product sales consist of sales associated with General Motors mid-size automobiles, pick-up trucks, and vans equipped with our bi-fuel and compressed natural gas fuel systems and General Motors medium duty trucks equipped with
dedicated liquid propane gas kits. Product sales during the second quarter of fiscal year 2004 were lower due to lower volumes of mid-size automobiles and the discontinuation of the GM van and medium duty truck platforms during the third quarter of
fiscal year 2003, offset by higher product sales of GM pick-up trucks primarily due to improved pricing on these platforms



Cost of product sales decreased $2.2 million, or 48.9%, from $4.4 million in the second quarter of fiscal year 2003 to $2.2 million in the second quarter of fiscal year
2004. The decrease in cost of product sales was due to a $0.9 million decrease in material costs related to lower unit sales as a result of the discontinuation of two platforms and a $1.3 million decrease in direct labor, manufacturing overhead and
other indirect production costs, including warranty reserve, inventory obsolescence, and freight charges. In the first half of fiscal year 2004, cost of product sales decreased $3.0 million, or 37.0%, from $8.1 million in the first half of fiscal
year 2003 to $5.1 million in the first half of fiscal year 2004. The decrease in cost of product sales was due to a $1.6 million decrease in material costs related to the lower sales volume, a $1.4 million decrease in direct labor, manufacturing
overhead and other indirect production costs, including warranty reserve, inventory obsolescence, and freight charges.



Gross profits on product sales increased $1.7 million, or 113.3%, from a negative $1.5 million in the second quarter of fiscal year 2003 to $0.2 million in the second
quarter of fiscal year 2004, due to a 38.7% decrease in cost of product sales as a percentage of sales. Gross profits on product sales increased $2.5 million, or 108.7%, from a negative $2.3 million in the first half of fiscal year 2003 to $0.2
million in the first half of fiscal year 2004, due to a 31.0% decrease in cost of product sales as a percentage of sales.



Contract revenue related to alternative fuels increased by $0.5 million, or 125.0%, from $0.4 million in the second quarter of fiscal year 2003 to $0.9 million in the
second quarter of fiscal year 2004. Contract revenues increased $0.5 million, or 50.0%, from $1.0 million in the first half of fiscal year 2003 to $1.5 million in the first half of fiscal year 2004. Contract revenues from emissions testing,
environmental testing and contract engine calibration services increased $0.3 million in the second quarter of fiscal year 2004 and $0.6 million in the first half of fiscal year 2004. Contract revenue is derived primarily from system development and
application engineering of our products under funded General Motors and other OEM contracts, and other funded contract work with state and federal agencies.



Research and development associated with cost of contract revenues included in our Alternative Fuels segment decreased $0.1 million, or 50.0%, from $0.2 million in the
second quarter of fiscal year 2003 to $0.1 million in the second quarter of fiscal year 2004. Research and development associated with cost of contract revenues decreased $0.2 million, or 33.3%, from $0.6 million in the first half of fiscal year
2003 to $0.4 million in the first half of fiscal year 2004. The decrease is primarily due to higher margins related to the emissions testing, environmental testing and contract engine calibration services.



Internally funded research and development expense for the Alternative Fuels segment
decreased by $0.1 million, or 12.5%, from $0.8 million in the second quarter of fiscal year 2003 to $0.7 million in the second quarter of fiscal year 2004. Internally funded research and development expense decreased $0.5 million, or 29.4%, from
$1.7 million in the first half of fiscal year 2003 to $1.2 million in the first half of fiscal year 2004.



Operating loss for the Alternative Fuels segment decreased by $2.1 million, or 77.7% from $2.7 million in the second quarter of fiscal year 2003 to $0.6 million in the second quarter of fiscal year 2004. The decrease
in loss was attributable to a $0.2 million gross profit on product sales in fiscal year 2004 as compared to a $1.5 million negative gross profit on product sales in fiscal year 2003, a $0.5 million increase in contract revenues, and $0.1 million
decrease in research and development expenses, partially offset by a $0.2 million increase in general and administrative expenses.



Operating loss for the Alternative Fuels segment decreased by $2.9 million, or 65.9%, from $4.4 million in the first half of fiscal year 2003 to $1.5 million in the first
half of fiscal year 2004. The decrease in loss was attributable to a $0.2 million gross profit on product sales in the first half of fiscal year 2003 as compared to a $2.3 million negative gross profit on product sales in the first half of fiscal
year 2003, a $0.5 million increase in contract revenues, and a $0.7 million decrease in research and development expenses, partially offset by a $0.8 million increase in sales and administrative expenses.





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Fuel Cell Systems. Revenues for the Fuel Cell Systems segment increased by $1.2 million, or 54.5%, from $2.2
million in the second quarter of fiscal year 2003 to $3.4 million in the second quarter of fiscal year 2004. Revenues increased by $4.4 million, or 129.4%, from $3.4 million in the first half of fiscal year 2003 to $7.8 million in the first half of
fiscal year 2004. Product sales were $2.9 million in the second quarter of fiscal year 2004 and $6.6 million in the first half of fiscal year 2004 compared to $0.9 in the second quarter of fiscal year 2003 and $0.9 in the first half of fiscal year
2003. Product sales consist of sales associated with Toyota Motor Corporations fuel cell SUV platform equipped with our hydrogen fuel metering and fuel storage systems. These product sales contributed $2.0 million in gross profit during the
second quarter of 2004 and $4.2 million in gross profit in the first half of fiscal year 2004.



Contract revenue for the Fuel Cell Systems segment decreased $0.9 million, or 64.3%, from $1.4 million in the second quarter of fiscal year 2003 to $0.5 million in the second quarter of fiscal year 2004. Contract
revenues decreased $1.3 million, or 52.0%, from $2.5 million in the first half of fiscal year 2003 to $1.2 million in the first half of fiscal year 2004. The decrease is primarily related to certain programs advancing into pre-production and
commercialization phases with efforts focused on production engineering and the production process. Contract revenue is derived primarily from system development and application engineering of our products under funded OEM contracts, and other
funded contract work with state and federal agencies.



Research and development
expenses associated with cost of contract revenues included in our Fuel Cell Systems segment decreased $0.3 million, or 42.9%, from $0.7 million in the second quarter of fiscal year 2003 to $0.4 million in the second quarter of fiscal year 2004.
Research and development associated with cost of contract revenues decreased $0.5 million, or 38.5%, from $1.3 million in the first half of fiscal year 2003 to $0.8 million in the second quarter of fiscal year 2004. The decrease is primarily due to
higher utilization of resources on product commercialization efforts associated with engineering and product sales compared to the same periods of fiscal year 2003.



Internally funded research and development expense for the Fuel Cell Systems segment decreased by $0.3 million, or 18.8%, from $1.6 million
in the second quarter of fiscal year 2003 to $1.3 million in the second quarter of fiscal year 2004. Internally funded research and development expense decreased by $0.2 million, or 7.4%, from $2.6 million in the first half of fiscal year 2003 to
$2.5 million in the first half of fiscal year 2004.



Operating income for the
Fuel Cell Systems segment increased by $1.4 million, or 175.0%, from a $0.8 million operating loss in the second quarter of fiscal year 2003 to $0.6 million in operating income for second quarter of fiscal year 2004. This increase was attributable
to a $1.8 million increase in gross profit from product sales, a $0.6 million decrease in research and development expenses, partially offset by a $0.9 million decrease in contract revenue and a $0.1 million increase in sales and marketing expenses.



Operating income for the Fuel Cell Systems segment increased by $3.3 million,
or 235.7%, from $1.4 million in operating loss in the first half of fiscal year 2003 to $1.9 million operating profit in the first half of fiscal year 2004. The decrease in loss was attributable to a $4.0 million increase in gross profit on product
sales, a $0.7 million decrease in research and development expenses, partially offset by a $1.3 million decrease in contract revenue and a $0.1 million increase in sales and marketing expenses.



Advanced Research & Product Development. Research and development expense
increased by $0.5 million, or 125.0%, from $0.4 million in the second quarter of fiscal year 2003 to $0.9 million in the second quarter of fiscal year 2004. Research and development expense increased by $1.0 million, or 142.9%, from $0.7 million in
the first half of fiscal year 2003 to $1.7 million in the first half of fiscal year 2004. The increase is due to higher development costs to commercialize our injectors, advanced vehicle design and support costs.



Corporate Expense. Corporate expenses decreased by $0.5 million, or 29.4%, from $1.7
million in the second quarter of fiscal year 2003 to $1.2 million in the second quarter of fiscal year 2004. Corporate expenses decreased by $1.1 million, or 30.6%, from $3.6 million in the first half of fiscal year 2003 to $2.5 million in the first
half of fiscal year 2004. The decrease is primarily due to non-recurring legal and other expenses experienced in the second quarter of fiscal year 2003 and non-recurring administrative expenses experienced in the first quarter of fiscal year 2003
related to the spin-off from IMPCO.



Interest Expense (Income), Net.
During the second quarter of fiscal year 2004, we recorded approximately $28,000 in interest income. In the second quarter of fiscal year 2003, we recorded approximately $36,000 in interest income. In the first half of fiscal year 2004, we recorded
approximately $55,000 in interest income and we had interest expense of $61,000 in the first half of fiscal year 2003 from the loan outstanding under IMPCOs credit facility.



Provision for Income Taxes. Income tax expense increased due to a provision for international taxes in Korea. A valuation allowance
has been established for deferred tax assets due to our lack of earnings history. We expect that income tax expense for fiscal year 2004 will be approximately the same as fiscal year 2003 as we expect to continue to incur operating losses.



Liquidity and Capital Resources



Prior to our spin-off from IMPCO, we used cash generated from IMPCOs operations, bank
financings and investments from IMPCO to fund capital expenditures and research and development, as well as to invest in and operate our existing operations and new businesses. Until fiscal year 2002, we had been funded entirely from IMPCO in the
form of equity investments. In fiscal year 2002, we became a co-borrower with IMPCO on a credit facility with Bank of America. On June 24, 2002, IMPCO amended its credit facility with Bank of America to remove us as a co-borrower under the line of
credit and to release the pledge of our assets under the facility, effective upon completion of the distribution.





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Prior to the distribution, IMPCO made an additional capital investment of $15.0 million in cash, plus an assumption of
our debt facility of $8.6 million. As of October 31, 2003, we had no material indebtedness or commitments for capital expenditures.



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 after underwriting discounts and commissions and offering expenses. In October 2003, we completed a public equity offering of an aggregate of 8,050,000 shares of our common stock at a price of $8.00 per share, which yielded net
proceeds of approximately $60.3 million after underwriting discounts and commissions and offering expenses.



We believe that our working capital will be adequate to meet our liquidity needs for at least the next twelve months. We may require additional sources of financing to develop facilities for commercialization and mass
production of our products and systems. 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.



Net cash used in operating activities was
approximately $725,000 in the first half of fiscal year 2004 as compared to $7.0 million in the first half of fiscal year 2003. The decrease in cash used in operating activities resulted primarily from the net operating loss in the first half of
fiscal year 2004 of $3.8 million as compared to the net operating loss of $10.3 million in the first half of fiscal year 2003. During the first half of fiscal year 2004, accounts receivable decreased $2.1 million as compared to a $0.2 million
increase in the first half of fiscal year 2003, inventory remained flat as compared to a $1.6 million decrease in the first half of fiscal year 2003, other assets increased $0.1 million as compared to $0.2 million decrease in the first half of
fiscal year 2003, accounts payable decreased $1.1 million as compared to $0.6 million decrease in the first half of fiscal year 2003, and accrued liabilities decreased $0.6 million as compared to a $0.3 million increase in the first half of fiscal
year 2003.



Net cash used in investing activities in the first half of fiscal
year 2004 was $0.4 million, a decrease of $0.2 million from the first half of fiscal year 2003. The decrease is a result of lower investment in equipment during the first half of fiscal year 2004 compared to the same period in the prior fiscal year.



Net cash provided by financing activities in the first half of fiscal year
2004 was $62.5 million as compared to $17.6 million of net cash provided in the first half of fiscal year 2003. During the second quarter of fiscal year 2004, we completed a public equity offering of an aggregate of 8,050,000 shares of our common
stock at a price of $8.00 per share, which yielded net proceeds of approximately $60.3 million after underwriting discounts and commissions and offering expenses. Proceeds from stock option exercises was $2.5 million during the second quarter of
fiscal year 2004. During the first half of fiscal year of 2003, we benefited from certain one-time financing activities, such as $2.7 million of net advances from IMPCO and a $15.0 million cash infusion from IMPCO as part of the spin-off.



The ratio of current assets to current liabilities was 2.9:1 at April 30, 2003
and 15.8:1 at October 31, 2003. During the first six months of fiscal year 2004, our total working capital increased by $62.2 million, from $15.5 million at the end of fiscal year 2003 to $77.7 million at October 31, 2003.



Quantitative and Qualitative Disclosures About Market Risk



We are exposed to market risk from exposures to changes in interest rates due to our
financing, investing and cash management activities. Specifically, our cash and cash equivalents are subject to fluctuations in interest rates. Based on our cash balance at October 31, 2003, a 1% decrease in interest rates would result in reduced
annual interest income of approximately $730,000.



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 and do not hold or issue financial investments for speculative purposes.





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Recent Accounting Pronouncements



In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies
the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. This interpretation
required variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack specific characteristics. The
adoption of this FIN 46 is not expected to have an impact on our financial statements.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified and for hedging relationships
designated after June 30, 2003. The adoption of this statement did not have a material impact on our financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the second interim period beginning after June 15, 2003. The adoption of SFAS No. 150 is not expected to have a material impact on our results of
operations or our financial position.





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



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 has been no change in our internal control over financial
reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





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##### Table of Contents

PART IIOTHER INFORMATION



Item 2. Changes in Securities and Use of Proceeds.



On January 16, 2003, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (No. 333-101668). The Registration Statement covered the sale of 4,025,000 shares of our common stock (including an option
to purchase 525,000 shares to cover over-allotments) at an offering price of $2.25 per share. After deducting the underwriting discounts and commissions and offering expenses, we received aggregate net proceeds of approximately $8.0 million in
connection with the offering. Through the date of the filing of this report, none of the net proceeds from the offering have been used. Pending use of the net proceeds from the offering, we have invested them in short-term, investment grade,
interest-bearing securities.



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



Our Annual Meeting of Stockholders was held on October 23, 2003. The stockholders re-elected Scott Samuelsen and Thomas J. Tyson as Class II directors for
a term of three years or until their respective successors are duly elected and qualified. The number of shares voting as to the election of each nominee is set forth below:



|                               |  | Votes     
|------------------------------ |  | ----------
|Election of Class II Directors |  | For       
|Scott Samuelsen                |  | 17,194,448
|Thomas J. Tyson                |  | 17,193,125



The stockholders also
ratified the selection of Ernst & Young LLP as the Companys independent auditors for the fiscal year ending April 30, 2004 with voting as follows: 17,476,004 shares for; 27,751 shares against; and 17,155 shares
abstaining.



Item 6. Exhibits and Reports on Form 8-K.



(a) Exhibits:



|Exhibit Number |  | Description                                                                                                                     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|               | 
|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 18 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 18 U.S.C. 1350



(b) Reports on Form 8-K:



Although we did not file any reports on Form 8-K during the quarter, we furnished to the
SEC a report on Form 8-K on September 9, 2003 (pursuant to Item 12 of Form 8-K) disclosing an earnings release announcing our financial results for the quarter ended July 31, 2003.





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SIGNATURES



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



|Date: December 9, 2003 |  |  |  | QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
|---------------------- |  |  |  | -------------------------------------------------
|                       |  |  | 
|                       |  |  |  | By:                                              
|                       |  |  |  |                                                  





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EXHIBIT INDEX



|Exhibit Number |  | Description                                                                                                                     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|               | 
|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 18 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 18 U.S.C. 1350