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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 January 31, 2006,

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.

Yesx    No ̈

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

Large accelerated
filer ̈Accelerated filerxNon-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ̈No  x

Number of shares
outstanding of each of the issuers classes of common stock, as of March 3, 2006:

53,740,363 shares of Common Stock, $.001 par value per share,
and 999,969 shares of Series B Common Stock, $.001 par value per share.



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##### Table of Contents

INDEX

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



|                                                                                                                    |  |   
|------------------------------------------------------------------------------------------------------------------- |  | --
|Part I.    
Financial Information                                                                                   |  |   
|Item 1.    Financial Statements:                                                                                    |  | 1 
|Condensed consolidated balance sheets  April 30, 2005 and January 31, 2006 (unaudited)                             |  | 1 
|Condensed consolidated statements of operations (unaudited)  Three and nine months ended January 31, 2005 and 2006 |  | 2 
|Condensed consolidated statements of cash flows (unaudited)  Nine months ended January 31, 2005 and 2006           |  | 3 
|Notes to condensed consolidated financial statements (unaudited)  January 31, 2006                                 |  | 5 
|Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 21
|Item 3.    Quantitative and Qualitative Disclosures About Market Risk                                               |  | 36
|Item 4.    Controls and Procedures                                                                                  |  | 37
|Part II.    Other Information                                                                                       |  |   
|Item 6.    Exhibits                                                                                                 |  | 37
|Signatures                                                                                                          |  | 38
|Exhibit Index                                                                                                       |  |   



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##### Table of Contents

PART IFINANCIAL INFORMATION

Item 1. Financial Statements.

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                           |  |                |             |   |                 |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | --------------- | - | ----------- | -
|                                                                                                                                                                           |  | April 30, 2005 |             |   | January, 312006 |  
|                                                                                                                                                                           |  | (Note 1)       |             |   | (Unaudited)     |  
|ASSETS                                                                                                                                                                     |  |                |             |   |                 |   |             |  
|                                                                                                                                                                           |  |               
|Current assets:                                                                                                                                                            |  |                |             |   |                 |   |             |  
|Cash and cash equivalents                                                                                                                                                  |  | $              | 11,736,688  |   |                 | $ | 11,676,960  |  
|Marketable securities held-to-maturity                                                                                                                                     |  |                | 32,101,357  |   |                 |   | 17,344,302  |  
|Accounts receivable, net                                                                                                                                                   |  |                | 24,100,272  |   |                 |   | 24,906,333  |  
|Inventories, net                                                                                                                                                           |  |                | 24,383,684  |   |                 |   | 30,090,507  |  
|Tooling and engineering                                                                                                                                                    |  |                | 1,330,934   |   |                 |   | 1,849,965   |  
|Refundable income taxes                                                                                                                                                    |  |                | 2,721,381   |   |                 |   | 616,910     |  
|Other current assets                                                                                                                                                       |  |                | 791,871     |   |                 |   | 1,316,083   |  
|                                                                                                                                                                           |  |                |             |   |                 |   |             |  
|Total current assets                                                                                                                                                       |  |                | 97,166,187  |   |                 |   | 87,801,060  |  
|                                                                                                                                                                           |  |               
|Investment in affiliate                                                                                                                                                    |  |                |            |   |                 |   | 1,548,501   |  
|Property and equipment, net                                                                                                                                                |  |                | 20,866,655  |   |                 |   | 19,644,999  |  
|Marketable securities held-to-maturity                                                                                                                                     |  |                | 4,001,182   |   |                 |   | 1,190,572   |  
|Intangible assets, net                                                                                                                                                     |  |                | 16,731,930  |   |                 |   | 13,381,099  |  
|Goodwill                                                                                                                                                                   |  |                | 138,004,271 |   |                 |   | 138,130,986 |  
|Other assets                                                                                                                                                               |  |                | 891,555     |   |                 |   | 729,908     |  
|                                                                                                                                                                           |  |                |             |   |                 |   |             |  
|Total assets                                                                                                                                                               |  | $              | 277,661,780 |   |                 | $ | 262,427,125 |  
|                                                                                                                                                                           |  |                |             |   |                 |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  |                |             |   |                 |   |             |  
|                                                                                                                                                                           |  |               
|Current liabilities:                                                                                                                                                       |  |                |             |   |                 |   |             |  
|Accounts payable                                                                                                                                                           |  | $              | 31,734,310  |   |                 | $ | 17,928,331  |  
|Accrued payroll obligations                                                                                                                                                |  |                | 2,234,049   |   |                 |   | 2,222,939   |  
|Accrued interest                                                                                                                                                           |  |                | 457,408     |   |                 |   | 325,474     |  
|Notes payable                                                                                                                                                              |  |                | 250,000     |   |                 |   | 1,750,000   |  
|Deferred revenue                                                                                                                                                           |  |                | 52,889      |   |                 |   | 347,243     |  
|Accrued warranties                                                                                                                                                         |  |                | 1,258,119   |   |                 |   | 561,653     |  
|Customer deposit                                                                                                                                                           |  |                |            |   |                 |   | 3,141,531   |  
|Other accrued liabilities                                                                                                                                                  |  |                | 2,285,595   |   |                 |   | 2,357,510   |  
|Current maturities of long-term debt                                                                                                                                       |  |                | 525,215     |   |                 |   | 18,205,343  |  
|                                                                                                                                                                           |  |                |             |   |                 |   |             |  
|Total current liabilities                                                                                                                                                  |  |                | 38,797,585  |   |                 |   | 46,840,024  |  
|                                                                                                                                                                           |  |               
|Long-term debt, net of current maturities                                                                                                                                  |  |                | 19,656,162  |   |                 |   | 18,199,086  |  
|Commitments and contingencies                                                                                                                                              |  |                |             |   |                 |   |             |  
|Minority interests                                                                                                                                                         |  |                |            |   |                 |   | 280,801     |  
|                                                                                                                                                                           |  |               
|Stockholders equity:                                                                                                                                                      |  |                |             |   |                 |   |             |  
|Preferred stock, $.001 par value, 20,000,000 shares authorized; none issued and outstanding for each period                                                                |  |                |            |   |                 |   |            |  
|Series B common stock, $.001 par value; 2,000,000 shares authorized; 999,969 issued and outstanding for each period                                                        |  |                | 1,000       |   |                 |   | 1,000       |  
|Common stock, $.001 par value; 98,000,000 shares authorized; 51,735,257 issued and outstanding at April 30, 2005 and 51,879,863 issued
and outstanding at January 31, 2006 |  |                | 51,735      |   |                 |   | 51,880      |  
|Additional paid-in-capital                                                                                                                                                 |  |                | 254,680,716 |   |                 |   | 255,184,773 |  
|Accumulated deficit                                                                                                                                                        |  |                | (35,543,418 | ) |                 |   | (57,510,475 | )
|Unearned compensation - restricted stock awards                                                                                                                            |  |                |            |   |                 |   | (243,676    | )
|Accumulated other comprehensive income (loss)                                                                                                                              |  |                | 18,000      |   |                 |   | (376,288    | )
|                                                                                                                                                                           |  |                |             |   |                 |   |             |  
|Total stockholders equity                                                                                                                                                 |  |                | 219,208,033 |   |                 |   | 197,107,214 |  
|                                                                                                                                                                           |  |                |             |   |                 |   |             |  
|Total liabilities and stockholders equity                                                                                                                                 |  | $              | 277,661,780 |   |                 | $ | 262,427,125 |  
|                                                                                                                                                                           |  |                |             |   |                 |   |             |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)



|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|------------------------------------------------------------------ |  | ----------------------------- | ---------- | - | ----------------------------- | - | ----------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                                                                   |  | Three Months EndedJanuary 31, |            |   | Nine Months Ended January 31, |  
|                                                                   |  | 2005                          |            |   | 2006                          |   |             | 2005 |  |   | 2006       |  
|Revenue:                                                           |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Net product sales                                                  |  | $                             | 2,902,889  |   |                               | $ | 31,738,395  |      |  | $ | 8,513,483  |   |  | $ | 132,217,470 |  
|Contract revenue                                                   |  |                               | 2,489,413  |   |                               |   | 4,265,583   |      |  |   | 8,195,435  |   |  |   | 14,275,529  |  
|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Total revenue                                                      |  |                               | 5,392,302  |   |                               |   | 36,003,978  |      |  |   | 16,708,918 |   |  |   | 146,492,999 |  
|                                                                   |  |                               |            |  
|Costs and expenses:                                                |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Cost of product sales                                              |  |                               | 2,300,473  |   |                               |   | 30,855,032  |      |  |   | 6,904,434  |   |  |   | 123,008,522 |  
|Research and development                                           |  |                               | 3,625,213  |   |                               |   | 6,326,822   |      |  |   | 11,089,307 |   |  |   | 18,934,816  |  
|Selling, general and administrative                                |  |                               | 2,248,124  |   |                               |   | 7,774,137   |      |  |   | 6,817,560  |   |  |   | 21,721,056  |  
|Amortization of intangibles                                        |  |                               | 414,944    |   |                               |   | 1,116,945   |      |  |   | 1,244,832  |   |  |   | 3,350,833   |  
|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Total costs and expenses                                           |  |                               | 8,588,754  |   |                               |   | 46,072,936  |      |  |   | 26,056,133 |   |  |   | 167,015,227 |  
|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Operating loss                                                     |  |                               | (3,196,452 | ) |                               |   | (10,068,958 | )    |  |   | (9,347,215 | ) |  |   | (20,522,228 | )
|                                                                   |  |                               |            |  
|Interest income                                                    |  |                               | 277,142    |   |                               |   | 272,471     |      |  |   | 716,324    |   |  |   | 814,290     |  
|Interest expense                                                   |  |                               |           |   |                               |   | (628,076    | )    |  |   |           |   |  |   | (1,869,442  | )
|Minority interest in earnings of subsidiaries                      |  |                               |           |   |                               |   | (219,985    | )    |  |   |           |   |  |   | (280,264    | )
|Equity in loss of investment in affiliate                          |  |                               |           |   |                               |   | (67,260     | )    |  |   |           |   |  |   | (72,823     | )
|Other income (expense), net                                        |  |                               |           |   |                               |   | (66,600     | )    |  |   | (18,589    | ) |  |   | (21,963     | )
|Income tax provision                                               |  |                               | (826       | ) |                               |   | (3,000      | )    |  |   | (5,626     | ) |  |   | (14,627     | )
|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Net loss                                                           |  | $                             | (2,920,136 | ) |                               | $ | (10,781,408 | )    |  | $ | (8,655,106 | ) |  | $ | (21,967,057 | )
|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Net loss per share - basic and diluted                             |  | $                             | (0.09      | ) |                               | $ | (0.20       | )    |  | $ | (0.27      | ) |  | $ | (0.42       | )
|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Number of shares used in per share calculation - basic and diluted |  |                               | 31,720,288 |   |                               |   | 52,879,832  |      |  |   | 31,703,736 |   |  |   | 52,865,626  |  
|                                                                   |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)



|                                                                            |  |                               |             |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                            |  | Nine Months Ended January 31, |            
|                                                                            |  | 2005                          |             |   | 2006 |  
|Operating activities:                                                       |  |                               |             |   |      |   |             |  
|Net loss                                                                    |  | $                             | (8,655,106  | ) |      | $ | (21,967,057 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                               |             |   |      |   |             |  
|Depreciation and amortization                                               |  |                               | 3,443,998   |   |      |   | 8,254,454   |  
|Loss on disposal of property and equipment                                  |  |                               | 18,563      |   |      |   |            |  
|Non-cash stock compensation charge                                          |  |                               |            |   |      |   | 81,324      |  
|Minority interest in earnings of subsidiaries                               |  |                               |            |   |      |   | 280,801     |  
|Equity in loss of investment in affiliate                                   |  |                               |            |   |      |   | 72,823      |  
|Changes in operating assets and liabilities:                                |  |                               |             |   |      |   |             |  
|Accounts receivables                                                        |  |                               | (125,129    | ) |      |   | (1,405,579  | )
|Inventories                                                                 |  |                               | (747,346    | ) |      |   | (6,155,785  | )
|Tooling and engineering                                                     |  |                               |            |   |      |   | (519,031    | )
|Refundable income taxes                                                     |  |                               |            |   |      |   | 2,019,325   |  
|Other assets                                                                |  |                               | 71,062      |   |      |   | (297,220    | )
|Accounts payable                                                            |  |                               | (469,987    | ) |      |   | (13,150,119 | )
|Other liabilities                                                           |  |                               | (1,062,377  | ) |      |   | 1,979,452   |  
|                                                                            |  |                               |             |   |      |   |             |  
|Net cash used in operating activities                                       |  |                               | (7,526,322  | ) |      |   | (30,806,612 | )
|                                                                            |  |                               |             |   |      |   |             |  
|Investing activities:                                                       |  |                               |             |   |      |   |             |  
|Purchases of property and equipment                                         |  |                               | (1,023,093  | ) |      |   | (4,021,406  | )
|Proceeds from sale of property and equipment                                |  |                               | 52,000      |   |      |   |            |  
|Pre-merger transaction costs                                                |  |                               | (266,797    | ) |      |   |            |  
|Acquisition transaction costs relating to Tecstar Automotive Group          |  |                               |            |   |      |   | (403,011    | )
|Proceeds from sale of assets to Concord Coatings                            |  |                               |            |   |      |   | 250,000     |  
|Acquisition of Empire Coach Enterprises                                     |  |                               |            |   |      |   | (600,000    | )
|Purchases of marketable securities                                          |  |                               | (30,411,491 | ) |      |   | (13,518,999 | )
|Maturities of marketable securities                                         |  |                               | 36,458,197  |   |      |   | 31,086,664  |  
|                                                                            |  |                               |             |   |      |   |             |  
|Net cash provided by investing activities                                   |  |                               | 4,808,816   |   |      |   | 12,793,248  |  
|                                                                            |  |                               |             |   |      |   |             |  
|Financing activities:                                                       |  |                               |             |   |      |   |             |  
|Payments on capital lease obligations                                       |  |                               |            |   |      |   | (17,566     | )
|Proceeds from issuance of notes payable                                     |  |                               |            |   |      |   | 1,500,000   |  
|Payments on notes and obligations payable                                   |  |                               |            |   |      |   | (369,580    | )
|Borrowings on revolving credit agreement                                    |  |                               |            |   |      |   | 16,581,392  |  
|Proceeds from exercises of stock options                                    |  |                               | 244,612     |   |      |   | 179,202     |  
|                                                                            |  |                               |             |   |      |   |             |  
|Net cash provided by financing activities                                   |  |                               | 244,612     |   |      |   | 17,873,448  |  
|                                                                            |  |                              
|Effect of exchange rate changes on cash                                     |  |                               |            |   |      |   | 80,188      |  
|                                                                            |  |                               |             |   |      |   |             |  
|Net decrease in cash and cash equivalents                                   |  |                               | (2,472,894  | ) |      |   | (59,728     | )
|Cash and cash equivalents at beginning of period                            |  |                               | 15,728,901  |   |      |   | 11,736,688  |  
|                                                                            |  |                               |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                  |  | $                             | 13,256,007  |   |      | $ | 11,676,960  |  
|                                                                            |  |                               |             |   |      |   |             |  

Continued on following page

See accompanying notes to condensed consolidated financial statements.



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Continued)



|                                                            |  |                              |   |      |   |            |  
|----------------------------------------------------------- |  | ---------------------------- | - | ---- | - | ---------- | -
|                                                            |  | Nine Months EndedJanuary 31, |  
|                                                            |  | 2005                         |   | 2006 |  
|Supplemental schedule of non-cash activity:                 |  |                              |   |      |   |            |  
|Issuance of shares of restricted stock:                     |  |                              |   |      |   |            |  
|Additional paid-in-capital                                  |  | $                            |  |      | $ | 325,000    |  
|Unearned compensation - restricted stock awards             |  |                              |  |      |   | (325,000   | )
|                                                            |  |                             
|Supplemental cash flow information:                         |  |                              |   |      |   |            |  
|Acquisition of Empire Coach Enterprises:                    |  |                              |   |      |   |            |  
|Current assets acquired                                     |  | $                            |  |      | $ | 166,193    |  
|Property and equipment acquired                             |  |                              |  |      |   | 120,887    |  
|Purchase price in excess of the net assets acquired         |  |                              |  |      |   | 599,442    |  
|Other assets acquired                                       |  |                              |  |      |   | 500        |  
|Current liabilities assumed                                 |  |                              |  |      |   | (287,022   | )
|                                                            |  |                              |   |      |   |            |  
|Net cash used to acquire Empire Coach Enterprises           |  | $                            |  |      | $ | 600,000    |  
|                                                            |  |                              |   |      |   |            |  
|Sale of assets to Concord Coatings:                         |  |                              |   |      |   |            |  
|Current assets disposed                                     |  | $                            |  |      | $ | (1,502,141 | )
|Note receivable obtained                                    |  |                              |  |      |   | 1,242,279  |  
|Investment in affiliate obtained                            |  |                              |  |      |   | 373,070    |  
|Property and equipment disposed                             |  |                              |  |      |   | (719,014   | )
|Other assets disposed                                       |  |                              |  |      |   | (66,907    | )
|Current liabilities released                                |  |                              |  |      |   | 422,713    |  
|                                                            |  |                              |   |      |   |            |  
|Net cash provided by the sale of assets to Concord Coatings |  | $                            |  |      | $ | (250,000   | )
|                                                            |  |                              |   |      |   |            |  

See accompanying notes to condensed consolidated financial statements.



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

January 31, 2006

1) Background and Basis of Presentation

Background

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

Prior to July 23, 2002, the Company was a wholly-owned division of IMPCO Technologies, Inc. (IMPCO). On this date, IMPCO distributed the
stock of the Company to stockholders of IMPCO based on a distribution ratio of one share of the Companys common stock for every share of IMPCO common stock outstanding on the record date. The Companys accumulated deficit represents its
operating results from the distribution date to the date of the periods presented.

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

On September 15, 2005, TAG acquired a 51.0% interest in Empire Coach Enterprises, LLC (Empire
Coach), a second stage limousine manufacturer. On September 22, 2005, TAG sold substantially all the assets of its production paint facility, Tarxien Automotive Products Ltd., to Concord Coatings, Inc. for a 20.0% equity interest in
Concord Coatings and other consideration. In November, 2005, the Company began operations of Quantum Power and Performance, LLC (QPP), a recently formed wholly-owned subsidiary to distribute aftermarket automotive parts through
QPPs internet service portal. On January 18, 2006, TAG obtained a 50.1% controlling interest in Unique Performance Concepts, LLC, a business venture formed with Unique Performance, Inc. to manufacture limited edition high performance
vehicles.

Basis of Presentation

The
accompanying condensed consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial
position and operating results for the interim periods. The condensed consolidated balance sheet at April 30, 2005 has been derived from the audited financial statements of the Company at that date. The condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the consolidated financial statements and notes thereto, together with managements discussion
and analysis of financial condition and the results of operations, contained in the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 2005. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the
information not misleading. The results of operations for the three and nine months ended January 31, 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year ending April 30, 2006.

The condensed consolidated financial statements include the accounts of Quantum Fuel Systems Technologies Worldwide, Inc. and its wholly-owned subsidiary
TAG (for the period subsequent to the merger completed on March 3, 2005). The condensed consolidated financial statements also include TAGs wholly-owned subsidiaries Tecstar Partners, LLC, Tecstar, L.P., Tecstar Manufacturing Canada
Limited, Tarxien Automotive Products Limited, Troy Tooling, LLC, Classic Design Concepts, LLC (formally known as Classic Acquisition Company, LLC), Wheel to Wheel, LLC, Wheel to Wheel Powertrain, LLC, Powertrain Integration, LLC, Quantum Power and
Performance, LLC, a 50.1% ownership interest in Unique Performance Concepts, LLC, and a 51.0% ownership interest in Empire Coach Enterprises, LLC. The ownership position of Powertrain Integration increased from 51.0% to 100.0% effective
August 31, 2005 pursuant to an Assignment of Capital Units. Also acquired in connection with the TAG merger is the operating activities of Amstar, LLC (Amstar) in which the Company holds an equity ownership position of 50.0%.



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The Company did not expend monetary or other compensation for the assignment of capital units in
Powertrain Integration as the entity was in the infancy of its start up and had recorded only nominal activity to the date of the assignment. The former minority partner does not have any remaining involvement in the entity.

Amstar is a variable interest entity as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R). Tecstar L.P. has a 50.0% equity position in Amstar with AM General LLC holding the remaining 50.0% equity position.
Amstars operations are similar in nature to TAGs primary business of second stage manufacturing for automotive applications. Tecstar L.P. acts as a guarantor for certain facility lease and other agreements of Amstar and has been
determined to be Amstars primary beneficiary. The accounts of Amstar are consolidated by the Company as required by FIN 46R. The Company accounts for AM Generals equity position as minority interest (see Note 15).

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

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. These estimates include assessing the collectability of accounts receivable, the use and recoverability of inventory, impairment of long-lived assets and goodwill, the realization of deferred tax
assets, useful lives for depreciation/amortization periods of tangible and intangible assets, provisions for warranty claims and accruals for self-insured risks, among others. The markets for the Companys products are characterized by
competition, technological development and new product introduction, all of which could impact the future realizability of the Companys assets. Actual results could differ from those estimates.

Revenue Recognition

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

Contract
revenue for customer funded research and development is principally recognized by the percentage of completion method in accordance with Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Percentage of completion is generally determined based on costs incurred as a percentage of total estimated costs at completion. For certain other contracts, percentage complete is determined by measuring progress
towards contract deliverables. These estimates are reviewed and revised periodically throughout the lives of the contracts. For those remaining contracts that are billed based upon time and materials, revenues are recognized as applicable costs are
incurred.



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2) Acquisitions and Dispositions

Tecstar Automotive Group (TAG)

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

TAG is a Tier One second stage manufacturer that designs, engineers and integrates specialty equipment products into motor vehicle applications,
primarily pick-up trucks and sport utility vehicles of General Motors Corporation and its affiliates (General Motors). In addition, TAG manufactures and distributes aftermarket automotive parts and products to wholesale and retail
customers, and provides engineering development services to customers in the automotive industry.

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

Under the purchase method of accounting, the total estimated consideration for the transaction was $146.4 million and consisted of the exchange of TAG
shares for the Companys common stock valued at $134.6 million, cash payments for TAG stock options and directors shares of $7.2 million, direct transaction fees and expenses of $3.5 million, and a separation agreement with TAGs
chairman of the board valued at $1.1 million.

On February 13, 2006, the Company received a comment letter from the staff of the
Securities and Exchange Commission, Division of Corporation Finance regarding the staffs review of the Companys Form 10-K for the year ended April 30, 2005 and 10-Q for the quarter ended October 31, 2005. The Company formally
responded on February 21, 2006. There remains one unresolved comment from the original staff comment letter. The unresolved comment regards the Companys accounting for the allocation of purchase price in excess of net tangible assets
acquired between identifiable intangible assets and goodwill, specifically as it relates to TAGs customer relationship with General Motors. The components of the consideration paid for TAG and the purchase price allocation of the acquired
business are based upon independent appraisals and managements estimates. During the preliminary allocation period and pursuant to an in-depth analysis of the existing accounting principles, the Company has not identified TAGs customer
relationship with General Motors as an asset separate from goodwill. The SEC, in a letter dated March 1, 2006, has requested that the Company reconsider the nature of the customer relationship to determine whether this relationship should be
identified as an intangible asset apart from goodwill. The Company is currently in the process of this evaluation and expects the matter to be resolved during the fourth quarter.

As of January 31, 2006, the Company has preliminarily allocated $137.5 million in goodwill and $5.2 million to intangible assets, which were
primarily existing customer contracts and intellectual property. Subject to the ultimate resolution of the SEC staff comment letter and the finalization of other estimates, the final amounts to be reported for the acquisition of TAG may change
materially before the final allocation is completed in the fourth quarter of fiscal 2006.

Empire Coach Enterprises

TAG acquired a 51.0% interest in Empire Coach Enterprises, LLC, a second stage limousine manufacturer, for $600,000 in cash pursuant to an Asset Purchase
Agreement dated September 15, 2005. The fair value of the net assets acquired, based upon managements preliminary estimates amounted to $558 and resulted in $599,442 of goodwill.

Tarxien Automotive Products.

On September 22,
2005, TAG sold substantially all the assets of its production paint facility, Tarxien Automotive Products Ltd. (Tarxien), to Concord Coatings, Inc. in exchange for a 20% equity interest in Concord Coatings, $250,000 in cash, and a
promissory note in the principal amount of $1,242,279. The note, included as part of investment in affiliate on the condensed consolidated balance sheet, is interest bearing only at 7.5% annually and matures in full on September 1, 2007. The
total consideration of $1,865,349 equaled the book value of the net assets disposed of and accordingly, no gain or loss was recorded on the sale. Total fiscal 2006 revenues for Tarxien through the date of the sale were $640,752. TAG, through



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its wholly-owned subsidiary Tarxien, acts as one of the guarantors for Concord Coatings CAD$1,500,000 ($1,306,950
as of January 31, 2006) revolving credit facility with a financial institution and accounts for its investment in Concord Coatings under the equity method.

Pro-Forma Data

The operating results of TAG and Empire Coach have been included in the Companys consolidated
financial statements from the dates of the respective acquisitions. The unaudited pro forma financial data set forth below gives effect to the Companys merger with TAG as if the acquisition had been completed on May 1, 2004. Pro forma
data for Empire Coach has not been included as it is not significant. The pro forma financial data includes adjustments to eliminate the operating revenues and expenses associated with TAGs kit and parts business that was transferred to the
outgoing chairman of TAG, incremental changes in amortization expense resulting from fair value adjustments to amortizable intangible assets, and an increase in the number of shares used in per share calculations as a result of shares issued in
connection with the transaction. The unaudited pro forma financial data excludes those adjustments made to allocate the purchase consideration to TAGs assets acquired and liabilities assumed based on their estimated fair value at the date of
acquisition.



|                                                                   |  |                                          |        |   |                                   |   |        |            |  |   |          |   |  |   |         |  
|------------------------------------------------------------------ |  | ---------------------------------------- | ------ | - | --------------------------------- | - | ------ | ---------- |  | - | -------- | - |  | - | ------- | -
|                                                                   |  | Three Months EndedJanuary 31, 2005       |        |   | Nine Months EndedJanuary 31, 2005 |  
|                                                                   |  | AsReported                               |        |   | ProForma                          |   |        | AsReported |  |   | ProForma |  
|                                                                   |  | (in thousands, except per share amounts) |       
|Total revenue                                                      |  | $                                        | 5,392  |   |                                   | $ | 46,395 |            |  | $ | 16,709   |   |  | $ | 149,632 |  
|Operating loss                                                     |  | $                                        | (3,196 | ) |                                   | $ | (5,367 | )          |  | $ | (9,347   | ) |  | $ | (10,814 | )
|Net loss                                                           |  | $                                        | (2,920 | ) |                                   | $ | (5,652 | )          |  | $ | (8,655   | ) |  | $ | (9,404  | )
|Net loss per share - basic and diluted                             |  | $                                        | (0.09  | ) |                                   | $ | (0.11  | )          |  | $ | (0.27    | ) |  | $ | (0.18   | )
|Number of shares used in per share calculation - basic and diluted |  |                                          | 31,720 |   |                                   |   | 52,716 |            |  |   | 31,704   |   |  |   | 52,700  |  

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



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3) Marketable Securities

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

At January 31, 2006, the Companys marketable securities held-to-maturity consist of the following:



|                            |  |               |            |                  |        |     |            |   |         |   |  |   |           
|--------------------------- |  | ------------- | ---------- | ---------------- | ------ | --- | ---------- | - | ------- | - |  | - | ----------
|                            |  | AmortizedCost |            | Gross Unrealized |        |     | Fair Value
|                            |  |               | Gains      |                  | Losses |     |           
|Short-Term                  |  |               |            |                  |        |     |            |   |         |   |  |   |           
|Certificates of deposit     |  | $             | 512,124    |                  | $      |    |            | $ |        |   |  | $ | 512,124   
|Asset backed securities     |  |               | 603,062    |                  |        | 8   |            |   | (903    | ) |  |   | 602,167   
|Corporate bonds             |  |               | 8,589,570  |                  |        | 724 |            |   | (23,481 | ) |  |   | 8,566,813 
|U.S. government securities  |  |               | 7,639,546  |                  |        |    |            |   | (42,471 | ) |  |   | 7,597,075 
|                            |  |               |            |                  |        |     |            |   |         |   |  |   |           
|                            |  |               | 17,344,302 |                  |        | 732 |            |   | (66,855 | ) |  |   | 17,278,179
|Long-Term                   |  |               |            |                  |        |     |            |   |         |   |  |   |           
|Corporate bonds             |  |               | 150,342    |                  |        |    |            |   | (3,695  | ) |  |   | 146,647   
|U.S. government securities  |  |               | 1,040,230  |                  |        |    |            |   | (6,095  | ) |  |   | 1,034,135 
|                            |  |               |            |                  |        |     |            |   |         |   |  |   |           
|                            |  |               | 1,190,572  |                  |        |    |            |   | (9,790  | ) |  |   | 1,180,782 
|                            |  |               |            |                  |        |     |            |   |         |   |  |   |           
|Total marketable securities |  | $             | 18,534,874 |                  | $      | 732 |            | $ | (76,645 | ) |  | $ | 18,458,961
|                            |  |               |            |                  |        |     |            |   |         |   |  |   |           

At January 31, 2006, the Companys marketable securities held-to-maturity classified as
long-term have maturity dates ranging from May 2007 to October 2007.

4) Accounts Receivable

Accounts receivable consist of the following:



|                                |  |                |            |   |                 |   |            |  
|------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30, 2005 |            |   | January 31,2006 |  
|Customer accounts billed        |  | $              | 22,840,496 |   |                 | $ | 22,562,139 |  
|Customer accounts unbilled      |  |                | 2,503,671  |   |                 |   | 2,794,035  |  
|Allowance for doubtful accounts |  |                | (1,243,895 | ) |                 |   | (449,841   | )
|                                |  |                |            |   |                 |   |            |  
|Accounts receivable, net        |  | $              | 24,100,272 |   |                 | $ | 24,906,333 |  
|                                |  |                |            |   |                 |   |            |  



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5) Inventories

Inventories consist of the following:



|                                |  |                |            |   |                 |   |            |  
|------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30, 2005 |            |   | January 31,2006 |  
|Materials and parts             |  | $              | 23,858,343 |   |                 | $ | 28,426,829 |  
|Work-in-process                 |  |                | 806,772    |   |                 |   | 1,622,845  |  
|Finished goods                  |  |                | 1,864,401  |   |                 |   | 2,118,686  |  
|                                |  |                |            |   |                 |   |            |  
|                                |  |                | 26,529,516 |   |                 |   | 32,168,360 |  
|Less provision for obsolescence |  |                | (2,145,832 | ) |                 |   | (2,077,853 | )
|                                |  |                |            |   |                 |   |            |  
|Inventories, net                |  | $              | 24,383,684 |   |                 | $ | 30,090,507 |  
|                                |  |                |            |   |                 |   |            |  

6) Property and Equipment

Property and equipment consist of the following:



|                                               |  |                |             |   |                 |   |             |  
|---------------------------------------------- |  | -------------- | ----------- | - | --------------- | - | ----------- | -
|                                               |  | April 30, 2005 |             |   | January 31,2006 |  
|Land                                           |  | $              | 211,000     |   |                 | $ | 211,000     |  
|Buildings                                      |  |                | 980,911     |   |                 |   | 1,131,704   |  
|Tooling, dies and molds                        |  |                | 3,018,290   |   |                 |   | 3,819,163   |  
|Plant machinery and equipment                  |  |                | 14,915,816  |   |                 |   | 15,073,682  |  
|Information systems and office equipment       |  |                | 13,335,490  |   |                 |   | 14,159,919  |  
|Automobiles and trucks                         |  |                | 847,148     |   |                 |   | 1,011,588   |  
|Leasehold improvements                         |  |                | 4,856,115   |   |                 |   | 5,411,006   |  
|Construction in progress                       |  |                | 1,167,597   |   |                 |   | 2,196,272   |  
|                                               |  |                |             |   |                 |   |             |  
|                                               |  |                | 39,332,367  |   |                 |   | 43,014,334  |  
|Less accumulated depreciation and amortization |  |                | (18,465,712 | ) |                 |   | (23,369,335 | )
|                                               |  |                |             |   |                 |   |             |  
|Net property and equipment                     |  | $              | 20,866,655  |   |                 | $ | 19,644,999  |  
|                                               |  |                |             |   |                 |   |             |  



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7) Goodwill and Other Intangible Assets

As discussed in Note 2, the Company completed its acquisition of TAG on March 3, 2005 and of Empire Coach on September 15, 2005. In accordance
with SFAS No. 141, the total estimated consideration for the transactions was allocated to the tangible assets acquired and liabilities assumed based on their fair values at the date of acquisition. In addition, certain identifiable intangible
assets were recorded in connection with contractual or other legal rights acquired in the TAG transaction. The excess cost of acquiring TAG and Empire Coach over the latest estimates of the net amounts assigned to their assets acquired and
liabilities assumed, of $137,531,544 and $599,442, respectively, is preliminarily recognized as goodwill (see unresolved SEC staff comment in Note 2).

The Company also has an intangible asset representing the fair value of common stock issued to General Motors in connection with a strategic alliance that became effective upon the Companys spin off from IMPCO.

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

Intangible assets consist of the following:



|                                 |  |                |            |   |                 |   |            |  
|-------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                 |  | April 30, 2005 |            |   | January 31,2006 |  
|GM Strategic Alliance Agreement: |  |                |            |   |                 |   |            |  
|Gross carrying value             |  | $              | 16,479,358 |   |                 | $ | 16,479,358 |  
|Accumulated amortization         |  |                | (4,479,428 | ) |                 |   | (5,724,259 | )
|                                 |  |                |            |   |                 |   |            |  
|Net carrying value               |  |                | 11,999,930 |   |                 |   | 10,755,099 |  
|                                 |  |               
|Customer contracts:              |  |                |            |   |                 |   |            |  
|Gross carrying value             |  | $              | 3,100,000  |   |                 | $ | 3,100,000  |  
|Accumulated amortization         |  |                | (322,000   | ) |                 |   | (1,771,000 | )
|                                 |  |                |            |   |                 |   |            |  
|Net carrying value               |  |                | 2,778,000  |   |                 |   | 1,329,000  |  
|                                 |  |               
|Existing technology:             |  |                |            |   |                 |   |            |  
|Gross carrying value             |  | $              | 2,100,000  |   |                 | $ | 2,100,000  |  
|Accumulated amortization         |  |                | (146,000   | ) |                 |   | (803,000   | )
|                                 |  |                |            |   |                 |   |            |  
|Net carrying value               |  |                | 1,954,000  |   |                 |   | 1,297,000  |  
|                                 |  |                |            |   |                 |   |            |  
|                                 |  | $              | 16,731,930 |   |                 | $ | 13,381,099 |  
|                                 |  |                |            |   |                 |   |            |  

The goodwill and intangible assets are reviewed on an annual basis (as of February 1) for
impairment or on a more frequent basis if events or circumstances change that might indicate that impairment exists. At January 31, 2006, the Company believes that no event or circumstance currently exists that would indicate impairment of
these long-lived assets.



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8) Warranties

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

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

The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes
in the Companys product warranty liability during the first nine months of fiscal 2006 are as follows:



|                                                                                          |  |   |           |  
|----------------------------------------------------------------------------------------- |  | - | --------- | -
|Balance at April 30, 2005                                                                 |  | $ | 1,258,119 |  
|Warranties issued during the period                                                       |  |   | 134,774   |  
|Settlements made during the period                                                        |  |   | (307,980  | )
|Changes in liability for pre-existing warranties during the period, including expirations |  |   | (523,260  | )
|                                                                                          |  |   |           |  
|Balance at January 31, 2006                                                               |  | $ | 561,653   |  
|                                                                                          |  |   |           |  



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9) Long-term Debt

Long-term debt consists of the following:



|                                                                                                                                                                                                                        |  |                |            |   |                 |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | --------------- | - | ----------- | -
|                                                                                                                                                                                                                        |  | April 30, 2005 |            |   | January 31,2006 |  
|Senior subordinated convertible notes                                                                                                                                                                                   |  | $              | 15,000,000 |   |                 | $ | 15,000,000  |  
|Domestic bank revolving line of credit                                                                                                                                                                                  |  |                |           |   |                 |   | 15,910,198  |  
|Canadian revolving line of credit                                                                                                                                                                                       |  |                |           |   |                 |   | 700,000     |  
|Mortgage note payable to bank, due in monthly installments of $15,000 including interest at the banks prime rate (effective rate of
7.50% at January 31, 2006), due September 2006, collateralized by related building |  |                | 1,255,712  |   |                 |   | 1,180,696   |  
|Promisory note payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $22,113 including interest at
5.38%, due May 1, 2013, unsecured                                              |  |                | 1,736,462  |   |                 |   | 1,605,143   |  
|Obligation payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $27,750 including imputed interest at
5.5%, due May 1, 2013, unsecured                                           |  |                | 2,169,084  |   |                 |   | 2,005,839   |  
|Various capital lease obligations with maturities through June 2006 (total monthly installments of $526 including interest of 12% as of
January 31, 2006)                                                               |  |                | 20,119     |   |                 |   | 2,553       |  
|                                                                                                                                                                                                                        |  |                |            |   |                 |   |             |  
|                                                                                                                                                                                                                        |  |                | 20,181,377 |   |                 |   | 36,404,429  |  
|Less current maturities                                                                                                                                                                                                 |  |                | (525,215   | ) |                 |   | (18,205,343 | )
|                                                                                                                                                                                                                        |  |                |            |   |                 |   |             |  
|Long-term debt                                                                                                                                                                                                          |  | $              | 19,656,162 |   |                 | $ | 18,199,086  |  
|                                                                                                                                                                                                                        |  |                |            |   |                 |   |             |  

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

As of
April 30, 2005, the Company had $30.0 million and $5.0 million revolving credit agreements with domestic and Canadian lenders. Advances under these credit agreements were limited to a specific percentage of eligible receivables and inventories
of TAG. The advances bore interest subject to a pricing matrix ranging from 0.75% below the prime rate to 0.25% above the prime rate depending upon a ratio of TAGs funded debt to earnings before interest, taxes, depreciation and amortization
(EBITDA).

On September 9, 2005, TAG and the lead domestic and Canadian financial institution lender amended the existing
revolving credit agreements. Under the terms of the Amended and Restated Credit Agreement (the Amended Credit Facility), maximum availability under the domestic credit line was reduced to $20.0 million and the Canadian credit line
remained at $5.0 million. The previous limitation on availability of the lines to a specific percentage of eligible receivables and inventories of TAG was eliminated under the Amended Credit Facility. Advances under the Amended Credit Facility bear
interest at the greater of prime rate (7.50% at January 31, 2006) minus 0.75% or the federal funds rate plus 1.00%. There is also a Euro currency based rate option as defined in the agreement. The Amended Credit Facility expires on
September 1, 2008. Advances under the Amended Credit Facility are secured by substantially all of TAGs assets and require the Company to meet certain covenants on a quarterly basis, including a minimum ratio for the Companys
unencumbered consolidated cash and marketable securities to the revolving commitment under the Amended Credit Facility, along with minimum net worth levels for TAG. Quantum acts as a guarantor under the Amended Credit Facility.

The Company did not meet the minimum net worth level required for TAG under the Amended Credit Facility as of January 31, 2006. The Company was in
compliance with all other debt covenants and reporting requirements of the Amended Credit Facility and the unsecured senior subordinated convertible notes. Although the lender has waived the minimum net worth requirement for January 31, 2006,
management anticipates that the minimum net worth levels will not be met at the next measurement date of April 30, 2006. Accordingly, the Company has recorded the outstanding balances under the Amended Credit Facility as a current liability.
Management is currently in discussions with its lender to modify the terms of the existing credit facilities and believes that it will be able to negotiate a mutually acceptable amendment.



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The Company is responsible for commitment fees on the unused portion of the Amended Credit Facility of
0.1875%. There were no outstanding letters of credit issued under the revolving credit facilities as of January 31, 2006.

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

10) Stock Based Compensation

Stock Options

On July 12, 2005, the Company granted an additional 1,010,000 options under the 2002 Stock Incentive Plan. The exercise price of the options granted
equaled the market price of the underlying stock on the date of the grant. Total options granted under the plan during the nine months ended January 31, 2006 is 1,040,000.

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



|                                                                                                                                                |  |                               |            |   |                               |   |             |      |  |   |             |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ----------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                                                                |  | Three Months EndedJanuary 31, |            |   | Nine Months Ended January 31, |  
|                                                                                                                                                |  | 2005                          |            |   | 2006                          |   |             | 2005 |  |   | 2006        |  
|Net loss, as reported                                                                                                                           |  | $                             | (2,920,136 | ) |                               | $ | (10,781,408 | )    |  | $ | (8,655,106  | ) |  | $ | (21,967,057 | )
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                               | (695,000   | ) |                               |   | (1,323,788  | )    |  |   | (1,901,000  | ) |  |   | (3,838,376  | )
|                                                                                                                                                |  |                               |            |   |                               |   |             |      |  |   |             |   |  |   |             |  
|Pro forma net loss                                                                                                                              |  | $                             | (3,615,136 | ) |                               | $ | (12,105,196 | )    |  | $ | (10,556,106 | ) |  | $ | (25,805,433 | )
|                                                                                                                                                |  |                               |            |   |                               |   |             |      |  |   |             |   |  |   |             |  
|Net loss per share, as reported - basic and diluted                                                                                             |  | $                             | (0.09      | ) |                               | $ | (0.20       | )    |  | $ | (0.27       | ) |  | $ | (0.42       | )
|Stock-based employee compensation cost per share                                                                                                |  |                               | (0.02      | ) |                               |   | (0.03       | )    |  |   | (0.06       | ) |  |   | (0.07       | )
|                                                                                                                                                |  |                               |            |   |                               |   |             |      |  |   |             |   |  |   |             |  
|Pro forma net loss per share-basic and diluted                                                                                                  |  | $                             | (0.11      | ) |                               | $ | (0.23       | )    |  | $ | (0.33       | ) |  | $ | (0.49       | )
|                                                                                                                                                |  |                               |            |   |                               |   |             |      |  |   |             |   |  |   |             |  
|Number of shares used in the calculation of pro forma per share                                                                                 |  |                               | 31,720,288 |   |                               |   | 52,879,832  |      |  |   | 31,703,736  |   |  |   | 52,865,626  |  
|                                                                                                                                                |  |                               |            |   |                               |   |             |      |  |   |             |   |  |   |             |  

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

In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123,
supersedes APB No. 25 and amends SFAS No. 95, Statement of Cash Flows. In April 2005, FASB delayed the initial adoption of SFAS No. 123R to annual periods that begin after June 15, 2005. As such, the Company plans to
adopt the provisions of SFAS No. 123R in fiscal 2007 beginning May 1, 2006. The Company is currently analyzing which method will be the most appropriate to estimate fair value of stock-based compensation upon adoption of SFAS
No. 123R. The Company anticipates that fair value estimates will be consistent with pro forma disclosures reported above if the Company determines it will use the Black-Scholes option-pricing model.



14



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##### Table of Contents

Restricted Stock

On May 1, 2005 the Company issued a total of 91,806 shares of restricted stock to the Chairman of the Board of Directors, the Chief Executive Officer and the Chief Financial Officer of the Company. The aggregate
value of these shares, measured on the date of award based upon the closing price of Quantums common stock of $3.54, was $325,000 and is being recorded as compensation expense ratably over the three year restricted period until they vest in
full on May 1, 2008. As of January 31, 2006, $243,676 of remaining unearned compensation is reported as part of stockholders equity on the consolidated balance sheet.

Shares Available for Grant

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

11)
Warrants

In connection with the Companys spin-off from IMPCO, the Company issued warrants to purchase an aggregate of 300,000
shares of the Companys common stock to holders of outstanding IMPCO warrants as of the distribution date, July 23, 2002. The Company issued these warrants at an exercise price of $5.83 per share. During the first nine months of fiscal
2005, warrants to purchase an aggregate of 3,556 shares of common stock were exercised on a cashless basis, which resulted in the issuance of 691 shares of common stock. No warrants were exercised during the first nine months of fiscal 2006. The
remaining unexercised warrants expired in January 2006.



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##### Table of Contents

12) Earnings (Loss) Per Share

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

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

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



|                                                                         |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|------------------------------------------------------------------------ |  | ----------------------------- | ---------- | - | ----------------------------- | - | ----------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                                                                         |  | Three Months EndedJanuary 31, |            |   | Nine Months Ended January 31, |  
|                                                                         |  | 2005                          |            |   | 2006                          |   |             | 2005 |  |   | 2006       |  
|Numerator:                                                               |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Net loss                                                                 |  | $                             | (2,920,136 | ) |                               | $ | (10,781,408 | )    |  | $ | (8,655,106 | ) |  | $ | (21,967,057 | )
|Numerator for basic loss per shareto common stockholders                |  | $                             | (2,920,136 | ) |                               | $ | (10,781,408 | )    |  | $ | (8,655,106 | ) |  | $ | (21,967,057 | )
|Numerator for diluted loss per share to common stockholders             |  | $                             | (2,920,136 | ) |                               | $ | (10,781,408 | )    |  | $ | (8,655,106 | ) |  | $ | (21,967,057 | )
|Denominator for basic loss per shareweighted- average shares            |  |                               | 31,720,288 |   |                               |   | 52,879,832  |      |  |   | 31,703,736 |   |  |   | 52,865,626  |  
|Denominator for diluted loss per shareadjusted weighted- average shares |  |                               | 31,720,288 |   |                               |   | 52,879,832  |      |  |   | 31,703,736 |   |  |   | 52,865,626  |  
|Basic loss per share                                                     |  | $                             | (0.09      | ) |                               | $ | (0.20       | )    |  | $ | (0.27      | ) |  | $ | (0.42       | )
|                                                                         |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Diluted loss per share                                                   |  | $                             | (0.09      | ) |                               | $ | (0.20       | )    |  | $ | (0.27      | ) |  | $ | (0.42       | )
|                                                                         |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  

For the three and nine months ended January 31, 2006, options to purchase approximately
4.8 million shares of common stock, warrants to purchase approximately 0.2 million shares of common stock, and senior subordinated notes payable convertible into approximately 2.6 million shares of common stock, were excluded from the
computation of diluted loss per share as their effect would have been anti-dilutive. For the three and nine months ended January 31, 2005, options to purchase approximately 2.6 million shares of common stock and warrants to purchase
approximately 0.2 million shares of common stock were excluded in the computation of diluted loss per share as their effect would have been anti-dilutive.

13) Income Taxes

Income taxes for the three and nine months ended January 31, 2006 were computed using the effective
tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The Company has established a valuation allowance against its net deferred tax asset since based on the Companys
lack of earnings history and current evidence, it is unlikely that the asset will be realized.

14) Business Segment and Geographic Information

The Company classifies its business operations into three reporting segments: Quantum Fuel Systems, Tecstar Automotive Group, and
Corporate. The reportable segments other than Corporate represent strategic businesses that are managed separately and offer products and services that can be differentiated. Corporate consists of general and administrative expense incurred at the
corporate level.

The Quantum Fuel Systems business operations primarily consist of design, manufacture and supply of packaged fuel systems
for use in alternative fuel vehicles and fuel cell applications. This segment generates product revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control systems to OEMs, and the installation of its fuel cell



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##### Table of Contents

products into OEM vehicles. Product revenues are also generated through the sale of compressed natural gas, and hydrogen
fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the
OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and operate with their fuel cell and alternative fuel applications. Prior to the acquisition of TAG, the Quantum Fuel Systems business was reported in three
separate segments that were aligned consistent with how previous operating performance was tracked. The amounts reported for the first nine months of fiscal 2005 have been restated to reflect the new presentation.

The Tecstar Automotive Group business operations are focused on the automotive supply industry and primarily consist of second stage manufacturing of
pick-up trucks and sport utility vehicles. Vehicle chassis are received from the OEM and certain appearance items such as ground effects, wheels and badging are added to the chassis. The Tecstar Automotive Group also has engineering and design
capabilities for concept vehicles and distributes automotive accessories through a dealer network. Goodwill and intangible assets associated with the merger are preliminarily reported in the Tecstar Automotive Group business segment.

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

For the third quarter of fiscal 2006, consolidated revenue related to sales of
our products to and contracts with General Motors represented 78.9% and 87.5% of total revenue for the Quantum Fuel Systems segment and the Tecstar Automotive Group segment, respectively. For the first nine months of fiscal 2006, consolidated
revenue related to sales of our products to and contracts with General Motors represented 73.1% and 90.6% of total revenue for the Quantum Fuel Systems segment and the Tecstar Automotive Group segment, respectively.

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

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

The Companys foreign assets which are all located
in Canada represent 3.2% of the Companys consolidated total assets at January 31, 2006. Revenues from Canadian operations represent 7.2% of the Companys consolidated total revenues for the first nine months of fiscal 2006.



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



|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|------------------------ |  | ----------------------------- | ------ | - | ---------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                         |  | Three Months EndedJanuary 31, |        |   | Nine Months EndedJanuary 31, |  
|                         |  | 2005                          |        |   | 2006                         |   |         | 2005 |  |   | 2006   |  
|                         |  | (in thousands)                |        |   | (in thousands)               |  
|Revenue                  |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Quantum Fuel Systems     |  | $                             | 5,392  |   |                              | $ | 3,689   |      |  | $ | 16,709 |   |  | $ | 12,827  |  
|Tecstar Automotive Group |  |                               |       |   |                              |   | 32,315  |      |  |   |       |   |  |   | 133,666 |  
|Corporate                |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Total                    |  | $                             | 5,392  |   |                              | $ | 36,004  |      |  | $ | 16,709 |   |  | $ | 146,493 |  
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Operating Income (Loss)  |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Quantum Fuel Systems     |  | $                             | (1,869 | ) |                              | $ | (3,642  | )    |  | $ | (5,502 | ) |  | $ | (11,104 | )
|Tecstar Automotive Group |  |                               |       |   |                              |   | (3,798  | )    |  |   |       |   |  |   | (2,107  | )
|Corporate                |  |                               | (1,327 | ) |                              |   | (2,629  | )    |  |   | (3,845 | ) |  |   | (7,311  | )
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Total                    |  | $                             | (3,196 | ) |                              | $ | (10,069 | )    |  | $ | (9,347 | ) |  | $ | (20,522 | )
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  

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



|                         |  |                |         |             |   |        
|------------------------ |  | -------------- | ------- | ----------- | - | -------
|                         |  | April 30,      |         | January 31,
|                         |  | 2005           |         | 2006       
|                         |  | (in thousands)
|Identifiable Assets      |  |                |         |             |   |        
|Quantum Fuel Systems     |  | $              | 29,331  |             | $ | 27,399 
|Tecstar Automotive Group |  |                | 194,513 |             |   | 200,360
|Corporate                |  |                | 53,818  |             |   | 34,668 
|                         |  |                |         |             |   |        
|Total assets             |  | $              | 277,662 |             | $ | 262,427
|                         |  |                |         |             |   |        

15) Minority Interests

Amstar

AM General LLC holds a minority interest equity position in the accounts of Amstar, an enterprise that was acquired
in the merger with TAG. In connection with the start up of Amstar operations in February 2005, AM General provided their initial and only capital contribution to date to the business venture. As of January 31, 2006 Amstar has an accumulated
retained earnings balance of $461,602. AM Generals minority interest at January 31, 2006 amounted to $280,801 which consists of its capital contribution plus 50% of Amstars retained earnings.

AM General advanced $250,000 to Amstar on March 22, 2005, $750,000 on May 16, 2005 and $750,000 on August 15, 2005 in exchange for
unsecured notes payable bearing interest at 5.5% fixed, 6.0% fixed and 6.5% variable based upon bank prime rate, respectively. The advances are payable upon demand and are presented as notes payable on the consolidated balance sheet.

Empire Coach

The Chief Executive Officer &
President of Empire Coach owns a 49% minority interest equity position in the accounts of Empire Coach. As of January 31, 2006, Empire Coach has incurred an accumulated deficit of $651,599. The minority interest is not required to provide
capital resources to cover accumulated deficits. Accordingly, the portion of the accumulated deficit that exceed the minority interests initial capital account has been allocated to the Company and there is no capital account balance to be
reported as minority interest as of January 31, 2006.



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##### Table of Contents

Unique Performance Concepts

Unique Performance, Inc., a Texas-based builder of special edition high performance vehicles owns a minority interest equity position of 49.9% in the accounts of Unique Performance Concepts. The initial contributions
of capital and the start up of operations is expected to commence in the fourth quarter of fiscal 2006.

16) Comprehensive Income or Loss

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



|                                                                |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|--------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ----------------------------- | - | ----------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                                                                |  | Three Months EndedJanuary 31, |            |   | Nine Months Ended January 31, |  
|                                                                |  | 2005                          |            |   | 2006                          |   |             | 2005 |  |   | 2006       |  
|Comprehensive loss, net of tax:                                 |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Net loss, as reported                                           |  | $                             | (2,920,136 | ) |                               | $ | (10,781,408 | )    |  | $ | (8,655,106 | ) |  | $ | (21,967,057 | )
|Other comprehensive loss - currency translation adjustments (1) |  |                               |           |   |                               |   | (180,275    | )    |  |   |           |   |  |   | (394,288    | )
|                                                                |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  
|Comprehensive loss, net of tax:                                 |  | $                             | (2,920,136 | ) |                               | $ | (10,961,683 | )    |  | $ | (8,655,106 | ) |  | $ | (22,361,345 | )
|                                                                |  |                               |            |   |                               |   |             |      |  |   |            |   |  |   |             |  

---

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

17) Customer Deposit

As of January 31, 2006, the Company had a deposit on hand of $3,141,531 representing overpayments on certain second-stage assembly
product sales from General Motors that resulted from a temporary error in General Motors electronic vendor payment system. The overpayments have been communicated to General Motors by the Company and are expected to be applied against future
product shipments.

18) Contingencies

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

19)
Subsequent Events

Regency Conversions, Inc.

On February 8, 2006, the Company acquired all of the stock of Texas based Regency Conversions, Inc. (Regency) for $3.3 million in cash, plus 1,815,000 shares of the Companys common stock valued at approximately $7.8
million. Regency is a vehicle converter and is expected to supplement the Companys second stage vehicle manufacturing and aftermarket parts business by offering additional distribution channels directly to automotive dealers, and significantly
broaden the Companys customer base beyond OEMs. In addition, the Companys manufacturing and engineering expertise will allow Regency to improve its product offerings and enter new vehicle markets. Regencys unaudited revenues for
calendar year 2005 were reported in excess of $40 million.

Assignment of Option to Purchase Real Property

On February 13, 2006, the Company entered into an Assignment and Assumption of Option to Purchase Agreement (Assignment Agreement) with
Cartwright, LLC (Cartwright). Cartwright is owned by the Companys chief executive



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officer, chief operating officer, chairman of the board and a party unrelated to the Company. Under the Assignment
Agreement, the Company assigned to Cartwright for nominal consideration all of its rights and obligations under a certain Option to Purchase Agreement (Option). Under the Option, the Company had the right to purchase the real property
located in Irvine, California that is leased by the Company for use as its principal executive offices. On March 3, 2006, the Option was exercised by Cartwright.



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##### Table of Contents

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

Forward-Looking Statements

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

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



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



| |  | our second stage assembly agreements with General Motors primarily extend through April 2006 and our bi-fuel and compressed natural gas fuel systems agreement with General Motors
extends through July 2006. If General Motors were to cease doing business with us or significantly reduce or delay its purchases from us or payments to us, and we are unable to replace the potential lost sales with agreements with other Original
Equipment Manufactures (OEMs) or dealer networks via dual-invoice programs, our business, financial condition and results of operations could be materially adversely affected;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



| |  | variability in our operating performance may impact our ability to meet certain financial covenants required under the Amended and Restated Credit Agreement with our financial
institution;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we may never be able to introduce commercially viable hydrogen products and systems;
|- |  | ------------------------------------------------------------------------------------



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##### Table of Contents

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



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



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



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



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



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



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



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



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



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



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



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



| |  | we may need to raise additional capital in the future to achieve commercialization of our products and technologies, to develop facilities for mass production of our products and
systems, to take advantage of strategic opportunities, and to fund operating activities;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to raise capital in the future may be difficult due to operating losses;
|- |  | ------------------------------------------------------------------------------------



| |  | we may not meet our product development and commercialization milestones;
|- |  | -------------------------------------------------------------------------



| |  | our business could suffer if we fail to attract and maintain key personnel;
|- |  | ---------------------------------------------------------------------------



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



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



| |  | our insurance may not be sufficient;
|- |  | ------------------------------------



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



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



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



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



| |  | changes in environmental policies could hurt the market for our products;
|- |  | -------------------------------------------------------------------------



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



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



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



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



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



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

This list of factors above is not intended to be exhaustive. Reference should also be made to the factors set forth from
time to time in our SEC reports, including but not limited to those set forth in the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended April 30, 2005. All forward-looking statements in this report
are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update or revise any of these forward-looking statements even if experience or future changes show that the indicated results
or events will not be realized.



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Overview

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

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

The Quantum Fuel Systems business operations primarily consist of design, manufacture
and supply of packaged fuel systems for use in fuel cell, hydrogen and alternative fuel vehicles. This segment generates product revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control systems to OEMs, and
the installation of its fuel cell products into OEM vehicles. Product revenues are also generated through the sale of compressed natural gas (CNG), and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion
engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and
operate with their fuel cell and alternative fuel applications. Prior to the acquisition of TAG, the Quantum Fuel Systems business was reported in three separate segments that were aligned consistent with how previous operating performance was
tracked. The segment disclosure amounts reported for the first nine months of fiscal 2005 have been restated to reflect the new presentation.

The Tecstar Automotive Group segment is comprised of virtually all of the business activities acquired via the merger with TAG, which was completed in March 2005, and primarily consist of second stage manufacturing of specialty equipment
for General Motors pick-up trucks and SUVs, engineering and design capabilities for concept vehicles, and distribution of automotive accessories through OEM dealer networks. This segment engineers and validates appearance items and performance
packages to OEM standards and completed systems carry the full OEM warranty and are distributed directly by the OEM to automotive dealerships.

The merger with TAG expands Quantums OEM one-stop-shop capability with expanded resources in terms of vehicle system design, powertrain engineering, systems integration, validation, and second stage manufacturing and
assembly for all future fuel cell, hybrid and alternative fuel vehicle programs. Our expanded OEM capabilities facilitates our participation in early stage development, production and second stage assembly of fuel systems and performance packages
for fuel cell, hybrid and alternative fuel vehicles. Through the integration of the two companies, we are starting to use Tecstar Automotive Groups second stage assembly capabilities in several of Quantum Fuel Systems programs involving
assembly and production.

The Tecstar Automotive Group product portfolio coupled with its service and assembly capabilities positions
Quantum as a specialty vehicle designer, integrator and assembler for low-volume programs with the military and public and private fleet operators. We have existing programs with the military and other government agencies wherein we are providing
specialty and hydrogen-hybrid vehicles using our expanded resources to design, integrate and assemble the vehicles and fuel systems in a more cost-effective, efficient and timely manner.

The merger has allowed us to strengthen our customer relationships as well as to build new OEM relationships within the combined business as a result of
a heightened profile as a leader in the specialty vehicle design and assembly industry coupled with our technology in the hydrogen vehicle industry.

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

Quantum Fuel Systems Segment

Our Quantum Fuel Systems segment supplies our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 18,700 fuel
systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our gaseous fuel systems and hydrogen products for fuel cell applications to major OEMs
through funded research and development contracts and on a prototype and production intent basis. These fuel cell



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and hydrogen products are not currently manufactured in high volumes and will require additional product development;
however, we believe that a commercial market will begin to develop for these products over the next five to seven years. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen products
using our systems on a commercial basis.

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

In January 2006, our Quantum Fuel Systems segment initiated the delivery of 30 hydrogen hybrid Priuses to
participating fleets located in Southern California. The objective of this effort, funded by the South Coast Air Quality Management District, is to stimulate the early demand for hydrogen, expedite the development of infrastructure, and provide a
bridge to fuel cell vehicles. We believe this program will help expedite the expansion of a hydrogen infrastructure and bridge the technology gap between conventional gasoline vehicles and fuel cell vehicles, as this technology of the future is
being commercialized.

Our Quantum Fuel Systems segment has grown its programs with the U.S. military to develop advanced fuel cell and
hybrid electric vehicle technologies. Quantums Alternative Mobility Vehicle (AMV) and Mobile Hydrogen Infrastructure programs received a total of $7.0 million in funding under the fiscal year 2006 Appropriations Bill for the
Department of Defense. With this funding, pre-production prototypes of diesel hybrid AMVs will be developed and built for testing and evaluation by selected commands to assess mission suitability, supportability, performance objectives, and guidance
on final vehicle configuration. Also, in February 2006, the U.S. Army selected Quantum to develop the Hydrogen Escape Hybrid concept, which will continue our expansion into the hybrid vehicle market.

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

Our fuel storage systems must be able to withstand rigorous testing as individual components and as part of the fuel system on the vehicle. The fuel system as a whole, including the tank, regulator and fuel lines,
need to comply with OEM vehicle requirements and applicable safety standards. Our systems are generally designed, validated and certified for short-term life, approximately three years, and are produced in accordance with requirements specified by
our OEM customers. We currently have programs with OEMs to design, validate and certify systems for longer durability and for vehicles designed for commercialization. Our hydrogen storage and delivery systems may encounter technology and design
challenges, durability constraints and issues with technology application into the vehicles. In early September 2005, Toyota Motor Company announced a grounding of 14 fuel cell prototype vehicles containing our hydrogen fuel storage systems due to
the discovery of a hydrogen leak in the system in one prototype vehicle. We worked with Toyota to evaluate these systems and have determined that the subject system had leaked hydrogen as a result of a combination of certain manufacturing process
conditions coupled with isolated operating conditions. Overall, the design and validation of these prototype systems met the OEM and certification requirements, but the systems for these 14 prototype vehicles were approaching their three-year
service life and were scheduled for replacement in the near future. Toyota has elected to begin phasing in their next generation fuel cell prototype vehicles to replace the 14 initial prototype vehicles and has equipped the new prototype vehicles
with Toyota designed and produced hydrogen fuel storage systems.

A significant portion of our Quantum Fuel Systems business is generally
related to fuel cell, hybrid and alternative fuel vehicle development programs and product sales, which vary directly with the program timing and production schedules of our OEM customers. The market for these vehicles is sensitive to general
economic conditions, government agency and commercial fleet spending and consumer preferences. The rate at which our customers sell fuel cell or alternative fuel vehicles depends on their marketing strategy, as well as company specific inventory and
incentive programs. Any significant reduction or increase in production of these vehicles by our OEM customers may have a material effect on our business. Our CNG program with General Motors extends through July 2006. We anticipate that future
programs for CNG applications will be under a dual-invoice program. A dual-invoice structure would allow us to assemble the CNG fuel system and directly sell our systems in conjunction with the General Motors vehicle to General Motors
customers under a QVM-Quality Vehicle Manufacturing arrangement without utilizing its marketing network.

Our industry is also dependent
upon a limited number of third party suppliers of materials and components for our products. Any quality problems or supply shortages with respect to these components could negatively impact our business. In the past year, we have experienced
pressure on the availability of high-strength fiber from our primary supplier, and we



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

Tecstar Automotive Group Segment

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

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

The sales of specialty equipment and
second stage manufacturing services are directly impacted by the size of the automotive industry and the relative market share of the major OEMs. Second stage assembly programs typically range from two to five years over the life of the OEM chassis
and are fulfilled under short-term purchase orders, as is standard in the industry. We provide a limited product warranty to the OEM, which is substantially the same as the OEM warranty provided to the OEMs retail customers. OEMs periodically
reduce production or close plants for model changeovers that adversely affect operating results of industry participants. Sales may be adversely affected if OEMs perform such second stage manufacturing programs themselves and do not outsource the
business. Approximately 90.6% of Tecstar Automotive Groups sales for the first nine months of fiscal 2006 were made to General Motors.

Most of our second stage assembly programs with General Motors extend through April 2006 for model year 2006. The 2007 model year vehicles produced by General Motors represent a model changeover and may not include our specialty equipment
products until future model years. Certain other second stage assembly programs that are continuing into fiscal 2007 include a sport utility vehicle platform and a pick-up truck platform. We also have a full-size van platform that began production
during the fourth quarter of fiscal 2006. We are in discussions with General Motors on targeted second stage vehicle platforms, programs and introductory timing. Any discontinuance of a specialty vehicle program or an extended transitional period in
redesigning a performance package for these new model year vehicles by General Motors would likely have a material adverse effect on our business if not replaced with other OEM programs or revenues from aftermarket programs, dealer network programs,
dual-invoice programs or other strategic initiatives.

We are in discussions with other OEMs for OEM-level second stage assembly programs
and have initiated several aftermarket and dealer network programs. To this end, we recently received a letter of intent from Nissan North America, Inc. (Nissan) to produce a special edition of Nissans full-size Titan pick-up truck
that is expected to provide diversification of a significant portion of our future second stage assembly product sales beyond General Motors beginning in late fiscal 2007.

On February 8, 2006, we acquired all of the stock of Texas based Regency Conversions, Inc. (Regency) for $3.3 million in cash, plus
1,815,000 shares of Quantums common stock valued at approximately $7.8 million. Regency is one of the largest vehicle converters in North America and will supplement our second stage vehicle manufacturing and aftermarket parts business by
offering additional distribution channels directly to automotive dealers, and significantly broaden our customer base beyond OEMs. In addition, it is anticipated that the Tecstar Automotive Group segments manufacturing and engineering
expertise will allow Regency to improve its product offerings and enter new vehicle markets. The addition of Regency will enable us to assemble a specialty equipment package on a new vehicle and directly sell our system in conjunction with a vehicle
sale from the OEM to high-volume customers or dealerships under a QVM-Quality Vehicle Manufacturing arrangement but without utilizing the OEM marketing network.

On January 18, 2006, we obtained a 50.1% controlling interest in Unique Performance Concepts, LLC (UPC), a business venture formed with UPCs minority interest partner Unique Performance, Inc. to
manufacture limited edition high performance vehicles. The new venture will begin production of a Chip Foose-designed 2006 Ford Stallion Mustang in the first half of fiscal 2007.

In September 2005, we acquired a 51% interest in Empire Coach Enterprises, LLC (Empire Coach), a second stage limousine manufacturer, for
$600,000 cash. Among other business opportunities, Empire Coach will pursue qualified vehicle modifier status with Ford Motor Company (Ford QVM) in order to modify Lincoln Town Cars to limousines. Empire Coach will also be
able to offer alternative fuel limousines using Quantums advanced fuel system technologies for compressed natural gas, propane, and hydrogen applications.



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The Tecstar Automotive Group is also involved in other special programs such as designing and
constructing second stage production and assembly operations for other companies involved in non-traditional consumer automotive markets. In August 2005, we were contracted by Force Protection Industries to assist in a second stage assembly program
for special military vehicle assembly.

In September 2005, we sold substantially all the assets of our production paint facility, Tarxien
Automotive Products Ltd., to Concord Coatings, Inc. in exchange for a 20% equity interest in Concord Coatings, $250,000 in cash, and a promissory note with a principal amount of approximately $1.2 million. Our investment in Concord Coatings is
included in the Tecstar Automotive Group segment and accounted for under the equity method.

Financial Operations Overview

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

For the third quarters of fiscal 2005 and 2006, consolidated revenue related to sales of our products to and contracts
with General Motors represented 36.1% and 86.6%, respectively, of our total revenue for these periods. For the third quarters of fiscal years 2005 and 2006, revenue related to sales of our products to and contracts with Toyota represented 47.4% and
0.8%, respectively, of our total revenue for those periods. For the first nine months of fiscal 2005 and 2006, consolidated revenue related to sales of our products to and contracts with General Motors represented 55.8% and 89.0%, respectively, of
our total revenue for these periods. For the first nine months of fiscal years 2005 and 2006, revenue related to sales of our products to and contracts with Toyota represented 28.8% and 0.5%, respectively, of our total revenue for those periods.

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

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

General Motors Relationship

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

In connection with our strategic alliance, immediately following our spin-off from IMPCO, we issued to General Motors an aggregate of 3,513,439 shares of
our Series A common stock, representing 19.9% (since diluted to 8.5% as of January 31, 2006) of our total outstanding equity following such issuance, for consideration of a nominal cash contribution and access to certain of General Motors
proprietary information. Under the alliance, we have committed to spend $4.0 million annually for specific research and development projects directed by General Motors to speed the commercialization of our fuel cell related products. Since this
commitment was waived or partially waived by General Motors for calendar years 2002 through 2005, we anticipate that the commitment will be waived or partially waived in the future. We and General Motors agreed upon a Directed Research and
Development Statement of Work that covered the period from May 15, 2004 though May 14, 2005. The statement of work outlined specific tasks for the advancement of compressed fuel storage technologies enabling improved performance. Total
spending under the statement of work approximated $1.8 million and



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was funded under the Quantum Fuel Systems segment. We are currently in discussions with General Motors regarding a new
directed research and development statement of work. Total spending for directed research and development activities over the first nine months of fiscal 2006 approximated $0.5 million. We plan to use jointly created technologies in certain aspects
of our business but will be required to share revenue with General Motors on fuel cell system-related products that are sold to General Motors or third parties.

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

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

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

Separation from IMPCO

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



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Critical Accounting Policies and Estimates

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

Management considers an accounting estimate to be critical if:



| |  |  | it requires assumptions to be made that were uncertain at the time the estimate was made; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management has discussed the development and selection of these critical accounting policies and estimates with the
audit committee of our board of directors, and the audit committee has reviewed the disclosure presented below relating to them. We believe the critical accounting policies described below affect the more significant judgments and estimates used in
the preparation of our consolidated financial statements:



| |  |  | We generally manufacture products based on specific orders from customers. Revenue is recognized on product sales when the earnings process is complete and collectibility is
reasonably assured. For product sales in connection with second stage manufacturing, consisting of assembly and integration of specialty equipment products into motor vehicle applications, revenue is recognized upon completion of the integration
activities when the vehicles are ready to be delivered to our customers in accordance with contract terms. The Company includes the costs of shipping and handling, when incurred, in cost of goods sold. We recognize revenue and profit as work
progresses on long-term, fixed price contracts for product application development using the percentage-of-completion method. Generally, we estimate percentage complete by determining cost incurred to date as a percentage of total estimated cost at
completion. For certain other contracts, percentage complete is determined by measuring progress towards contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings process. For contracts
measured under the estimated cost approach, we believe we can generally make dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to revisions as the contract progresses
to completion. Our estimates of contract costs are based on expectations of engineering development time and materials and other support costs. These estimates can change based on unforeseen technology and integration issues, but known risk factors
and contract challenges are generally allowed for in the initial scope and cost estimate of the program. Except as discussed below, our historical final contract costs have approximated the initial estimates and any unforeseen changes in the
estimates have not resulted in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We conduct a major portion of our business with a limited number of customers. For the past year, the first nine months of fiscal 2006, and for the foreseeable future, General
Motors has represented, and are expected to continue to represent, a significant portion of our sales and outstanding accounts receivable. Credit is extended based upon an evaluation of each customers financial condition, with terms consistent
with those present throughout the industry. Typically, we do not require collateral from customers. We have recorded an allowance for uncollectible accounts receivable based on past experience and certain circumstances surrounding the composition of
total accounts receivable. To the extent we increase this allowance in a period, we must include an expense in the statement of operations. If commercial conditions differ from managements estimates, an additional write-off may be required.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We provide for the estimated cost of product warranties at the time revenue is recognized based on past experience. Our Tecstar Automotive Group segment provides product warranties
to OEMs under terms similar to those offered by the OEMs to their customers, which are generally three years. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component
suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from
our estimates, revisions to the estimated warranty liability would be required.
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| |  |  | We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. As part of our estimate, we rely upon future planned design configurations and projected alternative usage of certain components estimated by engineering. We also consider estimated demand for
service and warranty parts based on historical information. If actual usage rates or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded our acquisition of TAG in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. We have not yet
obtained all information necessary to determine the total consideration paid and final allocation of the consideration to the net tangible and identified intangible assets acquired in connection with the transaction. In determining the fair value of
the assets acquired and liabilities assumed, we considered the evaluations of independent appraisers and other estimates. On February 13, 2006, we received a comment letter from the staff of the Securities and Exchange Commission, Division of
Corporation Finance regarding the staffs review of our Form 10-K for the year ended April 30, 2005 and our 10-Q for the quarter ended October 31, 2005. We formally responded on February 21, 2006. As of the filing of this Report
for the period ended January 31, 2006, there remains one unresolved comment from the staff letter. The unresolved comment regards our accounting for the allocation of purchase price in excess of net tangible assets acquired between identifiable
intangible assets and goodwill, specifically as it relates to TAGs customer relationship with General Motors. During the preliminary allocation period and pursuant to an in-depth analysis of the existing accounting principles, we have not
identified TAGs customer relationship with General Motors as an asset separate from goodwill. The staff has requested that we reconsider the nature of the customer relationship to determine whether this relationship should be identified as an
intangible asset apart from goodwill. We are currently in the process of this evaluation and expect the matter to be resolved during the fourth quarter. Subject to the ultimate resolution of this matter and the finalization of other estimates, the
final amounts to be reported for the acquisition of TAG may change materially before the final allocation is completed in the fourth quarter of fiscal 2006.
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| |  |  | We periodically evaluate for impairment our long-lived assets, particularly our goodwill and intangible assets relating to the acquisition of TAG and the intangible asset relating
to the strategic alliance with General Motors. Our identifiable finite-lived intangible assets are amortized over their estimated useful lives. Goodwill is not amortized, but is evaluated periodically for any impairment in the carrying value. We
review our long-lived assets, which includes property and equipment, goodwill and identifiable finite-lived intangible assets, for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following: significant underperformance relative to expected historical or projected future operating results;
significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; and a significant decline in our stock price for a sustained period. An impairment would
be recognized based on the difference between the fair value of the asset and its carrying value. Future events could cause us to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of operations.
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| |  |  | As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This
process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of the net
operating loss carryforward that has resulted from our cumulative net operating loss since our spin-off from IMPCO. In addition, we have estimated the temporary differences resulting from our merger with TAG as of and subsequent to the March 3,
2005 acquisition date. These differences result in a net deferred tax asset. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations. Significant management
judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance due to uncertainties related
to our ability to utilize the net deferred tax assets, primarily consisting of net operating losses and credits which may be carried forward before they expire, and that are subject to certain limitations. In the event that actual results differ
from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. At January 31, 2006, our net deferred
tax assets have been offset in full by a valuation allowance.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Recent Accounting Pronouncements

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

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



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Results of Operations

Three and nine months ended January 31, 2005 and 2006

Net revenues and operating loss for our
business segments for the three and nine months ended January 31, 2005 and 2006 were as follows:



|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|------------------------ |  | ----------------------------- | ------ | - | ---------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                         |  | Three Months EndedJanuary 31, |        |   | Nine Months EndedJanuary 31, |  
|                         |  | 2005                          |        |   | 2006                         |   |         | 2005 |  |   | 2006   |  
|                         |  | (in thousands)                |        |   | (in thousands)               |  
|Revenue                  |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Quantum Fuel Systems     |  | $                             | 5,392  |   |                              | $ | 3,689   |      |  | $ | 16,709 |   |  | $ | 12,827  |  
|Tecstar Automotive Group |  |                               |       |   |                              |   | 32,315  |      |  |   |       |   |  |   | 133,666 |  
|Corporate                |  |                               |       |   |                              |   |        |      |  |   |       |   |  |   |        |  
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Total                    |  | $                             | 5,392  |   |                              | $ | 36,004  |      |  | $ | 16,709 |   |  | $ | 146,493 |  
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Operating Income (Loss)  |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Quantum Fuel Systems     |  | $                             | (1,869 | ) |                              | $ | (3,642  | )    |  | $ | (5,502 | ) |  | $ | (11,104 | )
|Tecstar Automotive Group |  |                               |       |   |                              |   | (3,798  | )    |  |   |       |   |  |   | (2,107  | )
|Corporate                |  |                               | (1,327 | ) |                              |   | (2,629  | )    |  |   | (3,845 | ) |  |   | (7,311  | )
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  
|Total                    |  | $                             | (3,196 | ) |                              | $ | (10,069 | )    |  | $ | (9,347 | ) |  | $ | (20,522 | )
|                         |  |                               |        |   |                              |   |         |      |  |   |        |   |  |   |         |  

Overall revenue increased $30.6 million from $5.4 million in the third quarter of fiscal 2005 to
$36.0 million in the third quarter of fiscal 2006 and increased $129.8 million from $16.7 million in the first nine months of fiscal 2005 to $146.5 million in the first nine months of fiscal 2006. This increase in overall revenue is mainly a result
of the inclusion of Tecstar Automotive Groups operations in our consolidated results since the merger with Tecstar Automotive Group on March 3, 2005 and was partially offset by a decrease in revenue from our Quantum Fuel Systems segment.
Net revenue from our Quantum Fuel Systems segment decreased $1.7 million from $5.4 million in the third quarter of fiscal 2005 to $3.7 million in the third quarter of fiscal 2006 and decreased $3.9 million from $16.7 million in the first nine months
of fiscal 2005 to $12.8 million in the first nine months of fiscal 2006 primarily as a result of lower product sales.

Overall operating
loss increased $6.9 million, from $3.2 million in the third quarter of fiscal 2005 to $10.1 million in the third quarter of fiscal 2006 and increased $11.2 million, from $9.3 million in the first nine months of fiscal 2005 to $20.5 million in the
first nine months of fiscal 2006. The increase in the third quarter of fiscal 2006 is mainly due to the addition of Tecstar Automotive Group segment which had an operating loss of $3.8 million, a $1.8 million increase in the operating loss of our
Quantum Fuel Systems segment as a result of lower product sales and contract revenue, and a $1.3 million increase in corporate expenses.

Quantum
Fuel Systems Segment

Product sales for the Quantum Fuel Systems segment decreased $1.4 million, or
48.3%, from $2.9 million in the third quarter of fiscal 2005 to $1.5 million in the third quarter of fiscal 2006 and decreased $3.0 million, or 35.3%, from $8.5 million in the first nine months of fiscal 2005 to $5.5 million in the first nine months
of fiscal 2006. Product sales during fiscal 2005 consisted of our hydrogen fuel metering and fuel storage systems for Toyota Motor Corporations fuel cell SUV platform and bus platform and sales associated with General Motors pick-up
trucks equipped with our bi-fuel and compressed natural gas fuel systems. Sales related to hydrogen fuel metering and fuel storage systems for fuel cell vehicle applications were $2.4 million and $4.3 million in the third quarter and first nine
months of fiscal 2005, respectively, and $0 in the third quarter and first nine months of fiscal 2006 as a result of the completion and shipment during the fourth quarter of fiscal 2005 of all units ordered under the current generation of
Toyotas fuel cell SUV and bus platforms. We expect shipments on anticipated orders of hydrogen fuel metering and fuel storage systems under Toyotas fuel cell bus platform to begin near the end of fiscal 2006. Sales related to compressed
natural gas fuel systems increased $1.0 million, or 200%, from $0.5 million in the third quarter of fiscal 2005 to $1.5 million in the third quarter of fiscal 2006 and increased $1.4 million, or 33.3%, from $4.2 million in the first nine months of
fiscal 2005 to $5.6 million in the first nine months of fiscal 2006. The increase in the third quarter of fiscal 2006 is mainly due to increased sales volume and increased average unit prices related to the General Motors pick-up truck
program.



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Cost of product sales for the Quantum Fuel Systems segment decreased $0.6 million, or 26.1%, from $2.3
million in the third quarter of fiscal 2005 to $1.7 million in the third quarter of fiscal 2006 and decreased $0.4 million, or 5.8%, from $6.9 million in the first nine months of fiscal 2005 to $6.5 million in the first nine months of fiscal 2006.
The decrease in the third quarter of fiscal 2006 is mainly due to the decreased sales volume related to our hydrogen fuel metering and fuel storage systems and was partially offset by increased sales volume and increased average unit costs related
to our compressed natural gas fuel systems.

Gross profits on product sales for the Quantum Fuel Systems segment decreased $0.8 million
from a positive $0.6 million in the third quarter of fiscal 2005 to a negative $0.2 million in the third quarter of fiscal 2006 and decreased $2.6 million from a positive $1.6 million in the first nine months of fiscal 2005 to a negative $1.0
million in the first nine months of fiscal 2006. The decrease in the third quarter of fiscal 2006 is mainly attributable to lower sales volume for our hydrogen fuel metering and fuel storage systems.

Contract revenue for the Quantum Fuel Systems segment decreased $0.3 million, or 12.0%, from $2.5 million in the third quarter of fiscal 2005 to $2.2
million in the third quarter of fiscal 2006 and decreased $0.9 million, or 11.0%, from $8.2 million in the first nine months of fiscal 2005 to $7.3 million in the first nine months of fiscal 2006. Contract revenue is derived primarily from system
development and application engineering of our products under funded General Motors, Toyota and other OEM contracts, and other funded contract work with the U.S. military and other government agencies. Contract revenue is recognized as work
progresses on fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. Recognized revenue is subject to revisions as the contracts progress to completion.

Research and development expense associated with development contracts increased $0.4 million, or 25.0%, from $1.6 million in the third quarter of fiscal
2005 to $2.0 million in the third quarter of fiscal 2006 and increased $2.2 million, or 48.9%, from $4.5 million in the first nine months of fiscal 2005 to $6.7 million in the first nine months of fiscal 2006. The increase in research and
development expenses associated with development contracts during the first nine months of fiscal 2006 is primarily due to additional system design, product development and application engineering expenses for certain production-intent based
development programs.

Internally funded research and development expense for the Quantum Fuel Systems segment increased by
$0.1 million, or 4.8%, from $2.1 million in the third quarter of fiscal 2005 to $2.2 million in the third quarter of fiscal 2006 and decreased by $0.2 million, or 3.1%, from $6.5 million in the first nine months of fiscal 2005 to $6.3 million
in the first nine months of fiscal 2006. The decrease in the first nine months of fiscal 2006 is mainly attributable to a greater emphasis on utilizing internal resources for customer specific projects as compared to the third quarter and first nine
months of fiscal 2005.

Selling, general and administrative expenses for the Quantum Fuel Systems segment increased $0.2 million, or 22.2%,
from $0.9 million in the third quarter of fiscal 2005 to $1.1 million in the third quarter of fiscal 2006 and increased $0.2 million, or 6.7%, from $3.0 million in the first nine months of fiscal 2005 to $3.2 million in the first nine months of
fiscal 2006. Selling, general and administrative expenses as a percentage of total Quantum Fuel Systems segment operating costs and expenses was 14.9% for the third quarter of fiscal 2006 compared to 12.3% for the third quarter of fiscal 2005 and
was 13.4% for the first nine months of fiscal 2006 compared to 13.6% for the first nine months of fiscal 2005.

Amortization of intangibles
for the Quantum Fuel Systems segment relates to the Corporate Alliance Agreement with General Motors. The expense in the third quarter of fiscal year 2006 was the same as in the third quarter of fiscal 2005 and amounted to $0.4 million. The expense
for the first nine months of fiscal year 2006 was the same as the first nine months of fiscal 2005 and amounted to $1.2 million.

Operating
loss for the Quantum Fuel Systems segment increased $1.8 million, from $1.9 million in the third quarter of fiscal 2005 to $3.7 million in the third quarter of fiscal 2006 and increased $5.6 million, from $5.5 million in the first nine months of
fiscal 2005 to $11.1 million in the first nine months of fiscal 2006. The increase in the operating loss for the Quantum Fuel Systems segment for the third quarter of fiscal 2006 is primarily a result of decreased sales volume related to our
hydrogen fuel metering and fuel storage systems and higher research and development expenses associated with development contracts. We expect the Quantum Fuel System segment to incur lower losses in the fourth quarter of fiscal 2006 compared to the
third quarter as a result of anticipated higher revenue levels.

Tecstar Automotive Group Segment

Activity in the Tecstar Automotive Group segment relates to operations acquired in connection with the merger with TAG on March 3, 2005. The
operating results of TAG have been included in our consolidated financial results since the date of the acquisition. Tecstar Automotive Group product sales include OEM-level specialty equipment and vehicle accessories, known as styling parts and
performance products that are added to OEM pick-up trucks and SUVs through a second stage assembly process or distributed through an OEM dealer network.



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Product sales for the Tecstar Automotive Group totaled $30.2 million for the third quarter of fiscal 2006
and $126.7 million for the first nine months of fiscal 2006. Second stage assembly revenues were $16.5 million and $73.6 million for the three and nine-month periods ended January 31, 2006 and are associated with second stage automotive
manufacturing facilities located in Louisiana, Texas and Indiana in the United States and in Ontario, Canada. All of these facilities are located near General Motors assembly plants. Substantially all product sales for this business segment are to
General Motors. Product sales for automotive OEM accessory parts distributed through OEM distribution channels and dealer networks were $12.6 million and $48.5 million for the three and nine-month periods ended January 31, 2006, respectively.
Other revenues totaled $1.1 million and $4.6 million for the three and nine-month periods ended January 31, 2006, respectively. We expect second stage product sales in the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007 to
continue to be negatively impacted by the upcoming expiration of certain second stage contracts and changeovers in vehicle platforms currently planned by General Motors; however, we anticipate that product revenues will increase in the fourth
quarter by approximately 15% as compared to the third quarter as a result of the Regency acquisition and other dealer network and specialty vehicle programs.

Cost of product sales for the Tecstar Automotive Group were $29.2 million in the third quarter of fiscal 2006 and $116.5 million for the first nine months of fiscal 2006. Cost of product sales primarily represent the
cost of raw material, labor and assembly facility overhead required in the second stage manufacturing process and material costs related to parts distribution. Gross profit on product sales was $1.0 million or 3.3% of sales for the third quarter of
fiscal 2006 and $10.2 million or 8.1% of sales for the first nine months of fiscal 2006.

Contract revenue for the Tecstar Automotive Group
was $2.1 million for the third quarter of fiscal 2006 and $7.0 million for the first nine months of fiscal 2006. Revenue is associated with design and engineering services for concept vehicles and a second stage assembly consulting project for a
special military vehicle assembly program for Force Protection Industries. Research and development expense associated with cost of contract revenue was $2.2 million in the third quarter and $6.0 million for the first nine months of fiscal 2006.

Selling, general and administrative expenses for the Tecstar Automotive Group were $4.0 million for the third quarter of fiscal 2006 and
$11.2 million or 8.4% of total segment revenue for the first nine months of fiscal 2006. These expenses represent those costs that directly support the business segment and consist mainly of selling and administrative salaries, business development
costs, insurance and travel related costs. In addition, foreign currency transaction gains for the third quarter and first nine months of fiscal 2006 of $0.2 million and $0.8 million, respectively, related to our Canadian second stage operations are
included as a reduction of selling, general and administrative expenses.

Amortization of intangibles was $0.7 million for the third
quarter and $2.1 million for the first nine months of fiscal 2006 and relates to specifically identified customer contracts and existing technology acquired by Quantum in the merger with TAG.

Operating loss for the Tecstar Automotive Group segment was $3.8 million for the third quarter of fiscal 2006 and $2.1 million for the first nine months
of fiscal 2006. We expect the Tecstar Automotive Group segment to realize an operating loss during the fourth quarter of fiscal 2006 at approximately the same level of loss incurred during the third quarter.

Corporate

Corporate expenses
increased by $1.3 million, or 100.0%, from $1.3 million in the third quarter of fiscal 2005 to $2.6 million in the third quarter of fiscal 2006 and increased by $3.5 million, or 92.1%, from $3.8 million in the first nine months of fiscal 2005 to
$7.3 million in the first nine months of fiscal 2006 primarily as a result of supporting the addition of the Tecstar Automotive Group segment operations. Corporate expenses as a percentage of total revenues decreased to 5.0% in the first nine months
of fiscal 2006 as compared to 23.0% in the first nine months of fiscal 2005. We expect this ratio to remain relatively constant during the remainder of fiscal 2006 due to a higher anticipated revenue base as compared to fiscal 2005.

Non-Reporting Segment Results

Interest
Income and Expense. Interest income increased by $0.1 million, or 14.3%, from $0.7 million in the first nine months of fiscal 2005 to $0.8 million in the first nine months of fiscal 2006. The increase is primarily a result of higher yields
earned due to increases in the federal funds rate over the course of the last year. Interest expense amounted to $1.9 million in the first nine months of fiscal 2006 as compared to $0 in the first nine months of fiscal 2005. Interest expense relates
to debt obligations that were assumed in connection with the TAG merger on March 3, 2005 that had a total outstanding principal balance of $36.4 million as of January 31, 2006.



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

Liquidity and Capital Resources

In July 2002, we received $15.0 million in connection with our spin-off from IMPCO. In January 2003, we completed a public equity offering of an aggregate
of 4,025,000 shares of our common stock at a price of $2.25 per share, which yielded net proceeds of $8.0 million, all of which has been used for working capital purposes. In October 2003, we completed a public equity offering of an aggregate of
8,050,000 shares of our common stock at a price of $8.00 per share, which yielded net proceeds of $60.1 million.

We assumed a total of
$23.8 million of long-term debt at the close of the TAG merger on March 3, 2005 which included $15.0 million of unsecured senior subordinated convertible notes that were issued in a private placement with TAG in July 2004. The notes bear
interest at 8.5% and mature in July 2009 with semi-annual interest payments payable on January 1 and July 1 of each year. Per the terms of the notes, as modified by the merger agreement with TAG, the interest payments can be made in either
cash or shares of our common stock, at our discretion. In connection with the merger, we assumed the obligation to issue shares of Quantum common stock upon conversion of the notes at a conversion price of $5.77 per dollar of debt converted. The
scheduled July 1, 2005 and January 31, 2006 semi-annual interest payments were made in cash.

Our principal sources of liquidity
as of January 31, 2006 included cash and cash equivalents of $11.7 million, short-term marketable securities of $17.3 million, long-term marketable securities of $1.2 million, and revolving lines of credit with maximum availability totaling
$25.0 million. Advances outstanding under the lines totaled $16.6 million at January 31, 2006.

As of April 30, 2005, we had
$30.0 million and $5.0 million revolving credit agreements with domestic and Canadian lenders that were assumed in connection with our acquisition of TAG. Advances under these credit agreements were limited to a specific percentage of eligible
receivables and inventories of TAG. The advances bore interest subject to a pricing matrix with ranges of 0.75% below the prime rate to 0.25% above the prime rate dependent upon a ratio of TAGs funded debt to earnings before interest, taxes,
depreciation and amortization (EBITDA).

On September 9, 2005, TAG and the lead domestic and Canadian financial
institution lender amended the existing revolving credit agreements. Under the terms of the Amended and Restated Credit Agreement (the Amended Credit Facility), maximum availability under the domestic credit line was reduced to $20.0
million and the Canadian credit line remained at $5.0 million. The previous limitation on availability of the lines to a specific percentage of eligible receivables and inventories of TAG was eliminated under the Amended Credit Facility. Advances
under the Amended Credit Facility bear interest at the greater of prime rate (7.50% at January 31, 2006) minus 0.75% or the federal funds rate plus 1.00%. There is also a Euro currency based rate option as defined in the agreement. The Amended
Credit Facility expires on September 1, 2008. Advances under the Amended Credit Facility are secured by substantially all of TAGs assets and require us to meet certain covenants on a quarterly basis, including a minimum ratio for our
unencumbered consolidated cash and marketable securities to the revolving commitment under the Amended Credit Facility, along with minimum net worth levels for TAG. Quantum acts as a guarantor under the Amended Credit Facility.

We did not meet the minimum net worth level required for TAG under the Amended Credit Facility as of January 31, 2006. We were in compliance with
all other debt covenants and reporting requirements of the Amended Credit Facility and the unsecured senior subordinated convertible notes. Although the lender has waived the minimum net worth requirement for January 31, 2006, we anticipate
that the minimum net worth levels will not be met at the next measurement date of April 30, 2006. Accordingly, we have recorded the outstanding balances under the Amended Credit Facility as a current liability. We are currently in discussions
with our lender to modify the terms of the existing credit facilities.

We believe that our available working capital will be adequate to
meet our liquidity needs for at least the next twelve months. If we desire additional financing to take advantage of strategic opportunities, complete product and application development, to develop facilities for commercialization and limited
production of our products and systems, or to fund future operating activities, we believe such financing can be adequately sourced through financial institutions and public or private offerings of equity or debt securities. Although we believe
those requirements can be adequately sourced, we cannot assure you that such additional sources of financing will be available on acceptable terms, if at all. We have also agreed that, subject to limited exceptions, we will not issue any stock in a
private placement transaction without the prior written consent of General Motors. As of January 31, 2006, we had no material commitments for capital expenditures.



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Our long-term cash requirements depend on numerous factors. Our Quantum Fuel Systems segment is dependent
on factors such as the advancement of OEM fuel cell technologies, development and commercialization timing of our products, customer funding of application development programs, and other industry-wide growth factors. The Tecstar Automotive Group
segment is dependent on factors such as model year changeover of vehicle platforms by General Motors, economic conditions, including levels of disposable consumer income, the availability and price of gasoline, the level of interest rates, and the
availability of consumer financing. Our cash and levels of borrowing are also impacted by the timing of Tecstar Automotive Groups once-a-month cash collections on product sales to General Motors. For example, borrowings under the revolving
lines of credit at the end of our fourth quarter of fiscal 2005 were lower than at the end of our first, second and third quarters of fiscal 2006 primarily as a result of an early payment from General Motors that was scheduled for early May 2005.
Competition and a reliance on a few customers, particularly General Motors, are additional factors that may impact our future operations.

Net cash used in operating activities was $30.8 million during the first nine months of fiscal 2006 as compared to $7.5 million in the first nine months of fiscal 2005. The use of cash during fiscal 2006 is primarily due to a net loss of
$13.7 million as adjusted for the non-cash effect of depreciation and amortization of $8.3 million, a reduction in accounts payable of $13.2 million, and an increase in inventory of $6.2 million.

Although accounts receivable of $24.9 million at January 31, 2006 was comparable to the level at April 30, 2005 of $24.1 million, there is not
a direct correlation between the receivable levels at the end of these two periods and the applicable revenue streams that give rise to the receivables. Accounts receivable was lower than expected at April 30, 2005 as a result of the timing of
collections on product sales to General Motors. Tecstar Automotive Group normally receives a large cash collection from General Motors once a month that covers a substantial portion of its segment product sales. Over the course of the first nine
months of fiscal 2006, only eight large monthly payments were received due to this earlier than expected collection of a payment scheduled for May that was received during the last week in April amounting to $14.0 million. This timing, in addition
to increased product sales during the second quarter, resulted in significant higher levels of accounts receivable experienced during the first half of fiscal 2006 to $43.1 million at October 31, 2005. A significant decline in product sales
during the third quarter was the primary reason for the decrease in accounts receivable at the end of the current period.

The decrease in
accounts payable is primarily due to overall decreases in production during the third quarter of fiscal 2006 in our TAG segment. The increase in inventory was primarily due to expanded production activities related to our Amstar second stage
operations and higher levels of automotive OEM accessory parts on hand associated with an expanded distribution program.

Net cash provided
by investing activities during the first nine months of fiscal 2006 was $12.8 million as compared to $4.8 million during the first nine months of fiscal 2005. The net cash provided in the current fiscal year is mainly a result of maturities on our
marketable securities exceeding the levels of reinvestment in longer-term securities by $17.6 million. Purchases of equipment and leasehold improvements were $4.0 million for the first nine months of fiscal 2006 as compared to $1.0 million for the
prior fiscal year. During the second quarter of fiscal 2006, we received $250,000 in connection with our sale of assets to Concord Coatings and we paid $600,000 pursuant to our acquisition of Empire Coach.

Net cash provided by financing activities during the first nine months of fiscal 2006 was $17.9 million as compared to $0.2 million during the first nine
months of fiscal 2005. Cash provided during fiscal 2006 was principally from borrowings of $16.6 million on the revolving credit facilities we assumed in connection with the TAG acquisition in March 2005. We also received $1.5 million of proceeds in
connection with promissory notes issued to the minority interest partner associated with our consolidated subsidiary Amstar LLC.

The ratio
of current assets to current liabilities was 2.5:1 at April 30, 2005 and 1.9:1 at January 31, 2006. During the first nine months of fiscal 2006, our total working capital decreased by $17.4 million, from $58.4 million at the end of fiscal
2005 to $41.0 million at January 31, 2006.



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Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates due to our financing, investing and cash management activities. Specifically, our cash and
marketable securities are subject to fluctuations in interest rates. Based on our cash and marketable securities balance at January 31, 2006, a 1% decrease in interest rates would result in reduced annual interest income of approximately
$302,000.

We are also at risk due to the variable nature of our $25.0 million in revolving credit facilities and our mortgage note related
to one of our Troy, Michigan facilities. A 1% increase in the interest rate could result in an annual increase in interest expense of up to approximately $250,000, assuming the maximum amount was outstanding on the credit facilities during an entire
year. A 1% increase in the interest rate would result in approximately $8,000 of additional interest expense related to the mortgage note.

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

We are exposed to risk from fluctuating currency exchange rates, primarily the U.S. dollar against the Canadian
dollar. We face transactional currency exposures that arise when our foreign subsidiaries enter into transactions denominated in currencies other than their own local currency. We also face currency exposure that arises from translating the results
of our Canadian operations to the U.S. dollar. Net foreign currency transaction gains aggregated approximately $847,000 for the first nine months of fiscal 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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



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Item 4. Controls and Procedures.

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report.

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

PART IIOTHER INFORMATION

Item 6. Exhibits.

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



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SIGNATURES

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

Date: March 10, 2006



QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.By:

/s/ WILLIAM B. O LSONWilliam B. Olson, Chief Financial Officer and Treasurer[Authorized Signatory and Principal Financial Officer]




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EXHIBIT INDEX



|              |  |                                                                                                                               
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | 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 U.S.C. 1350.
|              | 
|32.2          |  | Certification of the Chief Financial Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.