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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended October 31, 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. Yes  x    No ̈

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

Large accelerated filer ̈Accelerated filer  x                    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ̈No  x

Number of shares outstanding of each of the issuers classes of common stock, as of December 12, 2006:

64,330,334 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                                                                                             |  | 2 
|                                                                                                                          | 
|Item 1. Financial Statements:                                                                                             |  | 2 
|                                                                                                                          | 
|Condensed consolidated balance sheets  April 30, 2006 and October 31, 2006 (unaudited)                                   |  | 2 
|                                                                                                                          | 
|Condensed consolidated statements of operations (unaudited)  Three months and six months ended October 31, 2005 and 2006 |  | 3 
|                                                                                                                          | 
|Condensed consolidated statements of cash flows (unaudited)  Six months ended October 31, 2005 and 2006                  |  | 4 
|                                                                                                                          | 
|Notes to condensed consolidated financial statements (unaudited)  October 31, 2006                                       |  | 5 
|                                                                                                                          | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 26
|                                                                                                                          | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 43
|                                                                                                                          | 
|Item 4. Controls and Procedures                                                                                           |  | 43
|                                                                                                                          | 
|Part II. Other Information                                                                                                |  | 45
|                                                                                                                          | 
|Item 1A. Risk Factors                                                                                                     |  | 45
|                                                                                                                          | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                               |  | 45
|                                                                                                                          | 
|Item 5. Other Information                                                                                                 |  | 45
|                                                                                                                          | 
|Item 6. Exhibits                                                                                                          |  | 46
|                                                                                                                          | 
|Signatures                                                                                                                |  | 47



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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, 2006 |             |   | October 31, 2006 |  
|ASSETS                                                                                                                                                                     |  |                |             |   | (unaudited)      |  
|Current assets:                                                                                                                                                            |  |                |             |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                                                  |  | $              | 9,012,610   |   |                  | $ | 12,529,410   |  
|Restricted cash equivalents and marketable securities                                                                                                                      |  |                |            |   |                  |   | 17,655,558   |  
|Accounts receivable, net                                                                                                                                                   |  |                | 28,785,558  |   |                  |   | 21,302,380   |  
|Inventories, net                                                                                                                                                           |  |                | 34,965,750  |   |                  |   | 32,630,629   |  
|Tooling and engineering                                                                                                                                                    |  |                | 2,511,876   |   |                  |   | 1,056,408    |  
|Prepaids and other current assets                                                                                                                                          |  |                | 2,027,305   |   |                  |   | 2,204,722    |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total current assets                                                                                                                                                       |  |                | 77,303,099  |   |                  |   | 87,379,107   |  
|Property and equipment, net                                                                                                                                                |  |                | 23,716,716  |   |                  |   | 23,358,844   |  
|Restricted cash equivalents and marketable securities                                                                                                                      |  |                | 15,000,000  |   |                  |   |             |  
|Intangible assets, net                                                                                                                                                     |  |                | 59,954,867  |   |                  |   | 57,685,662   |  
|Goodwill                                                                                                                                                                   |  |                | 105,593,765 |   |                  |   | 33,276,259   |  
|Deposits and other assets                                                                                                                                                  |  |                | 740,154     |   |                  |   | 748,452      |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total assets                                                                                                                                                               |  | $              | 282,308,601 |   |                  | $ | 202,448,324  |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  |                |             |   |                  |   |              |  
|Current liabilities:                                                                                                                                                       |  |                |             |   |                  |   |              |  
|Accounts payable                                                                                                                                                           |  | $              | 26,881,031  |   |                  | $ | 30,179,138   |  
|Accrued payroll obligations                                                                                                                                                |  |                | 2,677,661   |   |                  |   | 2,411,931    |  
|Accrued interest                                                                                                                                                           |  |                | 739,996     |   |                  |   | 738,396      |  
|Notes payable                                                                                                                                                              |  |                | 2,225,574   |   |                  |   | 2,214,737    |  
|Deferred revenue                                                                                                                                                           |  |                | 796,037     |   |                  |   | 1,434,100    |  
|Accrued warranties                                                                                                                                                         |  |                | 804,518     |   |                  |   | 1,064,434    |  
|Customer deposits                                                                                                                                                          |  |                | 6,151,754   |   |                  |   | 1,546,879    |  
|Other accrued liabilities                                                                                                                                                  |  |                | 1,252,211   |   |                  |   | 1,862,891    |  
|Current maturities of long-term debt                                                                                                                                       |  |                | 9,339,212   |   |                  |   | 24,991,574   |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total current liabilities                                                                                                                                                  |  |                | 50,867,994  |   |                  |   | 66,444,080   |  
|Long-term debt, net of current maturities                                                                                                                                  |  |                | 33,092,568  |   |                  |   | 17,899,779   |  
|Deferred income taxes                                                                                                                                                      |  |                | 5,885,143   |   |                  |   | 5,581,824    |  
|Other accrued liabilities                                                                                                                                                  |  |                | 401,227     |   |                  |   | 324,205      |  
|Commitments and contingencies                                                                                                                                              |  |                |             |   |                  |   |              |  
|Minority interests                                                                                                                                                         |  |                | 468,801     |   |                  |   | 216,358      |  
|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; 53,774,113 issued and outstanding at April 30, 2006 and 64,284,602 issued
and outstanding at October 31, 2006 |  |                | 53,774      |   |                  |   | 64,285       |  
|Additional paid-in-capital                                                                                                                                                 |  |                | 262,803,600 |   |                  |   | 286,012,683  |  
|Accumulated deficit                                                                                                                                                        |  |                | (71,076,473 | ) |                  |   | (173,832,132 | )
|Accumulated other comprehensive loss                                                                                                                                       |  |                | (189,033    | ) |                  |   | (263,758     | )
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total stockholders equity                                                                                                                                                 |  |                | 191,592,868 |   |                  |   | 111,982,078  |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                                                 |  | $              | 282,308,601 |   |                  | $ | 202,448,324  |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  

See accompanying notes to condensed consolidated financial statements.



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|------------------------------------------------------------------ |  | ------------------------------ | ---------- | - | ---------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ------------ | -
|                                                                   |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|                                                                   |  | 2005                           |            |   | 2006                         |   |             | 2005 |  |   | 2006        |  
|Revenue:                                                           |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Net product sales                                                  |  | $                              | 57,247,628 |   |                              | $ | 33,787,256  |      |  | $ | 100,521,620 |   |  | $ | 72,783,294   |  
|Contract revenue                                                   |  |                                | 5,911,594  |   |                              |   | 2,829,061   |      |  |   | 10,009,946  |   |  |   | 6,335,187    |  
|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Total revenue                                                      |  |                                | 63,159,222 |   |                              |   | 36,616,317  |      |  |   | 110,531,566 |   |  |   | 79,118,481   |  
|Costs and expenses:                                                |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Cost of product sales                                              |  |                                | 51,673,638 |   |                              |   | 35,840,375  |      |  |   | 92,114,960  |   |  |   | 73,446,003   |  
|Research and development                                           |  |                                | 5,981,295  |   |                              |   | 4,866,419   |      |  |   | 12,607,994  |   |  |   | 10,524,922   |  
|Selling, general and administrative                                |  |                                | 6,969,698  |   |                              |   | 11,353,406  |      |  |   | 14,021,010  |   |  |   | 22,343,163   |  
|Amortization of intangibles                                        |  |                                | 1,116,944  |   |                              |   | 1,134,172   |      |  |   | 2,233,888   |   |  |   | 2,268,355    |  
|Impairment loss on goodwill                                        |  |                                |           |   |                              |   | 72,317,506  |      |  |   |            |   |  |   | 72,317,506   |  
|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Total costs and expenses                                           |  |                                | 65,741,575 |   |                              |   | 125,511,878 |      |  |   | 120,977,852 |   |  |   | 180,899,949  |  
|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Operating loss                                                     |  |                                | (2,582,353 | ) |                              |   | (88,895,561 | )    |  |   | (10,446,286 | ) |  |   | (101,781,468 | )
|Interest income                                                    |  |                                | 208,841    |   |                              |   | 293,077     |      |  |   | 499,274     |   |  |   | 475,223      |  
|Interest expense                                                   |  |                                | (630,522   | ) |                              |   | (1,325,446  | )    |  |   | (1,205,805  | ) |  |   | (2,468,942   | )
|Minority interest in losses (income) of subsidiaries               |  |                                | (60,279    | ) |                              |   | 258,979     |      |  |   | (60,279     | ) |  |   | 545,124      |  
|Other income, net                                                  |  |                                | 39,074     |   |                              |   | 180,436     |      |  |   | 39,074      |   |  |   | 194,596      |  
|Income tax benefit (provision)                                     |  |                                | (11,406    | ) |                              |   | 158,369     |      |  |   | (11,627     | ) |  |   | 279,808      |  
|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Net loss                                                           |  | $                              | (3,036,645 | ) |                              | $ | (89,330,146 | )    |  | $ | (11,185,649 | ) |  | $ | (102,755,659 | )
|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Net loss per share - basic and diluted                             |  | $                              | (0.06      | ) |                              | $ | (1.40       | )    |  | $ | (0.21       | ) |  | $ | (1.78        | )
|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Number of shares used in per share calculation - basic and diluted |  |                                | 52,874,941 |   |                              |   | 63,963,433  |      |  |   | 52,858,523  |   |  |   | 57,840,525   |  
|                                                                   |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  

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)



|                                                                            |  |                              |             |   |      |   |              |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---- | - | ------------ | -
|                                                                            |  | Six months ended October 31, |            
|                                                                            |  | 2005                         |             |   | 2006 |  
|Cash flows from operating activities:                                       |  |                              |             |   |      |   |              |  
|Net loss                                                                    |  | $                            | (11,185,649 | ) |      | $ | (102,755,659 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |             |   |      |   |              |  
|Depreciation and amortization                                               |  |                              | 5,469,038   |   |      |   | 6,017,670    |  
|Loss on disposal of property and equipment                                  |  |                              |            |   |      |   | (4,404       | )
|Non-cash share-based compensation charges                                   |  |                              | 54,249      |   |      |   | 2,074,883    |  
|Deferred income taxes                                                       |  |                              |            |   |      |   | (303,319     | )
|Gain on exchange rate changes                                               |  |                              |            |   |      |   | 36,418       |  
|Minority interest in earnings (losses) of subsidiaries                      |  |                              | 60,279      |   |      |   | (545,124     | )
|Impairment loss on goodwill and intangibles                                 |  |                              |            |   |      |   | 72,317,506   |  
|Changes in operating assets and liabilities:                                |  |                              |             |   |      |   |              |  
|Accounts receivable                                                         |  |                              | (19,632,464 | ) |      |   | 9,494,178    |  
|Inventories                                                                 |  |                              | (4,136,203  | ) |      |   | 2,334,956    |  
|Tooling and engineering                                                     |  |                              | 161,422     |   |      |   | 1,455,468    |  
|Refundable income taxes                                                     |  |                              | 1,835,562   |   |      |   | 26,061       |  
|Deposits and other assets                                                   |  |                              | (939,258    | ) |      |   | (192,560     | )
|Accounts payable                                                            |  |                              | 186,469     |   |      |   | 1,493,203    |  
|Deferred revenue                                                            |  |                              |            |   |      |   | 638,063      |  
|Customer deposits                                                           |  |                              |            |   |      |   | (4,604,875   | )
|Other accrued liabilities                                                   |  |                              | 1,747,727   |   |      |   | 559,767      |  
|                                                                            |  |                              |             |   |      |   |              |  
|Net cash used in operating activities                                       |  |                              | (26,378,828 | ) |      |   | (11,957,768  | )
|                                                                            |  |                              |             |   |      |   |              |  
|Cash flows from investing activities:                                       |  |                              |             |   |      |   |              |  
|Purchases of property and equipment                                         |  |                              | (2,412,088  | ) |      |   | (4,301,903   | )
|Proceeds from sale of property and equipment                                |  |                              |            |   |      |   | 14,160       |  
|Acquisition transaction costs                                               |  |                              | (403,011    | ) |      |   | (43,280      | )
|Acquisition of Empire Coach Enterprises                                     |  |                              | (600,000    | ) |      |   |             |  
|Purchases of marketable securities                                          |  |                              | (10,262,910 | ) |      |   | (4,602,584   | )
|Maturities of marketable securities                                         |  |                              | 19,810,906  |   |      |   | 1,913,137    |  
|                                                                            |  |                              |             |   |      |   |              |  
|Net cash provided by (used in) investing activities                         |  |                              | 6,132,897   |   |      |   | (7,020,470   | )
|                                                                            |  |                              |             |   |      |   |              |  
|Cash flows from financing activities:                                       |  |                              |             |   |      |   |              |  
|Proceeds (payments) on capital lease and other obligations                  |  |                              | (16,094     | ) |      |   | 23,603       |  
|Proceeds from issuance of notes payable                                     |  |                              | 1,500,000   |   |      |   |             |  
|Payments on notes and obligations payable                                   |  |                              | (246,354    | ) |      |   | (1,467,982   | )
|Borrowings on revolving credit agreement                                    |  |                              | 14,356,176  |   |      |   | 1,868,829    |  
|Proceeds from issuance of common stock and warrants, net                    |  |                              |            |   |      |   | 21,743,732   |  
|Proceeds from exercises of stock options                                    |  |                              | 179,202     |   |      |   | 33,612       |  
|Contributions from minority interest holders                                |  |                              | 250,000     |   |      |   | 292,682      |  
|                                                                            |  |                              |             |   |      |   |              |  
|Net cash provided by financing activities                                   |  |                              | 16,022,930  |   |      |   | 22,494,476   |  
|Effect of exchange rate changes on cash                                     |  |                              | 54,359      |   |      |   | 562          |  
|                                                                            |  |                              |             |   |      |   |              |  
|Net increase (decrease) in cash and cash equivalents                        |  |                              | (4,168,642  | ) |      |   | 3,516,800    |  
|Cash and cash equivalents at beginning of period                            |  |                              | 11,736,688  |   |      |   | 9,012,610    |  
|                                                                            |  |                              |             |   |      |   |              |  
|Cash and cash equivalents at end of period                                  |  | $                            | 7,568,046   |   |      | $ | 12,529,410   |  
|                                                                            |  |                              |             |   |      |   |              |  

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)

October 31, 2006

1) Background and Basis of Presentation

Background

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

Prior to July 23, 2002, the Company was a wholly-owned division of IMPCO Technologies, Inc. (IMPCO). On this date, IMPCO distributed the
stock of the Company to stockholders of IMPCO (the Distribution) 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, a Tier One second stage manufacturer that designs, engineers and integrates specialty equipment products into motor
vehicle applications. 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. in exchange for a 20.0% equity interest in Concord Coatings, cash and a promissory note. On January 18, 2006, TAG obtained a 50.1% controlling interest
in Unique Performance Concepts, LLC (UPC), a business venture formed with Unique Performance, Inc. to manufacture limited edition high performance vehicles. On February 8, 2006, the Company acquired all of the stock of Regency
Conversions, Inc. (Regency), a vehicle converter with extensive distribution channels for second stage vehicle manufacturing and aftermarket parts. On March 24, 2006, the Company obtained an initial 35.5% interest in Advanced
Lithium Power Inc. (ALP), a newly formed company developing lithium ion and advanced battery control systems whose primary asset is intellectual property. The Companys interest in ALP was reduced to 23.1% on July 18, 2006 and
to 23.0% on August 31, 2006 as a result of additional equity contributed from other minority shareholders.

The Companys
authorized capital stock at October 31, 2006 consists of 20,000,000 shares of preferred stock, par value $0.001 per share, no shares issued and outstanding and 100,000,000 shares of common stock, par value $0.001 per share, 65,284,571 shares
issued and outstanding (which includes 999,969 shares of Series B common stock). Of the 100,000,000 authorized shares of common stock, 2,000,000 are designated as Series B common stock.

Basis of Presentation

The consolidated financial statements include the accounts of Quantum Fuel
Systems Technologies Worldwide, Inc. and its wholly-owned subsidiary TAG for the period subsequent to the merger completed on March 3, 2005 and TAGs wholly-owned subsidiary Regency Conversions, LLC for the period subsequent to the
acquisition of Regency on February 8, 2006. The 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%. The accounts of Advanced Lithium Power Inc. (ALP)
have been included in the consolidated financial statements for the period since the Company obtained a 35.5% equity share of ALP on March 24, 2006 due to the controlling nature of the Companys equity position resulting from proxy
agreements between the Company and certain other shareholders of ALP. Although the Companys equity share declined to 23.0% during the first half of fiscal 2007, the decline did not change the controlling nature of the Companys equity
position in ALP due to existing voting arrangements and other control features established by a shareholder agreement.



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##### Table of Contents

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).

Concord Coatings, Inc. is a variable interest entity as defined by FIN 46R due to the fact Concord
Coatings, Inc. requires additional subordinated financial support. The Company is the primary beneficiary of this entity based on the promissory note due to the Company and bank guarantees provided by the Company. The accounts of Concord Coatings,
Inc. are consolidated by the Company as required by FIN 46R.

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

Liquidity

In
January 2003, the Company completed a public equity offering of an aggregate of 4,025,000 shares of its common stock at a price of $2.25 per share, which yielded net proceeds of approximately $8.0 million after underwriting discounts and commissions
and offering expenses. In October 2003, the Company completed a public equity offering of an aggregate of 8,050,000 shares of common stock at a price of $8.00 per share, which yielded net proceeds of approximately $60.1 million after underwriting
discounts and commissions and offering expenses.

On June 29, 2006, the Company completed a private investment in public entity
(PIPE) transaction which yielded proceeds of $12.5 million from the sale of 4,403,000 shares of its common stock at a price of $2.84 per share, which represented a 10% discount on the June 29, 2006 closing price of $3.15. On
October 27, 2006, the Company completed a second PIPE transaction which yielded proceeds of $10.0 million from the sale of 6,098,000 shares of its common stock at a price of $1.64 per share, which represented a 20% discount on the
October 27, 2006 closing price of $2.05. The investors also received warrants in connection with the PIPE transactions (see Note 11).

The Companys principal sources of liquidity as of October 31, 2006 included cash and cash equivalents of $12.5 million, restricted cash equivalents and marketable securities of $17.7 million, and revolving lines of credit with a
financial institution which provide for a maximum availability totaling $25.0 million that were assumed in connection with the acquisition of TAG. Advances outstanding under the lines totaled $23.4 million at October 31, 2006. The restricted
cash equivalents and marketable securities consist of $16.7 million collateralized in connection with the revolving lines of credit and $1.0 million collateralized for the benefit of General Motors Acceptance Corporation (GMAC) in
connection with financing of vehicle chassis for Regencys operations.

As more fully described in Note 9, the Company is in violation
of certain financial covenants as of October 31 and November 30, 2006. On December 15, 2006, the company entered into a Forbearance Agreement with its financial institution under which the lender agreed to forbear from making demand
and taking collection actions until March 15, 2007 and to waive existing events of default under the amended credit agreement arising from the covenant violations. The lender also agreed to not require the Company to meet certain levels of
tangible net worth during the forbearance period. The Forbearance Agreement required the Company to liquidate $15.0 million of its restricted cash equivalents and marketable securities in connection with the execution of the agreement and to use the
proceeds to pay down the outstanding balance due under the credit facility. Concurrently with the pay down, the maximum aggregate advances available under the credit facility were reduced to $10 million. The Company has engaged consultants to assist
it in pursuing various financing alternatives and the Company believes it will be able to replace the existing credit facility with another lender or alternative debt or equity financing prior to the expiration of the Forbearance Agreement; however,
if the Company is unable to restructure the debt as expected or if the Company violates provisions of the Forbearance Agreement or the amended credit facility and fails to obtain future waivers, the financial institution along with holders of the
$15.0 million in senior subordinated convertible notes will have the right to accelerate the due dates of the outstanding balances on the credit facility and the convertible notes and demand immediate repayments.

During the first half of fiscal 2007, the Company reduced overall workforce levels by approximately 20% and implemented certain other cost saving
initiatives. The Company intends to continue its efforts to implement a cost reduction program that may include consolidation of facilities, streamlining of functions, monitoring of workforce levels and various other cost saving measures. Despite
the cost saving initiatives already implemented and those the Company expects to implement in the second half of fiscal 2007, the Company believes that based on current projections and forecasts that it does not have sufficient liquidity to fund its
short-term cash needs. Accordingly, the Company will require additional equity or debt financing near the beginning of the fourth quarter of fiscal 2007 to fund its operating activities. The amount of such additional financing that is needed is
substantial. In addition to the requirement to replace the existing credit facility with its financial institution prior to March 15, 2007, the Company anticipates that it will require approximately $20 million in



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additional equity or debt financing to fund its operating activities over the next twelve months above its principal sources of liquidity at October 31,
2006, which includes a requirement of approximately $5 to $8 million of additional capital to fund its operating activities through the end of fiscal 2007. The Companys actual capital requirements could be significantly higher. The Company
plans to utilize its available sources of tangible collateral, primarily consisting of accounts receivables, inventories and fixed assets to secure a new credit facility with an asset based lender in the range of $10 to $30 million near the
beginning of the fourth quarter. To the extent that this debt financing does not provide sufficient capital for the Companys operations, the Company anticipates issuing stock in private or public offerings. The Company may also sell certain
subsidiaries or other long-lived assets or issue subordinated debt to provide for its liquidity needs over the next year. Although the Company believes that its short-term cash requirements can be adequately sourced, it cannot assure the reader that
such additional sources of financing will be available on acceptable terms, if at all. The Companys ability to secure additional financing in this time period may be difficult due to its history of operating losses and negative cash flows.

An acceleration of the outstanding balances on the credit facility and/or the convertible notes or an inability by the Company to raise
sufficient capital to fund its operations would have a material adverse affect on the Company and would raise doubts about the Companys ability to continue as a going concern.

Use of Estimates in the Preparation of Consolidated Financial Statements

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

Revenue Recognition

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

Contract revenue for customer funded research and development is principally recognized by the percentage of completion method in accordance with
Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Generally, the Company estimates percentage complete by determining cost incurred to date as a percentage of
total estimated cost at completion. For certain other contracts, percentage completed is determined by measuring progress towards contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings
process. For contracts measured under the estimated cost approach, the Company believes it can generally make dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to
revisions as the contract progresses to completion. The Companys estimates of contract costs are based on expectations of engineering development time and materials and other support costs. These estimates can change based on unforeseen
technology and integration issues, but known risk factors and contract challenges are generally allowed for in the initial scope and cost estimate of the program. Revisions in profit estimates are charged to income in the period in which the facts
that give rise to the revision become known.

Reclassification

Certain reclassifications have been made to fiscal year 2006 amounts to conform to the fiscal year 2007 presentation.



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2) Acquisitions

Regency Conversions, Inc.

On February 8, 2006, the Company acquired all of the outstanding shares of stock of Texas
based Regency Conversions, Inc. in exchange for $3.3 million in cash and 1,815,000 shares of the Companys common stock pursuant to an Agreement and Plan of Merger in a transaction accounted for as a purchase under Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations.

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 is anticipated to 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.

Under the purchase method of accounting, the total estimated consideration for the transaction was $11.2 million and
consisted of a cash payment of $3.3 million, the issuance of the Companys common stock valued at $7.8 million, and direct transaction fees and expenses of $0.1 million. As a result, the Company recorded $2.9 million in goodwill and assigned
$5.3 million to intangible assets, consisting of Regencys dealer network and trade names. The goodwill is not deductible for tax purposes.

The value assigned for the Companys common stock exchanged in the merger was based on the weighted average price of $4.31 of Quantums common stock as reported on The Nasdaq National Market for the two day period before and after
the date the acquisition was announced (February 10, 2006). The Companys common stock was issued in a private placement exempt from registration under applicable provisions of the Securities Act of 1933 and Texas securities laws. Accordingly,
the common stock is considered restricted securities as defined in Rule 144 under the Securities Act of 1933 and the shareholders cannot sell the securities prior to registration. The restricted shareholders received registration rights in
connection with the merger that provide, under applicable circumstances, that the non-registered shares can be included in connection with future registration statements of the Company. The Company is responsible for all costs and expenses related
to the registration of the restricted shares.

The Company has not yet obtained all information related to the acquisition, primarily
related to estimates of fair value of dealer network and trade name intangibles, inventory and warranty reserves, other accrued expenses and completing income tax returns as of the acquisition date and settling incremental transaction costs. The
final allocation will be completed in the second half of fiscal 2007.

Empire Coach Enterprises

In September 2005, TAG and a minority interest partner formed Empire Coach Enterprises, LLC, for the purpose of acquiring the operations of Empire Coach,
Inc., a second stage limousine manufacturer. TAG received a 51.0% controlling interest in the new business venture for no consideration and subsequently contributed $600,000 in cash. The new LLC used the cash contribution to acquire the operations
of Empire Coach, Inc. pursuant to an Asset Purchase Agreement dated September 15, 2005. The Company has accounted for the transaction as a purchase under SFAS 141 and allocated $598,905 to goodwill, $288,117 to the fair value of tangible assets
acquired and $287,022 to the fair value of liabilities assumed. Empire Coach has a facility lease that runs through February 2013 that is guaranteed by TAG.

On November 29, 2006, an involuntary bankruptcy petition was filed against Empire Coach Enterprises in the U.S. Bankruptcy Court, District of New Jersey. The petition was filed by four unsecured creditors
claiming that they are collectively owed $109,701. The creditors are seeking relief under Chapter 7 of the United States Bankruptcy Code. An answer to the petition has not yet been filed and Empire Coach is currently evaluating its options.

The involuntary bankruptcy petition, along with recent operating results of Empire Coach that is well below its fiscal 2007 operating
plan, indicate that an impairment of the goodwill associated with the acquisition exists. In connection with impairment testing that was performed by the Company (see Note 18), the Company has recorded a charge of $598,905 in the second quarter of
fiscal 2007 to write-down the full amount of the Empire Coach goodwill.



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Pro Forma Data

The operating results of Regency have been included in the Companys consolidated financial statements from the date of the acquisition on February 8, 2006. The pro forma financial data set forth below gives
effect to the Companys merger with Regency as if the acquisition had been completed on May 1, 2005. The pro forma financial data includes an adjustment to increase the number of shares used in the per share calculations for fiscal 2005 as
a result of shares issued in connection with the Regency transaction. The pro forma financial data excludes those adjustments made to allocate the purchase consideration to Regencys assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The acquisition of Empire Coach has been excluded from the pro forma data as this business is not significant.



|                    |  |                                          |        |   |                                  |   |        |            |  |   |                      |   |  |   |         |  
|------------------- |  | ---------------------------------------- | ------ | - | -------------------------------- | - | ------ | ---------- |  | - | -------------------- | - |  | - | ------- | -
|                    |  | Three Months EndedOctober 31, 2005       |        |   | Six Months EndedOctober 31, 2005 |  
|                    |  | AsReported                               |        |   | Pro Forma(unaudited)             |   |        | AsReported |  |   | Pro Forma(unaudited) |  
|                    |  | (in thousands, except per share amounts) |       
|Net revenue         |  | $                                        | 63,159 |   |                                  | $ | 74,019 |            |  | $ | 110,532              |   |  | $ | 134,409 |  
|Operating loss      |  | $                                        | (2,582 | ) |                                  | $ | (2,235 | )          |  | $ | (10,446              | ) |  | $ | (9,782  | )
|Net loss            |  | $                                        | (3,037 | ) |                                  | $ | (2,932 | )          |  | $ | (11,186              | ) |  | $ | (11,052 | )
|Net loss per share: |  |                                          |        |   |                                  |   |        |            |  |   |                      |   |  |   |         |  
|Basic               |  | $                                        | (0.06  | ) |                                  | $ | (0.05  | )          |  | $ | (0.21                | ) |  | $ | (0.20   | )
|Diluted             |  | $                                        | (0.06  | ) |                                  | $ | (0.05  | )          |  | $ | (0.21                | ) |  | $ | (0.20   | )
|Number of shares:   |  |                                          |        |   |                                  |   |        |            |  |   |                      |   |  |   |         |  
|Basic               |  |                                          | 52,875 |   |                                  |   | 54,690 |            |  |   | 52,859               |   |  |   | 56,489  |  
|Diluted             |  |                                          | 52,875 |   |                                  |   | 54,690 |            |  |   | 52,859               |   |  |   | 56,489  |  

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 Regency transaction occurred on May 1, 2005.

3)
Restricted Cash Equivalents and Marketable Securities

As of October 31, 2006, the Company has collateralized $16.7 million of its
cash and cash equivalents and portfolio of marketable securities in connection with TAGs long-term revolving credit facility pursuant to amendments executed with the Companys financial institution on May 19, 2006 and June 30,
2006 (see Note 9) and collateralized $1.0 million for the benefit of General Motors Acceptance Corporation (GMAC) in connection with financing of vehicle chassis for Regencys operations. In connection with the Forbearance Agreement
with the Companys financial institution, the Company anticipates utilizing $15.0 million of the collateralized cash and marketable securities to reduce the outstanding borrowings under the credit facility in December 2006. To effectuate this
repayment, the Company will be required to sell certain marketable securities prior to their stated maturity dates. As a result, the Company has changed the classification of its marketable securities previously reported as held-to-maturity to
available-for-sale as of October 31, 2006. The unrealized gains or losses on available-for-sale securities are included in accumulated other comprehensive income as a separate component of shareholders equity unless the decline in value is
deemed to be other-than-temporary, in which case the securities are written down to fair value and the loss is charged to income. The unrealized losses on the Companys restricted marketable securities as of October 31, 2006 were $33,889.
Restricted cash equivalents and marketable securities carried at fair values consisted of the following as of October 31, 2006:



|                           |  |   |           
|-------------------------- |  | - | ----------
|Cash and cash equivalents  |  | $ | 8,453,732 
|Corporate bonds            |  |   | 3,600,083 
|U.S. government securities |  |   | 5,601,743 
|                           |  |   |           
|Total                      |  | $ | 17,655,558
|                           |  |   |           



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4) Accounts Receivable

Accounts receivable consist of the following:



|                                |  |               |            |   |                 |   |            |  
|------------------------------- |  | ------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30,2006 |            |   | October 31,2006 |  
|Customer accounts billed        |  | $             | 25,623,255 |   |                 | $ | 16,763,485 |  
|Customer accounts unbilled      |  |               | 3,687,551  |   |                 |   | 5,376,271  |  
|Allowance for doubtful accounts |  |               | (525,248   | ) |                 |   | (837,376   | )
|                                |  |               |            |   |                 |   |            |  
|Accounts receivable, net        |  | $             | 28,785,558 |   |                 | $ | 21,302,380 |  
|                                |  |               |            |   |                 |   |            |  

5) Inventories

Inventories consist of the following:



|                                |  |               |            |   |                 |   |            |  
|------------------------------- |  | ------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30,2006 |            |   | October 31,2006 |  
|Materials and parts             |  | $             | 31,022,896 |   |                 | $ | 31,418,795 |  
|Work-in-process                 |  |               | 2,071,794  |   |                 |   | 1,932,744  |  
|Finished goods                  |  |               | 4,433,363  |   |                 |   | 2,825,144  |  
|                                |  |               |            |   |                 |   |            |  
|                                |  |               | 37,528,053 |   |                 |   | 36,176,683 |  
|Less provision for obsolescence |  |               | (2,562,303 | ) |                 |   | (3,546,054 | )
|                                |  |               |            |   |                 |   |            |  
|Inventories, net                |  | $             | 34,965,750 |   |                 | $ | 32,630,629 |  
|                                |  |               |            |   |                 |   |            |  

6) Property and Equipment

Property and equipment consist of the following:



|                                               |  |               |             |   |                 |   |             |  
|---------------------------------------------- |  | ------------- | ----------- | - | --------------- | - | ----------- | -
|                                               |  | April 30,2006 |             |   | October 31,2006 |  
|Land                                           |  | $             | 211,000     |   |                 | $ | 211,000     |  
|Buildings                                      |  |               | 972,222     |   |                 |   | 972,222     |  
|Tooling, dies and molds                        |  |               | 3,018,290   |   |                 |   | 5,198,065   |  
|Plant machinery and equipment                  |  |               | 16,407,171  |   |                 |   | 17,119,158  |  
|Information systems and office equipment       |  |               | 15,484,932  |   |                 |   | 16,399,896  |  
|Automobiles and trucks                         |  |               | 1,879,400   |   |                 |   | 2,021,474   |  
|Leasehold improvements                         |  |               | 6,253,133   |   |                 |   | 6,577,991   |  
|Construction in progress                       |  |               | 4,248,678   |   |                 |   | 3,309,851   |  
|                                               |  |               |             |   |                 |   |             |  
|                                               |  |               | 48,474,826  |   |                 |   | 51,809,657  |  
|Less accumulated depreciation and amortization |  |               | (24,758,110 | ) |                 |   | (28,450,813 | )
|                                               |  |               |             |   |                 |   |             |  
|Net property and equipment                     |  | $             | 23,716,716  |   |                 | $ | 23,358,844  |  
|                                               |  |               |             |   |                 |   |             |  



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7) Goodwill and Other Intangible Assets

Acquisitions

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

The Company completed acquisitions of TAG, Empire Coach and Regency on March 3, 2005, September 15, 2005 and February 8, 2006,
respectively. 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 acquisitions. In addition,
certain identifiable intangible assets were recorded in connection with contractual or other legal rights acquired. The excess of the cost of acquiring TAG, Empire Coach and Regency over the net of the amounts assigned to their assets acquired and
liabilities assumed, amounting to $102,118,601, $598,905 and $2,876,259, respectively, was recognized as goodwill in connection with the acquisitions.

During the second quarter of fiscal 2007, indicators of goodwill impairment were noted and goodwill was tested. These tests determined that goodwill was impaired related to the acquisitions of TAG and Empire Coach
resulting in estimated charges to write-down goodwill totaling $72,317,506 which was recorded during the three months ended October 31, 2006 (see Note 18). Prior to the impairment charge, goodwill associated with the acquisition of TAG was
allocated 70% to the TAG business segment and 30% to the Quantum Fuel Systems business segment. The portion of goodwill allocated to TAG, amounting to $71,718,601, has been estimated to be fully impaired and was written-off. Goodwill related to the
acquisition of Empire Coach has also been estimated to be fully impaired and was written off in the amount of $598,905.

Goodwill allocated
to Quantum Fuel Systems business segment associated with the acquisition of TAG has been evaluated with no impairment indicated and has a carrying value of $30,400,000 at October 31, 2006. Goodwill associated with the Regency acquisition has
also been evaluated with no impairment indicated and is reported in the TAG business segment.

General Motors Strategic Alliance

In connection with the Companys strategic alliance with General Motors, the Company issued 3,513,439 shares of its Series A common stock to General
Motors on July 24, 2002. This issuance has been recorded at the estimated fair market value on the date of the Distribution of approximately $14.3 million, in accordance with SFAS No. 123, Accounting for Stock Based
Compensation, and EITF 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services. The intangible asset was recorded in accordance with the
consensus reached by the EITF during their November 2001 meeting with respect to EITF 00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other than Employees.

Pursuant to the terms of the Companys Amended and Restated Certificate of Incorporation, upon the completion of the Companys January 2003
public equity offering, all of the 3,513,439 shares of the Companys outstanding Series A common stock held by General Motors converted automatically into shares of the Companys common stock on a one-for-one basis, and the Company issued
to General Motors an aggregate of 999,969 shares of its non-voting Series B common stock. The issuance of the Series B common stock has been recorded as additional consideration related to the strategic alliance between the companies at the
estimated fair market value on the date of the public offering of approximately $2.2 million. As a result, the intangible asset recorded in connection with the Companys issuance of Series B common stock to General Motors increased by $2.2
million to $16.5 million.

Unique Performance Concepts

On January 18, 2006, TAG obtained a 50.1% controlling interest in Unique Performance Concepts, LLC (UPC), a business venture formed with Unique Performance, Inc. to manufacture limited edition high
performance vehicles. Pursuant to UPCs operating agreement, the Company provided capital contributions totaling $300,000 that consisted of tooling assets under construction of $250,000 and cash of $50,000 and the minority interest provided
capital contributions totaling $300,000 that consisted of trade name and dealer network intangibles of $250,000 and cash of $50,000.

Advanced Lithium
Power

On March 24, 2006, the Company and certain unaffiliated individuals formed Advanced Lithium Power Inc. The Company initially
held approximately 1.7 million shares or 35.5% of the Vancouver, British Columbia-based business of which its equity share was valued at $173,120 at the date of the formation. The Companys interest in ALP was reduced to



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23.1% on July 18, 2006 and to 23.0% on August 31, 2006 as a result of additional equity contributed from other minority shareholders. ALPs
primary objective is to develop lithium ion and advanced battery control systems that control state-of-charge and provide for thermal management, resulting in high-performance energy storage. ALPs primary assets are intellectual property
contributed by other shareholders of ALP and its technology has significant opportunities and applications in hybrid electric vehicles, fuel cell vehicles, uninterruptible power supplies, and energy storage for renewable energy, such as solar
photovoltaic applications. The accounts of ALP have been included in the consolidated financial statements for the period since the formation due to the controlling nature of the Companys equity position resulting from proxy agreements between
the Company and certain other shareholders of ALP. As of the date of the formation, the Company assigned $226,998 as intangible assets related to intellectual property and technology, $301,051 to tangible assets, $40,387 to accrued liabilities and
$314,542 to the minority interest equity holders of ALP. The gross carrying value of the intangible assets increased slightly to $234,866 at April 30, 2006 and subsequently declined to $234,000 at October 31, 2006 due to the effect of
exchange rates.

Amortization of Intangibles

SFAS No. 142 requires that recognized intangible assets be amortized over their useful lives and that goodwill is not subject to amortization. The assets consisting of customer related intangibles and existing technology acquired in
the acquisition of TAG are amortized using the straight-line method over their estimated weighted-average useful lives of 360 months and 29 months, respectively. The intangible assets consisting of dealer network and trade names acquired in the
acquisition of Regency are amortized using the straight-line method over their estimated weighted-average useful lives of 144 months and 240 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 agreement. The intangible assets recorded in connection with the formation of UPC are being amortized over the anticipated program life of 33 months. The intangible assets recorded in
connection with the formation of ALP are being amortized over the estimated useful life of the patents and other technology of 16 years.



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##### Table of Contents

Intangible assets consist of the following:



|                                         |  |               |            |   |                 |   |            |  
|---------------------------------------- |  | ------------- | ---------- | - | --------------- | - | ---------- | -
|                                         |  | April 30,2006 |            |   | October 31,2006 |  
|TAG contracts and customer relationship: |  |               |            |   |                 |   |            |  
|Gross carrying value                     |  | $             | 44,600,000 |   |                 | $ | 44,600,000 |  
|Accumulated amortization                 |  |               | (1,880,445 | ) |                 |   | (2,623,779 | )
|                                         |  |               |            |   |                 |   |            |  
|Net carrying value                       |  |               | 42,719,555 |   |                 |   | 41,976,221 |  
|TAG existing technology:                 |  |               |            |   |                 |   |            |  
|Gross carrying value                     |  |               | 2,100,000  |   |                 |   | 2,100,000  |  
|Accumulated amortization                 |  |               | (876,000   | ) |                 |   | (1,314,000 | )
|                                         |  |               |            |   |                 |   |            |  
|Net carrying value                       |  |               | 1,224,000  |   |                 |   | 786,000    |  
|Regency dealer network:                  |  |               |            |   |                 |   |            |  
|Gross carrying value                     |  |               | 4,280,000  |   |                 |   | 4,280,000  |  
|Accumulated amortization                 |  |               | (89,166    | ) |                 |   | (267,498   | )
|                                         |  |               |            |   |                 |   |            |  
|Net carrying value                       |  |               | 4,190,834  |   |                 |   | 4,012,502  |  
|Regency trade names:                     |  |               |            |   |                 |   |            |  
|Gross carrying value                     |  |               | 1,040,000  |   |                 |   | 1,040,000  |  
|Accumulated amortization                 |  |               | (12,999    | ) |                 |   | (38,997    | )
|                                         |  |               |            |   |                 |   |            |  
|Net carrying value                       |  |               | 1,027,001  |   |                 |   | 1,001,003  |  
|GM Strategic Alliance Agreement:         |  |               |            |   |                 |   |            |  
|Gross carrying value                     |  |               | 16,479,358 |   |                 |   | 16,479,358 |  
|Accumulated amortization                 |  |               | (6,139,203 | ) |                 |   | (6,969,090 | )
|                                         |  |               |            |   |                 |   |            |  
|Net carrying value                       |  |               | 10,340,155 |   |                 |   | 9,510,268  |  
|UPC dealer network and trade names:      |  |               |            |   |                 |   |            |  
|Gross carrying value                     |  |               | 250,000    |   |                 |   | 250,000    |  
|Accumulated amortization                 |  |               | (30,320    | ) |                 |   | (75,800    | )
|                                         |  |               |            |   |                 |   |            |  
|Net carrying value                       |  |               | 219,680    |   |                 |   | 174,200    |  
|ALP patents and technology:              |  |               |            |   |                 |   |            |  
|Gross carrying value                     |  |               | 234,866    |   |                 |   | 234,000    |  
|Accumulated amortization                 |  |               | (1,224     | ) |                 |   | (8,532     | )
|                                         |  |               |            |   |                 |   |            |  
|Net carrying value                       |  |               | 233,642    |   |                 |   | 225,468    |  
|                                         |  |               |            |   |                 |   |            |  
|                                         |  | $             | 59,954,867 |   |                 | $ | 57,685,662 |  
|                                         |  |               |            |   |                 |   |            |  

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



13



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##### Table of Contents

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

Changes in the Companys product warranty liability during the first six months of fiscal 2007 are as follows:



|                                    |  |   |           |  
|----------------------------------- |  | - | --------- | -
|Balance at April 30, 2006           |  | $ | 804,518   |  
|Warranties issued during the period |  |   | 435,182   |  
|Settlements made during the period  |  |   | (175,266  | )
|                                    |  |   |           |  
|Balance at October 31, 2006         |  | $ | 1,064,434 |  
|                                    |  |   |           |  

9) Long-term Debt

Long-term debt consists of the following:



|                                                                                                                                                                                                                          |  |               |            |   |                 |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | --------------- | - | ----------- | -
|                                                                                                                                                                                                                          |  | April 30,2006 |            |   | October 31,2006 |  
|Senior subordinated convertible notes                                                                                                                                                                                     |  | $             | 15,000,000 |   |                 | $ | 15,000,000  |  
|Domestic bank revolving line of credit                                                                                                                                                                                    |  |               | 19,548,172 |   |                 |   | 20,205,685  |  
|Canadian revolving line of credit                                                                                                                                                                                         |  |               | 3,215,000  |   |                 |   | 3,235,603   |  
|Mortgage note payable to bank, due in monthly installments of $15,000 including interest at the banks prime rate (effective rate of
8.25% at October 31, 2006), due December 1, 2006, collateralized by related building |  |               | 1,157,475  |   |                 |   | 1,121,259   |  
|Promissory note payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $22,113 including interest at
5.38%, due May 1, 2013, unsecured                                               |  |               | 1,560,183  |   |                 |   | 1,468,433   |  
|Obligation payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $27,750 including imputed interest at
5.5%, due May 1, 2013, unsecured                                             |  |               | 1,949,914  |   |                 |   | 1,835,735   |  
|Other                                                                                                                                                                                                                     |  |               | 1,036      |   |                 |   | 24,638      |  
|                                                                                                                                                                                                                          |  |               |            |   |                 |   |             |  
|                                                                                                                                                                                                                          |  |               | 42,431,780 |   |                 |   | 42,891,353  |  
|Less current maturities                                                                                                                                                                                                   |  |               | (9,339,212 | ) |                 |   | (24,991,574 | )
|                                                                                                                                                                                                                          |  |               |            |   |                 |   |             |  
|Long-term debt                                                                                                                                                                                                            |  | $             | 33,092,568 |   |                 | $ | 17,899,779  |  
|                                                                                                                                                                                                                          |  |               |            |   |                 |   |             |  

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.

The
Company has a revolving credit facility with a financial institution that consists of a domestic line of credit and a Canadian line of credit. On May 19, 2006, the credit facility was amended and restated for a second time (the Second
Amended Credit Agreement). On June 30, 2006, the Second Amended Credit Agreement was further amended (the Third Amended Credit Agreement). Under the terms of the Third Amended Credit Agreement, maximum availability under the
credit facility for the domestic and Canadian revolvers was a combined $25.0 million at October 31, 2006. The amount of available advances is subject to limitations based upon the Companys eligible accounts receivables and collateralized
cash equivalents and marketable securities determined on a consolidated basis. Advances under the credit facility bear interest at the greater of prime rate (8.25% at October 31, 2006) minus 1.25% or the federal funds rate plus 1.00%. The Third
Amended Credit Facility contains various affirmative and restrictive covenants including a tangible net worth covenant, limitation on annual capital expenditures, a pay-down covenant and a prohibition from making investments in, merging or
acquiring, any other unrelated entity or business without the approval of the lender. The pay-down covenant requires the Company to maintain an aggregate outstanding balance on the domestic and Canadian lines of less than $15.0 million for five
consecutive business days each month. At October 31, 2006 the Company was in violation of the tangible net worth covenant and at November 30, 2006 the Company was in violation of both the limitation on annual capital expenditures and the
pay-down covenant in addition to limits on



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##### Table of Contents

loans to non-affiliated entities (the Covenant Violations). The Third Amended Credit Agreement matures on February 1, 2009. Quantum and each
of Quantums direct and indirect subsidiaries provided the lender with an unlimited guaranty for TAGs obligations and granted a security interest in all of the Companys assets to the lender under the Third Amended Credit Agreement.

On December 15, 2006, the Company entered into a Forbearance Agreement with its financial institution under which the lender agreed
to forbear from making demand and taking collection actions until March 15, 2007 and to waive existing events of default under the Third Amended Credit Agreement arising from the Covenant Violations. The Forbearance Agreement required the
Company to liquidate $15.0 million of its restricted cash equivalents and marketable securities in connection with the execution of the agreement and to use the proceeds to pay down the outstanding balance due under the Third Amended Credit
Facility. Concurrently with the pay-down, the maximum aggregate advances available under the domestic and Canadian lines of credit were reduced to $10 million. Other provisions of the Forbearance Agreement include: (i) approximately $1.7
million of cash classified as restricted at October 31, 2006 will be released from the restrictions and become freely available to the Company, (ii) the interest rate on outstanding advances is increased to prime rate plus 0.50% on the
domestic line and prime plus 1.0% on the Canadian line, (iii) the Company is required to maintain cash collateral bank accounts at the financial institution, (iv) the Company is not able to use the accounts receivable from Empire Coach
Enterprises, LLC in its borrowing base, (v) Tecstar Automotive Group guaranteed the obligations that the Companys subsidiary Wheel to Wheel, LLC has to the financial institution under a certain mortgage currently in place on the facility
owned by Wheel to Wheel, LLC, (vi) the interest rate on the mortgage on the facility owned by Wheel to Wheel, LLC is increased to prime rate plus 2.25%, and (vii) the Company will not be required to meet certain levels of tangible net
worth during the forbearance period. As a result of the covenant violations and the Forbearance Agreement, the Company continues to classify the outstanding balance under the Third Amended Credit Facility as a current liability as of
October 31, 2006. See Liquidity under Note 1 regarding the Companys plans and risks related to restructuring the credit facility.

The Company is responsible for commitment fees on the unused portion of the Amended Credit Facility of 0.1875%. There were no outstanding letters of credit issued under the revolving credit facilities as of
October 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) Share-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS 123R). This
Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the requisite vesting period. SFAS 123R eliminates the alternative to use the intrinsic method of accounting
provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25), which generally results in no compensation expense recorded in the financial statements related to the grant
of stock options to employees if certain conditions were met.

Effective at the beginning of fiscal 2007, the Company adopted SFAS 123R
using the modified prospective method, which requires the Company to record compensation expense for all awards granted, modified, repurchased, or cancelled after the date of adoption, and for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. The Company did not incur a charge upon the adoption nor have prior period amounts presented herein been restated to reflect the adoption of SFAS 123R.

The fair value concepts have not changed significantly in SFAS 123R; however, in adopting SFAS 123R, companies must choose among alternative valuation
models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company determined that it will continue to use the Black-Scholes option-pricing formula and straight-line amortization of
compensation expense over the requisite vesting period of the option grants or other sharedbased awards. The Company will reconsider use of this model if additional information becomes available in the future that indicates another model would
be more appropriate for the Company, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Under APB 25, the Company was not required to estimate forfeitures in the expense calculation for
the stock compensation pro-forma footnote disclosure; however, SFAS 123R requires an estimate of forfeitures and upon adoption the Company changed its methodology to include an estimate of forfeitures. The adoption of SFAS 123R had no effect on cash
flows from operating or financing activities.



15



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##### Table of Contents

As a result of adopting SFAS 123R on May 1, 2006, the Companys operating loss and net loss for the
second quarter of fiscal 2007 is $925,877 higher and for the first half of fiscal 2007 is $2,020,734 higher, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted loss per share for the second
quarter of fiscal 2007 is $0.01 higher and basic and loss per share for the first half of fiscal 2007 is $0.03 higher, respectively, than if the Company had continued to account for share-based compensation under APB 25.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123,
Accounting for Stock-Based Compensation, to options and restricted stock granted under the Companys stock option plans in all periods prior to the adoption of FAS 123R. For purposes of this pro forma disclosure, the value of the
options is estimated using a Black-Scholes option-pricing formula and amortized to expense over the options vesting period.



|                                                                                                                                                |  |                                    |            |   |                                  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ---------- | - | -------------------------------- | - | ----------- | -
|                                                                                                                                                |  | Three Months EndedOctober 31, 2005 |            |   | Six Months EndedOctober 31, 2005 |  
|Net loss, as reported                                                                                                                           |  | $                                  | (3,036,645 | ) |                                  | $ | (11,185,649 | )
|Add: Stock-based employee compensation expense related to restricted stock included in reported net income, net of related tax
effects          |  |                                    | 27,075     |   |                                  |   | 54,150      |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                    | (1,365,816 | ) |                                  |   | (2,568,738  | )
|                                                                                                                                                |  |                                    |            |   |                                  |   |             |  
|Pro forma net loss                                                                                                                              |  | $                                  | (4,375,386 | ) |                                  | $ | (13,700,237 | )
|                                                                                                                                                |  |                                    |            |   |                                  |   |             |  
|Earnings per share:                                                                                                                             |  |                                    |            |   |                                  |   |             |  
|Basic and Diluted - as reported                                                                                                                 |  | $                                  | (0.06      | ) |                                  | $ | (0.21       | )
|                                                                                                                                                |  |                                    |            |   |                                  |   |             |  
|Basic and Diluted - pro forma                                                                                                                   |  | $                                  | (0.08      | ) |                                  | $ | (0.26       | )
|                                                                                                                                                |  |                                    |            |   |                                  |   |             |  



16



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##### Table of Contents

Share-Based Compensation Reported

The share-based compensation expense related to stock options and restricted stock included in the accompanying condensed consolidated statement of operations and in the financial information by reportable business
segment in Note 14 for the three and six month periods ended October 31, 2006 is:



|                                    |  |                                     |         |                        |   |           |  |        |           |  |   |          
|----------------------------------- |  | ----------------------------------- | ------- | ---------------------- | - | --------- |  | ------ | --------- |  | - | ---------
|                                    |  | Three Months Ended October 31, 2006
|Reportable Segment                  |  | Quantum FuelSystems                 |         | TecstarAutomotiveGroup |   | Corporate |  | Totals
|Cost of product sales               |  | $                                   | 31,246  |                        | $ |          |  | $      |          |  | $ | 31,246   
|Research and development            |  |                                     | 50,450  |                        |   | 42,538    |  |        |          |  |   | 92,988   
|Selling, general and administrative |  |                                     | 28,167  |                        |   | 126,387   |  |        | 674,164   |  |   | 828,718  
|                                    |  |                                     |         |                        |   |           |  |        |           |  |   |          
|Total share-based compensation      |  | $                                   | 109,863 |                        | $ | 168,925   |  | $      | 674,164   |  | $ | 952,952  
|                                    |  |                                     |         |                        |   |           |  |        |           |  |   |          
|                                    | 
|                                    |  | Six Months Ended October 31, 2006  
|                                    |  | Quantum FuelSystems                 |         | TecstarAutomotiveGroup |   | Corporate |  | Totals
|Cost of product sales               |  | $                                   | 72,186  |                        | $ |          |  | $      |          |  | $ | 72,186   
|Research and development            |  |                                     | 133,568 |                        |   | 85,199    |  |        |          |  |   | 218,767  
|Selling, general and administrative |  |                                     | 72,180  |                        |   | 241,539   |  |        | 1,470,212 |  |   | 1,783,931
|                                    |  |                                     |         |                        |   |           |  |        |           |  |   |          
|Total share-based compensation      |  | $                                   | 277,934 |                        | $ | 326,738   |  | $      | 1,470,212 |  | $ | 2,074,884
|                                    |  |                                     |         |                        |   |           |  |        |           |  |   |          

Stock Incentive Plan

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

A summary of option activity under the stock option plan, and changes during the first half of fiscal 2007 is presented as follows:



|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |  
|----------------------------------------------- |  | --------------- | - |  | ---------------------------- | ---- | --------------------------------------- | --- | ------------------------ | - | -
|                                                |  | Number ofShares |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingLife (In Years) |     | AggregateIntrinsic Value
|Options outstanding at April 30, 2006           |  | 4,968,692       |   |  | $                            | 4.78 |                                         |     |                          |   |  
|Granted                                         |  | 1,572,000       |   |  | $                            | 1.97 |                                         |     |                          |   |  
|Exercised                                       |  | (10,400         | ) |  | $                            | 3.23 |                                         |     |                          |   |  
|Forfeited                                       |  | (142,500        | ) |  | $                            | 4.76 |                                         |     |                          |   |  
|Expired                                         |  | (20,400         | ) |  | $                            | 5.67 |                                         |     |                          |   |  
|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |  
|Options outstanding at October 31, 2006         |  | 6,367,392       |   |  | $                            | 4.30 |                                         | 8.1 |                          | $ | 
|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |  
|Vested and expected to vest at October 31, 2006 |  | 5,981,648       |   |  | $                            | 4.32 |                                         | 7.9 |                          | $ | 
|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |  
|Options exercisable at October 31, 2006         |  | 2,217,592       |   |  | $                            | 4.49 |                                         | 6.6 |                          | $ | 
|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |  



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##### Table of Contents

Shares Available for Grant

On May 1, 2006, an additional 1,613,223 shares of common stock became available for future grant under the Plan pursuant to an evergreen provision contained in the Plan. On August 22, 2006, the
Company granted an additional 1,572,000 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. At October 31, 2006, there were 695,688
shares of common stock available for grant under the Plan.

Fair Value of Options

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



|                                    |  |                               |   |  |                             |   |  |      |   |  |      |  
|----------------------------------- |  | ----------------------------- | - |  | --------------------------- | - |  | ---- | - |  | ---- | -
|                                    |  | Three Months EndedOctober 31, |   |  | Six Months EndedOctober 31, |  
|                                    |  | 2005                          |   |  | 2006                        |   |  | 2005 |   |  | 2006 |  
|Dividend yield                      |  | 0.00                          | % |  | 0.00                        | % |  | 0.00 | % |  | 0.00 | %
|Expected life - years               |  | 6.6                           |   |  | 5.5                         |   |  | 6.4  |   |  | 5.5  |  
|Risk-free interest rate             |  | 4.11                          | % |  | 4.77                        | % |  | 3.71 | % |  | 4.77 | %
|Expected volatility of common stock |  | 86.0                          |   |  | 82.7                        |   |  | 80.5 |   |  | 82.7 |  

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



|                                                     |  |                               |         |                             |   |         |  |      |           |  |   |          
|---------------------------------------------------- |  | ----------------------------- | ------- | --------------------------- | - | ------- |  | ---- | --------- |  | - | ---------
|                                                     |  | Three Months EndedOctober 31, |         | Six Months EndedOctober 31,
|                                                     |  | 2005                          |         | 2006                        |   | 2005    |  | 2006
|Weighted average grant date fair value per share     |  | $                             | 2.93    |                             | $ | 1.97    |  | $    | 3.09      |  | $ | 1.97     
|Intrinsic value of of options exercised              |  | $                             | 2,363   |                             | $ |        |  | $    | 68,344    |  | $ | 12,335   
|Total fair value of options vested during the period |  | $                             | 524,349 |                             | $ | 499,909 |  | $    | 1,123,446 |  | $ | 1,790,718

Non-vested Options

A summary of the options activity of the Companys non-vested options and changes during the first half of fiscal 2007 is as follows:



|                                          |  |                 |                      |  |                        |      |                                       |     |  |   |           
|----------------------------------------- |  | --------------- | -------------------- |  | ---------------------- | ---- | ------------------------------------- | --- |  | - | ----------
|                                          |  | Number ofShares |                      |  | Weighted-Average       |      | RemainingUnrecognizedCompensationCost
|                                          |  |                 | Grant-DateFair Value |  | RemainingYears To Vest |     
|Nonvested outstanding at April 30, 2006   |  | 3,336,750       |                      |  | $                      | 3.83 |                                       |     |  |   |           
|Granted                                   |  | 1,572,000       |                      |  |                        | 1.97 |                                       |     |  |   |           
|Vested                                    |  | (616,450        | )                    |  |                        | 3.25 |                                       |     |  |   |           
|Forfeited                                 |  | (142,500        | )                    |  |                        | 4.76 |                                       |     |  |   |           
|                                          |  |                 |                      |  |                        |      |                                       |     |  |   |           
|Nonvested outstanding at October 31, 2006 |  | 4,149,800       |                      |  | $                      | 3.28 |                                       | 3.3 |  | $ | 13,622,826
|                                          |  |                 |                      |  |                        |      |                                       |     |  |   |           

Restricted Stock

A summary of the restricted stock activity during the first half of fiscal 2007 is as follows:



|                                                 |  |                 |                      |                  |                       |                                       |     |  |   |        
|------------------------------------------------ |  | --------------- | -------------------- | ---------------- | --------------------- | ------------------------------------- | --- |  | - | -------
|                                                 |  | Number ofShares |                      | Weighted-Average |                       | RemainingUnrecognizedCompensationCost
|                                                 |  |                 | Grant-DateFair Value |                  | RemainingYearsTo Vest |                                      
|Restricted stock outstanding at April 30, 2006   |  | 91,806          |                      | $                | 3.54                  |                                       |     |  |   |        
|Granted                                          |  |                |                      |                  |                       |                                       |     |  |   |        
|Vested                                           |  |                |                      |                  |                       |                                       |     |  |   |        
|Forfeited                                        |  |                |                      |                  |                       |                                       |     |  |   |        
|                                                 |  |                 |                      |                  |                       |                                       |     |  |   |        
|Restricted stock outstanding at October 31, 2006 |  | 91,806          |                      | $                | 3.54                  |                                       | 1.5 |  | $ | 162,451
|                                                 |  |                 |                      |                  |                       |                                       |     |  |   |        



18



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##### Table of Contents

11) Warrants

On June 29, 2006, the Company completed a PIPE transaction which yielded gross proceeds of $12.5 million from the sale of 4.4 million shares of its common stock at a price of $2.84 per share, which represented a 10% discount on
the June 29, 2006 closing price of $3.15. Proceeds from the sale of stock, net of issuance costs of $0.8 million for the placement agents fee, amounted to $11.7 million. The transaction also included the issuance of warrants to purchase
0.9 million shares of the Companys common stock at an exercise price of $3.94 to the PIPE investors. The warrants expire in June 2011 and have a fair value of $0.9 million.

On October 27, 2006, the Company completed a second PIPE transaction which yielded gross proceeds of $10.0 million from the sale of 6.1 million
shares of its common stock at a price of $1.64 per share, which represented a 20% discount on the October 27, 2006 closing price of $2.05. Proceeds from the sale of stock, net of issuance costs of $0.8 million for the placement agents
fees, amounted to $9.2 million. The investors also received 2.1 million A warrants to purchase common stock at an exercise price of $2.36 and 1.8 million B warrants to purchase additional shares of the
Companys common stock at $1.64 per share. Upon exercise of the B warrants, the investors will receive up to 0.6 million additional warrants identical to the A warrants. The A warrants expire in April
2014 and have a fair value of $3.5 million. The B warrants expire on the 45thtrading day following the
effective date of the Companys registration statement required to be filed under the registration rights agreement, and have a fair value of $0.9 million.

In connection with the two PIPE transactions, the Company entered into registration rights agreements which provided that the Company would file a registration statement with the SEC registering the shares issued for
resale within 30 days of the closing dates. The Company filed the required registration statements with the SEC on July 28, 2006 and November 13, 2006 and the registration statements became effective on August 4, 2006 and
November 24, 2006, respectively. The Company evaluated the warrants and related registration rights agreements in accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, and has concluded that equity classification is appropriate due to the fact that the contracts are required to be physically settled in shares of the Companys common stock. The proceeds from the transactions
have been allocated to the stock and the warrants based on their relative fair values. However, the Company aggregated the values for financial reporting purposes as both types of instruments have been classified as permanent equity.

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.



19



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##### Table of Contents

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



|                                                                           |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|-------------------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ---------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ------------ | -
|                                                                           |  | Three Months EndedOctober 31, |            |   | Six Months Ended October 31, |  
|                                                                           |  | 2005                          |            |   | 2006                         |   |             | 2005 |  |   | 2006        |  
|Numerator:                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Net loss                                                                   |  | $                             | (3,036,645 | ) |                              | $ | (89,330,146 | )    |  | $ | (11,185,649 | ) |  | $ | (102,755,659 | )
|Numerator for basic and diluted loss per share - to common stockholders    |  | $                             | (3,036,645 | ) |                              | $ | (89,330,146 | )    |  | $ | (11,185,649 | ) |  | $ | (102,755,659 | )
|Denominator for basic and diluted loss per share - weighted-average shares |  |                               | 52,874,941 |   |                              |   | 63,963,433  |      |  |   | 52,858,523  |   |  |   | 57,840,525   |  
|                                                                           |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Basic and diluted loss per share                                           |  | $                             | (0.06      | ) |                              | $ | (1.40       | )    |  | $ | (0.21       | ) |  | $ | (1.78        | )
|                                                                           |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |              |  

For the three and six months ended October 31, 2006, options to purchase approximately 6.4 million and
warrants to purchase approximately 5.5 million shares of common stock, respectively, were excluded in the computation of diluted net income per share, as the effect would be anti-dilutive. In addition, for the three and six months ended
October 31, 2006, senior subordinated notes payable convertible into approximately 2,600,000 shares of common stock were excluded in the computation of diluted net loss per share, as the effect would be anti-dilutive.

13) Income Taxes

Income tax benefit for the three
and six months ended October 31, 2006 was 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 current period income tax benefit results
from utilization of operating losses against income from reversal of the deferred tax liability from the TAG acquisition (discussed below).

The Company has established a valuation allowance against a portion of its deferred tax assets since based on the Companys lack of earnings history and current evidence, it is unlikely that the assets will be fully realized. There is
a deferred tax liability resulting from purchase accounting relating to the Companys acquisition of TAG in March 2005 where the amortization of identifiable assets exceed the carryforward period. The federal deferred tax liability from the
Regency business combination in February 2006 was recorded with a corresponding reduction of valuation allowance.

14) Business Segment and Geographic
Information

Business Segments

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

The Quantum Fuel Systems business operations primarily consist of design, manufacture and supply of packaged fuel systems for use in alternative fuel
vehicles and fuel cell applications. This segment generates product revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control systems to OEMs, and the installation of its fuel cell products into OEM vehicles.
Product revenues are also generated through the sale of compressed natural gas, and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. In addition to product sales, the Quantum Fuel
Systems segment generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and operate with their fuel cell and alternative fuel applications.
General Motors comprised 71.2% and 84.5% and Toyota Motor Corporation (Toyota) comprised 7.3% and 0% of the total Quantum Fuel Systems segment revenue reported for the three-month periods ended October 31, 2005 and 2006,
respectively. General Motors comprised 70.8% and 79.6% and Toyota Motor Corporation (Toyota) comprised 5.3% and 8.1% of the total Quantum Fuel Systems segment revenue reported for the six-month periods ended October 31, 2005 and
2006, respectively.

The Tecstar Automotive Group business operations are focused on the automotive supply industry and primarily consist
of second stage manufacturing of pick-up trucks, sport utility vehicles and vans. Vehicle chassis are received from the OEM and certain appearance items such as ground effects, wheels and badging are added to the chassis. The Tecstar Automotive
Group also has engineering and design capabilities for concept vehicles and distributes automotive accessories through a dealer network. General Motors comprised 91.5% and 70.5% of the total Tecstar Automotive Group segment



20



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revenue reported for the three-month periods ended October 31, 2005 and 2006 and comprised 90.4% and 71.5% of the total segment revenue reported for the
six-month periods ended October 31, 2005 and 2006, respectively .

Intangible assets associated with the TAG and Regency acquisitions
are reported in the Tecstar Automotive Group business segment. Goodwill associated with the TAG acquisition was allocated 30% to the Quantum Fuel Systems business segment and 70% to the Tecstar Automotive Group business segment (See Note 18).
Goodwill associated with the Regency acquisition is reported in the Tecstar Automotive Group business segment. Changes in the carrying values of goodwill for the six months ended October 31, 2006 are as follows:



|                                                |  |                     |            |                         |   |             |        |  |   |             |  
|----------------------------------------------- |  | ------------------- | ---------- | ----------------------- | - | ----------- | ------ |  | - | ----------- | -
|                                                |  | Quantum FuelSystems |            | Tecstar AutomotiveGroup |   |             | Totals | 
|Balance as of April 30, 2006                    |  | $                   | 30,400,000 |                         | $ | 75,193,765  |        |  | $ | 105,593,765 |  
|Impairment charge related to TAG acquisition    |  |                     |           |                         |   | (71,718,601 | )      |  |   | (71,718,601 | )
|Impairment charge related to Empire acquisition |  |                     |           |                         |   | (598,905    | )      |  |   | (598,905    | )
|                                                |  |                     |            |                         |   |             |        |  |   |             |  
|Balance as of October 31, 2006                  |  | $                   | 30,400,000 |                         | $ | 2,876,259   |        |  | $ | 33,276,259  |  
|                                                |  |                     |            |                         |   |             |        |  |   |             |  

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

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

Geographic Information

The Companys long-lived
assets are primarily based in facilities in Texas, California, Michigan, Indiana, Missouri, and Ontario, Canada at October 31, 2006. The Companys foreign assets, which are all located in Canada, represented 2.8% and 2.3% of the
Companys consolidated total assets at April 30, 2006 and October 31, 2006, respectively.



21



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Financial Information by Business Segment

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



|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|----------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                              |  | Three months ended October 31, |        |   | Six months ended October 31, |  
|                              |  | 2005                           |        |   | 2006                         |   |         | 2005 |  |   | 2006    |  
|Product revenue               |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 2,025  |   |                              | $ | 3,765   |      |  | $ | 4,060   |   |  | $ | 8,325    |  
|Tecstar Automotive Group      |  |                                | 55,223 |   |                              |   | 30,023  |      |  |   | 96,461  |   |  |   | 64,458   |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 57,248 |   |                              | $ | 33,788  |      |  | $ | 100,521 |   |  | $ | 72,783   |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Contract revenue              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 2,732  |   |                              | $ | 1,477   |      |  | $ | 5,078   |   |  | $ | 3,992    |  
|Tecstar Automotive Group      |  |                                | 3,179  |   |                              |   | 1,352   |      |  |   | 4,932   |   |  |   | 2,343    |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 5,911  |   |                              | $ | 2,829   |      |  | $ | 10,010  |   |  | $ | 6,335    |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Operating Loss                |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | (3,309 | ) |                              | $ | (3,771  | )    |  | $ | (7,462  | ) |  | $ | (6,790   | )
|Tecstar Automotive Group      |  |                                | 2,958  |   |                              |   | (81,492 | )    |  |   | 1,698   |   |  |   | (87,260  | )
|Corporate Expenses            |  |                                | (2,231 | ) |                              |   | (3,633  | )    |  |   | (4,682  | ) |  |   | (7,731   | )
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | (2,582 | ) |                              | $ | (88,896 | )    |  | $ | (10,446 | ) |  | $ | (101,781 | )
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Capital Expenditures          |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 214    |   |                              | $ | 31      |      |  | $ | 498     |   |  | $ | 109      |  
|Tecstar Automotive Group      |  |                                | 944    |   |                              |   | 952     |      |  |   | 1,747   |   |  |   | 4,090    |  
|Corporate Expenses            |  |                                | 75     |   |                              |   | 76      |      |  |   | 167     |   |  | $ | 103      |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 1,233  |   |                              | $ | 1,059   |      |  | $ | 2,412   |   |  | $ | 4,302    |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Depreciation and Amortization |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 1,009  |   |                              | $ | 1,464   |      |  | $ | 2,067   |   |  | $ | 2,506    |  
|Tecstar Automotive Group      |  |                                | 1,381  |   |                              |   | 1,267   |      |  |   | 2,647   |   |  |   | 2,784    |  
|Corporate Expenses            |  |                                | 393    |   |                              |   | 298     |      |  |   | 755     |   |  | $ | 728      |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 2,783  |   |                              | $ | 3,029   |      |  | $ | 5,469   |   |  | $ | 6,018    |  
|                              |  |                                |        |   |                              |   |         |      |  |   |         |   |  |   |          |  



|                         |  |               |         |                 |   |        
|------------------------ |  | ------------- | ------- | --------------- | - | -------
|                         |  | April 30,2006 |         | October 31,2006
|Identifiable Assets      |  |               |         |                 |   |        
|Quantum Fuel Systems     |  | $             | 60,347  |                 | $ | 53,185 
|Tecstar Automotive Group |  |               | 196,122 |                 |   | 116,576
|Corporate                |  |               | 25,840  |                 |   | 32,687 
|                         |  |               |         |                 |   |        
|Total assets             |  | $             | 282,309 |                 | $ | 202,448
|                         |  |               |         |                 |   |        

15) Minority Interests

Amstar

AM General LLC holds a minority interest equity position in the accounts of Amstar. As of April 30, 2006 and
October 31, 2006, Amstar had accumulated deficits of $466,603 and $259,180, respectively.



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In connection with the start up of operations in February 2005, AM General provided their initial and
only capital contribution to date of $50,000 to Amstar. AM General has no obligation to provide additional capital contributions to cover a deficit equity position. Accordingly, the portion of the accumulated deficits that exceed AM Generals
capital contribution has been allocated to the Company and as a result there is no balance to be reported as minority interest for the periods ended April 30, 2006 and October 31, 2006 for AM General.

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 condensed consolidated balance sheet.

Empire Coach

The Chief Executive
Officer & President of Empire Coach owns a 49% minority interest position in the accounts of Empire Coach and has not provided or been required to provide any capital contributions to date. As of April 30, 2006 and October 31,
2006, Empire Coach has incurred accumulated deficits of $1,268,512 and $2,789,216, respectively. The minority interest is not required to provide capital resources to cover accumulated deficits. Accordingly, the accumulated deficit has been entirely
allocated to the Company and there is no balance to be reported as minority interest as of April 30, 2006 and October 31, 2006 for Empire Coach.

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 UPC, a venture formed in January 2006. Pursuant to UPCs operating agreement, the Company provided capital contributions totaling $300,000 that consisted of tooling assets
under construction of $250,000 and cash of $50,000 and the minority interest provided capital contributions totaling $300,000 that consisted of trade name and dealer network intangibles of $250,000 and cash of $50,000. The minority interest in net
losses of UPC amounted to $100,071 from the date of formation to the end of fiscal 2006 and $540,731 for the six-month period ended October 31, 2006. As a result of losses applicable to the minority interest that have exceeded its net capital
contributions, the amount reflected for minority interest on the condensed consolidated balance sheet for UPC decreased from $199,929 as of April 30, 2006 to zero as of October 31, 2006.

Advanced Lithium Power

The Chief Executive and other
officers of ALP, along with other unaffiliated parties, hold minority equity interests in ALP. On July 18, 2006 and August 31, 2006, ALP received a total of $264,740 and $27,000 respectively in proceeds from other unaffiliated parties in
exchange for shares of common stock of ALP. The transactions increased the minority interest holdings from 64.5% to 76.9% in July and to 77.0% in August. On July 5, 2006, the Company advanced $181,000 to ALP in exchange for a convertible
subordinated note with interest at 4.0% per annum. The Company has the right, at its option, to convert the whole or any part of the advance into voting shares of ALP at the earlier of December 31, 2007 or an initial public offering of ALP
stock.

The net equity of ALP as of April 30, 2006 and October 31, 2006 was $416,855 and $241,456, of which the minority interest
position amounted to $268,872 and $216,358, respectively.

Concord Coatings

On September 22, 2005, TAG sold substantially all the assets of its 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 from the 80% equity interest, LJW Holdings, LTD., and a promissory note from Concord in the principal amount of $1,242,279. The total consideration of $1,865,349
equaled the book value of the net assets sold. The accounts of Concord Coatings have been included in the condensed consolidated financial statements subsequent to the September 2005 transaction. The promissory note between Concord and Tarxien is
eliminated in consolidation. As a result of operating losses since the date of the transaction and impairment of assets identified during the fourth quarter of fiscal 2006, Concord Coatings had a deficit equity position as of April 30, 2006 and
October 31, 2006 of $1,519,000 and $1,537,479, respectively. Accumulated deficits above the cash received in connection with the sale of assets have been allocated to Tarxien and there is no balance to be reported as minority interest as of
April 30, 2006 and October 31, 2006. TAG anticipates that the operations of Concord Coatings will cease in the third quarter of fiscal 2007 and its assets will be liquidated.



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16) Comprehensive Income or Loss

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



|                                                |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|----------------------------------------------- |  | ------------------------------ | ---------- | - | ---------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ------------ | -
|                                                |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|                                                |  | 2005                           |            |   | 2006                         |   |             | 2005 |  |   | 2006        |  
|Comprehensive loss, net of tax:                 |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Net loss, as reported                           |  | $                              | (3,036,645 | ) |                              | $ | (89,330,146 | )    |  | $ | (11,185,649 | ) |  | $ | (102,755,659 | )
|Unrealized loss - available for sale securities |  |                                |           |   |                              |   | (33,889     | )    |  |   |            |   |  |   | (33,889      | )
|Currency translation adjustments (1)            |  |                                | (190,987   | ) |                              |   | 155,942     |      |  |   | (214,013    | ) |  |   | (40,836      | )
|                                                |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  
|Comprehensive loss, net of tax:                 |  | $                              | (3,227,632 | ) |                              | $ | (89,208,093 | )    |  |   | (11,399,662 | ) |  | $ | (102,830,384 | )
|                                                |  |                                |            |   |                              |   |             |      |  |   |             |   |  |   |              |  



|(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

The Company had deposits on hand from customers totaling approximately $6.2 million and $1.5 million at the end of the first and second
quarters of fiscal 2007, respectively. Included in the deposits at the end of the first quarter of fiscal 2007 were approximately $4.7 million 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. Pursuant to an arrangement with General Motors in August 2006, the overpayments were applied against open receivables related to other similar programs with General
Motors, resulting in the elimination of the deposit during the second quarter of fiscal 2007.

18) Impairment of Goodwill

Under SFAS No. 142, goodwill and other indefinite-lived intangibles must be tested for impairment annually or in interim periods if events indicate
possible impairment. In connection with the preparation of the second quarter financial results, the Company performed an impairment test which resulted in the Company recording an estimated non-cash charge of $72.3 million for the impairment of
goodwill associated with the acquisition of Tecstar Automotive Group and the acquisition of Empire Coach Enterprises, which are included in the TAG business segment. This charge is recorded as an operating expense in the condensed consolidated
statement of operations for the three months and six months ended October 31, 2006.

The goodwill impairment test was performed as of
October 31, 2006 and is not yet completed. Under FAS 142, the goodwill impairment test is a two-step process. Under the first step, the fair value of the Companys reporting units was compared with their respective carrying values
(including goodwill). The fair value of certain reporting units using a discounted cash flow approach is less than their carrying values, which indicates that a goodwill impairment exists and which requires the Company to perform step two of the
impairment test. The Company has not yet completed step two of the goodwill impairment test. In step two, the implied fair value of goodwill will be calculated and then compared to the carrying amount of that goodwill. If the goodwill carrying
amount exceeds the implied fair value, an impairment loss must be recognized equal to that excess. The implied goodwill amount is determined by allocating the fair value of the Company to all of the assets and liabilities as if the Company had been
acquired in a business combination as of the date of the impairment test. In this step two test, fair value will be allocated to tangible net assets and to both recognized and unrecognized intangible assets as of the test date. Because the Company
has not yet obtained all information required to complete the step two test prior to the issuance of the financial statements for the quarter ended October 31, 2006 and because a goodwill impairment loss is probable and reasonably estimable,
the Company is required to recognize the estimate of the loss in the quarter ended October 31, 2006 in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies. Factors or
indicators that led to the goodwill impairment testing as of October 31, 2006 include the following:



| |  |  | A new potential OEM customer communicating to the Company the cancellation of a second-stage production program in the Companys Tecstar Automotive Group business segment that
was anticipated to begin in the fourth quarter of fiscal 2007;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | a sustained decrease in the Companys market capitalization during the latter stages of the second quarter of fiscal 2007 below the carrying value of the Companys net
equity;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the operating losses of the Companys wholly owned subsidiary, Empire Coach Enterprises, in addition to the petition filed by Empire Coachs primary suppliers in November
2006 to take the entity into involuntary bankruptcy.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company anticipates that it will be able to complete step two of the goodwill
impairment testing during the third quarter of fiscal 2007 and will the adjust the estimated impairment charges, if necessary, based upon the final assessment. Any change could have a material impact on operating results.

19) Contingencies

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



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

Forward-Looking Statements

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

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

Risks Related to Liquidity and Capital Resources:



| |  |  | We are currently operating under a Forbearance Agreement that requires us to satisfy a requirement to restructure our credit facility with an alternative source of financing before
March 15, 2007. If we are unable to satisfy the requirement within the time period allowed, our lender along with the holders of the senior subordinated convertible notes will have the right to accelerate the due dates of the outstanding
balances on the credit facility and the convertible notes and demand immediate repayments. An acceleration of the outstanding balances on the credit facility and/or the senior subordinated convertible notes would have a material adverse affect on
our business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we will require additional financing to fund operating activities near the beginning of the fourth quarter of fiscal 2007 as defined under the section entitled Liquidity and
Capital Resources. Management plans to utilize its available sources of tangible collateral, primarily consisting of accounts receivables, inventories and fixed assets to secure a new credit facility with an asset based lender. To the extent
that this debt financing does not provide sufficient capital for our operations, management anticipates issuing stock in private or public offerings. Management may also sell certain subsidiaries or other long-lived assets or issue subordinated debt
to provide for our liquidity needs over the next year. Our ability to secure additional financing in this time period may be difficult due to our history of operating losses and negative cash flows and we cannot assure you that such additional
sources of financing will be available on acceptable terms, if at all. An inability to raise sufficient capital to fund our operations would have a material adverse affect on our business;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A material adverse affect on our business resulting from accelerations of debt or an inability to raise sufficient capital would raise doubts about our ability to continue as a
going concern;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | we may need to raise additional capital in future fiscal years to fund operating activities, further implement cost reduction initiatives, achieve commercialization of our products
and technologies, to develop facilities for commercialization and limited production of our products and systems, and to take advantage of strategic opportunities; our ability to raise capital in the future may be difficult if our stock price
declines and our operating losses continue.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Risks Related to our Business:



| |  |  | We incurred a goodwill impairment charge in the second quarter of fiscal 2007 primarily related to the acquisition of Tecstar Automotive Group (TAG) as
we have not realized the expected benefits to the extent and within the timeframe initially anticipated. The impairment analysis has not been finalized as of the date of this quarterly
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

| | report and is based upon managements preliminary estimates. The final impairment charge is expected to be finalized and adjusted during the third
quarter of fiscal 2007 which could materially impact our operating results.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General Motors is our largest customer and our business and working capital depends to a great extent on General Motors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



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



| |  |  | our revenue is highly concentrated among a small number of customers;
| | - |  | ---------------------------------------------------------------------



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



| |  |  | we expect our mergers with TAG and Regency Conversions, Inc. (Regency) to result in benefits to the combined company, but we may not realize those benefits due to
industry and market trends, which could lead to impairment of other intangible assets and further impairment of goodwill;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | we could become subject to stockholder litigation associated with our merger with TAG and our restatement of our financial statements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



| |  |  | our ability to design and manufacture packaged fuel systems and battery control 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | 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 and battery control 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 not meet our product development and commercialization milestones;
| | - |  | -------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



| |  |  | we may be unable to remedy our material weakness on internal control over financial reporting in a timely manner;
| | - |  | -----------------------------------------------------------------------------------------------------------------



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



| |  |  | past acquisitions and any future acquisitions or transactions may not be successful;
| | - |  | ------------------------------------------------------------------------------------



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



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



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



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



| |  |  | we depend upon the availability of vehicle chassis for our conversion business and our financial results can be adversely impacted if there is a shortage or delay in obtaining a
sufficient supply of these chassis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

This list of factors above is not intended to be exhaustive. Reference should also be made to the factors set forth from time to time in our SEC reports,
including but not limited to those set forth in the sections entitled Risk Factors in our Annual Report on Form 10-K for the year ended April 30, 2006 and in our Registration Statement on Form S-3 filed on November 13, 2006.
All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update or revise any of these forward-looking statements even if experience or
future changes show that the indicated results or events will not be realized.

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



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Overview

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

As a result of our acquisition of Tecstar Automotive Group, our combined business now includes automotive
supply operations, primarily consisting of second stage manufacturing of specialty equipment for General Motors pick-up trucks and sport utility vehicles (SUVs), engineering and design capabilities for concept vehicles, and distribution of
automotive accessories through OEM dealer networks.

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

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

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

The acquisition of Tecstar Automotive Group 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 facilitate 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.



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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 19,650 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our gaseous fuel systems and hydrogen products for fuel cell
applications to major OEMs through funded research and development contracts and on a prototype and production intent basis. These fuel cell and hydrogen products are not currently 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, hybrid systems or clean burning gaseous fuels in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. Our products for these markets consist primarily of fuel storage, fuel
delivery, electronic vehicle control systems and battery control systems, as well as system integration of our products into fuel cell, hybrid, and alternative fuel vehicles, and hydrogen refueling products, which includes the complete design of
fuel cell and hybrid vehicles to demonstrate our advanced fuel systems expertise.

In January 2006, we delivered 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.

In May 2006, we received a purchase order for 15 hydrogen-fueled Toyota Prius hybrid vehicles from Miljobil Grenland
AS, a participant and vehicle provider to the Norwegian Hydrogen Highway (HyNor). These hydrogen hybrid vehicles will be put in service in Norway in 2006 and 2007 as part of the HyNor program. During the first quarter of fiscal 2007, we began
shipping converted hydrogen-fueled hybrid units to the HyNor program under the purchase order. HyNor is a unique Norwegian joint public/private partnership initiative to demonstrate real life implementation of hydrogen energy infrastructure along a
route of 580 kilometers (360 miles) from Oslo to Stavanger during the years 2005 to 2008. The project comprises all steps required to develop a hydrogen infrastructure and includes various hydrogen production technologies and uses of hydrogen, in
all cases with an adaptation to local conditions. The overall objectives of the HyNor project are to demonstrate the commercial viability of hydrogen energy production, hydrogens use in the transportation sector, and the development of a
hydrogen infrastructure.

On November 6, 2006, we announced that we had received a purchase order from General Motors for 110 hydrogen
fuel storage systems to be used in General Motors Chevrolet Equinox Fuel Cell vehicle program. General Motors has announced that it will begin building and deploying a large fleet of these hydrogen fuel cell vehicles in 2007.

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 approximately $5.9 million of a total $7.0 million in program 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.



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Our Quantum Fuel Systems business is generally related to fuel cell, hybrid and alternative fuel vehicle
development programs and product sales, which vary directly with the program timing and production schedules of our OEM customers. The market for these vehicles is sensitive to general economic conditions, government agency and commercial fleet
spending and consumer preferences. The rate at which our customers sell fuel cell or alternative fuel vehicles depends on their marketing strategy, as well as company specific inventory and incentive programs. Any significant reduction or increase
in production of these vehicles by our OEM customers may have a material effect on our business. Our CNG program with General Motors was completed in November 2006. We anticipate that future programs for CNG applications will be 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 are looking for alternative suppliers to fulfill our needs in the event of any potential shortages. Any issues with respect to the availability of raw materials such as high-strength fiber could negatively impact our ability to
develop and manufacture fuel storage systems for our customers.

On March 24, 2006, we obtained a 35.5% stake (reduced to 23.1% as of
July 18, 2006 and 23.0% as of August 31, 2006) in Vancouver, British Columbia-based Advanced Lithium Power Inc. (ALP), a newly formed company whose primary asset is intellectual property. ALP is developing state-of-the-art
lithium ion battery and control systems that control state-of-charge and provide for thermal management, resulting in high-performance energy storage. ALPs technology has significant opportunities and applications in hybrid electric vehicles,
fuel cell vehicles, uninterruptible power supplies, and energy storage for renewable energy, such as solar photovoltaic applications.

Tecstar
Automotive Group Segment

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

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

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

Most of our second stage assembly programs with General Motors expired in April 2006 for
model year 2006. The 2007 model year vehicles produced by General Motors represent a model changeover and 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 along with related accessory and service parts. We also have a full-size van platform that began production during the fourth quarter of fiscal 2006 and a
mid-sized truck platform that is scheduled to start production in December 2006. We are in discussions with General Motors on targeted second stage vehicle platforms, vehicles and accessory parts 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.



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We are in discussions with other OEMs for OEM-level second stage assembly programs and have initiated
several aftermarket and dealer network programs.

In February 2006, we acquired all of the stock of Regency Conversions, Inc.
(Regency). Regency is one of the largest vehicle converters in North America and supplements our second stage vehicle manufacturing and aftermarket parts business by offering additional distribution channels directly to automotive
dealers, and significantly broadens 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 enables 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.

In January 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 began
production of a Chip Foose-designed 2006 Ford Stallion Mustang in June 2006.

In September 2005, we acquired a 51% interest in Empire Coach
Enterprises, LLC (Empire Coach), a second stage limousine manufacturer. On November 29, 2006, an involuntary bankruptcy petition was filed against Empire Coach Enterprises in the U.S. Bankruptcy Court, District of New Jersey. The
petition was filed by four unsecured creditors claiming that they are collectively owed $109,701. The creditors are seeking relief under Chapter 7 of the United States Bankruptcy Code. An answer to the petition has not yet been filed and Empire
Coach is currently evaluating its options.

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. Tecstar Automotive Group, through its
wholly-owned subsidiary Tarxien, acted as one of the guarantors for Concord Coatings CAD$1,500,000 (US$1,210,603 advanced as of October 31, 2006) revolving credit facility with Comerica Bank.

Concord Coatings, Inc. is a variable interest entity as defined by FIN 46R due to the fact Concord Coatings, Inc. requires additional subordinated
financial support. The Company is the primary beneficiary of this entity based on the promissory note due to the Company and bank guarantees provided by the Company. The accounts of Concord Coatings, Inc. are consolidated by the Company as required
by FIN 46R.

During the first quarter of fiscal 2007, it was determined that Concord Coatings was insolvent and could not repay the
promissory note owed to Tarxien nor the outstanding advances on the credit facility with Comerica Bank. In light of this, Tecstar Automotive Group agreed to purchase Concord Coatings loan from Comerica Bank. Tecstar Automotive Groups
purchase of the loan will allow us to have a lead secured position over the remaining Concord assets in anticipation of the closure of the operations in the third quarter of fiscal 2007.

In November 2006, a new potential OEM customer for the Tecstar Automotive Group, who had previously signed a letter of intent with us to produce a
special edition pick-up truck, formally notified us that the program had been cancelled by the OEMs management. We are currently in discussions with the OEM to come to a mutually agreed upon settlement and look forward to partnering with the
OEM on potential future second stage programs.

Financial Operations Overview

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

For the second quarters of fiscal 2006 and 2007, consolidated revenue related to sales of our products to and
contracts with General Motors and its affiliates represented 90.0% and 55.7%, respectively, of our total revenue for these periods. For



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the first half of fiscal 2006 and 2007, consolidated revenue related to sales of our products to and contracts with General Motors represented 88.7% and
54.8%, respectively, of our total revenue for these periods.

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

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

General Motors Relationship

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

In connection with our strategic alliance, we issued stock to General Motors, representing 19.9% (since diluted to 6.9%
as of October 31, 2006) of our total outstanding equity following our January 2003 public offering, 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, the Company anticipates that this commitment will be waived or partially waived in the future. During the first half of fiscal 2007, we spent approximately $0.4 million for directed research and
development activities at the direction of GM. 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.

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.

Critical Accounting Policies and Estimates

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

Management considers an accounting estimate to
be critical if:



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



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



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



| |  |  | We generally manufacture products based on specific orders from customers. Revenue is recognized on product sales upon shipment or when the earnings process is complete and
collectibility is reasonably assured. For product sales in connection with second stage manufacturing, consisting of assembly and integration of specialty equipment products into motor vehicle applications, revenue is recognized upon completion of
the integration activities when the vehicles are 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. Our historical final contract costs have usually approximated the initial estimates and any unforeseen changes in the estimates
have not normally resulted in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | We provide for the estimated cost of product warranties at the time revenue is recognized based on past experience and expectations of future costs to be incurred. Our Tecstar
Automotive Group segment provides product warranties to OEMs under terms similar to those offered by the OEMs to their customers, which are generally three years. While we engage in product quality programs and processes, including actively
monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates,
material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. 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 acquisitions of Tecstar Automotive Group, Empire Coach and Regency Conversions in accordance with Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations. In determining the fair value of the assets acquired and liabilities assumed in connection with our acquisitions, we consider the evaluations of independent valuation consultants and other estimates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We periodically evaluate for impairment our long-lived assets, particularly our goodwill and intangible assets relating to the acquisition of Tecstar Automotive
Group and the intangible asset relating to the strategic alliance with General Motors. Our identifiable finite-lived intangible assets are amortized over their estimated useful lives. Goodwill is not amortized, but is evaluated periodically for any
impairment in the carrying value. We review our long-lived assets, which include property and equipment, goodwill and identifiable finite-lived intangible assets,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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. During the second quarter of fiscal 2007,
certain indicators of impairment led us to perform an impairment test of our goodwill and other intangible assets. Based upon the results of this initial test, we determined that an impairment of our goodwill existed. The amount of the impairment to
be recorded will be based upon a second test that will calculate the difference between the fair value of the goodwill and its carrying value. Although we have not yet completed the fair value analysis to determine the impairment charge, we have
estimated the charge based upon available information and have recorded this estimate in the second quarter. We anticipate finalizing the second step of the impairment analysis during the third quarter of fiscal 2007. The finalization of the
analysis may result in a significant change from our current estimate of impairment. Goodwill and long-lived asset impairment assessments are generally determined based on fair value techniques, including determining the estimated future discounted
and undiscounted cash flows over the remaining useful life of the asset. Those models require estimates of future revenue, profits, capital expenditures and working capital for each reporting unit. We estimate these amounts by evaluating historical
trends, current budgets, operating plans, and industry averages. Discounted cash flows are calculated using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Determining the fair value
of reporting units and goodwill includes significant judgment by management and different judgments could yield different results. If these estimates or their related assumptions change in the future, we might be required to record additional
impairment charges. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This
process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of the net
operating loss carry-forward that has resulted from our cumulative net operating loss since our spin-off from IMPCO. In addition, we have estimated the temporary differences resulting from our merger with Tecstar Automotive Group as of and
subsequent to the March 3, 2005 acquisition date. These differences result in an overall net deferred tax asset position before any valuation allowances are considered. We must assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we generally include
an expense or benefit within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. We have recorded a valuation allowance on a portion of our deferred tax assets due to uncertainties related to our ability to fully utilize these assets, primarily consisting of net operating
losses and credits which may be carried forward before they expire, and that are subject to certain limitations. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the
recorded valuation allowance, which could materially impact our financial position and results of operations. At October 31, 2006, our gross deferred tax assets have been partially offset by a valuation allowance, resulting in an overall net
deferred tax liability position that is recorded on the consolidated balance sheet.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment,
(SFAS 123R). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the requisite vesting period. SFAS 123R eliminates the alternative to use the
intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25), which generally results in no compensation expense recorded in the financial
statements related to the grant of stock options to employees if certain conditions were met. Effective for the first quarter of fiscal 2007, we adopted SFAS 123R using the modified prospective method, which requires us to record compensation
expense for all awards granted, modified, repurchased, or cancelled after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. We did not incur a charge upon the adoption
nor have prior period amounts presented herein been restated to reflect the adoption of SFAS 123R. For the first half of fiscal 2007, we granted 1,572,000 in stock options and did not modify any previously issued awards. We recorded total
compensation charges of $1.1 million and $2.2 million related to the unvested portion of stock option grants for the second quarter and first half of fiscal 2007, respectively.



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In November 2004, the 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 adopted these provisions as of the beginning of our current fiscal year effective May 1, 2006. No
significant changes resulted in our accounting for inventory from the adoption of SFAS 151 in the first half of fiscal 2007.

In June 2006,
the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainties in income taxes
recognized in an enterprises financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position
meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate settlement. This accounting standard is effective for
fiscal years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 on our financial position and results of operations has not been finalized.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. (SAB 108) which provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. We are currently evaluating the effect, if any, that this pronouncement will
have on our financial results.

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



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Results of Operations

Three and six months ended October 31, 2005 and 2006

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



|                         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|------------------------ |  | ----------------------------- | ------ | - | --------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                         |  | Three months endedOctober 31, |        |   | Six months endedOctober 31, |  
|                         |  | 2005                          |        |   | 2006                        |   |         | 2005 |  |   | 2006    |  
|                         |  | (in thousands)                |       
|Product revenue          |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems     |  | $                             | 2,025  |   |                             | $ | 3,765   |      |  | $ | 4,060   |   |  | $ | 8,325    |  
|Tecstar Automotive Group |  |                               | 55,223 |   |                             |   | 30,023  |      |  |   | 96,461  |   |  |   | 64,458   |  
|                         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Total                    |  | $                             | 57,248 |   |                             | $ | 33,788  |      |  | $ | 100,521 |   |  | $ | 72,783   |  
|                         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Contract revenue         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems     |  | $                             | 2,732  |   |                             | $ | 1,477   |      |  | $ | 5,078   |   |  | $ | 3,992    |  
|Tecstar Automotive Group |  |                               | 3,179  |   |                             |   | 1,352   |      |  |   | 4,932   |   |  |   | 2,343    |  
|                         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Total                    |  | $                             | 5,911  |   |                             | $ | 2,829   |      |  | $ | 10,010  |   |  | $ | 6,335    |  
|                         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Operating Loss           |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems     |  | $                             | (3,309 | ) |                             | $ | (3,771  | )    |  | $ | (7,462  | ) |  | $ | (6,790   | )
|Tecstar Automotive Group |  |                               | 2,958  |   |                             |   | (81,492 | )    |  |   | 1,698   |   |  |   | (87,260  | )
|Corporate Expenses       |  |                               | (2,231 | ) |                             |   | (3,633  | )    |  |   | (4,682  | ) |  |   | (7,731   | )
|                         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  
|Total                    |  | $                             | (2,582 | ) |                             | $ | (88,896 | )    |  | $ | (10,446 | ) |  | $ | (101,781 | )
|                         |  |                               |        |   |                             |   |         |      |  |   |         |   |  |   |          |  

Overall revenue decreased $26.4 million from $63.1 million in the second quarter of fiscal 2006 to
$36.7 million in the second quarter of fiscal 2007 and decreased $31.4 million from $110.5 million in the first half of fiscal 2006 to $79.1 million in the first half of fiscal 2007. This decrease is mainly due to declines in our Tecstar Automotive
Group segment product revenues of $25.2 million in the second quarter of fiscal 2007 and $32 million in the first half of fiscal 2007 as a result of the expiration of certain second stage contracts and changeovers in vehicle platforms by General
Motors that have occurred since the second half of fiscal 2006.

Overall operating loss increased $86.2 million, from $2.5 million in the
second quarter of fiscal 2006 to $88.7 million in the second quarter of fiscal 2007 and increased $91.2 million from $10.5 million in the first half of fiscal 2006 to $101.7 million in the first half on fiscal 2007 primarily due to impairment
charges of $72.3 million for the estimated impairment of goodwill related to our merger with Tecstar Automotive Group and on our acquisition of Empire Coach. The higher overall operating loss (excluding estimated impairment charges) in the second
quarter and first half of fiscal 2007 is primarily due to increases in operating losses in our Tecstar Automotive Group of $12.1 million and $16.6, respectively, resulting from the decline in second stage product revenues and increased selling,
general and administrative expenses as a result of the Regency acquisition. Additionally, our Corporate segment had a $1.4 million and $3.0 million increase in losses for the second quarter and the first half of fiscal 2007, respectively, as a
result of expanded support to administer a larger base of subsidiaries of the overall operations in fiscal 2007 as compared to fiscal 2006 and higher compensation charges as a result of the adoption of SFAS 123R at the beginning of fiscal 2007.

Quantum Fuel Systems Segment

Product sales for the Quantum Fuel Systems segment increased $1.8 million, or 90%, from $2.0 million in the second quarter of fiscal 2006 to $3.8 million in the second quarter of fiscal 2007 and increased $4.3 million, or 108%, from $4.0
million in the first half of fiscal 2006 to $8.3 million in the first half of fiscal 2007. Product sales during fiscal 2007 primarily consist of orders associated with General Motors pick-up trucks equipped with our bi-fuel and compressed
natural gas fuel systems. Sales related to compressed natural gas fuel systems increased $1.7 million, or 85%, from $2.0 million in the second quarter of fiscal 2006 to $3.7 million in the second quarter of fiscal 2007. The increase in the second
quarter of fiscal 2007 is mainly due to increased sales volume and increased average unit prices related to the General Motors pick-up truck program. We expect compressed natural gas product sales to decline significantly during the third
quarter of fiscal 2007 in connection with the expiration of the current natural gas vehicle program with General Motors in November 2006.



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Cost of product sales for the Quantum Fuel Systems segment increased $1.6 million, or 70%, from $2.3
million in the second quarter of fiscal 2006 to $3.9 million in the second quarter of fiscal 2007 and increased $2.9 million, or 60%, from $4.8 million in the first half of fiscal 2006 to $7.7 million in the first half of fiscal 2007. The increase
in the second quarter of fiscal 2007 is mainly due to the higher overall sales volume in the segment and an increase in average unit costs related to the compressed natural gas fuel system program.

Gross profits on product sales for the Quantum Fuel Systems segment increased $0.2 million from a negative $0.3 million in the second quarter of fiscal
2006 to a negative $0.1 million in the second quarter of fiscal 2007 and increased $1.4 million, or 175%, from a negative $0.8 million in the first half of fiscal 2006 to a positive $0.6 million in the first half of fiscal 2007. The increase in the
second quarter of fiscal 2007 is mainly attributable to the increased sales volume.

Contract revenue for the Quantum Fuel Systems segment
decreased $1.2 million, or 44%, from $2.7 million in the second quarter of fiscal 2006 to $1.5 million in the second quarter of fiscal 2007 and decreased $1.1 million, or 22%, from $5.1 million in the first half of fiscal 2006 to $4.0 million in the
first half of fiscal 2007. Contract revenue is derived primarily from system development and application engineering of our products under funded General Motors and other OEM contracts, and other funded contract work with the U.S. military and other
government agencies. Contract revenue is recognized as work progresses on fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. Recognized revenue is subject to
revisions as the contracts progress to completion.

Research and development expense associated with development contracts decreased $0.6
million, or 27%, from $2.2 million in the second quarter of fiscal 2006 to $1.6 million in the second quarter of fiscal 2007 and decreased $1.0 million, or 21%, from $4.7 million in the first half of fiscal 2006 to $3.7 million in the first half of
fiscal 2007. Internally funded research and development expense for the Quantum Fuel Systems segment decreased by $0.4 million, or 19%, from $2.1 million in the second quarter of fiscal 2006 to $1.7 million in the second quarter of fiscal 2007
and remained the same in the first half of fiscal 2007 as fiscal 2006 at $4.1 million.

Selling, general and administrative expenses for
the Quantum Fuel Systems segment increased $0.1 million, or 9%, from $1.1 million in the second quarter of fiscal 2006 to $1.2 million in the second quarter of fiscal 2007 and increased $0.3 million, or 14%, from $2.2 million in the first half of
fiscal 2006 to $2.5 million in the first half of fiscal 2007. Selling, general and administrative expenses as a percentage of total Quantum Fuel Systems segment operating costs and expenses was 13% for the second quarter of fiscal 2007 compared to
14% for the second quarter of fiscal 2006 and remained the same at 13% of the fiscal year.

Amortization of intangibles for the Quantum
Fuel Systems segment relates to the Corporate Alliance Agreement with General Motors. The expense in the second quarter of fiscal year 2007 was the same as in the second quarter of fiscal 2006 and amounted to $0.4 million. The expense in the first
half of fiscal 2007 was also the same as the first half of fiscal 2006 and amounted to $0.8 million.

Operating loss for the Quantum Fuel
Systems segment in the second quarter of fiscal 2007 was $3.7 million, an increase of $0.4 million, from the second quarter of fiscal 2006 loss of $3.3 million. The first half of fiscal 2007 operating losses were $6.8 million, a decrease of $0.7
million, from $7.5 million in the first half of fiscal 2006. We expect the Quantum Fuel Systems segment to incur continued operating losses in fiscal 2007 and a decline in quarterly revenues over the remainder of fiscal 2007 as compared to the first
half of fiscal 2007 due to the expiration of the compressed natural gas program with General Motors. However, we do expect revenues for Quantum Fuel Systems to be higher in fiscal 2007 compared to fiscal 2006.

Tecstar Automotive Group Segment

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

Overall revenues for the Tecstar Automotive Group of $31.4 million for the second quarter of fiscal 2007 decreased $27.0 million or 46% from the second quarter of fiscal 2006 revenues of $58.4 million. This decrease
is mainly due to declines in product revenues as a result of the expiration of certain second stage contracts and changeovers in vehicle platforms by General Motors that have occurred since the second half of fiscal 2006 that were partially offset
by $19.9 million in additional revenues generated by our Regency operations in the current fiscal year. Overall revenues for the second half of fiscal 2006 totaled $101.4 million compared to $66.8 million for the first half of 2007.



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Product sales for the Tecstar Automotive Group decreased $25.2 million, or 46%, from $55.2 million in the
second quarter of fiscal 2006 to $30.0 million in the second quarter of fiscal 2007. Product sales decreased $32.0 million, or 33% from $96.5 million in the first half of fiscal 2006 to $64.5 million in the first half of fiscal 2007. Product sales
include second stage assembly revenues which 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. Second stage assembly revenues decreased $18.4 million, or 55%, from $33.6 million in the second quarter of fiscal 2006 to $15.2 million in the second quarter of 2007 due to the expiration of programs noted above. Product
sales for automotive OEM accessory parts distributed through OEM distribution channels and dealer networks were $20.3 million and $12.3 million for the second quarters of fiscal 2006 and 2007, respectively. Other revenues totaled $1.3 million and
$2.5 million for the second quarters of fiscal 2006 and 2007, respectively. We expect overall product sales in fiscal 2007 as compared to fiscal 2006 to continue to be negatively impacted by the expiration of certain second stage contracts and
changeovers in vehicle platforms by General Motors that occurred in the second half of fiscal 2006.

Cost of product sales for the Tecstar
Automotive Group decreased $17.5 million, or 35%, from $49.4 million in the second quarter of fiscal 2006 to $31.9 million in the second quarter of fiscal 2007. Cost of product sales were $87.3 million and $65.7 million in the first half of fiscal
2006 and 2007, respectively. Cost of product sales primarily represents the cost of raw material, labor and assembly facility overhead required in the second stage manufacturing process and material costs related to parts distribution. Gross profit
on product sales was $5.8 million and $9.2 million of sales for the three month and six month periods ended October 31, 2005 as compared to gross loss of $1.9 and $1.2 million for the three month and six month period ended October 31,
2006. The decrease is primarily due to the lower volumes of second-stage activities in the first half of fiscal 2007.

Contract revenue for
the Tecstar Automotive Group decreased $1.8 million, or 56%, from $3.2 million in the second quarter of 2006 to $1.4 million in the second quarter of 2007. There was also a decrease of $2.6 million, or 53%, from $4.9 million in the first half of
fiscal 2006 compared to $2.3 million in the first half of fiscal 2007. Revenue is associated with design and engineering services for concept vehicles. Research and development expense associated with cost of contract revenue decreased $0.3 million,
or 18%, from $1.7 million in the second quarter of fiscal 2006 to $1.4 million in the second quarter of fiscal 2007. There was also a decrease in research and development expense associated with cost of contract revenue of $1.4 million, or 37%, from
$3.8 million in the first half of fiscal 2006 to $2.4 million in the first half of fiscal 2007.

Selling, general and administrative
expenses for the Tecstar Automotive Group were $6.5 million and $12.2 million for the three month and six month periods, respectively, ended October 31, 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. The increase in the current year is mainly due to the expanded activities related to the operations of Regency, Empire and Unique
Performance which were not included in the second quarter of the prior year. Selling, general and administrative expenses attributable to these three entities were $1.8 million and $3.6 million for the three month and six month ended
October 31, 2006, respectively. This also includes $0.2 million and $0.3 million, for the three month and six month of fiscal 2007, of share-based compensation expense related to unvested options previously granted that are required to be
expensed beginning in fiscal 2007.

Amortization of intangibles was $0.7 million in both the second quarter of fiscal 2006 and 2007, and
$1.4 million in both first half of fiscal 2006 and 2007, respectively. This primarily relates to specifically identified customer related intangibles and existing technology acquired by Quantum in the acquisitions of Tecstar Automotive Group and
also includes dealer network and other intangible assets acquired in the acquisition of Regency and the start up of Unique Performance Concepts.

Operating loss for the Tecstar Automotive Group segment was $81.4 million and $87.2 million for the three month and six months periods for fiscal 2007, compared to a profit of $3.0 million and $1.7 million for the three month and six month
periods of fiscal 2006, respectively. We expect our Tecstar Automotive Group segment to continue incurring losses during the second half of fiscal 2007; however, we anticipate those losses will be less than the first half of fiscal 2007 as a result
of higher-margin revenues from our dealer network programs and the implementation of cost reduction initiatives.



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Corporate

Corporate expenses increased by $1.4 million, or 64%, from $2.2 million in the second quarter of fiscal 2006 to $3.6 million in the second quarter of fiscal 2007 and increased $3.0 million, or 64%, from $4.7 million
in the first half of fiscal 2006 to $7.7 million in the first half of fiscal 2007. Increases in the first half of fiscal 2007 compared to fiscal 2006 were due in part to share-based compensation expense of $1.4 million resulting from the new
accounting change for unvested options effective beginning in fiscal 2007, increased audit related fees and services of $0.5 million, and $0.2 million for investor relation expenses. Expansion of corporate activities related to subsidiaries added
over the past year has contributed to the increased level of costs incurred in the second quarter of fiscal 2007. Corporate expenses as a percentage of total revenues increased to 10% for the first six months of fiscal 2007 as compared to 4% for the
first six months of fiscal 2006.

Non-Reporting Segment Results

Interest Income and Expense. Interest income remained the same in the first six months of fiscal 2007 as fiscal 2006 at $0.5 million. Interest expense amounted to $2.5 million in the first half of fiscal 2007
as compared to $1.2 million in the first half of fiscal 2006. Interest expense primarily relates to debt obligations that were assumed in connection with the Tecstar Automotive Group acquisition in March 2005 and the Regency acquisition in February
2006. The increase in interest expense is attributable to higher prime interest rates and higher levels of borrowing under the credit facility with Comerica Bank as compared to the second quarter of the previous year.

Income Taxes.During the three month period ended October 31, 2006, we realized a tax benefit of approximately $0.2 million primarily as a
result of the declining temporary difference between the book basis and tax basis related to intangible assets recorded in connection with the Tecstar Automotive Group acquisition. A partial valuation allowance has been established for our net
deferred tax assets due to our lack of earnings history. We anticipate incurring net losses to continue through fiscal 2007 and to continue to realize a tax benefit as a result of the declining temporary difference related to intangible assets.



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Liquidity and Capital Resources

Net cash used in operating activities for the first half of fiscal 2007 was $12.0 million as compared to a cash use of $26.2 million during the first half of fiscal 2006. The cash used during the first half of
fiscal 2007 is primarily due to a net loss of $23.2 million before the non-cash effects of goodwill impairments, depreciation and amortization, stock compensation charges, and other items. The loss from operations was offset by favorable changes in
levels of operating assets and liabilities of $11.2 million, primarily related to a decrease in levels of accounts receivable that resulted from non-recurring collections related to programs with General Motors in the first quarter of fiscal 2007.
We expect an unfavorable change in levels of working capital over the second half of fiscal 2007, but at levels below the favorable changes realized in the first half of fiscal 2007.

Net cash used in investing activities during the first half of fiscal 2007 was $7.0 million as compared to net cash provided of $6.1 million during the
first half of fiscal 2006. The net cash used in the current fiscal year is mainly a result of purchases of property and equipment of $4.3 million mainly relating to the development of tooling for our new programs at Unique Performance. Cash of $2.7
million was also used for the net purchases of marketable securities during the first half of the current fiscal year.

Net cash provided
by financing activities during the first half of fiscal 2007 was $22.4 million as compared to $16.2 million during the first half of fiscal 2006. Cash provided during the first half of fiscal 2007 was principally from the sales of
4.4 million shares of stock to private investors that provided $12.5 million in gross proceeds in June and 6.0 million shares of stock sold to private investors in October that provided $10.0 million in gross proceeds. We also
received $0.3 million from a minority interest holder in Advanced Lithium Power.

The ratio of current assets to current liabilities was
1.3:1 at October 31, 2006 versus 1.5:1 at April 30, 2006. During the first half of fiscal 2007, our total working capital decreased by $5.4 million, from $26.4 million at April 30, 2006 to $21.0 million at October 31, 2006
primarily as a result of the change in classification of the outstanding balances under our revolving credit facility from long-term to current.

In July 2002, we received $15.0 million in cash in connection with our spin-off from IMPCO. In January 2003, we completed a public equity offering of an aggregate of 4,025,000 shares of our common stock at a price of $2.25 per share, which
yielded net proceeds of $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. On June 29, 2006, we completed a private investment in public entity (PIPE) transaction which yielded proceeds of $12.5 million from the sale of 4,403,000 shares of our common stock at a price
of $2.84 per share, which represented a 10% discount on the June 29, 2006 closing price of $3.15. On October 27, 2006, we completed a second PIPE transaction which yielded proceeds of $10.0 million from the sale of 6,098,000 shares of our
common stock at a price of $1.64 per share, which represented a 20% discount on the October 27, 2006 closing price of $2.05.

In
connection with our acquisition of Tecstar Automotive Group which closed on March 3, 2005, we assumed a total of $23.8 million of long-term debt. This debt included $15.0 million of unsecured senior subordinated convertible notes that were
issued by Tecstar Automotive Group in a private placement 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 Tecstar Automotive Group, 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. All of the semi-annual interest payments to date have been made in cash.

Our principal sources of liquidity as of October 31, 2006 included cash and cash equivalents of $12.5 million, restricted cash equivalents and
marketable securities of $17.7 million, and revolving lines of credit with Comerica Bank which provide for a maximum availability totaling $25.0 million. Advances outstanding under the lines totaled $23.4 million at October 31, 2006. The
restricted cash equivalents and marketable securities consist of $16.7 million collateralized in connection with the revolving lines of credit and $1.0 million collateralized for the benefit of General Motors Acceptance Corporation
(GMAC) in connection with financing of vehicle chassis for Regencys operations.

Our revolving credit facility with
Comerica Bank consists of a domestic line of credit and a Canadian line of credit. On May 19, 2006, the credit facility was amended and restated for a second time (the Second Amended Credit Agreement). On June 30, 2006, the
Second Amended Credit Agreement was further amended (the Third Amended Credit Agreement). Under the terms of the Third Amended Credit Agreement, maximum availability under the credit facility for the domestic and Canadian revolvers was a
combined $25.0 million at October 31, 2006. The amount of available advances is subject to limitations based upon our eligible accounts receivables and collateralized cash equivalents and marketable securities determined on a consolidated
basis. Advances under the credit facility bear interest at the greater of prime rate (8.25% at



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October 31, 2006) minus 1.25% or the federal funds rate plus 1.00%. The Third Amended Credit Facility contains various affirmative and restrictive
covenants including a tangible net worth covenant, limitation on capital expenditures and a pay-down covenant. The pay-down covenant requires us to maintain an aggregate outstanding balance on the domestic and Canadian lines of less $15.0 million
for five consecutive business days each month. At October 31, 2006 we were in violation of the tangible net worth covenant and at November 30, 2006 we were in violation of both the limitation on capital expenditures and the pay-down
covenant (the Covenant Violations). The Third Amended Credit Facility also prohibits us from making investments in, merging or acquiring, any other unrelated entity or business without the approval of Comerica Bank. The Third Amended
Credit Agreement matures on February 1, 2009. Quantum and each of our direct and indirect subsidiaries provided Comerica Bank with an unlimited guaranty for TAGs obligations and granted a security interest in all of our assets to Comerica
Bank under the Third Amended Credit Agreement.

On December 15, 2006, we entered into a Forbearance Agreement with Comerica Bank under
which Comerica Bank agreed to forbear from making demand and taking collection actions until March 15, 2007 and to waive existing events of default under the Third Amended Credit Agreement arising from the Covenant Violations. The Forbearance
Agreement required us to liquidate $15.0 million of our restricted cash equivalents and marketable securities in connection with the execution of the agreement and to use the proceeds to pay down the outstanding balance due under the Third Amended
Credit Facility. Concurrently with the pay-down, the maximum aggregate advances available under the domestic and Canadian lines of credit were reduced to $10 million. Other provisions of the Forbearance Agreement include: (i) approximately $1.7
million of cash classified as restricted at October 31, 2006 will be released from the restrictions and become freely available to us, (ii) the interest rate on outstanding advances is increased to prime rate plus 0.50% on the domestic
line and prime plus 1.0% on the Canadian line, (iii) we are required to maintain cash collateral bank accounts at Comerica Bank, (iv) we are not able to use the accounts receivable from Empire Coach Enterprises, LLC in its borrowing base,
(v) Tecstar Automotive Group guaranteed the obligations that the Companys subsidiary Wheel to Wheel, LLC has to Comerica Bank under a certain mortgage currently in place on the facility owned by Wheel to Wheel, LLC, (vi) the interest
rate on the mortgage on the facility owned by Wheel to Wheel, LLC is increased to prime rate plus 2.25%, and (vii) we will not be required to meet certain levels of tangible net worth during the forbearance period. As a result of the Covenant
Violations and the Forbearance Agreement, we continue to classify the outstanding balance under the Third Amended Credit Facility as a current liability as of October 31, 2006.

We have engaged consultants to assist us in pursuing various financing alternatives and we believe we will be able to replace the existing Third Amended
Credit Facility with another lender or alternative financing prior to the expiration of the Forbearance Agreement; however, if we are unable to restructure the debt as expected or if we violate provisions of the Forbearance Agreement or the Third
Amended Credit Facility and fail to obtain future waivers, Comerica Bank along with the holders of the senior subordinated convertible notes will have the right to accelerate the due dates of the outstanding balances on the credit facility and the
convertible notes and demand immediate repayments. An acceleration of the outstanding balances on the credit facility and/or the convertible notes would have a material adverse effect on our business.

During the first half of fiscal 2007, we reduced overall workforce levels by approximately 20% and implemented certain other cost saving initiatives. We
intend to continue our efforts to implement a cost reduction program that may include consolidation of facilities, streamlining of functions, monitoring of workforce levels and various other cost saving measures. Despite the cost saving initiatives
already implemented and those we expect to implement in the second half of fiscal 2007, we believe that based on current projections and forecasts we do not have sufficient liquidity to fund our short-term cash needs. Accordingly, we will require
additional equity or debt financing near the beginning of the fourth quarter of fiscal 2007 to fund operating activities. The amount of such additional financing that is needed is substantial. In addition to the requirement to replace the existing
credit facility with Comerica prior to March 15, 2007, we anticipate that we will require approximately $20 million in additional equity or debt financing to fund our operating activities over the next twelve months above our principal sources
of liquidity at October 31, 2006, which includes a requirement of approximately $5 to $8 million of additional capital to fund our operating activities through the end of fiscal 2007. Our actual capital requirements could be significantly
higher. Management plans to utilize its available sources of tangible collateral, primarily consisting of accounts receivables, inventories and fixed assets to secure a new credit facility with an asset based lender in the range of $10 to $30
million near the beginning of the fourth quarter. To the extent that this debt financing does not provide sufficient capital for our operations, management anticipates issuing stock in private or public offerings. Management may also sell certain
subsidiaries or other long-lived assets or issue subordinated debt to provide for our liquidity needs over the next year. An inability by the Company to raise sufficient capital to fund its operations would have a material adverse affect on the
Company and would raise doubts about the Companys ability to continue as a going concern. We may also require additional financing to take advantage of future strategic opportunities, further implement cost reduction initiatives, complete
product and application development, or to develop facilities for commercialization and limited production of our products and systems. Although we believe our short-term cash 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 October 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. Our Tecstar Automotive Group
segment is dependent on factors such as model year changeover of vehicle platforms by General Motors, economic conditions, including levels of disposable consumer income, the availability and price of gasoline, the level of interest rates, and the
availability of consumer financing. Our cash and levels of borrowing are also impacted by the timing of Tecstar Automotive Groups once-a-month cash collections on product sales to General Motors. Competition and a reliance on a few customers,
particularly General Motors, are additional factors that may impact our future operations.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates due to our financing, investing and cash management activities.
Specifically, our cash and marketable securities are subject to fluctuations in interest rates. Based on our cash and marketable securities balance at October 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. 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.

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 losses aggregated approximately $47,000 for the first six months of fiscal 2007.

Off Balance Sheet Disclosures

Consigned
Inventories

Our wholly-owned subsidiary, Regency, obtains vehicle chassis for its specialized vehicle products directly from OEMs under
converter pool agreements. Chassis are obtained from the OEMs based on orders from customers, and to a lesser extent, for unallocated orders. Although each OEM agreement has different terms and conditions, the agreements generally provide that the
OEM will provide a supply of chassis to be maintained from time to time at Regencys facility under the conditions that Regency will store such chassis and will not move, sell or otherwise dispose of such chassis, except under the terms of the
agreement. The OEM does not transfer the certificate of origin to Regency and, accordingly, Regency accounts for the chassis as consigned inventory belonging to the OEM. Under these agreements, Regency is required to pay a finance charge on the
chassis inventory equal to a fixed rate of zero to 2.0% for the first 90 days and a variable rate of prime plus 1.0% for days 91 and thereafter. The finance charges incurred on consigned chassis inventory, included in interest expense in the
consolidated statement of income, aggregated $554,438 for the first half of fiscal 2007. Chassis inventory, accounted for as consigned inventory to Regency by the OEMs, aggregated approximately $24.3 million at April 30, 2006 and $25.6 million
at October 31, 2006. Typically, chassis are converted and delivered to the customers within 90 days of the receipt of the chassis by Regency.



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

Information 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.



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

(a) Disclosure
Controls and Procedures

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



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(b) Design of Internal Control Over Financial Reporting

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

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



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



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



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



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

Status of Managements Remedial Action

At April 30, 2006 we reported that we had a material weakness as a result of not having the internal resources necessary to apply the numerous
complex accounting standards to non-routine transactions in a timely manner. We have made progress on remediating this material weakness and have developed a remediation plan that involves a restructure and enhancement of our internal accounting
resources and functions that we believe will resolve the material weakness. We began implementing this plan during the second quarter of fiscal 2007 and anticipate completing this plan in the second half of fiscal 2007. We believe the full
implementation of this plan will make the design and operation of our internal controls over financial reporting effective.

(c) Changes
in Internal Control Over Financial Reporting

Other than the remediation plan that is discussed above, there have been no other 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.



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PART IIOTHER INFORMATION



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

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

Risks Related to Liquidity and Capital Resources:



| |  |  | We are currently operating under a Forbearance Agreement that requires us to satisfy a requirement to restructure the credit facility with an alternative source of financing before
March 15, 2007. If we are unable to satisfy the requirement within the time period allowed, our lender along with the holders of the senior subordinated convertible notes will have the right to accelerate the due dates of the outstanding
balances on the credit facility and the convertible notes and demand immediate repayments. An acceleration of the outstanding balances on the credit facility and/or the senior subordinated convertible notes would have a material adverse affect on
our business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will require additional financing to fund operating activities near the beginning of the fourth quarter of fiscal 2007 as defined under the section entitled Liquidity and
Capital Resources. Management plans to utilize its available sources of tangible collateral, primarily consisting of accounts receivables, inventories and fixed assets to secure a new credit facility with an asset based lender. To the extent
that this debt financing does not provide sufficient capital for our operations, management anticipates issuing stock in private or public offerings. Management may also sell certain subsidiaries or other long-lived assets or issue subordinated debt
to provide for our liquidity needs over the next year. Our ability to secure additional financing in this time period may be difficult due to our history of operating losses and negative cash flows and we cannot assure you that such additional
sources of financing will be available on acceptable terms, if at all. An inability to raise sufficient capital to fund our operations would have a material adverse affect on our business;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A material adverse affect on our business resulting from accelerations of debt or an inability to raise sufficient capital would raise doubts about our ability to continue as a
going concern;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Risks Related to our Business:



| |  |  | We incurred a goodwill impairment charge in the second quarter of fiscal 2007 primarily related to the acquisition of Tecstar Automotive Group (TAG) as we have not
realized the expected benefits to the extent and within the timeframe initially anticipated. The impairment analysis has not been finalized as of the date of this quarterly report and is based upon managements preliminary estimates. The final
impairment charge is expected to be finalized and adjusted during the third quarter of fiscal 2007 which could materially impact our operating results.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

We held our annual meeting of security holders in Irvine, California on September 21, 2006. Two matters came to a vote before the security holders at that meeting: 1) the election of two Class II directors; and 2) ratification of
approval of our independent auditors. The results of the vote are set forth below.



|                        |  |                |  |               |  |                         
|----------------------- |  | -------------- |  | ------------- |  | ------------------------
|                        |  | Votes in favor |  | Votes against |  | Votes withheld/abstained
|G. Scott Samuelsen      |  | 43,264,239     |  |               |  | 1,016,033               
|Thomas J. Tyson         |  | 43,261,018     |  |               |  | 1,019,254               
|McGladrey & Pullen, LLP |  | 43,990,688     |  | 235,594       |  | 53,990                  



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

On December 15, 2006, we
entered into a Forbearance Agreement with Comerica Bank under which Comerica Bank agreed to forbear from making demand and taking collection actions until March 15, 2007 and to waive existing events of default under the Third Amended Credit
Agreement arising from the Covenant Violations. The Forbearance Agreement required us to liquidate $15.0 million of our restricted cash equivalents and marketable securities in connection with the



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execution of the agreement and to use the proceeds to pay down the outstanding balance due under the Third Amended Credit Facility. Concurrently with the
pay-down, the maximum aggregate advances available under the domestic and Canadian lines of credit were reduced to $10 million. Other provisions of the Forbearance Agreement include: (i) approximately $1.7 million of cash classified as
restricted at October 31, 2006 will be released from the restrictions and become freely available to us, (ii) the interest rate on outstanding advances is increased to prime rate plus 0.50% on the domestic line and prime plus 1.0% on the
Canadian line, (iii) we are required to maintain cash collateral bank accounts at Comerica Bank, (iv) we are not able to use the accounts receivable from Empire Coach Enterprises, LLC in its borrowing base, (v) Tecstar Automotive
Group guaranteed the obligations that the Companys subsidiary Wheel to Wheel, LLC has to Comerica Bank under a certain mortgage currently in place on the facility owned by Wheel to Wheel, LLC, (vi) the interest rate on the mortgage on the
facility owned by Wheel to Wheel, LLC is increased to prime rate plus 2.25%, and (vii) we will not be required to meet certain levels of tangible net worth during the forbearance period.

Also on December 15, 2006 and in connection with the Forbearance Agreement, our wholly owned subsidiary, Tecstar Automotive Group, executed a
Guaranty in favor of our lender, Comerica Bank, under which Tecstar Automotive Group guaranteed all of obligations of Wheel to Wheel, LLC, a wholly owned subsidiary of Tecstar Automotive Group, to Comerica Bank including its mortgage obligations on
the facility owned by Wheel to Wheel, LLC.

The foregoing descriptions of the terms and conditions of the Forbearance Agreement and
Guaranty are qualified by reference to the complete terms of those agreements, copies of which is being filed herewith as Exhibits 10.3 and 10.4.



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

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



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SIGNATURES

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

Date: December 18, 2006



QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.By:

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




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EXHIBIT INDEX

Form 10-Q For Period Ended October 31, 2006.



|      |  |                                                                                                                                                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1.1 |  | Common Stock Purchase Warrant A. (Incorporated herein by reference to Exhibit 4.1.1 of Registrants Current Report on Form 8-K filed on October 31, 2006)                                                                                                       
|      | 
|4.1.2 |  | Form of Common Stock Purchase Warrant A issued by the Registrant in a Private Placement of Securities dated October 27, 2006. (Incorporated herein by reference to Exhibit 4.1.2 of
Registrants Current Report on Form 8-K filed on October 31, 2006)          
|      | 
|4.2.1 |  | Common Stock Purchase Warrant B. (Incorporated herein by reference to Exhibit 4.2.1 of Registrants Current Report on Form 8-K filed on October 31, 2006)                                                                                                       
|      | 
|4.2.2 |  | Form of Common Stock Purchase Warrant B issued by the Registrant in a Private Placement of Securities dated October 27, 2006. (Incorporated herein by reference to Exhibit 4.2.2 of
Registrants Current Report on Form 8-K filed on October 31, 2006).         
|      | 
|4.3   |  | Form of Additional Warrant issued by the Registrant in a Private Placement of Securities dated October 27, 2006. (Incorporated herein by reference to Exhibit 4.3.1 of Registrants Current
Report on Form 8-K filed on October 31, 2006).                      
|      | 
|10.1  |  | Form of Securities Purchase Agreement executed in connection with Registrants Private Placement of Securities dated October 27, 2006. (Incorporated herein by reference to Exhibit 10.1 of
Registrants Current Report on Form 8-K filed on October 31, 2006). 
|      | 
|10.2  |  | Form of Registrations Rights Agreement executed in connection with Registrants Private Placement of Securities dated October 27, 2006. (Incorporated herein by reference to Exhibit 10.2 of
Registrants Current Report on Form 8-K filed on October 31, 2006).
|      | 
|10.3  |  | Forbearance Agreement, dated December 15, 2006, between Registrant, each of its subsidiaries and Comerica Bank                                                                                                                                                  
|      | 
|10.4  |  | Guaranty, dated December 15, 2006, executed by Tecstar Automotive Group in favor of Comerica Bank.                                                                                                                                                              
|      | 
|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.                                                                                                                                  
|      | 
|99.1  |  | Schedule of Investors. (Incorporated herein by reference to Exhibit 99.1 of Registrants Current Report on form 8-K filed on October 31, 2006).