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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the quarterly period ended October 31, 2004, 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



Quantum Fuel Systems Technologies Worldwide, Inc.

(Exact name of registrant as specified in its charter)



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



17872 Cartwright
Road, Irvine, CA 92614

(Address of principal executive offices) (Zip Code)



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



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



Yes  x    No ̈



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



Yes  x    No ̈



Number of shares outstanding of each of the issuers classes of common stock, as of December 7, 2004:



30,712,174 shares of Common Stock, $.001 par value per share, and 999,969 shares of Series B
Common Stock, $.001 par value per share.



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##### Table of Contents



INDEX



QUANTUM FUEL SYSTEMS TECHNOLOGIES
WORLDWIDE, INC.



|              |  |                                                                                                       |  |   
|------------- |  | ----------------------------------------------------------------------------------------------------- |  | --
|Part I.       |  | Financial Information                                                                                 |  |   
|              |  |                                                                                                      
|Item 1.       |  | Financial Statements:                                                                                 |  |   
|              |  |                                                                                                      
|              |  | Condensed balance sheets  April 30, 2004 and October 31, 2004 (unaudited)                            |  | 1 
|              |  |                                                                                                      
|              |  | Condensed statements of operations (unaudited)  Three and six months ended October 31, 2003 and 2004 |  | 2 
|              |  |                                                                                                      
|              |  | Condensed statement of cash flows (unaudited)  Three and six months ended October 31, 2003 and 2004  |  | 3 
|              |  |                                                                                                      
|              |  | Notes to condensed financial statements (unaudited)  October 31, 2004                                |  | 4 
|              |  |                                                                                                      
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 11
|              |  |                                                                                                      
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 21
|              |  |                                                                                                      
|Item 4.       |  | Controls and Procedures                                                                               |  | 21
|              |  |                                                                                                      
|Part II.      |  | Other Information                                                                                     |  |   
|              |  |                                                                                                      
|Item 2.       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                      |  | 21
|              |  |                                                                                                      
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                   |  | 21
|              |  |                                                                                                      
|Item 6.       |  | Exhibits                                                                                              |  | 21
|              |  |                                                                                                      
|Signatures    |  |                                                                                                       |  | 22
|              | 
|Exhibit Index |  | 23                                                                                                   





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PART IFINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED BALANCE SHEETS

|                                                                                                                                                                           |  |               |             |   |                 |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | --------------- | - | ----------- | -
|                                                                                                                                                                           |  | April 30,2004 |             |   | October 31,2004 |  
|                                                                                                                                                                           |  |               |             |   | (Unaudited)     |  
|ASSETS                                                                                                                                                                     |  |               |             |   |                 |   |             |  
|Current assets:                                                                                                                                                            |  |               |             |   |                 |   |             |  
|Cash and cash equivalents                                                                                                                                                  |  | $             | 15,728,901  |   |                 | $ | 8,411,238   |  
|Marketable securities held-to-maturity                                                                                                                                     |  |               | 35,595,269  |   |                 |   | 46,629,270  |  
|Accounts receivable, net                                                                                                                                                   |  |               | 5,896,504   |   |                 |   | 5,849,070   |  
|Inventories, net                                                                                                                                                           |  |               | 5,744,769   |   |                 |   | 6,098,479   |  
|Other current assets                                                                                                                                                       |  |               | 719,229     |   |                 |   | 547,062     |  
|                                                                                                                                                                           |  |               |             |   |                 |   |             |  
|Total current assets                                                                                                                                                       |  |               | 63,684,672  |   |                 |   | 67,535,119  |  
|Equipment and leasehold improvements, net                                                                                                                                  |  |               | 8,780,096   |   |                 |   | 8,007,284   |  
|Marketable securities held-to-maturity                                                                                                                                     |  |               | 17,232,298  |   |                 |   | 7,843,134   |  
|Intangible asset, net                                                                                                                                                      |  |               | 13,659,705  |   |                 |   | 12,829,818  |  
|Other assets                                                                                                                                                               |  |               | 90,173      |   |                 |   | 90,173      |  
|                                                                                                                                                                           |  |               |             |   |                 |   |             |  
|Total assets                                                                                                                                                               |  | $             | 103,446,944 |   |                 | $ | 96,305,528  |  
|                                                                                                                                                                           |  |               |             |   |                 |   |             |  
|                                                                                                                                                                           |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  |               |             |   |                 |   |             |  
|Current liabilities:                                                                                                                                                       |  |               |             |   |                 |   |             |  
|Accounts payable                                                                                                                                                           |  | $             | 2,836,025   |   |                 | $ | 2,196,446   |  
|Accrued payroll obligations                                                                                                                                                |  |               | 773,937     |   |                 |   | 842,616     |  
|Deferred revenue                                                                                                                                                           |  |               | 736,518     |   |                 |   | 183,362     |  
|Accrued warranties                                                                                                                                                         |  |               | 948,521     |   |                 |   | 928,715     |  
|Other accrued liabilities                                                                                                                                                  |  |               | 700,466     |   |                 |   | 297,749     |  
|                                                                                                                                                                           |  |               |             |   |                 |   |             |  
|Total current liabilities                                                                                                                                                  |  |               | 5,995,467   |   |                 |   | 4,448,888   |  
|Commitments and contingencies                                                                                                                                              |  |               |             |   |                 |   |             |  
|Stockholders equity:                                                                                                                                                      |  |               |             |   |                 |   |             |  
|Preferred stock, $.001 par value, 20,000,000 shares authorized; none issued and outstanding for each period                                                                |  |               |            |   |                 |   |            |  
|Series A common stock, $.001 par value; 12,000,000 shares authorized; none issued and outstanding for each period                                                          |  |               |            |   |                 |   |            |  
|Series B common stock, $.001 par value; 6,000,000 shares authorized; 999,969 issued and outstanding for each period                                                        |  |               | 1,000       |   |                 |   | 1,000       |  
|Common stock, $.001 par value; 42,000,000 shares authorized; 30,673,089 issued and outstanding at April 30, 2004 and 30,711,924 issued and
outstanding at October 31, 2004 |  |               | 30,673      |   |                 |   | 30,712      |  
|Additional paid-in-capital                                                                                                                                                 |  |               | 119,864,432 |   |                 |   | 120,004,526 |  
|Accumulated deficit                                                                                                                                                        |  |               | (22,444,628 | ) |                 |   | (28,179,598 | )
|                                                                                                                                                                           |  |               |             |   |                 |   |             |  
|Total stockholders equity                                                                                                                                                 |  |               | 97,451,477  |   |                 |   | 91,856,640  |  
|                                                                                                                                                                           |  |               |             |   |                 |   |             |  
|Total liabilities and stockholders equity                                                                                                                                 |  | $             | 103,446,944 |   |                 | $ | 96,305,528  |  
|                                                                                                                                                                           |  |               |             |   |                 |   |             |  



See accompanying notes
to condensed financial statements.



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED STATEMENTS OF OPERATIONS (Unaudited)



|                                                                   |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------ |  | ------------------------------ | ---------- | - | ---------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                   |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|                                                                   |  | 2003                           |            |   | 2004                         |   |            | 2003 |  |   | 2004       |  
|Revenue:                                                           |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Net product sales                                                  |  | $                              | 5,348,875  |   |                              | $ | 2,252,591  |      |  | $ | 11,898,560 |   |  | $ | 5,610,594  |  
|Contract revenue                                                   |  |                                | 1,376,243  |   |                              |   | 2,709,078  |      |  |   | 2,704,744  |   |  |   | 5,706,022  |  
|                                                                   |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                      |  |                                | 6,725,118  |   |                              |   | 4,961,669  |      |  |   | 14,603,304 |   |  |   | 11,316,616 |  
|Costs and expenses:                                                |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Cost of product sales                                              |  |                                | 3,175,941  |   |                              |   | 1,940,768  |      |  |   | 7,548,830  |   |  |   | 4,603,961  |  
|Research and development                                           |  |                                | 3,436,663  |   |                              |   | 4,167,623  |      |  |   | 6,544,817  |   |  |   | 8,293,982  |  
|Selling, general and administrative                                |  |                                | 2,198,992  |   |                              |   | 2,370,332  |      |  |   | 4,353,739  |   |  |   | 4,569,436  |  
|                                                                   |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Total costs and expenses                                           |  |                                | 8,811,596  |   |                              |   | 8,478,723  |      |  |   | 18,447,386 |   |  |   | 17,467,379 |  
|Operating loss                                                     |  |                                | (2,086,478 | ) |                              |   | (3,517,054 | )    |  |   | (3,844,082 | ) |  |   | (6,150,763 | )
|Interest income, net                                               |  |                                | 28,352     |   |                              |   | 230,597    |      |  |   | 54,587     |   |  |   | 439,182    |  
|Other income (expense), net                                        |  |                                | 24,403     |   |                              |   | (18,589    | )    |  |   | 24,394     |   |  |   | (18,589    | )
|Provision for income taxes                                         |  |                                | (2,800     | ) |                              |   | (4,000     | )    |  |   | (39,345    | ) |  |   | (4,800     | )
|                                                                   |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Net loss applicable to common stock                                |  | $                              | (2,036,523 | ) |                              | $ | (3,309,046 | )    |  | $ | (3,804,446 | ) |  | $ | (5,734,970 | )
|                                                                   |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Net loss per share - basic and diluted                             |  | $                              | (0.09      | ) |                              | $ | (0.10      | )    |  | $ | (0.16      | ) |  | $ | (0.18      | )
|                                                                   |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Number of shares used in per share calculation - basic and diluted |  |                                | 23,507,253 |   |                              |   | 31,704,600 |      |  |   | 23,093,849 |   |  |   | 31,695,549 |  
|                                                                   |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  



See accompanying notes
to condensed financial statements.



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)



|                                                                            |  |                              |            |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                            |  | Six Months Ended October 31, |           
|                                                                            |  | 2003                         |            |   | 2004 |  
|Operating activities:                                                       |  |                              |            |   |      |   |             |  
|Net loss                                                                    |  | $                            | (3,804,446 | ) |      | $ | (5,734,970  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |            |   |      |   |             |  
|Depreciation and amortization                                               |  |                              | 2,625,637  |   |      |   | 2,373,885   |  
|Loss on disposal of equipment and leasehold improvements                    |  |                              |           |   |      |   | 18,563      |  
|Non-cash stock compensation charge                                          |  |                              | 16,714     |   |      |   |            |  
|Changes in operating assets and liabilities:                                |  |                              |            |   |      |   |             |  
|Accounts receivable                                                         |  |                              | 2,060,452  |   |      |   | 47,434      |  
|Inventories                                                                 |  |                              | 21,125     |   |      |   | (353,710    | )
|Other assets                                                                |  |                              | (15,533    | ) |      |   | 172,167     |  
|Accounts payable                                                            |  |                              | (1,050,176 | ) |      |   | (639,579    | )
|Other liabilities                                                           |  |                              | (578,990   | ) |      |   | (907,000    | )
|                                                                            |  |                              |            |   |      |   |             |  
|Net cash used in operating activities                                       |  |                              | (725,217   | ) |      |   | (5,023,210  | )
|                                                                            |  |                              |            |   |      |   |             |  
|Investing activities:                                                       |  |                              |            |   |      |   |             |  
|Purchases of equipment and leasehold improvements                           |  |                              | (355,693   | ) |      |   | (841,749    | )
|Proceeds from sale of equipment                                             |  |                              |           |   |      |   | 52,000      |  
|Purchases of marketable securities                                          |  |                              |           |   |      |   | (22,983,595 | )
|Maturities of marketable securities                                         |  |                              |           |   |      |   | 21,338,758  |  
|                                                                            |  |                              |            |   |      |   |             |  
|Net cash used in investing activities                                       |  |                              | (355,693   | ) |      |   | (2,434,586  | )
|                                                                            |  |                              |            |   |      |   |             |  
|Financing activities:                                                       |  |                              |            |   |      |   |             |  
|Payments on capital lease obligations                                       |  |                              | (91,965    | ) |      |   |            |  
|Proceeds from issuance of common stock                                      |  |                              | 60,271,000 |   |      |   |            |  
|Proceeds from exercises of stock options                                    |  |                              | 2,460,444  |   |      |   | 140,133     |  
|Additional costs related to equity offering                                 |  |                              | (127,013   | ) |      |   |            |  
|                                                                            |  |                              |            |   |      |   |             |  
|Net cash provided by financing activities                                   |  |                              | 62,512,466 |   |      |   | 140,133     |  
|                                                                            |  |                              |            |   |      |   |             |  
|Net increase (decrease) in cash and cash equivalents                        |  |                              | 61,431,556 |   |      |   | (7,317,663  | )
|Cash and cash equivalents at beginning of period                            |  |                              | 11,538,873 |   |      |   | 15,728,901  |  
|                                                                            |  |                              |            |   |      |   |             |  
|Cash and cash equivalents at end of period                                  |  | $                            | 72,970,429 |   |      | $ | 8,411,238   |  
|                                                                            |  |                              |            |   |      |   |             |  



See accompanying notes
to condensed financial statements.



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)



October 31, 2004



1) Basis of
Presentation and Background



Quantum Fuel Systems Technologies Worldwide,
Inc. (Quantum or the Company) designs, manufactures, and supplies packaged fuel systems to Original Equipment Manufacturers (OEMs) for use in alternative fuel vehicles and fuel cell applications. For automotive
OEMs, the Company provides hydrogen systems for both internal combustion engine and fuel cell vehicles, and natural gas fuel systems for internal combustion engine vehicles. In the area of hydrogen refueling infrastructure, the Company offers
several hydrogen refueling systems focused on early infrastructure development.



The accompanying condensed financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial
position and operating results for the interim periods. The condensed balance sheet at April 30, 2004 has been derived from the audited financial statements of the Company at that date. The condensed financial statements should be read in
conjunction with the financial statements and notes thereto, together with managements discussion and analysis of financial condition and the results of operations, contained in the Companys Annual Report on Form 10-K for the fiscal year
ended April 30, 2004. The results of operations for the three and six months ended October 31, 2004 are not necessarily indicative of the results that may be expected for the entire year ending April 30, 2005.



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



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



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



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2) Marketable Securities



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



At October 31, 2004, the Companys marketable securities
held-to-maturity consist of the following:



|                            |  |                |            |                  |        |            |  |   |         |  |   |           
|--------------------------- |  | -------------- | ---------- | ---------------- | ------ | ---------- |  | - | ------- |  | - | ----------
|                            |  | Amortized Cost |            | Gross Unrealized |        | Fair Value
|                            |  |                | Gains      |                  | Losses |           
|Short-Term                  |  |                |            |                  |        |            |  |   |         |  |   |           
|Certificates of deposit     |  | $              | 2,619,783  |                  | $      |           |  | $ |        |  | $ | 2,619,783 
|Asset backed securities     |  |                | 1,754,041  |                  |        |           |  |   | 6,043   |  |   | 1,747,998 
|Corporate bonds             |  |                | 20,033,982 |                  |        |           |  |   | 57,809  |  |   | 19,976,173
|U.S. Treasury obligations   |  |                | 515,866    |                  |        |           |  |   | 619     |  |   | 515,247   
|U.S. government agencies    |  |                | 21,705,598 |                  |        |           |  |   | 28,278  |  |   | 21,677,320
|                            |  |                |            |                  |        |            |  |   |         |  |   |           
|                            |  |                | 46,629,270 |                  |        |           |  |   | 92,749  |  |   | 46,536,521
|Long-Term                   |  |                |            |                  |        |            |  |   |         |  |   |           
|Asset backed securities     |  |                | 785,623    |                  |        |           |  |   | 24,553  |  |   | 761,070   
|Corporate bonds             |  |                | 1,389,914  |                  |        | 252        |  |   | 10,590  |  |   | 1,379,576 
|U.S. government agencies    |  |                | 5,667,597  |                  |        |           |  |   | 21,815  |  |   | 5,645,782 
|                            |  |                |            |                  |        |            |  |   |         |  |   |           
|                            |  |                | 7,843,134  |                  |        | 252        |  |   | 56,958  |  |   | 7,786,428 
|                            |  |                |            |                  |        |            |  |   |         |  |   |           
|Total marketable securities |  | $              | 54,472,404 |                  | $      | 252        |  | $ | 149,707 |  | $ | 54,322,949
|                            |  |                |            |                  |        |            |  |   |         |  |   |           



At October 31, 2004, marketable
securities held-to-maturity classified as long-term have maturity dates ranging from November 2005 to October 2007.



3) Accounts Receivable



Accounts receivable consist of the following:



|                                |  |               |           |   |                 |   |           |  
|------------------------------- |  | ------------- | --------- | - | --------------- | - | --------- | -
|                                |  | April 30,2004 |           |   | October 31,2004 |  
|Customer accounts billed        |  | $             | 3,120,131 |   |                 | $ | 4,084,550 |  
|Customer accounts unbilled      |  |               | 2,923,373 |   |                 |   | 1,935,520 |  
|Allowance for doubtful accounts |  |               | (147,000  | ) |                 |   | (171,000  | )
|                                |  |               |           |   |                 |   |           |  
|Accounts receivable, net        |  | $             | 5,896,504 |   |                 | $ | 5,849,070 |  
|                                |  |               |           |   |                 |   |           |  



4) Inventories



Inventories consist of the following:



|                                |  |               |           |   |                 |   |            |  
|------------------------------- |  | ------------- | --------- | - | --------------- | - | ---------- | -
|                                |  | April 30,2004 |           |   | October 31,2004 |  
|Inventories:                    |  |               |           |   |                 |   |            |  
|Materials and parts             |  | $             | 5,198,673 |   |                 | $ | 5,379,068  |  
|Work-in-process                 |  |               | 58,945    |   |                 |   | 446,490    |  
|Finished goods                  |  |               | 1,424,719 |   |                 |   | 1,410,943  |  
|                                |  |               |           |   |                 |   |            |  
|                                |  |               | 6,682,337 |   |                 |   | 7,236,501  |  
|Less provision for obsolescence |  |               | (937,568  | ) |                 |   | (1,138,022 | )
|                                |  |               |           |   |                 |   |            |  
|Inventories, net                |  | $             | 5,744,769 |   |                 | $ | 6,098,479  |  
|                                |  |               |           |   |                 |   |            |  



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5) Equipment and Leasehold Improvements



Equipment and leasehold improvements consist of the following:



|                                               |  |                |             |   |                 |   |             |  
|---------------------------------------------- |  | -------------- | ----------- | - | --------------- | - | ----------- | -
|                                               |  | April 30, 2004 |             |   | October 31,2004 |  
|Equipment and leasehold improvements:          |  |                |             |   |                 |   |             |  
|Dies, molds and patterns                       |  | $              | 2,975,192   |   |                 | $ | 2,969,127   |  
|Machinery and equipment                        |  |                | 8,970,785   |   |                 |   | 9,129,049   |  
|Office furnishings and equipment               |  |                | 7,867,990   |   |                 |   | 7,940,666   |  
|Automobiles and trucks                         |  |                | 136,386     |   |                 |   | 136,386     |  
|Leasehold improvements                         |  |                | 2,547,012   |   |                 |   | 2,500,933   |  
|Capitalized machinery and equipment            |  |                | 623,358     |   |                 |   | 623,358     |  
|Construction in progress                       |  |                | 841,282     |   |                 |   | 1,290,722   |  
|                                               |  |                |             |   |                 |   |             |  
|                                               |  |                | 23,962,005  |   |                 |   | 24,590,241  |  
|Less accumulated depreciation and amortization |  |                | (15,181,909 | ) |                 |   | (16,582,957 | )
|                                               |  |                |             |   |                 |   |             |  
|Equipment and leasehold improvements, net      |  | $              | 8,780,096   |   |                 | $ | 8,007,284   |  
|                                               |  |                |             |   |                 |   |             |  



6) Intangible Asset



The Company has an intangible asset representing the fair value of common stock issued to
General Motors Corporation (General Motors) in connection with a strategic alliance that became effective upon the distribution of the Company by IMPCO. The asset is being amortized over the ten-year term of the strategic alliance with
General Motors ending July 22, 2012.



In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company reviews the intangible asset on an annual basis for impairment or more frequent basis if events or circumstances
change that might indicate that impairment exists. The Company believes that no event or circumstance currently exists that would indicate impairment of this asset. Amortization expense was approximately $415,000 and $830,000 for the three and
six-months ended October 31, 2004, respectively.



7) Warranties



The Company offers a warranty for all of its alternative fuel products.
The specific terms and conditions of those warranties varies depending on the platform and model year. For most alternative fuel products, the Company provides a limited warranty, including parts and labor, extending three years or 36,000 miles,
whichever is achieved first.



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



The
Company estimates the costs that may be incurred under its limited warranty or non-warranty programs and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Companys warranty
liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.



Changes in the Companys product warranty liability during the first six
months of fiscal 2005 are as follows:



|                                                                                          |  |   |          |  
|----------------------------------------------------------------------------------------- |  | - | -------- | -
|Balance at April 30, 2004                                                                 |  | $ | 948,521  |  
|Warranties issued during the period                                                       |  |   | 75,522   |  
|Settlements made during the period                                                        |  |   | (115,048 | )
|Changes in liability for pre-existing warranties during the period, including expirations |  |   | 19,720   |  
|                                                                                          |  |   |          |  
|Balance at October 31, 2004                                                               |  | $ | 928,715  |  
|                                                                                          |  |   |          |  



6



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##### Table of Contents

8) Stock Option Plans



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



|                                                                                                                                                |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                                |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|                                                                                                                                                |  | 2003                           |            |   | 2004                         |   |            | 2003 |  |   | 2004       |  
|Net loss, as reported                                                                                                                           |  | $                              | (2,036,523 | ) |                              | $ | (3,309,046 | )    |  | $ | (3,804,446 | ) |  | $ | (5,734,970 | )
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                | (496,000   | ) |                              |   | (600,000   | )    |  |   | (879,000   | ) |  |   | (1,206,000 | )
|                                                                                                                                                |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Pro forma net loss                                                                                                                              |  | $                              | (2,532,523 | ) |                              | $ | (3,909,046 | )    |  | $ | (4,683,446 | ) |  | $ | (6,940,970 | )
|                                                                                                                                                |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Net loss per share, as reported - basic and diluted                                                                                             |  | $                              | (0.09      | ) |                              | $ | (0.10      | )    |  | $ | (0.16      | ) |  | $ | (0.18      | )
|Stock-based employee compensation cost per share                                                                                                |  |                                | (0.02      | ) |                              |   | (0.02      | )    |  |   | (0.04      | ) |  |   | (0.04      | )
|                                                                                                                                                |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Pro forma net loss per share-basic and diluted                                                                                                  |  | $                              | (0.11      | ) |                              | $ | (0.12      | )    |  | $ | (0.20      | ) |  | $ | (0.22      | )
|                                                                                                                                                |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Number of shares used in the calculation of pro forma per share                                                                                 |  |                                | 23,507,253 |   |                              |   | 31,704,600 |      |  |   | 23,093,849 |   |  |   | 31,695,549 |  
|                                                                                                                                                |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  



On May 1, 2004, an additional 920,193
shares of common stock became available for future grant under the 2002 Stock Incentive Plan pursuant to an evergreen provision contained in the plan.



9) Warrants



In connection with the spin-off from IMPCO, the Company issued warrants to purchase an aggregate of 300,000 shares of the Companys common stock to holders of
outstanding IMPCO warrants as of the distribution date, July 23, 2002. The Company issued these warrants at an exercise price of $5.83 with a term expiring in January 2006. During the second quarter of fiscal 2005, warrants to purchase an aggregate
of 3,556 shares of common stock were exercised on a cashless basis, which resulted in the issuance of 691 shares of common stock. At October 31, 2004, 245,444 of these warrants remain outstanding.



10) Earnings 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.



7



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##### Table of Contents

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



|                                                                         |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------ |  | ------------------------------ | ---------- | - | ---------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                         |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|                                                                         |  | 2003                           |            |   | 2004                         |   |            | 2003 |  |   | 2004       |  
|Numerator:                                                               |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                                 |  | $                              | (2,036,523 | ) |                              | $ | (3,309,046 | )    |  | $ | (3,804,446 | ) |  | $ | (5,734,970 | )
|Numerator for basic loss per shareto common stockholders                |  | $                              | (2,036,523 | ) |                              | $ | (3,309,046 | )    |  | $ | (3,804,446 | ) |  | $ | (5,734,970 | )
|Numerator for diluted loss per share to common stockholders             |  | $                              | (2,036,523 | ) |                              | $ | (3,309,046 | )    |  | $ | (3,804,446 | ) |  | $ | (5,734,970 | )
|Denominator for basic and diluted loss per shareweighted-average shares |  |                                | 23,507,253 |   |                              |   | 31,704,600 |      |  |   | 23,093,849 |   |  |   | 31,695,549 |  
|Basic and diluted loss per share                                         |  | $                              | (0.09      | ) |                              | $ | (0.10      | )    |  | $ | (0.16      | ) |  | $ | (0.18      | )
|                                                                         |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  



11) Income Taxes



Income taxes for the three and six month periods ended October 31, 2004 were computed using
the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The Company has established a full valuation allowance for deferred income tax assets due to the lack of
earnings history.



12) Business Segment Information



The Company classifies its business operations into four reporting segments: the Fuel Cell
Systems division, Alternative Fuels division, Advanced Research & Product Development, and Corporate. The Fuel Cell Systems division generates revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control
systems to OEMs, and the installation of its products into OEM vehicles. The Fuel Cell Systems division also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic
control systems integrate and operate with their fuel cell applications. The Alternative Fuels division generates revenues 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. The Alternative Fuels division also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic control
systems integrate and operate with certain of their alternative fuel vehicles. The chief operating decision maker allocates resources and tracks performance by the four reporting segments.



All research and development is expensed as incurred. Research and development expense
includes both customer-funded research and development and Company-sponsored research and development. For segment reporting purposes, research and development expense is allocated to the Fuel Cell Systems and Alternative Fuels segments when the
expense can be identified with those segments. Advanced Research & Product Development is a sub-category of research and development expense and represents Company-sponsored research and development that is not allocated to the Fuel Cell Systems
or Alternative Fuels reporting segments. Customer-funded research and development consists primarily of expenses associated with contract revenue. These expenses include applications development costs in the Company funded under customer contracts.



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



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



All of the Companys product revenues are generated from fuel cell-related hydrogen storage systems and alternative fuel systems for automotive OEM applications. The
Companys revenue from unaffiliated customers is primarily derived from within the United States.



8



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##### Table of Contents

The Company leases facilities in Irvine, California; Lake Forest, California; and Troy, Michigan. The Companys
long-lived assets are principally based in its Irvine and Lake Forest facilities.



During the second quarter of fiscal 2005, the Company negotiated a lease buyout for the remaining six months on its Sterling Heights, Michigan facility. Operations previously located in Sterling Heights were transferred to the facility in
Troy, Michigan. Non-recurring costs associated with the relocation, including the lease buyout, amounted to approximately $125,000.



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



|                                        |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------- |  | ------------------------------ | ---------- | - | ---------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                        |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|                                        |  | 2003                           |            |   | 2004                         |   |            | 2003 |  |   | 2004       |  
|Revenue                                 |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Fuel Cell Systems                       |  | $                              | 3,424,680  |   |                              | $ | 2,643,334  |      |  | $ | 7,840,739  |   |  | $ | 5,849,596  |  
|Alternative Fuels                       |  |                                | 3,300,438  |   |                              |   | 2,318,335  |      |  |   | 6,762,565  |   |  |   | 5,467,020  |  
|Advanced Research & Product Development |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|Corporate                               |  |                                |           |   |                              |   |           |      |  |   |           |   |  |   |           |  
|                                        |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Total                                   |  | $                              | 6,725,118  |   |                              | $ | 4,961,669  |      |  | $ | 14,603,304 |   |  | $ | 11,316,616 |  
|                                        |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Operating Income (Loss)                 |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Fuel Cell Systems                       |  | $                              | 602,048    |   |                              | $ | (343,779   | )    |  | $ | 1,865,947  |   |  | $ | (219,551   | )
|Alternative Fuels                       |  |                                | (632,361   | ) |                              |   | (1,244,074 | )    |  |   | (1,548,736 | ) |  |   | (1,979,323 | )
|Advanced Research & Product Development |  |                                | (869,623   | ) |                              |   | (669,749   | )    |  |   | (1,710,039 | ) |  |   | (1,434,153 | )
|Corporate(1)                            |  |                                | (1,186,542 | ) |                              |   | (1,259,452 | )    |  |   | (2,451,254 | ) |  |   | (2,517,736 | )
|                                        |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  
|Total                                   |  | $                              | (2,086,478 | ) |                              | $ | (3,517,054 | )    |  | $ | (3,844,082 | ) |  | $ | (6,150,763 | )
|                                        |  |                                |            |   |                              |   |            |      |  |   |            |   |  |   |            |  

---

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



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



|                                        |  |                |             |                  |   |           
|--------------------------------------- |  | -------------- | ----------- | ---------------- | - | ----------
|                                        |  | April 30, 2004 |             | October 31, 2004
|Identifiable Assets                     |  |                |             |                  |   |           
|Fuel Cell Systems                       |  | $              | 20,706,325  |                  | $ | 19,805,721
|Alternative Fuels                       |  |                | 9,904,711   |                  |   | 9,814,886 
|Advanced Research & Product Development |  |                | 1,045,969   |                  |   | 952,083   
|Corporate                               |  |                | 2,424,069   |                  |   | 2,211,960 
|                                        |  |                |             |                  |   |           
|Total identifiable assets               |  |                | 34,081,074  |                  |   | 32,784,650
|Assets not specifically identifiable    |  |                | 69,365,870  |                  |   | 63,520,878
|                                        |  |                |             |                  |   |           
|Total assets                            |  | $              | 103,446,944 |                  | $ | 96,305,528
|                                        |  |                |             |                  |   |           



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13) Subsequent Event - Merger Agreement
with Starcraft Corporation



On November 23, 2004, the Company entered into
an Agreement and Plan of Merger with Starcraft Corporation. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, the Company will maintain its listing on the Nasdaq National Market and will operate Starcraft as a
wholly-owned subsidiary.



In connection with the proposed merger, each share of
Starcraft common stock that is outstanding at the effective time of the merger will be converted into the right to receive 2.341 shares of Quantum common stock. Each outstanding option to purchase a share of Starcraft common stock will be either (i)
converted into an option to acquire 2.341 shares of Quantum common stock, at an exercise price equal to the current Starcraft exercise price divided by 2.341, or (ii) canceled in exchange for a payment of the difference between $15.61 and the
exercise price of the vested Starcraft stock option. Holders of interests in Starcrafts directors share plan will receive $15.61 per share, and their interests in the plan will terminate. On November 23, 2004, there were 8,968,691 shares
of Starcraft common stock outstanding, of which 814,030 shares were subject to outstanding and vested Starcraft stock options and 28,074 shares were subject to directors share plan rights. The Company will also assume debt in connection with
the merger, including Starcrafts 8.5% convertible subordinated promissory notes due July 1, 2009 in the aggregate amount of $15.0 million.



The completion of the proposed transaction is subject to various customary conditions, including the approval of the Quantum stockholders and Starcraft shareholders and
the expiration of the applicable waiting period under the Hart-Scott-Rodino Act.



Based on the number of shares outstanding on the date of the Merger Agreement, Starcraft common shareholders would own approximately 40% of the pro forma Quantum common shares outstanding following completion of the transaction.



The proposed transaction is expected to close during the first quarter of calendar year
2005. If the Merger Agreement is terminated, depending on the nature of the termination event, the Company or Starcraft may be required to pay a termination fee to the other party in the amount of $3,250,000.



10



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##### Table of Contents



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



Forward-Looking Statements



This Report, including the Managements Discussion and Analysis that follows, contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not historical facts but rather are based on current expectations, estimates, and projections about our industry, our
beliefs, and assumptions. We use words such as anticipate, expect, intend, plan, believe, seek, estimate, and variations of these words and similar expressions to
identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual
results to differ materially from those expressed or forecasted in the forward-looking statements.



These risks and uncertainties include, but are not limited to, the following:



| |  | 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 revenue is highly concentrated among a small number of customers and our business may be negatively impacted if one or more of these customers were to cease or significantly
reduce its purchases from us;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we have a history of operating losses and negative cash flow which may continue into the foreseeable future if the planned merger with Starcraft Corporation is terminated prior to
closing or if the merger does not provide the anticipated benefits from combining the operations of Starcraft Corporation with ours;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we may never be able to introduce commercially viable fuel storage, fuel delivery, and electronic control systems for fuel cell systems;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | estimates for the development of a commercial market have lengthened in recent years, and a mass market for fuel cell products and systems may never develop or may take longer to
develop than anticipated;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



| |  | we may continue to experience delays in shipments due to evolving customer specifications and testing procedures;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | we may not ship currently delayed products within the timeframe expected;
| | - | -------------------------------------------------------------------------



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



| |  | our business depends to a great extent on our relationship with General Motors and General Motors commitment to the commercialization of the fuel cell and alternative fuel
automotive OEM markets;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



| |  | we have limited experience manufacturing fuel systems for fuel cell applications at low rate initial production levels, and as a result, we may experience process and technical
difficulties that cause product shipments to be delayed;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we may be required to indemnify IMPCO for taxes arising in connection with our spin-off from IMPCO, and the tax characteristics of the spin-off may interfere with our ability to
engage in desirable strategic transactions and to issue equity securities;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



11



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##### Table of Contents

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



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



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



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



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



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



| |  | if we fail to achieve and to maintain profitability in the future, investors could lose confidence in the value of our stock, which could cause it to decline;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | we may not consummate the proposed transaction with Starcraft in the timeframe expected or at all;
| | - | --------------------------------------------------------------------------------------------------



| |  | we may experience difficulties integrating the operations and employees of Starcraft with our operations and employees; and
| | - | ---------------------------------------------------------------------------------------------------------------------------



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



This list of factors above is not intended to be exhaustive. Reference should also be made to
the factors set forth from time to time in our SEC reports, including but not limited to those set forth in the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended April 30, 2004 and in the Registration Statement on
Form S-4 that we plan to file in connection with the proposed transaction with Starcraft. 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.



Overview



We design, manufacture, and supply packaged fuel systems to Original Equipment Manufacturers (OEMs) for use in alternative fuel vehicles and fuel cell
applications. For automotive OEMs, we provide hydrogen systems for both internal combustion engine and fuel cell vehicles, and natural gas fuel systems for internal combustion engine vehicles. In the area of hydrogen refueling infrastructure, we
offer several hydrogen refueling systems focused on early infrastructure development.



Our advanced fuel systems for fuel cell applications are used in transportation and industrial vehicles, for stationary and portable power generation, and in hydrogen refueling products for the infrastructure to support fuel cell vehicles.
Our packaged fuel systems comprise the storage, monitoring, control, and injection of gaseous fuels to improve efficiency, enhance power output, and reduce pollutant emissions from internal combustion engines and fuel cell systems.



We supply our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers
for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 18,000 fuel systems for alternative fuel vehicles, primarily to General Motors Corporation and its affiliates (General Motors), which
in turn has sold substantially all of these vehicles to its customers. We also provide our gaseous fuel systems and hydrogen refueling products for fuel cell applications to major OEMs through funded research and development contracts and on a
prototype basis. These fuel cell and hydrogen refueling products are not currently manufactured in high volumes and will require additional product development over the next five years for commercialization; however, we believe that a commercial
market will begin to develop for these products over the next five years. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen refueling products using our systems on a commercial
basis.



Our revenues and cash flows are dependent on the advancement of OEM
fuel cell technologies, our OEM customers internal plans, the technology required of our storage systems to meet evolving OEM specifications and spending levels, and timing for pre-production development programs and commercial production. Our
business 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 infrastructure, technology advancements, government advocacy, and
consumer adoption of fuel cell and alternative fuel technologies on a commercial scale. In evaluating financial condition and operating results, we assess these industry-wide factors and the potential impact on our business.



12



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Our industry is also dependent on a limited number of third party suppliers of materials and components for our products,
particularly high-strength fiber. Any quality or supply issue with these materials and components can negatively impact our business. In the past several months, we have experienced shortages of high-strength fiber from our primary supplier due to
industry-wide demand and short-term capacity issues. This shortage of fiber negatively impacted our ability to execute certain contract activities during the first half of fiscal 2005. Although the short-term capacity issues were resolved during the
second quarter, we could experience supply shortages or the discontinuance of certain fiber products in the future. These supply issues could negatively impact our ability to develop and manufacture fuel storage systems for our customers.



A significant portion of our business is generally related to alternative fuel
automotive sales, which vary directly with the production schedules of our OEM customers. The market for alternative fuel vehicles is sensitive to general economic conditions, government agency and commercial fleet spending, and consumer
preferences. The rate at which our customers sell alternative fuel vehicles depends on their marketing strategy, as well as company specific inventory and incentive programs. Any significant reduction or increase in alternative fuel production by
our OEM customers may have a material effect on our business.



In managing our
business, our management utilizes several non-financial factors to analyze our performance. 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 classify our business operations into four reporting segments:
the Fuel Cell Systems division, Alternative Fuels division, Advanced Research & Product Development, and Corporate. The Fuel Cell Systems division generates revenue through the sale of compressed hydrogen storage, fuel delivery, and electronic
control systems to OEMs, and the installation of our products into OEM fuel cell vehicles and hydrogen refueling systems. The Fuel Cell Systems division also generates contract revenue by providing engineering design and support to OEMs so that our
fuel storage, fuel delivery, and electronic control systems integrate and operate with certain of their fuel cell applications. The Alternative Fuels division generates revenue 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. The Alternative Fuels division also generates contract revenue by providing engineering design and support to
OEMs so that our fuel storage, fuel delivery, and electronic control systems integrate and operate with certain of their alternative fuel vehicles. The chief operating decision maker allocates resources and tracks performance by each of the four
reporting segments.



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



We expense all research and development when incurred. Research and development expenses include both customer-funded research and development, and company-sponsored
research and development. For segment reporting purposes, research and development expenses are allocated to the Fuel Cell Systems and Alternative Fuels segments when the expense can be identified with those segments. Advanced Research & Product
Development is a sub-category of research and development expense and represents Company-sponsored research and development that is not allocated to the Fuel Cell Systems or Alternative Fuels reporting segments. Customer-funded research and
development consists primarily of expenses associated with contract revenue. These expenses include application development costs we funded under customer contracts. We will continue to require significant research and development expenditures over
the next several years in order to commercialize our products for fuel cell applications.



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



Customers representing over 10% of total revenues are as follows:



|                                  |  |                               |   |  |                             |   |  |      |   |  |      |  
|--------------------------------- |  | ----------------------------- | - |  | --------------------------- | - |  | ---- | - |  | ---- | -
|                                  |  | Three Months EndedOctober 31, |   |  | Six Months EndedOctober 31, |  
|                                  |  | 2003                          |   |  | 2004                        |   |  | 2003 |   |  | 2004 |  
|General Motors and its affiliates |  | 42.3                          | % |  | 58.3                        | % |  | 37.6 | % |  | 56.6 | %
|Toyota Motor Corporation          |  | 42.9                          | % |  | 18.6                        | % |  | 44.5 | % |  | 19.9 | %



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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 may 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.



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. While this commitment was waived by General Motors for calendar
years 2002 and 2003, we cannot assure you that this commitment will be waived in the future. Recently, we agreed upon a Directed Research and Development Statement of Work (the SOW) with General Motors that covers the period from May 15,
2004 though May 14, 2005. The SOW outlines specific tasks for the advancement of compressed fuel storage technologies enabling improved performance. Total spending under the SOW is expected to be approximately $2.9 million. Each party will retain
the ownership of its existing technology and will jointly own technology that is created under the alliance. We have the opportunity 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. This intangible asset is being amortized over the ten-year term of the
strategic alliance with General Motors, subject to periodic evaluations for impairment.



Separation from IMPCO. On July 23, 2002, IMPCO completed the distribution and spin-off of Quantum by distributing to IMPCO stockholders one share of Quantum common stock for every share of IMPCO common stock held on the record date,
which was July 5, 2002. Prior to the distribution, we entered into several agreements with IMPCO with respect to, among other things, intellectual property, interim services, and a number of ongoing commercial relationships. The pricing terms for
goods and services covered by the commercial agreements reflected negotiated prices. These agreements expire thru July 22, 2007.



Merger with Starcraft Corporation.On November 23, 2004, we entered into an Agreement and Plan of Merger with Starcraft Corporation. Pursuant to the terms and
subject to the conditions set forth in the Merger Agreement, Quantum will maintain its listing on the Nasdaq National Market and will operate Starcraft as a wholly-owned subsidiary.



In connection with the proposed merger, each share of Starcraft common stock that is outstanding at the effective time of the merger will be
converted into the right to receive 2.341 shares of Quantum common stock. Each outstanding option to purchase a share of Starcraft common stock will be either (i) converted into an option to acquire 2.341 shares of Quantum common stock, at an
exercise price equal to the current Starcraft exercise price divided by 2.341, or (ii) canceled in exchange for a payment of the difference between $15.61 and the exercise price of the vested Starcraft stock option. Holders of interests in
Starcrafts directors share plan will receive $15.61 per share, and their interests in the plan will terminate. On November 23, 2004, there were 8,968,691 shares of Starcraft common stock outstanding, of which 814,030 shares were subject
to outstanding and vested Starcraft stock options and 28,074 shares were subject to directors share plan rights. We will also assume debt in connection with the merger, including Starcrafts 8.5% convertible subordinated promissory notes
due July 1, 2009 in the aggregate amount of $15.0 million.



The completion of
the proposed transaction is subject to various customary conditions, including the approval of the Quantum stockholders and Starcraft shareholders and the expiration of the applicable waiting period under the Hart-Scott-Rodino Act.



Based on the number of shares outstanding on the date of the Merger Agreement, Starcraft
common shareholders would own approximately 40% of the pro forma Quantum common shares outstanding following completion of the transaction.



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The proposed transaction is expected to close during the first quarter of calendar year 2005. If the Merger Agreement is
terminated, depending on the nature of the termination event, Quantum or Starcraft may be required to pay a termination fee to the other party in the amount of $3,250,000.



Critical Accounting Policies and Estimates



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



Management considers an accounting estimate to be critical if:



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



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



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



| |  | We recognize revenue and profit as work progresses on long-term, fixed price contracts for product application development using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. We follow this method because we can make reasonably dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to
revisions as the contract progresses to completion. 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. Historically, our final contract costs have approximated the initial estimates and any unforeseen
changes in the estimates have not resulted in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. 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, inventory write-downs may be required.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We conduct a major portion of our business with a limited number of customers. For the past year and for the foreseeable future, General Motors (and subsidiaries of
General Motors) and Toyota have represented, and are expected to continue to represent, a significant portion of our sales and outstanding accounts receivable. Credit is extended based upon an evaluation of each customers financial condition,
with terms consistent with those present throughout the industry. Typically, we do
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | not require collateral from customers. We have recorded an allowance for uncollectible accounts receivable based on past experience and certain circumstances
surrounding the composition of total accounts receivable. To the extent we increase this allowance in a period, we must include an expense in the statement of operations. If commercial conditions differ from managements estimates, an
additional write-off may be required.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves
the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of the net operating loss
carryforward that has resulted from our cumulative net operating loss since spin-off. These differences result in a net deferred tax asset. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and
to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the
statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance due to uncertainties related to our ability to utilize the net deferred tax assets, primarily consisting of net operating losses and credits which may be carried forward, before they expire. In the event that actual results
differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. At October 31, 2004, our net deferred
tax assets have been offset in full by a valuation allowance.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We evaluate our long-lived assets, particularly our intangible asset relating to the strategic alliance with General Motors, in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. We review our long-lived assets, which includes property, plant and equipment, and identifiable finite-lived intangible assets, for impairment on an annual basis or whenever events or changes in
circumstances indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following: significant underperformance relative to
expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; and a significant decline in
our stock price for a sustained period. An impairment would be recognized based on the difference between the fair value of the asset and its carrying value. Future events could cause us to conclude that impairment indicators exist and that
long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Results of Operations



Three and six months ended October 31, 2003 and 2004



Net revenues and operating income (loss) for our reportable business segments were as follows:



|                                        |  |                                |            |   |                              |   |            |        |  |      |      |  |   |            |   |  |        |            |   |  |      |   
|--------------------------------------- |  | ------------------------------ | ---------- | - | ---------------------------- | - | ---------- | ------ |  | ---- | ---- |  | - | ---------- | - |  | ------ | ---------- | - |  | ---- | --
|                                        |  | Three Months Ended October 31, |            |   | Six Months Ended October 31, |  
|                                        |  | 2003                           |            |   | 2004                         |   |            | Change |  |      | 2003 |  |   | 2004       |   |  | Change |           
|Revenue                                 |  |                                |            |   |                              |   |            |        |  |      |      |  |   |            |   |  |        |            |   |  |      |   
|Fuel Cell Systems                       |  | $                              | 3,424,680  |   |                              | $ | 2,643,334  |        |  | (23  | %)   |  | $ | 7,840,739  |   |  | $      | 5,849,596  |   |  | (25  | %)
|Alternative Fuels                       |  |                                | 3,300,438  |   |                              |   | 2,318,335  |        |  | (30  | %)   |  |   | 6,762,565  |   |  |        | 5,467,020  |   |  | (19  | %)
|Advanced Research & Product Development |  |                                |           |   |                              |   |           |        |  | 0    | %    |  |   |           |   |  |        |           |   |  | 0    | % 
|Corporate                               |  |                                |           |   |                              |   |           |        |  | 0    | %    |  |   |           |   |  |        |           |   |  | 0    | % 
|                                        |  |                                |            |   |                              |   |            |        |  |      |      |  |   |            |   |  |        |            |   |  |      |   
|Total                                   |  | $                              | 6,725,118  |   |                              | $ | 4,961,669  |        |  | (26  | %)   |  | $ | 14,603,304 |   |  | $      | 11,316,616 |   |  | (23  | %)
|                                        |  |                                |            |   |                              |   |            |        |  |      |      |  |   |            |   |  |        |            |   |  |      |   
|Operating Income (Loss)                 |  |                                |            |   |                              |   |            |        |  |      |      |  |   |            |   |  |        |            |   |  |      |   
|Fuel Cell Systems                       |  | $                              | 602,048    |   |                              | $ | (343,779   | )      |  | (157 | %)   |  | $ | 1,865,947  |   |  | $      | (219,551   | ) |  | (112 | %)
|Alternative Fuels                       |  |                                | (632,361   | ) |                              |   | (1,244,074 | )      |  | (97  | %)   |  |   | (1,548,736 | ) |  |        | (1,979,323 | ) |  | (28  | %)
|Advanced Research & Product Development |  |                                | (869,623   | ) |                              |   | (669,749   | )      |  | 23   | %    |  |   | (1,710,039 | ) |  |        | (1,434,153 | ) |  | 16   | % 
|Corporate(1)                            |  |                                | (1,186,542 | ) |                              |   | (1,259,452 | )      |  | (6   | %)   |  |   | (2,451,254 | ) |  |        | (2,517,736 | ) |  | (3   | %)
|                                        |  |                                |            |   |                              |   |            |        |  |      |      |  |   |            |   |  |        |            |   |  |      |   
|Total                                   |  | $                              | (2,086,478 | ) |                              | $ | (3,517,054 | )      |  | (69  | %)   |  | $ | (3,844,082 | ) |  | $      | (6,150,763 | ) |  | (60  | %)
|                                        |  |                                |            |   |                              |   |            |        |  |      |      |  |   |            |   |  |        |            |   |  |      |   

---

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



Overall total revenue decreased $1.8 million and $3.3 million during the three and six-month periods in fiscal 2005, respectively, as
compared to the same periods in fiscal 2004. The decrease in the second quarter was mainly attributable to lower product sales of $3.1 million and partially offset by increases in customer-funded development contract activities of $1.3 million.



Product sales declined primarily in the Fuel Cell Systems division as we
experienced interruptions in our storage system production in order to satisfy evolving customer requirements on product specifications applicable to a bus platform, to perform additional product testing applicable to an SUV platform, and to perform
additional process validation associated with production equipment upgrades and replacement. Fuel Cell Systems product sales also declined due to a shift in product mix and lower average unit prices as compared to the second quarter of the previous
year. Lower order volume was the primary factor in decreased product sales in the Alternative Fuels division.



The increase in customer-funded development contract revenue was mainly attributable to new and expanded programs in the Fuel Cell Systems division for the development of fuel delivery systems on behalf of automotive
OEM customers and military branches.



Declines in product sales was primarily
responsible for the increase in the overall net operating loss for the current periods.



Fuel Cell Systems. Product revenue decreased 69% for the second quarter of fiscal 2005 compared to fiscal 2004 from $2.9 million to $0.9 million and decreased 70% for the first half of fiscal 2005 compared to fiscal 2004 from $6.6
million to $2.0 million. Product revenue primarily consists of sales associated with Toyota Motor Corporations (Toyota) fuel cell SUV platform and bus platform equipped with our hydrogen fuel metering and fuel storage systems.
During the second quarter of fiscal 2005, we experienced interruptions in our storage system production in order to satisfy evolving customer requirements on product specifications for the bus platform. In addition, shipments of fuel storage systems
for the SUV platform were delayed due to design and process characteristics that require further testing and analysis before the units are shipped. These delays resulted in a reduction



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in anticipated product sales by approximately $1.3 million for the second quarter. The remaining decrease in revenue from product sales in the second quarter
related to a shift in product mix and lower average unit prices as compared to the second quarter of fiscal 2004. Revenues for the first half of fiscal 2005 reflect these factors in addition to lower product orders in the first quarter as compared
to fiscal 2004. We anticipate that we will be able to ship all of these delayed orders during the third and fourth quarters.



Cost of product sales for the Fuel Cell Systems division decreased 67% for the second quarter of fiscal 2005 compared to fiscal 2004 from $0.9 million to $0.3 million and
decreased 64% for the first half of fiscal 2005 compared to fiscal 2004 from $2.5 million to $0.9 million. The decrease in costs was consistent with the decline in product sales for the respective periods.



Contract revenue for the Fuel Cell Systems division increased 240% for the second quarter of
fiscal 2005 compared to fiscal 2004 from $0.5 million to $1.7 million and increased 225% for the first half of fiscal 2005 compared to fiscal 2004 from $1.2 million to $3.9 million. Contract revenue is derived primarily from system development and
application engineering of our products under funded OEM contracts, and other funded contract work with the military and other government agencies. The increase was primarily due to new and expanded programs for the development of fuel delivery
systems on behalf of automotive OEM customers and military branches. We anticipate that contract revenue from these development programs for the 2005 fiscal year will remain higher than the 2004 fiscal year.



Research and development expenses associated with cost of contract revenue included in our
Fuel Cell Systems division increased 175% for the second quarter of fiscal 2005 compared to fiscal 2004 from $0.4 million to $1.1 million and increased 188% for the first half of fiscal 2005 compared to fiscal 2004 from $0.8 million to $2.3 million.
The increase in research and development expenses associated with cost of contract revenues was due to the increase in contract revenue for the second quarter and first half of fiscal 2005.



Internally funded research and development expense for the Fuel Cell Systems division
decreased 14% for the second quarter of fiscal 2005 compared to fiscal 2004 from $1.4 million to $1.2 million and remained consistent for the first half of fiscal 2005 compared to fiscal 2004 at $2.5 million. The decrease in the second quarter is
mainly attributable to a greater emphasis on utilizing internal resources for customer specific projects as compared to the previous year.



Operating income for the Fuel Cell Systems division decreased for the second quarter from an operating income of $0.6 million in fiscal 2004 to an operating loss of $0.3
million in fiscal 2005 and decreased for the first half of the fiscal year from an operating income of $1.9 million in fiscal 2004 to an operating loss of $0.2 million in fiscal 2005. The decline in operating income for the second quarter and first
half of fiscal 2005 is primarily attributable to lower product sales that were only partially offset by increased contract revenues.



Alternative Fuels. Product revenue decreased 46% for the second quarter of fiscal 2005 compared to fiscal 2004 from $2.4 million to $1.3 million and decreased 30%
for the first half of fiscal 2005 compared to fiscal 2004 from $5.3 million to $3.7 million. Product revenue consists of sales associated with General Motors mid-size automobiles and pick-up trucks equipped with our compressed natural gas fuel
systems. The decrease in the second quarter is mainly due to lower demand and lower average unit prices related to fuel storage systems designed for truck applications that resulted in decreased revenue of $0.5 million and General Motors
discontinuance of the mid-size vehicle platform that resulted in decreased revenue of $0.3 million for the quarter. We expect most of our product sales in this segment for the remainder of fiscal 2005 to be related to fuel storage systems designed
for truck applications.



Cost of product sales for the Alternative Fuels
division decreased 27% for the second quarter of fiscal 2005 compared to fiscal 2004 from $2.2 million to $1.6 million and decreased 27% for the first half of fiscal 2005 compared to fiscal 2004 from $5.1 million to $3.7 million. The decrease in
costs was mainly due to the decline in units produced.



Contract revenue for
the Alternative Fuels division increased 11% for the second quarter of fiscal 2005 compared to fiscal 2004 from $0.9 million to $1.0 million and increased 20% for the first half of fiscal 2005 compared to fiscal 2004 from $1.5 million to $1.8
million. Contract revenue is derived primarily from system development and application engineering of our products under funded General Motors and other OEM contracts, and other funded contract work with state and federal agencies. The increase in
revenue for the first half of fiscal 2005 was primarily attributable to engineering, design, and integration activities related to hydrogen internal combustion engine applications.



Research and development associated with cost of contract revenues for the Alternative Fuels division increased 140% for the second quarter
of fiscal 2005 compared to fiscal 2004 from $147 thousand to $353 thousand and increased 105% for the first half of fiscal



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2005 compared to fiscal 2004 from $359 thousand to $735 thousand. The increased spending in the first half of fiscal 2005 was due to higher levels of
contract activities.



Operating loss for the Alternative Fuels division
increased 100% for the second quarter of fiscal 2005 compared to fiscal 2004 from $0.6 million to $1.2 million and increased 33% for the first half of fiscal 2005 compared to fiscal 2004 from $1.5 million to $2.0 million. The higher operating losses
were primarily attributable to lower revenue on product sales and declines in gross margins due to the lower volumes during the first half of fiscal 2005.



Advanced Research & Product Development. Advanced research & product development activities decreased 22% for the second quarter of fiscal 2005 compared to
fiscal 2004 from $0.9 million to $0.7 million and decreased 18% for the first half of fiscal 2005 compared to fiscal 2004 from $1.7 million to $1.4 million during the first half of fiscal 2005. Research and development activities during fiscal 2005
have focused a greater percentage of efforts on development contracts with our customers resulting in declines in research and development projects that are internally funded.



Corporate. Corporate expenses increased 8% for the second quarter of fiscal 2005 compared to fiscal 2004 from $1.2 million to $1.3
million and remained virtually unchanged for the first half of fiscal 2005 compared to fiscal 2004 at $2.5 million. During the second quarter of fiscal 2005, approximately $125,000 was incurred related to a relocation of our operations from Sterling
Heights, Michigan to a facility in Troy, Michigan.



Interest Income,
Net. During the first half of fiscal 2005, we recorded approximately $439,000 in interest income, net of advisor fees, associated with our marketable securities. In the first half of fiscal 2004, we recorded approximately $55,000 in net interest
income. The higher level of net interest income earned is due to the investment of the proceeds of our public equity offering completed in the second quarter of fiscal 2004.



Provision for Income Taxes. Income tax expense remained minor due to our net losses during the current period. A full valuation
allowance has been established for our net deferred tax assets due to our lack of earnings history. We expect that income tax expense for fiscal 2005 will be the same as fiscal 2004 as we expect to continue to incur operating losses during the
remainder of fiscal 2005. The tax credits and net operating losses incurred through the date of the distribution remained with IMPCO.



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Liquidity and Capital Resources



Our principal sources of liquidity at October 31, 2004 include cash and cash equivalents of $8.4 million, short-term marketable securities
of $46.6 million, and long-term marketable securities of $7.8 million.



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



We believe that our working capital
will be adequate to meet our liquidity needs for at least the next twelve months independent of our proposed merger with Starcraft. We also believe that working capital will be adequate to meet the liquidity needs of the combined operations of our
business and Starcrafts business for at least the next twelve months if the proposed merger is completed as anticipated. As of October 31, 2004, we had no material indebtedness or commitments for capital expenditures.



Our long-term cash requirements depend on numerous 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. We may require additional sources of financing to complete product and
application development, develop facilities for commercialization and mass production of our products and systems, and to take advantage of strategic opportunities. These additional sources of financing may include bank borrowings or public or
private offerings of equity or debt securities. We cannot assure you that such additional sources of financing will be available on acceptable terms, if at all.



Net cash used in operating activities was $5.0 million during the first six months of fiscal 2005 as compared to a net use of $0.7 million for the same period in
fiscal 2004. The increase in cash used in operating activities primarily resulted from higher net losses in the current period, higher customer collections in the prior year period, and an increase in inventory purchases in the current period.
Specifically, the net loss was $5.7 million in the current period versus a net loss of $3.8 million in the prior period; accounts receivable declined $47 thousand in the current period versus a decline of $2.1 million in the prior period; and
inventories increased $0.4 million in the current period versus a decline of $21 thousand in the prior period.



Net cash used by investing activities during the first six months of fiscal 2005 was $2.4 million as compared to a net use of $0.4 million during the first six months of fiscal 2004. During the first half of fiscal
2005, we increased our holdings in marketable securities by a net $1.6 million above levels held at the end of fiscal 2004. Purchases of equipment and leasehold improvements were $0.8 million for the first half of fiscal 2005 as compared to $0.4
million for the first half of the prior fiscal year.



Net cash provided by
financing activities during the first six months of fiscal 2005 was $0.1 million as compared to $62.5 million provided during the first six months of fiscal 2004. Cash provided during the first half of fiscal 2004 was principally from proceeds from
the public equity offering in October 2003.



The ratio of current assets to
current liabilities was 10.6:1 at April 30, 2004 and 15.2:1 at October 31, 2004. During the first half of fiscal 2005, our total working capital increased by $5.4 million, from $57.7 million at the end of fiscal 2004 to $63.1 million at October 31,
2004.



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, 2004, a 1% decrease in interest
rates would result in reduced annual interest income of approximately $629,000.



To date, we have not used any derivative financial instruments for the purpose of reducing our exposure to adverse fluctuations in interest rates. We are not a party to leveraged derivatives and do not hold or issue financial investments
for speculative purposes.



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



Information relating to Quantitative and Qualitative Disclosures About Market Risk appear under the heading Quantitative and Qualitative Disclosures About Market Risk in
Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations.



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



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



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



PART IIOTHER INFORMATION



|Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
|------- | ---------------------------------------------------------------------------------



On January 16, 2003, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (No. 333-101668). The
Registration Statement covered the sale of 4,025,000 shares of our common stock (including an option to purchase 525,000 shares to cover over-allotments) at an offering price of $2.25 per share, for an aggregate of $9,056,250. The managing
underwriter was Adams Harkness, Inc. After deducting the underwriting discounts and commissions and offering expenses totaling approximately $1.0 million in the aggregate, we received net proceeds of approximately $8.0 million in connection with the
offering. Through the date of the filing of this report, all of the net proceeds from this initial offering have been used for working capital purposes and are now fully exhausted.



In connection with the spin-off from IMPCO, we issued warrants to purchase an aggregate of 300,000 shares of the our common stock to holders
of outstanding IMPCO warrants as of the distribution date, July 23, 2002. We issued these warrants at an exercise price of $5.83 with a term expiring in January 2006. During the second quarter of fiscal 2005, warrants to purchase an aggregate of
3,556 shares of common stock were exercised on a cashless basis, which resulted in the issuance of 691 shares of common stock.



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



Our Annual Meeting of Stockholders was held on September 23, 2004. The stockholders re-elected Alan P. Niedzwiecki and Dale L. Rasmussen as Class III directors for a term
of three years or until their respective successors are duly elected and qualified. The number of shares voting as to the election of Alan P. Niedzwiecki was: 27,670,101 shares for and 338,272 shares withheld. The number of
shares voting as to the election of Dale L. Rasmussen was: 27,666,940 shares for and 341,433 shares withheld.



The stockholders also ratified the selection of Ernst & Young LLP as the Companys independent auditors for the fiscal year ending April 30, 2005 with voting as
follows: 27,471,443 for; 504,649 shares against; and 32,281 shares abstaining.



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



|              |  |                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                     
|              | 
|31.1          |  | Certification of the Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a)                             
|              | 
|31.2          |  | Certification of the Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a)                             
|              | 
|32.1          |  | Certification of the Chief Executive Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350
|              | 
|32.2          |  | Certification of the Chief Financial Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350



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SIGNATURES



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



Date: December 9, 2004



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



|              |  |                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                     
|              | 
|31.1          |  | Certification of the Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a)                             
|              | 
|31.2          |  | Certification of the Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a)                             
|              | 
|32.1          |  | Certification of the Chief Executive Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350
|              | 
|32.2          |  | Certification of the Chief Financial Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350



23