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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 January 31, 2009,

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in
Rule 12b-2 of the Exchange Act).



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

Number of shares outstanding of each of the issuers classes of common stock, as of March 10, 2009:

97,627,955 shares of Common Stock,
$.001 par value per share, and 999,969 shares of Series B Common Stock, $.001 par value per share.









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INDEX

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.



|                                                                                                                     |  |   
|-------------------------------------------------------------------------------------------------------------------- |  | --
|Part I. Financial Information                                                                                        |  | 2 
|                                                                                                                     | 
|Item 1. Financial Statements:                                                                                        |  | 2 
|                                                                                                                     | 
|Condensed consolidated balance sheets  April 30, 2008 and January 31, 2009
(unaudited)                              |  | 2 
|                                                                                                                     | 
|Condensed consolidated statements of operations (unaudited)  Three and nine months ended January 
31, 2008 and 2009 |  | 3 
|                                                                                                                     | 
|Condensed consolidated statements of cash flows (unaudited)  Nine months ended January 31, 2008 and 2009            |  | 4 
|                                                                                                                     | 
|Notes to condensed consolidated financial statements (unaudited)  January 31, 2009                                  |  | 5 
|                                                                                                                     | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                        |  | 35
|                                                                                                                     | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 56
|                                                                                                                     | 
|Item 4. Controls and Procedures                                                                                      |  | 57
|                                                                                                                     | 
|Part II. Other Information                                                                                           |  | 58
|                                                                                                                     | 
|Item 1A. Risk Factors                                                                                                |  | 58
|                                                                                                                     | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  | 60
|                                                                                                                     | 
|Item 5. Other Information                                                                                            |  | 60
|                                                                                                                     | 
|Item 6. Exhibits                                                                                                     |  | 60
|                                                                                                                     | 
|Signatures                                                                                                           |  | 61



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##### Table of Contents

PART IFINANCIAL INFORMATION



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

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                            |  |               |              |   |                 |   |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | - | --------------- | - | ------------ | -
|                                                                                                                                                                            |  | April 30,2008 |              |   | January 31,2009 |  
|                                                                                                                                                                            |  |               |              |   | (unaudited)     |  
|ASSETS                                                                                                                                                                      |  |               |              |   |                 |   |              |  
|Current assets:                                                                                                                                                             |  |               |              |   |                 |   |              |  
|Cash and cash equivalents                                                                                                                                                   |  | $             | 6,023,715    |   |                 | $ | 7,661,730    |  
|Accounts receivable, net                                                                                                                                                    |  |               | 9,664,751    |   |                 |   | 5,386,103    |  
|Inventories, net                                                                                                                                                            |  |               | 6,062,137    |   |                 |   | 4,049,634    |  
|Prepayments to affiliate                                                                                                                                                    |  |               |             |   |                 |   | 871,600      |  
|Prepaids and other current assets                                                                                                                                           |  |               | 990,925      |   |                 |   | 1,067,623    |  
|                                                                                                                                                                            |  |               |              |   |                 |   |              |  
|Total current assets                                                                                                                                                        |  |               | 22,741,528   |   |                 |   | 19,036,690   |  
|Property and equipment, net                                                                                                                                                 |  |               | 3,852,566    |   |                 |   | 6,941,729    |  
|Deferred loan fees                                                                                                                                                          |  |               | 343,711      |   |                 |   |             |  
|Investment in and advances to affiliate                                                                                                                                     |  |               | 2,780,526    |   |                 |   | 5,103,776    |  
|Intangible assets, net                                                                                                                                                      |  |               | 7,020,606    |   |                 |   |             |  
|Goodwill                                                                                                                                                                    |  |               | 30,400,000   |   |                 |   | 30,400,000   |  
|Prepayments to affiliate                                                                                                                                                    |  |               | 1,445,100    |   |                 |   | 5,239,950    |  
|Deposits and other assets                                                                                                                                                   |  |               | 201,583      |   |                 |   | 295,507      |  
|                                                                                                                                                                            |  |               |              |   |                 |   |              |  
|Total assets                                                                                                                                                                |  | $             | 68,785,620   |   |                 | $ | 67,017,652   |  
|                                                                                                                                                                            |  |               |              |   |                 |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  |               |              |   |                 |   |              |  
|Current liabilities:                                                                                                                                                        |  |               |              |   |                 |   |              |  
|Accounts payable                                                                                                                                                            |  | $             | 3,364,580    |   |                 | $ | 2,987,900    |  
|Accrued payroll obligations                                                                                                                                                 |  |               | 1,422,779    |   |                 |   | 1,098,577    |  
|Deferred revenue from affiliate                                                                                                                                             |  |               | 4,321,774    |   |                 |   | 1,479,665    |  
|Deferred revenue from non-affiliates                                                                                                                                        |  |               | 385,860      |   |                 |   | 403,291      |  
|Accrued warranties                                                                                                                                                          |  |               | 665,606      |   |                 |   | 323,990      |  
|Obligation payable to affiliate                                                                                                                                             |  |               | 1,869,000    |   |                 |   |             |  
|Other accrued liabilities                                                                                                                                                   |  |               | 1,458,086    |   |                 |   | 1,403,667    |  
|Current maturities of long-term debt                                                                                                                                        |  |               | 8,325,144    |   |                 |   | 33,353,992   |  
|                                                                                                                                                                            |  |               |              |   |                 |   |              |  
|Total current liabilities                                                                                                                                                   |  |               | 21,812,829   |   |                 |   | 41,051,082   |  
|Long-term debt, net of current maturities                                                                                                                                   |  |               | 33,623,598   |   |                 |   | 135,044      |  
|Commitments and contingencies                                                                                                                                               |  |               |              |   |                 |   |              |  
|                                                                                                                                                                            |  |              
|Stockholders equity:                                                                                                                                                       |  |               |              |   |                 |   |              |  
|Preferred stock, $.001 par value, 20,000,000 shares authorized; none issued and outstanding at April 30, 2008 and January 31, 2009                                          |  |               |             |   |                 |   |             |  
|Series B common stock, $.001 par value; 2,000,000 shares authorized; 999,969 issued and outstanding at April 30, 2008 and
January 31, 2009                                  |  |               | 1,000        |   |                 |   | 1,000        |  
|Common stock, $.001 par value; 248,000,000 shares authorized; 77,972,399 issued and outstanding at April 30, 2008 and 97,627,955 issued
and outstanding at January 31, 2009 |  |               | 77,972       |   |                 |   | 97,628       |  
|Additional paid-in-capital                                                                                                                                                  |  |               | 309,901,962  |   |                 |   | 384,440,801  |  
|Accumulated deficit                                                                                                                                                         |  |               | (296,631,741 | ) |                 |   | (358,707,903 | )
|                                                                                                                                                                            |  |               |              |   |                 |   |              |  
|Total stockholders equity                                                                                                                                                  |  |               | 13,349,193   |   |                 |   | 25,831,526   |  
|                                                                                                                                                                            |  |               |              |   |                 |   |              |  
|Total liabilities and stockholders equity                                                                                                                                  |  | $             | 68,785,620   |   |                 | $ | 67,017,652   |  
|                                                                                                                                                                            |  |               |              |   |                 |   |              |  

See accompanying notes to condensed consolidated financial statements.



2



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|---------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ---------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                 |  | Three Months EndedJanuary 31, |            |   | Nine Months EndedJanuary 31, |  
|                                                                 |  | 2008                          |            |   | 2009                         |   |             | 2008 |  |   | 2009        |  
|Revenue:                                                         |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Net product sales                                                |  | $                             | 2,521,053  |   |                              | $ | 215,873     |      |  | $ | 7,236,326   |   |  | $ | 814,134     |  
|Contract revenue from affiliate                                  |  |                               | 1,000,000  |   |                              |   | 4,344,667   |      |  |   | 1,000,000   |   |  |   | 9,342,108   |  
|Contract revenue from non-affiliates                             |  |                               | 3,624,777  |   |                              |   | 1,320,353   |      |  |   | 8,595,198   |   |  |   | 6,859,514   |  
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Total revenue                                                    |  |                               | 7,145,830  |   |                              |   | 5,880,893   |      |  |   | 16,831,524  |   |  |   | 17,015,756  |  
|                                                                 |  |                               |            |  
|Costs and expenses:                                              |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Cost of product sales                                            |  |                               | 2,009,188  |   |                              |   | 1,047,850   |      |  |   | 6,144,305   |   |  |   | 2,124,102   |  
|Research and development                                         |  |                               | 4,691,373  |   |                              |   | 6,716,880   |      |  |   | 11,706,891  |   |  |   | 18,110,412  |  
|Selling, general and administrative                              |  |                               | 3,870,661  |   |                              |   | 3,870,302   |      |  |   | 11,862,762  |   |  |   | 10,569,428  |  
|Amortization and impairment of intangible asset                  |  |                               | 419,081    |   |                              |   | 6,190,719   |      |  |   | 1,256,813   |   |  |   | 7,020,607   |  
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Total costs and expenses                                         |  |                               | 10,990,303 |   |                              |   | 17,825,751  |      |  |   | 30,970,771  |   |  |   | 37,824,549  |  
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Operating loss                                                   |  |                               | (3,844,473 | ) |                              |   | (11,944,858 | )    |  |   | (14,139,247 | ) |  |   | (20,808,793 | )
|                                                                 |  |                               |            |  
|Interest expense, net                                            |  |                               | (589,131   | ) |                              |   | (836,936    | )    |  |   | (1,539,093  | ) |  |   | (2,830,904  | )
|Loss on modification of debt                                     |  |                               |           |   |                              |   |            |      |  |   |            |   |  |   | (39,763,016 | )
|Minority interest in losses of subsidiary                        |  |                               | 496,247    |   |                              |   |            |      |  |   | 1,317,695   |   |  |   |            |  
|Equity in earnings (losses) of affiliates, net                   |  |                               | 97,500     |   |                              |   | (793,250    | )    |  |   | 97,500      |   |  |   | (672,000    | )
|Other income (expense), net                                      |  |                               | (2,442     | ) |                              |   |            |      |  |   | (14,163     | ) |  |   | 1,999,751   |  
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Loss from continuing operations before income taxes              |  |                               | (3,842,299 | ) |                              |   | (13,575,044 | )    |  |   | (14,277,308 | ) |  |   | (62,074,962 | )
|                                                                 |  |                               |            |  
|Income tax expense                                               |  |                               | (400       | ) |                              |   | (400        | )    |  |   | (1,200      | ) |  |   | (1,200      | )
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Loss from continuing operations                                  |  |                               | (3,842,699 | ) |                              |   | (13,575,444 | )    |  |   | (14,278,508 | ) |  |   | (62,076,162 | )
|                                                                 |  |                               |            |  
|Income (loss) from discontinued operations, net of tax effects   |  |                               | 2,484,568  |   |                              |   |            |      |  |   | (66,062,163 | ) |  |   |            |  
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Net loss                                                         |  | $                             | (1,358,131 | ) |                              | $ | (13,575,444 | )    |  | $ | (80,340,671 | ) |  | $ | (62,076,162 | )
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Per share databasic and diluted:                                |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Loss from continuing operations                                  |  | $                             | (0.05      | ) |                              | $ | (0.14       | )    |  | $ | (0.19       | ) |  | $ | (0.69       | )
|Income (loss) from discontinued operations                       |  |                               | 0.03       |   |                              |   |            |      |  |   | (0.87       | ) |  | $ |            |  
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                                         |  | $                             | (0.02      | ) |                              | $ | (0.14       | )    |  | $ | (1.06       | ) |  | $ | (0.69       | )
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                 |  |                               |            |  
|Number of shares used in per share calculationbasic and diluted |  |                               | 78,552,368 |   |                              |   | 97,629,241  |      |  |   | 76,143,277  |   |  |   | 89,880,374  |  
|                                                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



|                                                                                                   |  |                               |             |   |      |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                   |  | Nine Months Ended January 31, |            
|                                                                                                   |  | 2008                          |             |   | 2009 |  
|Cash flows from operating activities:                                                              |  |                               |             |   |      |   |             |  
|Net loss                                                                                           |  | $                             | (80,340,671 | ) |      | $ | (62,076,162 | )
|Add back: Loss from discontinued operations, net of income tax                                     |  |                               | 66,062,163  |   |      |   |            |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net loss from continuing operations                                                                |  |                               | (14,278,508 | ) |      |   | (62,076,162 | )
|Adjustments to reconcile net loss from continuing operations to cash used in operating activities: |  |                               |             |   |      |   |             |  
|Depreciation on property and equipment and amortization of intangible asset                        |  |                               | 2,826,787   |   |      |   | 2,693,944   |  
|Impairment of intangible asset                                                                     |  |                               |            |   |      |   | 5,775,775   |  
|Share-based compensation charges                                                                   |  |                               | 2,155,154   |   |      |   | 1,521,777   |  
|Minority interest in losses of subsidiaries                                                        |  |                               | (1,317,696  | ) |      |   |            |  
|Loss on modification of debt                                                                       |  |                               |            |   |      |   | 39,763,016  |  
|Provision for inventory obsolescence                                                               |  |                               | 112,410     |   |      |   | 1,013,945   |  
|Other non-cash items                                                                               |  |                               | (767,816    | ) |      |   | 1,624,535   |  
|Changes in operating assets and liabilities:                                                       |  |                               |             |   |      |   |             |  
|Accounts receivable                                                                                |  |                               | (4,105,615  | ) |      |   | 4,278,648   |  
|Prepayments to affiliates                                                                          |  |                               | (1,492,356  | ) |      |   | (4,666,450  | )
|Inventories                                                                                        |  |                               | (898,189    | ) |      |   | 998,558     |  
|Other assets                                                                                       |  |                               | (1,122,781  | ) |      |   | (122,977    | )
|Accounts payable                                                                                   |  |                               | 633,236     |   |      |   | (356,502    | )
|Deferred revenue and other accrued liabilities                                                     |  |                               | 3,629,490   |   |      |   | (3,781,173  | )
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net cash used in operating activities of continuing operations                                     |  |                               | (14,625,884 | ) |      |   | (13,333,066 | )
|Net cash used in operating activities of discontinued operations                                   |  |                               | (12,374,485 | ) |      |   |            |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net cash used in operating activities                                                              |  |                               | (27,000,369 | ) |      |   | (13,333,066 | )
|                                                                                                   |  |                               |             |   |      |   |             |  
|                                                                                                   |  |                              
|Cash flows from investing activities:                                                              |  |                               |             |   |      |   |             |  
|Purchases of property and equipment                                                                |  |                               | (782,772    | ) |      |   | (4,538,276  | )
|Advances to and payments associated with discontinued operations                                   |  |                               | (9,393,493  | ) |      |   |            |  
|Investment in and advances to affiliates                                                           |  |                               | (503,973    | ) |      |   | (4,863,000  | )
|Other                                                                                              |  |                               |            |   |      |   | (67,823     | )
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net cash used in investing activities of continuing operations                                     |  |                               | (10,680,238 | ) |      |   | (9,469,099  | )
|Net cash provided by investing activities of discontinued operations                               |  |                               | 6,112,467   |   |      |   |            |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net cash used in investing activities                                                              |  |                               | (4,567,771  | ) |      |   | (9,469,099  | )
|                                                                                                   |  |                               |             |   |      |   |             |  
|                                                                                                   |  |                              
|Cash flows from financing activities:                                                              |  |                               |             |   |      |   |             |  
|Borrowings on notes and other obligations                                                          |  |                               | 11,195,676  |   |      |   | 7,614,776   |  
|Payments on notes and other obligations                                                            |  |                               | (5,385      | ) |      |   | (1,499,067  | )
|Proceeds from issuance of common stock, net of transaction fees                                    |  |                               | 17,587,072  |   |      |   | 17,724,471  |  
|Proceeds from exercise of warrants                                                                 |  |                               |            |   |      |   | 600,000     |  
|Contributions from minority interest holders                                                       |  |                               | 1,383,710   |   |      |   |            |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net cash provided by financing activities of continuing operations                                 |  |                               | 30,161,073  |   |      |   | 24,440,180  |  
|Net cash provided by financing activities of discontinued operations                               |  |                               | 4,757,014   |   |      |   |            |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net cash provided by financing activities                                                          |  |                               | 34,918,087  |   |      |   | 24,440,180  |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Effect of exchange rate changes on cash of continuing operations                                   |  |                               | (6,823      | ) |      |   |            |  
|Effect of exchange rate changes on cash of discontinued operations                                 |  |                               | 12,330      |   |      |   |            |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net effect of exchange rate changes on cash                                                        |  |                               | 5,507       |   |      |   |            |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Net increase in cash and cash equivalents                                                          |  |                               | 3,355,454   |   |      |   | 1,638,015   |  
|Cash and cash equivalents at beginning of period                                                   |  |                               | 4,018,986   |   |      |   | 6,023,715   |  
|                                                                                                   |  |                               |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                                         |  | $                             | 7,374,440   |   |      | $ | 7,661,730   |  
|                                                                                                   |  |                               |             |   |      |   |             |  

See accompanying notes to condensed consolidated financial statements.



4



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##### Table of Contents

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

January 31, 2009

1) Background and Basis of Presentation

Background

Quantum Fuel Systems
Technologies Worldwide, Inc. and Subsidiaries (collectively referred to as Quantum or the Company) develops and produces alternative fuel propulsion, storage and systems, energy storage technologies, and alternative fuel
vehicles. The Companys portfolio of technologies includes electronic controls, hybrid electric drive systems, hydrogen storage and metering systems, and other alternative fuel technologies that enable fuel efficient, low emission hybrid,
plug-in electric hybrid, fuel cell and other alternative fuel vehicles. The Companys powertrain engineering, system integration, and assembly capabilities provide fast-to-market solutions to support the production of hybrid and plug-in hybrid,
hydrogen-powered hybrid, fuel cell, and other alternative fuel vehicles, as well as modular, transportable hydrogen refueling stations.

The Company was incorporated in the state of Delaware in October 2000 as a wholly-owned subsidiary of IMPCO Technologies, Inc (IMPCO). The Company spun off from IMPCO and became a separate company on July 23, 2002.

On August 27, 2008, start-up activities were initiated in Quantum Solar Energy, Inc. (Quantum Solar), a new venture owned 85.0% by the Company and
15.0% by the majority shareholder of our affiliate, asola Advanced and Automotive Solar Systems GmbH (Asola). Quantum Solar was formed for the purpose of developing a solar panel distribution and manufacturing operation in Irvine, California.

On January 16, 2008, the Company completed a series of transactions that resulted in the disposal of substantially all the assets of
the Tecstar Automotive Group business segment. Prior to the disposal, the Tecstar Automotive Group business segment comprised all of the business activities acquired via the acquisition of Tecstar Automotive Group, Inc. (Tecstar Automotive Group),
formerly known as Starcraft Corporation, that occurred on March 3, 2005 and subsequent specialty vehicle business acquisitions, including the February 8, 2006 acquisition of Regency Conversions, Inc. (Regency). See Note 2.

On January 4, 2008, the Company acquired a 24.9% ownership interest in asola Advanced and Automotive Solar Systems GmbH (Asola), a solar module
manufacturer located in Erfurt, Germany. See Note 4.

On August 7, 2007, the Company obtained a 62.0% interest in Fisker Automotive,
Inc. (Fisker Automotive), a joint venture with Fisker Coachbuild, LLC. Fisker Automotive was formed for the purpose of producing premium plug-in hybrid automobiles. The Companys ownership interest in Fisker Automotive as of January 31,
2009 was 21.9% as a result of financing activities completed by Fisker Automotive. See Note 4.

On March 24, 2006, the Company
obtained a 35.5% ownership interest in Vancouver, British Columbia-based Advanced Lithium Power Inc. (ALP). ALP is developing state-of-the-art lithium ion battery and control systems that control state-of-charge and provide for thermal management,
resulting in high-performance energy storage. The Companys direct ownership interest in ALP as of January 31, 2009, and February 6, 2009 was 16.1% and 12.6%, respectively, as a result of financing activities completed by ALP. See
Note 4.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles. The consolidated financial statements include the accounts of Quantum Fuel Systems Technologies
Worldwide, Inc. and its majority-owned subsidiary, Quantum Solar.



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The accounts of ALP were included in the consolidated financial statements from the date of the
Companys initial ownership interest until April 10, 2008 due to the nature of the controlling voting interest the Company had secured in ALP during this period. Subsequent to this period and as a result of additional financing obtained by
ALP that diluted the Companys equity stake and voting interests, the Company no longer maintained its control of a majority of the voting interests in ALP and deconsolidated ALP. However, since the Company still has the ability to exert
significant influence on ALP due to its board representation and its voting interests, the Company accounts for its ownership interest in ALP under the equity method of accounting.

All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior periods
amounts to conform to the current fiscal year 2009 presentation.

Capital Resources

On August 25, 2008, the Company completed a public offering of 9.0 million units, with each unit consisting of one share of common stock and one
warrant to purchase an additional 1.5 shares of common stock, at a purchase price of $2.12 per unit. The warrants have an initial exercise price of $4.00 per share that is subject to an anti-dilution price reset provision discussed further in Note
10, are immediately exercisable and expire on August 25, 2015. The net proceeds to the Company from the public offering, after deducting placement agent fees and estimated offering expenses, were approximately $17.8 million.

On May 30, 2008, the Company received $7.5 million in proceeds from its lender under a term note that matures on August 31, 2009 (Term Note C)
and secured a $10.0 million unconditional commitment (May 2008 Commitment) from its lender that allows the Company to draw on the commitment at its option and also allows the lender to fund the commitment at the lenders option under certain
defined structures. The option for either party expires on August 31, 2009. To date, neither the lender nor the Company has exercised the option under the May 2008 Commitment. In connection with the incremental financing associated with Term
Note C and the May 2008 Commitment, the Company and its lender agreed to certain modifications to the existing Convertible Note, Term Note A and Term Note B. See Note 9.

Liquidity

The Companys principal sources of liquidity as of January 31, 2009 approximate
$17.7 million, consisting of $7.7 million of cash and cash equivalents and $10.0 million of committed funding from its lender that is available to be drawn upon from its lender through August 31, 2009.

As discussed further in Note 9, each of the outstanding debt instruments with the Companys lender have structures that allow for the payment of
scheduled principal payments with the issuance of shares of the Companys common stock; however, the lender can elect to forgo future conversions of principal under a convertible note and elect not to extend the scheduled maturity date of the
convertible note. As such, a cash payment equal to the outstanding principal balance plus accrued interest, totaling approximately $7 million, could be required on the scheduled maturity date of July 1, 2009 for the convertible note. In
addition, repayment of all or a portion of a $10.0 million term note referred to as Term Note B can be demanded by the lender beginning on January 17, 2009 and this obligation can only be satisfied in shares of common stock if the
Companys share price is greater than $0.50 for five consecutive business days prior to the payment date. Thus, it is possible that Term Note B will have to be satisfied in cash.

The Company has incurred recurring operating losses and negative cash flows from its continuing operating activities. The Company has used $13.9 million
and $13.3 million in cash for its continuing operating activities during the twelve-month period of fiscal 2008 and the first nine months of fiscal 2009, respectively. From its inception through January 31, 2009, the Company has funded its
operations and strategic investments primarily with proceeds from public and private offerings of its common stock and borrowings with financial institutions and its lender. The Companys historical operating results, its capital resources and
financial position in combination with current projections and estimates were considered in the Companys plan and intentions to fund its operations over the next twelve months.



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Although the Companys current operating plan anticipates increased revenues and improved gross
profits, the Company expects to continue incurring operating losses over the next twelve months. The Companys plan anticipates that it will have to raise additional capital within the next twelve months to fund the operations and obligations
of its business and to fund Quantum Solar Energy. The Company believes it will require approximately $5 million in additional capital for its operating requirements and $10 million to complete its solar module manufacturing operation in Irvine,
California. In addition to these funding requirements, the Company may also need to raise up to $17 million in capital ($7 million associated with a convertible note and $10 million associated with Term Note B) over the next twelve months to satisfy
debt requirements if the lender doesnt convert or extend the maturity date of a convertible note or if the Company cannot use its shares to satisfy obligations under Term Note B that are contingently payable in cash as discussed above. The
Company believes it can raise the necessary level of capital that will be required through public or private offerings of equity or debt securities and/or through the U.S. Department of Energys Advanced Technology Vehicles Manufacturer
Assistance Program or other governmental grants or loans; however, the Company cannot provide any assurances that it will be able to secure additional funding on terms acceptable to the Company, if at all. The Companys inability to achieve its
current operating plan or raise capital to cover any shortfall would have a material adverse affect on its ability to meet its obligations as they become due without substantial disposition of assets or other similar actions outside the ordinary
course of business. Additionally, the Company may sell certain long-lived assets to provide for a portion of its liquidity.

Use of
Estimates in the Preparation of Consolidated Financial Statements

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

These consolidated financial statements are unaudited and have been prepared in
accordance with the instructions of Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These adjustments consist of normal and recurring
accruals, as well as non-recurring charges for the modification of debt instruments and impairment of an intangible asset in continuing operations, as well as the impairment of certain long-lived assets and the classification of historical
activities associated with the discontinued operations of the Tecstar Automotive Group business segment.



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Revenue Recognition

The Company generally manufactures products based on specific orders from customers. Revenue is recognized on product sales upon shipment or when the earnings process is complete and collectibility is reasonably
assured. The Company includes the costs of shipping and handling, when incurred, in cost of goods sold.

Contract revenue for customer
funded research and development is principally recognized by the percentage of completion method in accordance with Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Generally, the Company estimates percentage complete by determining cost incurred to date as a percentage of total estimated cost at completion. For certain other contracts, percentage complete is determined by measuring progress
towards contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings process. For contracts measured under the estimated cost approach, the Company believes it can generally make dependable
estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to revisions as the contract progresses to completion. The Companys estimates of contract costs are based on expectations
of engineering development time and materials and other support costs. These estimates can change based on unforeseen technology and integration issues, but known risk factors and contract challenges are generally allowed for in the initial scope
and cost estimate of the program. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. In certain circumstances, specific contracts in which the Company cannot reliably
make estimates of total revenues and expenses are accounted for under the completed contract method. Under the completed contract method, all revenue and expenses attributable to the specific contract are deferred until the end of the project.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (FAS 141R). FAS 141R replaces FAS No. 141, Business Combinations (FAS 141). FAS 141R retains the fundamental requirements
of FAS 141 that the purchase method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. FAS 141R expands the definition of
transactions and events that qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. FAS 141R broadens the fair value measurement and recognition of assets
acquired, liabilities assumed, and interests transferred as a result of business combinations. FAS 141R also increases the disclosure requirements for business combinations in the financial statements. This statement is effective for the Company at
the beginning of its 2010 fiscal year. The Company does not believe that the adoption of FAS 141R will have a material impact on its financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB
No. 51 (FAS 160). FAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method will
significantly change the accounting for transactions with minority interest holders. This statement is effective for the Company at the beginning of its 2010 fiscal year. The Company does not believe that the adoption of FAS 160 will have a material
impact on its financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activitiesan Amendment of SFAS No. 133 (FAS 161). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using
derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. In addition, FAS 161 requires the cross-referencing of derivative disclosures
within the financial statements and notes thereto. This statement is effective for the Company at the beginning of the fourth quarter of its 2009 fiscal year. The Company is currently evaluating the impact of the provisions of FAS 161.



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In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial cash Settlement (APB 14-1). APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash (or other assets)
upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuers nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected
to be outstanding as additional non-cash interest expense. APB 14-1 is effective for the Company at the beginning of its 2010 fiscal year and early adoption is not permitted. Retrospective application to all periods presented is required except for
instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. The Company is currently evaluating the impact of the
provisions of APB 14-1.

In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-5, Determining Whether
an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instruments contingent exercise and settlement provisions. It also clarifies the impact that foreign currency denominated strike prices and market-based employee stock option valuation
instruments have on the evaluation. EITF 07-5 is effective for the Company at the beginning of its 2010 fiscal year and cannot be adopted early. The Company is currently evaluating the impact of the provisions of EITF 07-5.

2) Discontinued Operations

As a result of the
disposal of the Tecstar businesses during the third quarter of fiscal 2008, the historical activities and balances of the Tecstar Automotive Group business segment are reported as discontinued operations in the accompanying condensed consolidated
statements of operations and condensed consolidated statements of cash flows for all periods presented in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.



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The historical operating results of the Tecstar Automotive Group business segment for the three months
and nine months ended January 31, 2008, classified as discontinued operations, were as follows:



|                                                          |  |                                   |            |   |                                  |   |             |  
|--------------------------------------------------------- |  | --------------------------------- | ---------- | - | -------------------------------- | - | ----------- | -
|                                                          |  | Three MonthsEndedJanuary 31, 2008 |            |   | Nine MonthsEndedJanuary 31, 2008 |  
|Revenue:                                                  |  |                                   |            |   |                                  |   |             |  
|Net product sales                                         |  | $                                 | 11,141,499 |   |                                  | $ | 53,738,861  |  
|Contract revenue                                          |  |                                   | 916,597    |   |                                  |   | 5,023,412   |  
|                                                          |  |                                   |            |   |                                  |   |             |  
|                                                          |  |                                  
|Total revenue                                             |  |                                   | 12,058,096 |   |                                  |   | 58,762,273  |  
|                                                          |  |                                  
|Costs and expenses:                                       |  |                                   |            |   |                                  |   |             |  
|Cost of product sales                                     |  |                                   | 11,834,229 |   |                                  |   | 54,989,022  |  
|Research and development                                  |  |                                   | 1,331,862  |   |                                  |   | 5,450,843   |  
|Selling, general and administrative                       |  |                                   | 3,741,519  |   |                                  |   | 15,204,456  |  
|Amortization of intangibles                               |  |                                   |           |   |                                  |   | 698,570     |  
|Impairment of long-lived assets (1)                       |  |                                   |           |   |                                  |   | 58,900,000  |  
|                                                          |  |                                   |            |   |                                  |   |             |  
|                                                          |  |                                  
|Total costs and expenses                                  |  |                                   | 16,907,610 |   |                                  |   | 135,242,891 |  
|                                                          |  |                                   |            |   |                                  |   |             |  
|                                                          |  |                                  
|Operating loss                                            |  |                                   | (4,849,514 | ) |                                  |   | (76,480,618 | )
|                                                          |  |                                  
|Interest expense, net                                     |  |                                   | (1,397,999 | ) |                                  |   | (3,171,291  | )
|Gain on disposal of business segment (2)                  |  |                                   | 8,641,447  |   |                                  |   | 8,641,447   |  
|Other expense, net                                        |  |                                   | 10,913     |   |                                  |   | 5,827       |  
|                                                          |  |                                   |            |   |                                  |   |             |  
|                                                          |  |                                  
|Earnings (loss) from discontinued operations before taxes |  |                                   | 2,404,847  |   |                                  |   | (71,004,635 | )
|                                                          |  |                                  
|Income tax benefit (3)                                    |  |                                   | 79,721     |   |                                  |   | 4,942,472   |  
|                                                          |  |                                   |            |   |                                  |   |             |  
|                                                          |  |                                  
|Earnings (loss) from discontinued operations              |  | $                                 | 2,484,568  |   |                                  | $ | (66,062,163 | )
|                                                          |  |                                   |            |   |                                  |   |             |  

| | 
| | 

| | (1) | Represents impairment charges of $45.8 million related to intangible assets, $9.6 million to write down property and equipment to estimated fair value and $3.5 million to write off
goodwill associated with Tecstar Automotive Groups acquisition of Regency.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The components of the gain on disposal of the Tecstar Automotive Group business segment effective upon the cease of operations on January 16, 2008 consisted of the following:
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                         |  |   |             |  
|---------------------------------------- |  | - | ----------- | -
|Assets transferred to lender             |  | $ | (36,385,894 | )
|Current liabilities assumed by lender    |  |   | 24,529,439  |  
|Long term liabilities released by lender |  |   | 20,501,145  |  
|Long term liabilities assumed by lender  |  |   | 2,867,785   |  
|Release fee paid to lender upon transfer |  |   | (1,000,000  | )
|Transaction fees and other costs         |  |   | (1,871,028  | )
|                                         |  |   |             |  
|                                         | 
|Total gain on disposal                   |  | $ | 8,641,447   |  
|                                         |  |   |             |  



| | (3) | Tax benefit realized in the nine month period ended in 2008 mainly represents the elimination of a deferred tax liability in the amount of $4.9 million recognized in connection with
the impairment discussed in (1) above.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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3) General Motors Relationship / Automotive Industry Deterioration

In 2002, the Company entered into a ten-year strategic alliance with General Motors. The Company believes that its strategic alliance with General Motors
will advance and commercialize, on a global basis, the integration of its gaseous storage and handling systems into fuel cell systems used in the transportation markets. Under the alliance, the Company and General Motors have co-developed
technologies that are designed to accelerate the commercialization of fuel cell applications. This strategic alliance expanded the relationship that has been in place between General Motors and Quantum since 1993, through which we provided packaged
natural gas and propane fuel systems for General Motors alternative fuel vehicle products.

General Motors has represented a
significant portion of the Companys historical revenue streams and although the Companys relationship with General Motors and its commitment to continue to develop hydrogen storage and handling systems for fuel cell vehicles together
under the strategic alliance remains strong, certain existing programs are currently experiencing funding restraints as a result of General Motors deteriorating financial condition. Specifically, activities on certain next generation hydrogen
fuel system programs have declined or have been terminated by General Motors with indications that existing and proposed new programs could experience extended delays. The Company and General Motors have expressed a mutual desire to continue the
strategic alliance relationship, although at a significantly lower level of activity over the near term which includes the remainder of fiscal 2009. The Company continues to support development programs under the auspices of the strategic alliance
and it believes that vehicle programs at General Motors utilizing alternative energy technologies are likely to receive enhanced focus in the future once the financial condition of General Motors stabilizes.

In connection with the strategic alliance, the Company has issued 3.5 million shares of Common Stock and 1.0 million shares of Series B Common
Stock to General Motors. The Company recorded the value of the shares issued to General Motors as an intangible asset at fair market value on the dates of their respective issuances. The Company had been amortizing this intangible asset over the
ten-year term of the strategic alliance with General Motors until January 31, 2009, at which time the Company wrote-off the remaining unamortized carry balance of $5.8 million in connection with the performance of an updated impairment analysis
discussed below.

In recent months, the U.S. and world economy and the automotive industry have deteriorated further and measures
implemented by the federal government to stabilize the domestic credit markets and the economy in late 2008 and early 2009 have not yet been realized to the extent expected. On December 31, 2008, General Motors entered into a loan and security
agreement with the United States Department of Treasury (UST), pursuant to which the UST agreed to provide General Motors with a $13.4 billion secured term loan facility. General Motors borrowed $4.0 billion on December 31, 2008, $5.4 billion
on January 21, 2009 and $4.0 billion on February 17, 2009. On February 17, 2009, General Motors submitted its viability plan to the United States Government wherein General Motors requested a total of $22.5 billion (including the
$13.4 billion already secured) in federal loan assistance and stated additional loan assistance could be needed if vehicle sales did not meet certain minimum levels. Furthermore, General Motorss recently announced that sales for January 2009
and February 2009 were 49% and 53% lower than sales in the same period in 2008. On March 5, 2009, General Motors released its annual report for calendar 2008 in which their independent auditors raised substantial doubt about General
Motors ability to continue as a going concern in their audit opinion. The January and February sales results for General Motors further support the fact that the automotive industry is continuing to deteriorate and suffering its worse economic
conditions in decades as automakers are struggling due to the rise in unemployment, weakening consumer confidence, and lack of availability in the credit markets for consumer loans.

Therefore, pursuant to this continuing deterioration, the Company updated as of January 31, 2009, an impairment analysis that was most recently
performed as of October 31, 2008, associated with the General Motors Strategic Alliance intangible asset, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets, (FAS 144). Although the Company believes the federal loan arrangement provided to General Motors in December 2008 and the remarks of President Obama on February 24, 2009 in his address at a joint session of the U.S.
Congress are indicators that the federal government will be inclined to continue to provide assistance to



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General Motors in maintaining sufficient liquidity in the near term, there is an increasing level of uncertainty for General Motors ability to fund
future hydrogen fuel cell projects under the strategic alliance.

Given these increased uncertainties of General Motors viability and
the state of the automotive industry, the Company believes that it can no longer reasonably forecast the long-term revenue streams under the strategic alliance and, as a result, the Company impaired the remaining carrying balance of the intangible
asset as of January 31, 2009 (see Note 7). In addition, the Company increased its inventory reserves on specific hydrogen fuel system component parts and materials as it expects sales of automotive fuel system products utilizing hydrogen
components to be negatively impacted as a result of current economic conditions (see Note 6).

4) Investments in Affiliates

Fisker Automotive

On
August 7, 2007, the Company and Fisker Coachbuild, LLC, launched a new venture, Fisker Automotive, Inc. (Fisker Automotive) to produce premium plug-in hybrid automobiles. Upon formation, the Company owned 62.0% of Fisker Automotive. Through
January 31, 2009, Fisker Automotive had raised a level of capital that has resulted in the dilution of the Companys ownership interest to 21.9%. There are six members on Fisker Automotives Board of Directors, of which the Company
has the right to appoint two of the members. The Company has appointed its Chairman of the Board of Directors and its Chief Executive Officer to serve as directors of Fisker Automotive. Fisker Automotive will need to raise substantial additional
capital in order to complete future phases of development, testing, and tooling for the new vehicle platform, which will further reduce the Companys ownership percentage in the venture.

The Company accounts for its equity interest in Fisker Automotive under the equity method of accounting in accordance with APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock, (APB 18). Due to the temporary nature of its majority interest in Fisker Automotive, the Company also accounted for its initial equity interest in Fisker Automotive under
the equity method. Although Fisker Automotive is a variable interest entity as defined by FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN
46R), the Company is not the primary beneficiary as defined by FIN 46R as it is not required to absorb a majority of current and potential future losses or to be considered the primary beneficiary of a gain generated by Fisker Automotive.

Fisker Automotive has an accumulated deficit since inception through January 31, 2009 as a result of funding the design and
development activities for the new vehicle platform. The Company has not contributed any cash or other assets with a historical cost basis to the venture and has no obligation to fund deficit balances. As a result, the Companys initial
investment balance and balances as of April 30, 2008 and January 31, 2009 are zero and there is no equity in losses of the affiliate to be reported in the Companys condensed consolidated statement of operations for the three and nine
month periods ended January 31, 2008 and 2009.

During the third quarter of fiscal 2008, the Company completed an initial concept
analysis program on powertrain and software control systems for the production intent hybrid-electric vehicle under a $1.0 million contractual arrangement. On February 14, 2008, the Company was awarded a second contract for $13.5 million for
the second phase of the development. Under the second phase, the Company is developing the powertrain and software control systems and is integrating its plug-in hybrid electric vehicle architecture known as Q-Drive for the Fisker Karma
production model that is expected to have initial deliveries beginning near the end of calendar 2009. The Company anticipates beginning the next phase of the Fisker development program in April which includes system validation, certification and
other pre-production development activities.

The Company has received $12.5 million in cash from Fisker Automotive and has recognized
$11.5 million in cumulative contract revenue through January 31, 2009 of which $4.3 million was recognized



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during the third quarter of fiscal 2009 and $9.3 million was recognized during the first nine months of fiscal 2009. The cash received and contract billings
generated in excess of the revenue earned, of $4.3 million and $1.5 million as of April 30, 2008 and January 31, 2009, respectively, is reported as deferred revenue from affiliate on the accompanying condensed consolidated balance sheets.

Asola

On
January 4, 2008, the Company acquired a 24.9% ownership interest in asola Advanced and Automotive Solar Systems GmbH (Asola), a solar module manufacturer located in Erfurt, Germany. In exchange for the ownership interest, the Company provided
the following consideration (i) 0.3 million euro (US$0.4 million), (ii) commitment to contribute an additional 1.2 million euro to provide for capital equipment for the planned expansion of Asolas annual manufacturing
capacity to approximately 40 to 45 mega watts peak (MWp), (iii) commitment to provide a guaranty to Asolas bank of 1.0 million euro related to an anticipated expansion of Asolas bank financing arrangement, and
(iv) commitment to transfer 15.0% ownership interest in its solar venture in the United States, if and when such venture was established. The Company also has an option to increase its ownership interest in Asola by an additional 7.8% in
exchange for 0.1 million euro. The conversion rate of one euro to one U.S. dollar was 1.56 to 1 as of April 30, 2008 and 1.28 to 1 as of January 31, 2009. The Company accounts for its equity interest in Asola under the equity method
of accounting in accordance with APB 18. Although Asola is a variable interest entity, the Company is not considered the primary beneficiary as defined by FIN 46R.

On May 8, 2008, the Company paid 1.2 million euro (US$1.9 million) to Asola to satisfy the commitment to provide funds for capital equipment noted in (ii) above that was classified as obligation payable
to affiliate on the condensed consolidated balance sheet as of April 30, 2008. In August 2008, the Company satisfied the commitment noted in (iv) above by transferring 15.0% ownership in Quantum Solar Energy, Inc. to Asolas majority
shareholder, ConSolTec GmbH (ConSolTec).

Asola reported total assets of US$27.8 million and total liabilities of US$24.5 million
as of January 31, 2009 (unaudited); revenues of US$8.3 million and US$39.4 million and net losses of US$1.2 million and net earnings of US$0.5 million for the three and nine month periods ending January 31, 2009
(unaudited). The Companys equity in net losses was US$0.3 million and its equity in net earnings was US$0.1 million for the three and nine month periods ending January 31, 2009.

On November 7, 2007 the Company entered into an agreement with Asola under which it agreed to purchase one-half of Asolas rights and
obligations under a certain long-term solar cell supply agreement dated November 1, 2007 to which Asola is a party. Asolas obligations under the long-term solar cell supply agreement includes the required purchase by Asola of solar cells
with a cumulative power of 155 mega watts peak (MWp) for the period from January 1, 2008 through December 31, 2017 at predetermined fixed prices, with prepayments required by November 1, 2007 of 1.0 million euro, by
September 1, 2008 of 3.0 million euro, and by September 1, 2009 of 5.0 million euro.

The Companys agreement to
purchase one-half of Asolas rights and obligations under Asolas long-term solar cell supply agreement provides the Company with the rights to purchase 77.5 MWp. In consideration for Asolas sale of one-half of its contract rights,
the Company paid Asola 1.0 million euro (US$1.4 million) on October 29, 2007, representing the full amount of the November 17, 2007 prepayment requirement and agreed to pay up to 1.5 million euro of the prepayment due in
September 2008 and up to 2.5 million euro of the prepayment due in September 2009. The Company anticipates that Asola will generate cash flows sufficient to cover a portion of the September 2009 prepayment; however, if there is insufficient
cash available within Asola operations, the Company will endeavor to raise funds specifically for Asola to cover the shortfall.

On
July 17, 2008 and September 26, 2008, the Company made additional prepayments of 1.0 million euro (US$1.6 million) and 1.5 million euro (US$2.2 million), respectively, to Asola under the agreement. The cumulative prepayments of
3.5 million euro (US$5.2 million) are reflected as prepayments to affiliate in the accompanying condensed consolidated balance sheet as of January 31, 2009.

The long-term solar cell supply agreement secures a ten-year supply of silicon photovoltaic solar cells that Asola and the Company anticipate to utilize for the manufacture of solar modules for commercial,
residential, and automotive applications in both Europe and the United States. The Company had not purchased any solar cells from Asola under the arrangement through January 31, 2009.



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The Companys unconditional remaining obligations to purchase solar cells from Asola and provide its
share of prepayments to Asola over the next five years (in euros and in U.S dollars based on the currency exchange rate as of January 31, 2009) are as follows:



|                                  |  |        |             |             |   |            
|--------------------------------- |  | ------ | ----------- | ----------- | - | -----------
|                                  |  | Euros: |             | US Dollars:
|Eleven months ended December 2009 |  |       | 5,765,000   |             | $ | 7,388,000  
|Twelve months ended December 2010 |  |        | 8,110,000   |             |   | 10,394,000 
|Twelve months ended December 2011 |  |        | 15,720,000  |             |   | 20,147,000 
|Twelve months ended December 2012 |  |        | 15,220,000  |             |   | 19,506,000 
|Twelve months ended December 2013 |  |        | 14,620,000  |             |   | 18,737,000 
|Thereafter                        |  |        | 53,875,000  |             |   | 69,046,000 
|                                  |  |        |             |             |   |            
|Total                             |  |       | 113,310,000 |             | $ | 145,218,000
|                                  |  |        |             |             |   |            

The Company provided Asola with a loan in the amount of US$2.2 million on September 26, 2008.
The loan is evidenced by a promissory note and is guaranteed by Asolas majority shareholder, ConSolTec, which guaranty is secured by ConSolTecs pledge of all of its ownership interest in Quantum Solar Energy, Inc. The loan accrues
interest at a 6.0% annualized rate and matures upon the earlier of Asolas completion of a capital raise of at least 20.0 million euro and March 31, 2010.

The Company recorded its initial investment in Asola at cost and adjusts the carrying amount of the investment to recognize its share of the earnings of Asola after the date of acquiring the ownership interest. The
activity in fiscal 2009 and the carrying balances of the Companys investment in and advances to Asola as of January 31, 2009 are as follows:



|                                                                |  |               |          
|--------------------------------------------------------------- |  | ------------- | ---------
|                                                                |  | U.S. Dollars:
|Investment in and advances to Asolabalance at April 30, 2008   |  | $             | 2,780,526
|Equity in earnings for the nine months ended January 31, 2009   |  |               | 127,000  
|Payment of advance in exchange for promissory note              |  |               | 2,196,250
|                                                                |  |               |          
|Investment in and advances to Asolabalance at January 31, 2009 |  | $             | 5,103,776
|                                                                |  |               |          



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Advanced Lithium Power

On March 24, 2006, the Company obtained an initial 35.5% ownership interest in Advanced Lithium Power, Inc (ALP). In addition to its direct ownership
stake, the Company has certain voting arrangements in place and has protective rights for certain decisions made by the ALP Board of Directors, including third party use of ALPs technology, which requires approval by one of the Companys
board representatives. There are six members on ALPs Board of Directors, of which the Company has the right to appoint two of the members. The Company has appointed its Chairman of the Board of Directors and its Chief Executive Officer to
serve as directors of ALP.

On March 24, 2006 and August 8, 2006, the Company invested CAD$0.3 million and CAD$0.2 million,
respectively, in convertible debentures, which allows the Company to convert the debentures, under an amended agreement dated December 28, 2008, into shares of ALPs common stock at an equivalent value of CAD$0.12 per share through
December 31, 2009.

On May 1, 2008, the Company invested CAD$0.3 million in exchange for common shares of ALP. The Company also
received common stock purchase warrants that entitle it to purchase 0.3 million shares of ALP stock at $0.75 per share and 0.3 million shares of ALP stock at $1.00 per share. The warrants expire on June 11, 2011. On January 15,
2009 in connection with capital financing activities for ALP, the Company provided ALP with cash in exchange for a convertible note in the amount of US$0.5 million. Upon the closing of the financing activities on February 6, 2009, the
Companys note was converted into preferred shares of ALP. Our affiliate, Fisker Automotive, also provided capital to ALP in connection with this round of financing and received a 33.3% ownership interest.

As a result of financing activities completed by ALP from its inception through February 6, 2009, the Companys direct ownership interest in
ALP has declined to 16.1% as of January 31, 2009 and to 12.6% as of February 6, 2009. If the Company elects to convert the debentures, its direct ownership interest on a fully diluted basis would increase to 20.8% and Fisker
Automotives would decline to 25.9%.

The accounts of ALP were included in the consolidated financial statements from the date of the
Companys initial ownership interest until April 10, 2008 (the Consolidation Period) due to the nature of the controlling voting interest it had secured in ALP during the Consolidation Period. As a result of additional
financing obtained by ALP during the Consolidation Period and the ratification of a revised allotment and pricing of common shares by ALPs Board of Directors on April 10, 2008, the Companys equity stake (15.4% as of April 30,
2008) plus its voting interests declined below 50% to a level where it no longer maintained its control of a majority of the voting interests in ALP. Accordingly, the Company deconsolidated ALP and began accounting for its equity stake under the
equity method of accounting.

Although ALP is a variable interest entity as defined by FIN 46R, the Company is not the primary beneficiary
as defined by FIN 46R as it is not required to absorb a majority of current and potential future losses or to be considered the primary beneficiary of a gain generated by ALP.

ALP has incurred a level of accumulated losses to date such that the Companys share of the losses exceeds the Companys total investment in
ALP. The Company has no obligation to fund deficit balances. As a result, the Companys investment balance at the time of deconsolidation of ALPs accounts was zero. The balance as of April 30, 2008 and January 31, 2009 is also
zero. During the first nine months of fiscal 2009, the investment balance increased as a result of the May 1, 2008 purchase of ALPs common shares and on January 15, 2009 in connection with financing activities; however, the balance
was reduced to zero as a result of the Company recognizing its share of equity in losses for the nine month period ending January 31, 2009.

The minority interest in losses of subsidiary reported on the accompanying condensed consolidated statements of operations for the three and nine month periods ended January 31, 2008 represents the minority interest position held by
ALPs Chief Executive Officer and other officers of ALP, along with other unaffiliated parties during the Consolidation Period. The reporting of minority interest positions of ALP ceased upon the deconsolidation of their accounts.



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The Company sources certain advanced battery components and services from ALP in connection with its
various ongoing development programs including the Fisker Automotive and military programs. The Company incurred costs of $0.7 million for the nine month period ended January 31, 2009 associated with these purchases that are included in
research and development expense. Also, included in current assets at January 31, 2009 on the accompanying condensed consolidated balance sheet was $0.9 million in payments made by the Company for products and services not yet received from
ALP.

5) Accounts Receivable

Accounts
receivable consist of the following:



|                                |  |               |           |   |                 |   |            |  
|------------------------------- |  | ------------- | --------- | - | --------------- | - | ---------- | -
|                                |  | April 30,2008 |           |   | January 31,2009 |  
|Customer accounts billed        |  | $             | 8,023,981 |   |                 | $ | 4,983,947  |  
|Customer accounts unbilled      |  |               | 2,247,731 |   |                 |   | 1,418,524  |  
|Allowance for doubtful accounts |  |               | (606,961  | ) |                 |   | (1,016,368 | )
|                                |  |               |           |   |                 |   |            |  
|Accounts receivable, net        |  | $             | 9,664,751 |   |                 | $ | 5,386,103  |  
|                                |  |               |           |   |                 |   |            |  

Included in accounts receivable as of January 31, 2009 were $2.2 million of net receivables
due from General Motors that management expects to collect in the normal course assuming that General Motors continues as a going concern (see Note 3). The Company assesses the collectibility of receivables associated with General Motors and other
customers on an ongoing basis.

6) Inventories

Inventories consist of the following:



|                                |  |               |            |   |                 |   |            |  
|------------------------------- |  | ------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30,2008 |            |   | January 31,2009 |  
|Materials and parts             |  | $             | 5,609,388  |   |                 | $ | 5,301,013  |  
|Work-in-process                 |  |               | 12,085     |   |                 |   |           |  
|Finished goods                  |  |               | 1,496,212  |   |                 |   | 1,150,695  |  
|                                |  |               |            |   |                 |   |            |  
|                                |  |               | 7,117,685  |   |                 |   | 6,451,708  |  
|Less provision for obsolescence |  |               | (1,055,548 | ) |                 |   | (2,402,074 | )
|                                |  |               |            |   |                 |   |            |  
|Inventories, net                |  | $             | 6,062,137  |   |                 | $ | 4,049,634  |  
|                                |  |               |            |   |                 |   |            |  

During the quarter ended January 31, 2009, the Company increased its provision for
obsolescence reserves associated with specific hydrogen fuel system component parts and materials as it expects future sales to General Motors and other OEMs of its automotive fuel system products utilizing hydrogen components will be negatively
impacted as a result of current economic conditions as discussed in Note 3.



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7) Goodwill and Other Intangible Assets

Goodwill

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

Goodwill is not subject to amortization. There were no changes in the carrying value of goodwill allocated to the Quantum Fuel
Systems segment during the three or nine months ended January 31, 2009.

Effective as of January 31, 2009, the Company performed
an interim impairment assessment of its goodwill recorded in the Quantum Fuel Systems (QFS) reporting segment as a result of certain indicators of potential impairment associated with the deterioration of General Motors financial condition and
the automotive industry (see Note 3). QFS represents the Companys only continuing non-corporate reporting unit. The goodwill for QFS has a carrying value of $30.4 million as of January 31, 2009. The Company followed the guidance
prescribed by paragraph 19 of SFAS No. 142, Goodwill and Other Intangible Assets, (FAS 142), known as the two-step test for its interim impairment assessment. In performing step one of the two step assessment, the Company first
estimated the fair value of QFS as of January 31, 2009 based on a number of different factors, namely, the market capitalization of the Companys common stock and a discounted cash flow analysis under the income approach based on operating
forecasts. Based on the factors analyzed, the Company determined that the fair value of QFS exceeded its book value and, thus, the recorded goodwill is not considered to be impaired under the first step of the impairment assessment. As a result, the
Company believes no impairment existed as of January 31, 2009 and the step two test was not considered necessary.

Amortization and
Impairment of Intangibles

The Company amortizes specifically identified intangible assets using the straight-line method over the
estimated useful lives of the assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.

Effective as
of January 31, 2009, the Company performed an updated interim impairment assessment of its intangible assets as a result of certain indicators of potential impairment associated with the deterioration of General Motors financial condition
and the automotive industry (see Note 3). Based on the assessment, the remaining carrying value of the intangible asset was written off in the amount of $5.8 million.

Intangible assets consist of the following:



|                                 |  |               |            |   |                 |   |             |  
|-------------------------------- |  | ------------- | ---------- | - | --------------- | - | ----------- | -
|                                 |  | April 30,2008 |            |   | January 31,2009 |  
|GM Strategic Alliance Agreement: |  |               |            |   |                 |   |             |  
|Gross carrying value             |  | $             | 16,479,358 |   |                 | $ | 16,479,358  |  
|Accumulated amortization         |  |               | (9,458,752 | ) |                 |   | (10,703,583 | )
|Impairment                       |  |               |           |   |                 |   | (5,775,775  | )
|                                 |  |               |            |   |                 |   |             |  
|Net carrying value               |  | $             | 7,020,606  |   |                 | $ |            |  
|                                 |  |               |            |   |                 |   |             |  



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8) Warranties

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

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

Changes in the Companys product warranty liability during the nine month period ended January 31, 2009 is as
follows:



|                                       |  |   |          |  
|-------------------------------------- |  | - | -------- | -
|Balance at April 30, 2008              |  | $ | 665,606  |  
|Warranties issued during the period    |  |   | 20,101   |  
|Adjustments to pre-existing warranties |  |   | 14,573   |  
|Settlements made during the period(1)  |  |   | (376,290 | )
|                                       |  |   |          |  
|Balance at January 31, 2009            |  | $ | 323,990  |  
|                                       |  |   |          |  

| | (1) | Consists of material and labor costs incurred to repair or replace products under warranty contracts.
| | --- | -----------------------------------------------------------------------------------------------------



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9) Long-term Debt

Long-term debt consists of the following:



|                                                                                                                                                                                                  |  |               |            |   |                 |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | --------------- | - | ----------- | -
|                                                                                                                                                                                                  |  | April 30,2008 |            |   | January 31,2009 |  
|Convertible Note; $16,195,676 principal, $4,846,154 unamortized conversion premium and $539,413 accrued interest in April 2008; $6,765,279
principal and $68,627 accrued interest in January 2009 |  | $             | 21,581,243 |   |                 | $ | 6,833,906   |  
|Term Note A                                                                                                                                                                                       |  |               | 10,000,000 |   |                 |   | 8,800,000   |  
|Term Note B                                                                                                                                                                                       |  |               | 10,000,000 |   |                 |   | 10,000,000  |  
|Term Note C                                                                                                                                                                                       |  |               |           |   |                 |   | 7,671,922   |  
|Other obligations                                                                                                                                                                                 |  |               | 367,499    |   |                 |   | 183,208     |  
|                                                                                                                                                                                                  |  |               |            |   |                 |   |             |  
|Long-term debt, current and non-current                                                                                                                                                           |  |               | 41,948,742 |   |                 |   | 33,489,036  |  
|Less current maturities for scheduled payments and conversion premium amortization of debt                                                                                                        |  |               | (8,325,144 | ) |                 |   | (33,353,992 | )
|                                                                                                                                                                                                  |  |               |            |   |                 |   |             |  
|Long-term debt, non-current                                                                                                                                                                       |  | $             | 33,623,598 |   |                 | $ | 135,044     |  
|                                                                                                                                                                                                  |  |               |            |   |                 |   |             |  

Convertible Note

The Convertible Note, initially originated by Tecstar Automotive Group, Inc. in July 2004 and assumed by the Company in March 2005 in connection with the
acquisition of Tecstar Automotive Group, was most recently amended on May 30, 2008. As amended, the note has an annual interest rate of 11.5%, consisting of a required minimum payment-in-kind (PIK) of 5.0% and a cash or PIK option of 6.5%, and
is scheduled to mature on July 1, 2009.

The holder of the Convertible Note has the right to extend the scheduled maturity date of
July 1, 2009 for an additional three years (if exercised, the required minimum PIK is thereafter lowered to 3.0%; thus reducing the annual interest rate to 9.5%). The Convertible Note has scheduled semi-annual interest payment dates on
January 1 and July 1 of each year until maturity and the principal cannot be prepaid in part or whole by the Company without consent of the holder.

The note can be converted into shares of the Companys common stock at a fixed conversion price of $1.35 per share at any time until maturity at the option of the note holder. The lender is also entitled to
receive upon conversion of all or part of the balance due under the note, the sum of each interest coupon that the holder would otherwise have been paid through the extended maturity date (July 1, 2012) on the portion of the principal converted
(referred to as the Make-Whole Amount). The Make-Whole Amount is payable in shares of the Companys common stock. The number of shares issuable in payment of the Make-Whole Amount is determined by dividing the Make-Whole Amount by a
fixed amount of $1.50.

The lender has converted a total of $10.2 million of principal under the amended terms of the Convertible Note on
various dates beginning on June 30, 2008 and most recently on January 16, 2009. In exchange, the Company issued the lender 7.6 million shares in satisfaction of the principal amount converted and 2.7 million shares in
satisfaction of the Make-Whole Amount as required by the contractual terms of the amended debt instrument.

On January 31, 2007, debt
instruments representing the Convertible Note were amended. The significant amendments were: (i) the cash coupon rate was decreased from 8.5% to 6.5%, (ii) a 5.0% PIK was added thus increasing the total interest rate from 8.5% to 11.5%,
(iii) the holders of the note were



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provided the right to extend the maturity date of the note for an additional three years (if exercised, the PIK is thereafter lowered to 3.0%), (iv) the
conversion price was reset from $5.77 to $2.36 per share, (v) an anti-dilution provision was added which provided that the current conversion price of $2.36 would reset to the level of the value of future shares issued, if the Company issued
the shares for a value less than $1.50 per share, (vi) the holders of the note were prohibited from not converting prior to November 24, 2007, (vii) the Company guaranteed all of Tectar Automotive Groups obligations under the
Convertible Note; and (viii) the holders of the Convertible Note were granted a security interest in substantially all of the assets of the Company.

The Company determined that the amendments to the note on January 31, 2007 were substantial and represented an implied exchange of debt instruments as prescribed in EITF 96-19, Debtors Accounting for
a Modification or Exchange of Debt Instruments. In accordance with EITF 96-19, the original note, with an outstanding balance of $15.0 million just prior to the amendment, was accounted for as an early extinguishment of debt and the amended
note was accounted for as a new debt instrument and recorded at its estimated fair value of $21.3 million. The deemed replacement of the original debt instrument with the new debt instrument resulted in a charge of $6.3 million recorded in the third
quarter of fiscal 2007. The difference between the fair value and face value of the note of $6.3 million as of January 31, 2007 was being amortized against interest expense over the remaining 65 months of the expected life of the note to
reflect the effective interest rate of the new debt obligation, until the remaining unamortized balance was eliminated in connection with a subsequent amendment on May 30, 2008 described below.

On June 22, 2007, in connection with the $18.75 million private placement transaction that was completed by the Company, the conversion price under
the Convertible Note was reset from $2.36 to $1.35 due to the anti-dilution provision contained in the Convertible Note. The reset of the conversion price did not have any impact on our financial statements; however, the reset did increase the
number of shares that the holder would receive upon conversion of the principal balance.

On January 11, 2008, Tecstar Automotive
Group was in default of the January 1, 2008 semi-annual interest payment owed to holder of the Convertible Note. As a result of the default, the entire amount of principal and accrued interest due under the Convertible Note was immediately due
and payable. On January 16, 2008, the Company transferred substantially all the assets of the Tecstar Automotive Group business segment to an affiliate of the holder of the Convertible Note pursuant to a strict foreclosure under Article 9 of
the Uniform Commercial Code in satisfaction of the debt obligation due under the Convertible Note. In connection with the transfer of assets, the Companys outstanding debt instruments payable to its lender were restructured (see Troubled
Debt Restructuringdiscussed below). The restructure included the replacement of the Convertible Notes existing debt instruments with a new debt instrument issued by the Company that had the same significant terms as the existing debt
instruments. The existing debt obligation had a principal balance of $15.5 million and unpaid accrued interest of $0.7 million at the time of replacement on January 16, 2008 and the new debt obligation had a principal balance of $16.2 million,
which included the assumption by the Company of the unpaid accrued interest under the existing debt instrument.

The Company determined
that the execution of the new Convertible Note debt instrument on January 16, 2008 did not result in a substantial change in the fair value of the debt obligation as defined by EITF 96-19. Accordingly, the remaining unamortized balance and the
expected remaining life of the premium, arising pursuant to the January 31, 2007 restructure, were not affected by the January 16, 2008 restructure.

On May 30, 2008, in connection with additional financing provided by the lender, the Company modified the Convertible Note. The significant amendments included: (i) the Make-Whole Amount
provision was added which provides the lender with an incentive to convert all or part of the balance due under the note prior to its maturity and (ii) the anti-dilution conversion price reset provision that was originally added on
January 31, 2007 was eliminated.

The Company determined that the amendments to the Convertible Note on May 30, 2008 in
combination with modifications to the Term Note B (discussed below) that were negotiated together, were substantial and represented an implied exchange of debt instruments as prescribed in EITF 96-19. As such, the replacement of debt instruments was
accounted for as an early extinguishment of debt and the amended



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Convertible Note and the amended Term Note B were thus required to be recorded at their estimated fair values. The Convertible Note had an estimated fair
value of $45.1 million as of May 30, 2008. The replacement of the debt instruments resulted in a total non-cash charge of $39.8 million recorded during the first quarter of fiscal 2009 of which the Convertible Note represented
$23.5 million of the charge. The $23.5 million charge represents the difference between the carrying balance of the note and the estimated fair value of the note as amended. The fair value of the note was significantly higher than its carrying
value primarily due to the substantial premium that resulted from the difference between the contractual conversion price ($1.35 per share) in relation to the closing market price of the Companys common stock ($2.43 per share) on the date of
the May 2008 modifications. In accordance with Accounting Principals Board (APB) 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, if the implied premium is substantial, then the premium is presumed to
represent equity and is allocated to additional paid-in-capital. As this modification resulted in the debt being issued at a substantial premium, the fair value of the amended Convertible Note was allocated $16.9 million to debt and $28.2 million to
additional paid-in-capital. See discussion of EITF 07-5 under New Accounting Pronouncements in Note 1.

The estimated fair value of the
remaining balance on the Convertible Note approximates its carrying value of as of January 31, 2009.

Term Note A

Term Note A originated on January 31, 2007 and, as last amended on March 12, 2009, requires monthly interest payments
in cash in arrears at 12.0% through September 15, 2008, increasing by 1.0% each month thereafter, up to a maximum rate of 18.0%. Term Note A requires monthly principal payments of $0.4 million beginning on October 15, 2008 with an
additional payment of $3.9 million required on March 15, 2009. Term Note A matures on February 28, 2010. The Company has the right to prepay all or part of the principal without penalty and has the option to repay the principal with
shares of its common stock, subject to certain conditions. If the Company chooses to repay in common stock, the value of the shares delivered will be determined based on 95% of the volume weighted average price (VWAP) of the Companys stock for
the five business days prior to the payment date. The Company also has the option to delay any scheduled principal reductions for a period up to two months with proper notice to its lender as long as the VWAP of the Companys stock is below
$1.50 per share for the five business days prior to the scheduled payment date. The portion of the outstanding principal that is deferred at the Companys option accrues interest at a rate of 2.0% above the stated interest rates. If the VWAP of
the Companys stock is below $0.50 per share for the first three business days of the five business day VWAP measurement period or if the lender is unable to immediately trade such shares, the lender may instead choose to require the Company to
add such payment to the outstanding principal amount by providing the Company proper notice. The portion of the outstanding principal that is deferred at the lenders option accrues interest at a fixed rate of 9.0% from the date such amount is
deferred.

The Company has satisfied the October, November and December 2008 principal requirements in cash and elected to defer the
January and February 2009 principal requirements. The Company anticipates satisfying the January and February principal requirements in cash on or about March 15, 2009 and deferring the $4.3 million scheduled March 2009 principal requirement
for at least one month.

On September 13, 2007, January 16, 2008, May 30, 2008 and most recently on March 12,
2009, the note was amended to revise interest rates, dates of scheduled principal reductions and maturity, and provisions under which the Company can use it shares to satisfy the payments of the outstanding principal. The Company determined that
none of these modifications were substantial as defined by EITF 96-19.

The estimated fair value of Term Note A approximates its carrying
value as of January 31, 2009.

Term Note B

Term Note B originated on January 16, 2008 and, as amended on May 30, 2008, requires monthly interest payments in arrears at a fixed rate of
6.5%. The Company and the holder of the Term Note B



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cannot prepay or call any part of the principal amount due until January 17, 2010. Term Note B matures on January 16, 2015. The Company has the
option to repay the principal with shares of its common stock, provided certain conditions are met, most notably, a share price of at least $0.50 for five consecutive business days prior to the payment date. When demand for payment is made, the
principal amount that is due and payable is equal to the principal amount so demanded multiplied by the greater of (A) 1.0 and (B) 1.5 multiplied by the lesser of (x) the VWAP for the Companys common stock for the five business
days immediately prior to the repayment date and (y) $3.50. The minimum amount of principal that is payable through the maturity date under the multiplier is $10.0 million and the maximum amount of principal that is payable under the multiplier
is $52.5 million.

On May 30, 2008, the Company amended the note in connection with additional financing associated with Term Note C
and the May 2008 Commitment discussed below. The significant amendments were: (i) the limit for the maximum amount of principal payable under the multiplier provision was increased from $37.5 million to $52.5 million and (ii) a provision
that allowed for the Company to make prepayments under the note at any time was revised to restrict the Company from making prepayments under the note prior to January 17, 2010. Notwithstanding the change to the formula discussed above, the
maximum number of shares issuable in payment of the principal remained fixed at 15.0 million.

As discussed above, the Company determined
that the amendments to Term Note B on May 30, 2008 in combination with modifications to the Convertible Note Term that were negotiated together, were substantial and represented an implied exchange of debt instruments as prescribed in EITF
96-19. As such, the replacement of the Term Note B debt instrument was accounted for as an early extinguishment of debt and the amended note was required to be recorded at its estimated fair value of $26.3 million as of May 30, 2008. The
portion of the non-cash charge in connection with the early extinguishment of debt related to Term Note B was $16.3 million. The charge represents the difference between the carrying balance of the note and the estimated fair values of the notes as
amended. The fair value of the note was significantly higher than its carrying value primarily as a result of the substantial premium that resulted from the contractual principal multiplier that would be required based on the closing market price of
the Companys common stock ($2.43 per share) on the date of the May 2008 modifications. As this modification resulted in the amended debt instrument being issued at a substantial premium, the fair value of the amended Term Note B was allocated
$10.0 million to debt and $16.3 million to additional paid-in-capital.

The fair value of the amended Term Note B, including the value
resulting from the multiplier provisions described above, is estimated to be $13.3 million as of January 31, 2009.

Term Note
C

On May 30, 2008, the Company received $7.5 million in proceeds from its lender under a term note that matures on
August 31, 2009 (Term Note C). Term Note C calls for monthly principal payments of $1.25 million commencing on March 1, 2009 until paid in full. Interest accrues at 9.0% per annum and is due and payable on the first day of each month.
The Company may elect to pay the interest in cash or add it to the unpaid principal balance. The Company has the right to prepay all or part of the principal at any time without penalty. The Company also has the option to repay the principal with
shares of its common stock. If the Company chooses to repay in common stock, the value of the shares delivered will be determined based on the lower of: (i) 95% of the VWAP of the Companys stock for the five business days prior to the
payment date, and (ii) the closing share price on the day immediately preceding the payment due date. The Company also has the option to delay any scheduled principal reductions for a period up to two months with proper notice to its lender as
long as the VWAP of the Companys stock is below $1.50 per share for the five business days prior to the scheduled payment date. The portion of the outstanding principal that is deferred at the Companys option accrues interest at a rate
of 2.0% above the stated interest rate. The Company elected to defer the March 1, 2009 principal requirement for at least one month.

The estimated fair value of Term Note C approximates its carrying value as of January 31, 2009.



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##### Table of Contents

Troubled Debt Restructuring

On January 11, 2008, the Companys Tecstar Automotive Group subsidiary was in default of the January 1, 2008 semi-annual interest payment
owed to holders of the existing Convertible Note. As a result of the default, the amount due under the Convertible Note was immediately due and payable. On January 16, 2008 and in connection with a strict foreclosure under Article 9 of the
Uniform Commercial Code, the Company transferred the net assets of the Tecstar Automotive Group business segment to affiliates of its lender pursuant to satisfy the obligation in default and restructured its other debt obligations. The fair value of
the net assets transferred to the lender approximated the carrying value of the net assets of $8.9 million on the date of the transfer, primarily as a result of impairments recorded in the quarter previous to the default that decreased the carrying
balances of the assets to their estimated fair values. In connection therewith, the Companys outstanding debt instruments payable to the lender were restructured in a manner that resulted in the elimination or release of $20.5 million of
debt and provided the Company with incremental net borrowing capacity of $1.9 million. The elimination or release of debt included approximately $15.5 million secured by Tecstar Automotive Groups assets under a revolving line of credit and a
$5.0 million term note issued by Tecstar Automotive Group. The revolving credit facility, with a remaining availability of approximately $8.1 million after the transfer of the Tecstar business assets to the lender, was terminated and
replaced with the $10.0 million Term Note B ($8.1 million available under the line of credit plus the $1.9 of additional borrowing capacity mentioned above). The debt instruments representing the existing Convertible Note that was in default
beginning on January 11, 2008 were replaced by a new $16.2 million Convertible Note debt instrument.

These transactions were
accounted for by the Company as a troubled debt restructuring in accordance with SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (FAS 15), as a result of concessions granted by the lender by way of
modifications to the terms of the existing debt structure and releases of certain debt obligations and guarantees of the Company.

The
Company calculated a contingent gain of $1.1 million on the restructure of the debt obligations with the lender which represented the difference between the future cash payments under the restructured debt obligations and the carrying amount of the
debt obligations just prior to the restructure, as reduced by the fair value of the net assets transferred to the lender. However, in accordance with FAS 15, the Company did not recognize the contingent gain in connection with the troubled debt
restructuring because it was possible that the gain could have been offset by future interest charges resulting from the payment multiplier under the Term Note B.

Lender Commitment

On May 30, 2008, the Company secured a $10.0 million
unconditional commitment (May 2008 Commitment) from its lender that allows the Company to draw on the commitment at the Companys option and also allows the lender to fund the commitment at the lenders option under certain defined
structures. The option for either party expires on August 31, 2009. To date, neither the lender nor the Company has exercised the option under the May 2008 Commitment.

Should the Company choose to draw on the May 2008 Commitment, the lender has the option to choose between one of the following three investment
structures: (i) receipt of the Companys common stock at a 25.0% discount to market price with 100.0% warrant coverage at an exercise price equal to market price at the time of funding, (ii) a two year secured convertible note, the
conversion price equal to a 10.0% discount to the market price and the coupon on the note equal to 12.0% payable in the Companys common stock, and (iii) a senior secured straight note that redeems in cash at 120% of face value after one
year. In exchange for extending the commitment, the Company granted to the lender the option to make a $10.0 million investment that will be structured as a non-interest bearing convertible note priced at 100.0% of par and redeemable at 120.0% of
par two years after the funding date. The note under this structure would convert into the Companys common stock at a price equal to the market price.



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##### Table of Contents

Shares in Lieu of Cash in Satisfaction of Principal Obligations

Each of the outstanding debt instruments allow the Company to pay the principal using shares of its common stock. On September 18, 2008, the
Companys shareholders approved the potential issuance of shares of common stock upon conversion of convertible debt and in payment of term debt, thus, allowing the Company to issue shares in satisfaction of those debt obligations even though
such issuance would be in excess of 19.99% of its issued and outstanding shares and remain in compliance with the Marketplace Rules.

If
the Company chooses to repay all or portions of principal under the Term Note A and/or Term Note C in shares of its common stock in the future, the value of the shares delivered will be determined based on 95% of the VWAP of the Companys
common stock for the five business days prior to the payment date pursuant to the terms of the debt instruments. In these instances, the Company will perform a separate calculation each time it makes a payment in shares. The calculation will
determine whether the shares provided in satisfaction of principal resulted in value being transferred to the lender based on the intrinsic value of the shares provided. To the extent that there is additional value granted to the lender, the Company
will record the amount immediately as interest expense with a concurrent increase in additional-paid-in-capital in accordance with EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion features or Contingently
Adjustable Conversion Ratios, and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments.

Collateral and Covenants

The Companys obligations under the Convertible Note and the three term notes
are secured by substantially all its assets. Although the Company has continued to satisfy the debt service requirements on the outstanding debt obligations under its Credit Agreement, the Company believes that it was not in compliance with certain
affirmative and negative covenants as of January 31, 2009. The Company received a waiver from its lender on March 12, 2009 waiving all such existing and potential defaults that existed, whether known or unknown, as of March 12, 2009.
In connection with the waiver, Term Note A was amended to (i) extend the stated maturity date from January 31, 2010 to February 28, 2010, (ii) to revise provisions under which the Company can use it shares to satisfy the payments
of the outstanding principal, and (iii) to revise the interest rate for principal payments that are deferred at the lenders option.



24



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##### Table of Contents

Debt Maturities

The table below shows maturities of the Companys long-term debt for each of the next five twelve month periods ending January 31. For this
purpose, it is assumed that the Convertible Note will mature on July 1, 2009 and that the holder will not extend the maturity date:



|           |  |                             |           
|---------- |  | --------------------------- | ----------
|           |  | Maturities ofLong-Term Debt
|2009       |  | $                           | 33,353,992
|2010       |  |                             | 52,306    
|2011       |  |                             | 46,774    
|2012       |  |                             | 24,611    
|2013       |  |                             | 11,353    
|Thereafter |  |                             |          
|           |  |                             |           
|           |  | $                           | 33,489,036
|           |  |                             |           

10) Stockholders Equity

Stock Option Plan

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

Stock Option Exchange Program

On November 17, 2008, the Company completed a value-for-value stock option exchange program which was approved by the
Companys stockholders on September 18, 2008. Pursuant to the option exchange, 3.9 million eligible options were canceled and replaced with 2.6 million replacement stock options. The exchange ratio was calculated such that the
value of the replacement options would approximate the value of the canceled options, determined in accordance with the Black-Scholes option valuation model. Under SFAS No. 123 (revised 2004), Share-Based Payment (FAS 123R), the
Company recognized the excess value of vested replacement options as compensation expense in the third quarter of fiscal 2009 and will recognize the excess value of non-vested replacement options as compensation expense ratably over their vesting
periods. The excess value was nominal.



25



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##### Table of Contents

Share-Based Compensation

The Company has included the following amounts for share-based compensation cost in the accompanying condensed consolidated statements of operations:



|                                    |  |                               |          |                              |      |   |         |  |      |           |  |   |          
|----------------------------------- |  | ----------------------------- | -------- | ---------------------------- | ---- | - | ------- |  | ---- | --------- |  | - | ---------
|                                    |  | Three Months EndedJanuary 31, |          | Nine Months EndedJanuary 31,
|                                    |  | 2008                          |          |                              | 2009 |   | 2008    |  | 2009
|Continuing operations:              |  |                               |          |                              |      |   |         |  |      |           |  |   |          
|Cost of product sales               |  | $                             | 24,811   |                              |      | $ | 29,529  |  | $    | 79,068    |  | $ | 83,278   
|Research and development            |  |                               | 33,831   |                              |      |   | 60,868  |  |      | 126,030   |  |   | 159,764  
|Selling, general and administrative |  |                               | 576,165  |                              |      |   | 379,860 |  |      | 1,956,762 |  |   | 1,278,735
|Discontinued operations             |  |                               | (286,852 | )                            |      |   |        |  |      | 91,475    |  |   |         
|                                    |  |                               |          |                              |      |   |         |  |      |           |  |   |          
|Total share-based compensation      |  | $                             | 347,955  |                              |      | $ | 470,257 |  | $    | 2,253,335 |  | $ | 1,521,777
|                                    |  |                               |          |                              |      |   |         |  |      |           |  |   |          

Below is a summary of the options activity under the stock option plan for the nine months ended
January 31, 2009:



|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |        
|----------------------------------------------- |  | --------------- | - |  | ---------------------------- | ---- | --------------------------------------- | --- | ------------------------ | - | -------
|                                                |  | Number ofShares |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingLife (In Years) |     | AggregateIntrinsic Value
|Options outstanding at April 30, 2008           |  | 5,968,694       |   |  | $                            | 3.33 |                                         |     |                          |   |        
|Granted (1)                                     |  | 3,013,673       |   |  | $                            | 1.21 |                                         |     |                          |   |        
|Exercised                                       |  |                |   |  |                              |     |                                         |     |                          |   |        
|Forfeited (2)                                   |  | (1,222,250      | ) |  | $                            | 3.26 |                                         |     |                          |   |        
|Expired (3)                                     |  | (2,967,082      | ) |  | $                            | 4.50 |                                         |     |                          |   |        
|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |        
|Options outstanding at January 31, 2009         |  | 4,793,035       |   |  | $                            | 1.29 |                                         | 7.2 |                          | $ | 102,600
|                                                |  |                 |   |  |                              |      |                                         |     |                          |   |        
|                                                |  |                 |   | 
|Vested and expected to vest at January 31, 2009 |  | 3,929,685       |   |  | $                            | 1.37 |                                         | 6.9 |                          | $ | 68,715 
|Options exercisable at January 31, 2009         |  | 2,257,754       |   |  | $                            | 1.72 |                                         | 5.4 |                          | $ |       



|(1) | Includes 2,574,673 options granted pursuant to the stock option exchange program
|--- | --------------------------------------------------------------------------------

|(2) | Includes 931,750 non-vested options canceled pursuant to the stock option exchange program
|--- | ------------------------------------------------------------------------------------------

|(3) | Includes 2,965,076 vested options canceled pursuant to the stock option exchange program
|--- | ----------------------------------------------------------------------------------------

On May 1, 2008, an additional 2,339,172 shares of common stock became available for future grant under the Plan pursuant to an evergreen provision contained in the Plan. At January 31, 2009,
there were 5,248,536 shares of common stock available for grant under the Plan.



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##### Table of Contents

The fair value of options granted was estimated using the following weighted-average assumptions:



|                                                                                      |  |                               |              |                              |   |       |  |      |              |  |   |        
|------------------------------------------------------------------------------------- |  | ----------------------------- | ------------ | ---------------------------- | - | ----- |  | ---- | ------------ |  | - | -------
|                                                                                      |  | Three months endedJanuary 31, |              | Nine months endedJanuary 31,
|                                                                                      |  | 2008                          |              | 2009                         |   | 2008  |  | 2009
|Dividend yield                                                                        |  |                               | n/a          |                              |   | 0.0%  |  |      | n/a          |  |   | 0.0%   
|Expected lifeyears                                                                   |  |                               | n/a          |                              |   | 5.2   |  |      | n/a          |  |   | 5.3    
|Risk-free interest rate                                                               |  |                               | n/a          |                              |   | 2.2%  |  |      | n/a          |  |   | 2.3%   
|Expected volatility of common stock                                                   |  |                               | n/a          |                              |   | 91.0% |  |      | n/a          |  |   | 90.5%  
|                                                                                     
|A summary of the grant date fair value and intrinsic value information is as follows:
|                                                                                      |  |                              
|                                                                                      |  | Three months endedJanuary 31, |              | Nine months endedJanuary 31,
|                                                                                      |  | 2008                          |              | 2009                         |   | 2008  |  | 2009
|Weighted average grant date fair value per share                                      |  |                               | none granted |                              | $ | 0.43  |  |      | none granted |  | $ | 0.53   
|Intrinsic value of options exercised                                                  |  | $                             |             |                              | $ |      |  | $    |             |  | $ |       
|Total fair value of options vested during the period                                  |  | $                             | 3,091        |                              | $ | 3,091 |  | $    | 1,697,784    |  | $ | 989,550

Warrants

Warrant activity for the nine months ended January 31, 2009 and warrants outstanding as of January 31, 2009, reported in equivalent number of shares of the Companys common stock that can be purchased
upon exercise of the warrants, is as follows:



|                                         |  |                   |           |                          |   |            |                   |  |                     |               |        |   |             |  |            |  
|---------------------------------------- |  | ----------------- | --------- | ------------------------ | - | ---------- | ----------------- |  | ------------------- | ------------- | ------ | - | ----------- |  | ---------- | -
|                                         |  | Warrant Type      |           |                          |  
|                                         |  | June 2006Warrants |           | October 2006A Warrants |   |            | June 2007Warrants |  | August 2008Warrants |               | Totals |  
|Warrants outstanding at April 30, 2008   |  |                   | 880,506   |                          |   | 3,780,522  |                   |  |                     | 15,000,000    |        |   |            |  | 19,661,028 |  
|Exercised                                |  |                   |          |                          |   | (400,000   | )                 |  |                     |              |        |   |            |  | (400,000   | )
|Issued                                   |  |                   |          |                          |   |           |                   |  |                     |              |        |   | 13,500,000  |  | 13,500,000 |  
|                                         |  |                   |           |                          |   |            |                   |  |                     |               |        |   |             |  |            |  
|Warrants outstanding at January 31, 2009 |  |                   | 880,506   |                          |   | 3,380,522  |                   |  |                     | 15,000,000    |        |   | 13,500,000  |  | 32,761,028 |  
|                                         |  |                   |           |                          |   |            |                   |  |                     |               |        |   |             |  |            |  
|                                         |  |                   |           |                          |  
|Exercise Price                           |  | $                 | 3.94      |                          | $ | 1.50       |                   |  | $                   | 2.09          |        | $ | 4.00        |  |            |  
|Expiration Date                          |  |                   | June 2011 |                          |   | April 2014 |                   |  |                     | December 2014 |        |   | August 2015 |  |            |  

Net cash proceeds from the exercise of the October 2006 A Warrants on July 10,
2008 amounted to $0.6 million.

In connection with the public offering completed in August 2008 (see Note 1), the Company issued common
stock purchase warrants entitling the investor to purchase up to 13.5 million shares of the Companys common stock at an exercise price of $4.00 per share. The warrants are immediately exercisable and will expire on August 25, 2015.

The outstanding warrants to purchase 3.4 million shares issued in October 2006 and the outstanding warrants to purchase 13.5 million
shares issued in August 2008 contain provisions which, subject to certain exceptions, resets the exercise price of such warrants if at any time while such warrants are outstanding the Company sells or issues shares of its common stock or rights,
warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of its common stock at a price below $1.50 for the October 2006 warrants or $4.00 for the August 2008 warrants, provided that the exercise price for
the August 2008 warrants cannot be reset below $1.93.



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##### Table of Contents

In the event of a price reset to the October 2006 warrants and/or the August 2008 warrants, the number of
shares of the Companys common stock that is subject to such warrants will increase so that the aggregate purchase price payable applicable to the exercise of the warrants after the reset of the exercise price is the same as the aggregate
purchase price payable immediately prior to the reset. Therefore, any such reset to the exercise price of the October 2006 warrants and/or August 2008 warrants will have a dilutive effect on the Companys existing shareholders.

The Company evaluates the warrants provided in connection with each of its private placements or public offerings in accordance with EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, and has concluded that equity classification is appropriate for all of its outstanding warrants due to the fact that
(i) the warrants are required to be physically settled in shares of the Companys common stock and (ii) the future issuance of shares that could trigger a potential reset of the exercise prices is within the control of the Company.
The proceeds from the transactions have been allocated to the stock and the warrants based on their relative fair values. However, the Company aggregates the values for financial reporting purposes as both types of instruments have been classified
as permanent equity.

Shares Available

The number of undesignated shares available as January 31, 2009 is as follows:



|                                               |  |     |  |              |   |  |                      |   |  |                
|---------------------------------------------- |  | --- |  | ------------ | - |  | -------------------- | - |  | ---------------
|                                               |  |     |  | Common Stock |   |  | Series BCommon Stock |   |  | Preferred Stock
|Shares authorized                              |  |     |  | 248,000,000  |   |  | 2,000,000            |   |  | 20,000,000     
|Less shares issued and outstanding             |  |     |  | (97,627,955  | ) |  | (999,969             | ) |  |               
|Less shares designated for issuance under:     |  |     |  |              |   |  |                      |   |  |                
|Stock options                                  |  |     |  | (4,793,035   | ) |  |                     |   |  |               
|Warrants                                       |  |     |  | (32,761,028  | ) |  |                     |   |  |               
|Conversion of principal under Convertible Note |  | (1) |  | (5,011,318   | ) |  |                     |   |  |               
|Make-Whole provision under Convertible Note    |  | (2) |  | (1,544,739   | ) |  |                     |   |  |               
|Repayment of principal under Term Note A       |  | (3) |  | (10,771,114  | ) |  |                     |   |  |               
|Repayment of principal under Term Note B       |  | (4) |  | (15,000,000  | ) |  |                     |   |  |               
|Repayment of principal under Term Note C       |  | (3) |  | (9,179,927   | ) |  |                     |   |  |               
|                                               |  |     |  |              |   |  |                      |   |  |                
|Total shares designated for future issuance    |  |     |  | (79,061,161  | ) |  |                     |   |  |               
|                                               |  |     |  |              |   |  |                      |   |  |                
|Undesignated shares available                  |  |     |  | 71,310,884   |   |  | 1,000,031            |   |  | 20,000,000     
|                                               |  |     |  |              |   |  |                      |   |  |                



|(1) | Conversion price for repayment of principal in shares is fixed at $1.35 per share.
|--- | ----------------------------------------------------------------------------------

|(2) | Conversion price for repayment of Make-Whole Amount in shares is fixed at $1.50 per share.
|--- | ------------------------------------------------------------------------------------------

|(3) | Repayment of principal in shares is at Companys option at 95% of market price. Market price used is $0.86 per share which represents the Companys closing share price on
January 31, 2009.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Repayment of principal in shares is at Companys option, but share price must be above $0.50 and number of shares is fixed at 15.0 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Stockholders Equity Rollforward

The following table provides a condensed roll-forward of stockholders equity for the nine months ended January 31, 2009:



|                                                                                                                                 |  |                    |   |  |                          |             |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | - |  | ------------------------ | ----------- | -
|                                                                                                                                 |  | Common StockShares |   |  | TotalStockholdersEquity |            
|Balance at April 30, 2008                                                                                                        |  | 77,972,399         |   |  | $                        | 13,349,193  |  
|                                                                                                                                 |  |                   
|Share-based compensation on stock option and restricted stock awards                                                             |  |                   |   |  |                          | 1,523,795   |  
|Forfeiture of restricted stock award and reversal of share-based compensation                                                    |  | (20,000            | ) |  |                          | (2,018      | )
|Issue common stock, net of transaction fees                                                                                      |  | 9,000,000          |   |  |                          | 17,724,471  |  
|Conversions of principal under the Convertible Note, including shares provided under Make-Whole provision                        |  | 10,275,556         |   |  |                          | 10,200,000  |  
|Fair value of Convertible Note and Term Note B allocated to additional paid-in-capital in connection with May 2008
modifications |  |                   |   |  |                          | 44,512,247  |  
|Warrant exercises                                                                                                                |  | 400,000            |   |  |                          | 600,000     |  
|Net loss                                                                                                                         |  |                   |   |  |                          | (62,076,162 | )
|                                                                                                                                 |  |                    |   |  |                          |             |  
|Balance at January 31, 2009                                                                                                      |  | 97,627,955         |   |  | $                        | 25,831,526  |  
|                                                                                                                                 |  |                    |   |  |                          |             |  

Comprehensive Income or Loss

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



|                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|-------------------------------- |  | ----------------------------- | ---------- | - | ---------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                 |  | Three Months EndedJanuary 31, |            |   | Nine Months EndedJanuary 31, |  
|                                 |  | 2008                          |            |   | 2009                         |   |             | 2008 |  |   | 2009        |  
|Comprehensive loss, net of tax:  |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Net loss, as reported            |  | $                             | (1,358,131 | ) |                              | $ | (13,575,444 | )    |  | $ | (80,340,671 | ) |  | $ | (62,076,162 | )
|Currency translation adjustments |  |                               | (23,768    | ) |                              |   |            |      |  |   | 348,872     |   |  |   |            |  
|                                 |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Comprehensive loss, net of tax:  |  | $                             | (1,381,899 | ) |                              | $ | (13,575,444 | )    |  | $ | (79,991,799 | ) |  | $ | (62,076,162 | )

11) Earnings (Loss) Per Share

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

The Company considers common equivalent shares from the
exercise of stock options, warrants and convertible debt payable 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, warrants and convertible debt were
anti-dilutive for all periods presented.



29



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##### Table of Contents

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



|                                                                                |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ---------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                |  | Three Months EndedJanuary 31, |            |   | Nine Months EndedJanuary 31, |  
|                                                                                |  | 2008                          |            |   | 2009                         |   |             | 2008 |  |   | 2009        |  
|Numerators for basic and diluted loss per share data - to common stockholders:  |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Loss from continuing operations                                                 |  | $                             | (3,842,699 | ) |                              | $ | (13,575,444 | )    |  | $ | (14,278,508 | ) |  | $ | (62,076,162 | )
|Earnings (loss) from discontinued operations                                    |  |                               | 2,484,568  |   |                              |   |            |      |  |   | (66,062,163 | ) |  |   |            |  
|                                                                                |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                                                        |  | $                             | (1,358,131 | ) |                              | $ | (13,575,444 | )    |  | $ | (80,340,671 | ) |  | $ | (62,076,162 | )
|                                                                                |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|                                                                                |  |                               |            |  
|Denominator for basic and diluted loss per share data - weighted-average shares |  |                               | 78,552,368 |   |                              |   | 97,629,241  |      |  |   | 76,143,277  |   |  |   | 89,880,374  |  
|                                                                                |  |                               |            |  
|Basic and diluted per share data:                                               |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Loss from continuing operations                                                 |  | $                             | (0.05      | ) |                              | $ | (0.14       | )    |  | $ | (0.19       | ) |  | $ | (0.69       | )
|Earnings (loss) from discontinued operations                                    |  |                               | 0.03       |   |                              |   |            |      |  |   | (0.87       | ) |  |   |            |  
|                                                                                |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                                                        |  | $                             | (0.02      | ) |                              | $ | (0.14       | )    |  | $ | (1.06       | ) |  | $ | (0.69       | )
|                                                                                |  |                               |            |   |                              |   |             |      |  |   |             |   |  |   |             |  

For the nine month period ended January 31, 2009, options to purchase 4.8 million shares
and warrants to purchase 32.8 million shares of common stock, respectively, were excluded in the computation of diluted net loss per share, as the effects would be anti-dilutive. In addition, for the nine month period ended January 31,
2009, a convertible note obligation convertible into 6.6 million shares of common stock and an estimated 35.0 million shares potentially issuable in satisfaction of term note obligations were excluded in the computation of diluted net loss
per share, as the effects would be anti-dilutive.

12) Income Taxes

Income taxes associated with continuing operations for the three and nine months ended January 31, 2009 were computed using the effective tax rate estimated to be applicable for the full taxable year, which is
subject to ongoing review and evaluation by management. At January 31, 2009, the Company had deferred tax assets primarily consisting of net operating loss carry forwards that were available to offset future taxable income. The Company has
established a full valuation allowance for its deferred tax assets since it is unlikely that the assets will be fully realized based on the Companys lack of earnings history and current evidence.



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13) Business Segment and Geographic Information

Business Segments

The Company previously classified its business operations into three reporting
segments: Quantum Fuel Systems, Tecstar Automotive Group, and Corporate. The Tecstar Automotive Group business segment ceased operations in connection with a series of transactions that were completed on January 16, 2008 that resulted in the
transfer of all the Tecstar businesses to an affiliate of the Companys lender. As a result, the historical activities of the Tecstar Automotive Group business segment are now classified as discontinued operations for all periods presented. The
Quantum Fuel Systems business segment was not affected by the disposal of the Tecstar Automotive Group business segment. The product and contract revenues for continuing operations of the Company were all generated by the Quantum Fuel Systems
segment for all periods presented. The Corporate reportable segment consists of general and administrative expenses incurred at the corporate level that indirectly support the Companys ongoing Quantum Fuel Systems operating segment and the
Companys anticipated future operating segments. Corporate expenses consist primarily of personnel costs, share-based compensation costs and related general and administrative costs for executive, finance, legal, human resources, investor
relations and the Companys board of directors. Certain historical indirect expenses of the Corporate segment that were directly attributable to the Tecstar Automotive Group business activities and would not have been incurred had the Tecstar
Automotive Group business segment not existed, have been reclassified and reported as discontinued operations on the accompanying consolidated statements of operations.

The Quantum Fuel Systems business operations primarily consist of design, manufacture and supply of packaged fuel and electric drive and battery system technologies for use in fuel cell, hybrid, plug-in electric
hybrid, hydrogen and other alternative fuel vehicles. This segment generates product revenues through the sale of hydrogen fuel storage, fuel delivery, and electronic control systems to OEMs, the installation of its systems into OEM vehicles, and
the sale of transportable hydrogen refueling stations. Product revenues are also generated through the sale of compressed natural gas (CNG), propane (LPG), and hydrogen fuel storage, fuel delivery, and electronic control systems for internal
combustion engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the OEMs so that its advanced propulsion systems integrate and operate with
their fuel cell or hybrid applications. Contract revenue is also generated from customers in the aerospace industry, military and other government entities, and other strategic alliance partners. General Motors comprised 61% and 16% and Fisker
Automotive comprised 6% and 55% of the total Quantum Fuel Systems segment revenue reported for the nine months ended January 31, 2008 and 2009, respectively.

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

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

Geographic Information

The Companys long-lived assets as of January 31, 2009 are primarily based in facilities in Irvine and Lake Forest, California. The
Companys affiliate, ALP, is based in Vancouver, British Columbia, Canada; the Companys affiliate, Asola, is based in Erfurt, Germany; and the Companys affiliate, Fisker Automotive, is based in Irvine, California.



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Financial Information by Business Segment

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



|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|--------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                            |  | Three Months EndedJanuary 31, |        |   | Nine Months EndedJanuary 31, |  
|                            |  | 2008                          |        |   | 2009                         |   |         | 2008 |  |   | 2009    |  
|Total Revenue               |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems        |  | $                             | 7,146  |   |                              | $ | 5,881   |      |  | $ | 16,832  |   |  | $ | 17,016  |  
|Corporate                   |  |                               |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                       |  | $                             | 7,146  |   |                              | $ | 5,881   |      |  | $ | 16,832  |   |  | $ | 17,016  |  
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                            |  |                               |        |  
|Operating Loss              |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems        |  | $                             | (1,367 | ) |                              | $ | (9,100  | )    |  | $ | (6,272  | ) |  | $ | (12,492 | )
|Corporate                   |  |                               | (2,477 | ) |                              |   | (2,845  | )    |  |   | (7,867  | ) |  |   | (8,317  | )
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                       |  | $                             | (3,844 | ) |                              | $ | (11,945 | )    |  | $ | (14,139 | ) |  | $ | (20,809 | )
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                            |  |                               |        |  
|Gross Profit (Loss)         |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems:       |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Net product sales           |  | $                             | 2,521  |   |                              | $ | 216     |      |  | $ | 7,236   |   |  | $ | 814     |  
|Cost of product sales       |  |                               | (2,009 | ) |                              |   | (1,048  | )    |  |   | (6,144  | ) |  |   | (2,124  | )
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Gross profit (loss)         |  | $                             | 512    |   |                              | $ | (832    | )    |  | $ | 1,092   |   |  | $ | (1,310  | )
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                            |  |                               |        |  
|Capital Expenditures        |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems        |  | $                             | 382    |   |                              | $ | 96      |      |  | $ | 781     |   |  | $ | 2,447   |  
|Corporate                   |  |                               | 2      |   |                              |   | 713     |      |  |   | 2       |   |  |   | 2,091   |  
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                       |  | $                             | 384    |   |                              | $ | 809     |      |  | $ | 783     |   |  | $ | 4,538   |  
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                            |  |                               |        |  
|Depreciation                |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems        |  | $                             | 582    |   |                              | $ | 453     |      |  | $ | 1,560   |   |  | $ | 1,440   |  
|Corporate                   |  |                               | 3      |   |                              |   | 3       |      |  |   | 10      |   |  |   | 9       |  
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                       |  | $                             | 585    |   |                              | $ | 456     |      |  | $ | 1,570   |   |  | $ | 1,449   |  
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                            |  |                               |        |  
|Amortization of Intangibles |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems        |  | $                             | 419    |   |                              | $ | 415     |      |  | $ | 1,257   |   |  | $ | 1,245   |  
|                            |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  

Selected financial information for discontinued operations is as follows (in thousands):



|                            |  |                               |     |                              |   |      |  |      |       |  |   |  
|--------------------------- |  | ----------------------------- | --- | ---------------------------- | - | ---- |  | ---- | ----- |  | - | -
|                            |  | Three Months EndedJanuary 31, |     | Nine Months EndedJanuary 31,
|                            |  | 2008                          |     | 2009                         |   | 2008 |  | 2009
|Discontinued Operations:    |  |                               |     |                              |   |      |  |      |       |  |   |  
|Capital Expenditures        |  | $                             | 205 |                              | $ |     |  | $    | 916   |  | $ | 
|Depreciation                |  |                               | 129 |                              |   |     |  |      | 1,577 |  |   | 
|Amortization of Intangibles |  |                               |    |                              |   |     |  |      | 698   |  |   | 



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Identifiable assets by reporting segment is as follows (in thousands):



|                     |  |               |        |                 |   |       
|-------------------- |  | ------------- | ------ | --------------- | - | ------
|                     |  | April 30,2008 |        | January 31,2009
|Identifiable Assets  |  |               |        |                 |   |       
|Quantum Fuel Systems |  | $             | 61,753 |                 | $ | 45,677
|Corporate            |  |               | 7,033  |                 |   | 21,341
|                     |  |               |        |                 |   |       
|                     |  | $             | 68,786 |                 | $ | 67,018
|                     |  |               |        |                 |   |       

14) Insurance Settlements

Property Damage Recovery

On September 22, 2007, a flood caused damages to the Companys
inventory, manufacturing equipment and a warehouse facility that is insured by the Company. The settlement payments to be received under the insurance claim were finalized as of October 31, 2008 in the amount of $3.7 million. The Company
received the insurance benefits in installments on various dates since the date of the incident. The final payment in the amount of $0.6 million was received in November 2008. The Company recognized a gain of $1.2 million in the second quarter of
fiscal 2009 which is included as a reduction to selling, general and administrative expense on the condensed consolidated statements of operations. The gain is primarily related to the difference between the insured values and carrying values of the
damaged inventory and equipment. Insurance proceeds on the settlements are included in cash flows from operating activities on the condensed consolidated statements of cash flows.

Life Insurance Proceeds

The Company
recorded other income of $2.0 million during the second quarter of fiscal 2009 in connection with a life insurance settlement payment that was received during November 2008 that stemmed from the death of a Company executive in September 2008. The
executive had served as the Companys Chief Operating Officer and had been on paid medical leave since December 2007. Insurance proceeds on the settlement are included in cash flows from operating activities on the condensed consolidated
statement of cash flows.

15) Fair Value Measurements

Effective May 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (FAS 157) for its financial assets and liabilities. FAS 157 defines
fair value, establishes a framework for measuring fair value, creates a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. FAS 157 defines fair value as
the price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is defined under a hierarchy based on three levels of inputs that may be used
to measure fair value. The inputs for the first two levels are considered observable and the last is unobservable and include the following: Level (1) unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities; Level (2) quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or Level
(3) prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable.

FAS 157 describes three different valuation techniques to be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques described within FAS 157 are consistent
with generally accepted valuation methodologies.

The Company does not have any financial assets or liabilities that are measured on a
recurring basis; however, the Company measured the fair value of debt instruments (as discussed below) on the income approach during the nine months ended January 31, 2009 using unobservable inputs consistent with Level 3 that were significant
to the fair value measurement of the debt.



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On May 30, 2008, the Company and its lender agreed to certain substantial modifications to its
Convertible Note and Term Note B debt instruments that are described further in Note 9. As a result of the modifications, there was an implied exchange of debt instruments. The replacement of debt instruments was accounted for as an early
extinguishment of debt and the amended Convertible Note and the amended Term Note B were recorded at their estimated fair values on May 30, 2008 of $45.1 million and $26.3 million, respectively. The estimated fair values of the Convertible Note
and Term Note B has since declined to $6.9 million and $13.3 million, respectively, as of January 31, 2009, primarily as a result of a lower share price of the Companys common stock and principal conversions to equity on the Convertible
Note. The Company determines the fair values of the amended debt instruments primarily based on binomial probability distribution models that integrate multiple layers of logic at each node representing probability weighted stock price points and
possible outcomes over time based on volatility and appropriate risk free rates. The end node values are then individually present valued back to the valuation date. Under a binomial probability distribution model, the closing market price of the
Companys common stock on the dates of measurement and the estimated annual volatility rates used are the primary drivers of fair value in addition to the contractual terms of the financial instruments. The Company used an estimated annual
volatility rate of 77% to 83% based on historical share prices of its common stock and risk free rates ranging from 1.9% to 3.7% for the amended debt instruments.

The Company did not adopt FAS 157 for non-financial assets and liabilities as the FASB has deferred the effective date of FAS 157 until fiscal years beginning after November 15, 2008 for these instruments that
are recognized or disclosed at fair value in the financial statements on a non-recurring basis in accordance with FAS 157-2.

Effective
May 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial
and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under SFAS 159 for any of its financial assets or liabilities.

16) Contingencies

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



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

Forward-Looking Statements

Some of the information in this report and in the documents that we
incorporate by reference contains forward-looking statements that involve risks and uncertainties. These forward-looking statements come within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and are subject to the safe harbor created by those sections. These statements take into consideration the disposal of the Tecstar Automotive Group business segment on January 16, 2008 and relate to,
among other things: our market and business strategies; our plans to develop and commercialize our products; our ability to provide engineering and manufacturing services to our customers; our ability to integrate acquisitions and realize expected
synergies thereof; our plans to expand our customer base; our ability to establish and maintain necessary strategic relationships; our ability to maintain our competitive advantage; our ability to secure the necessary certification of our products
and comply with applicable standards; our ability to establish and effectively operate our assembly and manufacturing sites; our ability to attract and retain necessary employees; our ability to protect our intellectual property; our position in our
markets; government support of hybrid vehicles; and the future growth of alternative energy industries, including the fuel cell and hybrid vehicle industries, and the solar industries. All statements included in this report and the documents that we
incorporate by reference, other than those that are historical, are forward-looking statements. These statements include words such as may, could, will, should, assume, expect,
anticipate, plan, intend, believe, predict, estimate, forecast, outlook, potential, or continue, or the negative of these terms,
and other comparable terminology. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of risks and other factors, including those described below, elsewhere in this quarterly
report and in the other filings we make from time to time with the SEC.

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

Risks Related to
Liquidity and Capital Resources:



| |  |  | We have a history of operating losses and negative cash flow and anticipate continued net losses as we execute our long-term strategic plan and commercialization
plan for our products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may not be able to maintain compliance with NASDAQs continued listing requirements.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | We anticipate that we will need to raise additional capital to take advantage of strategic business opportunities, to complete product and application development,
to fund the solar initiatives of our subsidiary, Quantum Solar Energy, Inc., to fund future operating activities and contractual commitments, and/or payoff or refinance debt.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our shareholders are subject to significant dilution upon the occurrence of certain events such as the exercise of outstanding options, warrants and convertible
debt and the issuance of shares to pay debt.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Future sales of substantial amounts of our common stock could adversely affect its market price.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | An increase in the principal amount due under a $10.0 million term note we issued on January 16, 2008, as amended could have a material effect on our financial
statements as a result of an upward adjustment clause contained in the credit facility.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may not be able to obtain waivers of potential defaults in the future from our lender if we do not meet future requirements associated with our amended credit
facility and convertible promissory note.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have a commitment to provide a 1.0 million euro guaranty to an affiliates credit facility that could be called upon if the affiliate defaults on the
credit facility in the future.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The market price and trading volume of our common stock may be volatile.
| | - |  | ------------------------------------------------------------------------



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



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Other Risks Related to our Business:



| |  |  | Fisker Automotive, Inc. represents a substantial portion of our anticipated revenues and will have to raise substantial additional capital for their business for us
to be able to realize these potential revenue streams.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We depend on third-party suppliers for the supply of materials and components for our products, including our affiliate, Advanced Lithium Power, Inc. for our
plug-in electric drive system.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our business depends on the growth of hybrid, hydrogen and alternative fuel based vehicles and the solar industry.
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to design and manufacture fuel systems and powertrains for fuel cell, hydrogen and hybrid applications that can be integrated into new vehicle platforms
will be critical to our business and our ability to successfully complete existing development programs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our future fuel cell vehicle development and production revenue depends on our relationship with General Motors and General Motors viability and commitment to
the commercialization of fuel cell vehicles.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our revenue is highly concentrated among a small number of customers.
| | - |  | ---------------------------------------------------------------------



| |  |  | Decrease in demand or price for solar cells could have an adverse effect on our financial statements.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Past acquisitions and any future acquisitions, equity investments, joint ventures, strategic alliances or other similar transactions may not be successful.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Future acquisitions could harm our operating results and share price.
| | - |  | ---------------------------------------------------------------------



| |  |  | We could become subject to stockholder litigation associated with our merger with and subsequent disposition of the Tecstar Automotive Group business segment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may never be able to introduce commercially viable hydrogen products and hybrid propulsion systems.
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | A mass market for hydrogen products and systems may never develop or may take longer to develop than anticipated.
| | - |  | -----------------------------------------------------------------------------------------------------------------



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



| |  |  | The terms and enforceability of many of our strategic partner relationships are uncertain.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | 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 propulsion and fuel systems for fuel cell and hybrid applications on a commercial basis.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Our insurance may not be sufficient.
| | - |  | ------------------------------------



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



| |  |  | Failure to comply with applicable environmental and other laws and regulations could adversely affect our business and harm our results of operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New technologies could render our existing products obsolete.
| | - |  | -------------------------------------------------------------



| |  |  | Changes in environmental policies could hurt the market for our products.
| | - |  | -------------------------------------------------------------------------



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



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



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

The foregoing list of risk factors represents those material risks known to the Company but the list is
not intended to be exhaustive. Reference should also be made to the factors set forth from time to time in our SEC reports, including but not limited to those set forth in the sections entitled Risk Factors in our Annual Report on Form
10-K for the year ended April 30, 2008, in our Prospectus Supplement on Form 424(b)(5) filed on August 21, 2008, and in our amended Registration Statement on Form S-3/A filed on February 27, 2009. All forward-looking statements in
this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update or revise any of these forward-looking statements even if experience or future changes show that the
indicated results or events will not be realized.

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

Overview

We are a fully integrated alternative energy company and a leader in the development and production of advanced propulsion systems, energy storage technologies, and alternative fuel vehicles. We believe that we are uniquely positioned to
integrate advanced fuel system, electric drive and battery control system technologies for hydrogen and hybrid vehicles based on our years of experience in vehicle-level design, vehicle electronics and system integration.

Our portfolio of technologies include electronic controls, hybrid electric drive systems, hydrogen storage and metering systems, and alternative fuel
technologies that enable fuel efficient, low emission hybrid, plug-in electric hybrid, fuel cell and alternative fuel vehicles. We provide powertrain engineering, system integration, manufacturing and assembly of packaged fuel systems and battery
control systems for vehicles and other applications including fuel cells, hybrids, plug-in electric hybrid, alternative fuels, and hydrogen refueling. We also design, engineer and manufacture hybrid and fuel cell vehicles.

Our powertrain engineering, system integration, and assembly capabilities provide fast-to-market solutions to support the production of hybrid and
plug-in hybrid, hydrogen-powered hybrid, fuel cell, and alternative fuel vehicles, as well as modular, transportable hydrogen refueling stations. Our customer base includes automotive Original Equipment Manufacturers (OEMs), military and
governmental agencies, aerospace, and other strategic alliance partners.

Business Strategy

Our business strategy is to enhance our leadership position as a tier-one automotive supplier of advanced propulsion systems, alternative fuel systems,
powertrain engineering, system integration, and assembly. We intend to leverage our alternative fuel, battery system, electronic control, electric and hybrid electric drive system, fuel cell, and hydrogen handling and refueling capabilities and
experience to support the growing hybrid vehicle market and the early introduction of other advanced vehicle technologies. We intend to utilize our tier-one OEM design and assembly capabilities to provide fast-to-market solutions to OEMs for the
early limited production business as hydrogen-powered hybrid vehicles, hybrids and plug-in hybrids move toward commercialization. We intend to leverage our advanced hydrogen and battery storage technologies into broader energy storage applications,
including hybrid electric vehicles and energy storage for renewable energy, such as solar photovoltaic applications, as we establish Quantum as a fully integrated alternative energy company.

We also intend to continue to expand our investments and alliances in solar operations, including a US-based solar photovoltaic module manufacturing
operation. In January 2008, we acquired an equity stake in Asola Advanced and Automotive Solar Systems GmbH (Asola), a German solar energy technology company that develops and manufactures high-efficiency photovoltaic modules for a number of
innovative applications, including automotive, residential, and commercial applications. We expect Asola to continue to grow and expand in Europe, Africa and Asia. Asola has signed letters of intent for the formation of joint ventures with alliance
partners in Spain, South Korea, Italy, and Morocco for the production and distribution of mono and poly-crystalline silicon solar modules with initial capacities of 30 MWp in each of the respective countries. Provided we can obtain funding at the
Quantum Solar level, we plan to assemble solar photovoltaic modules in the United States beginning in fiscal 2010 and assess strategic opportunities to manufacture thin film solar photovoltaic modules as well as opportunities in solar panel
distribution and integration.



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Business Segments and Other Equity Interests

We classify our business operations into two reporting segments: Quantum Fuel Systems and Corporate. The Corporate segment consists of general and
administrative expenses incurred at the corporate level that are not directly attributable to the Quantum Fuel Systems segment and our anticipated future operating segments. Prior to January 16, 2008, we had a third business segmentthe
Tecstar Automotive Group business segment, which ceased operations on January 16, 2008 when we transferred substantially all of that segments business operations to an affiliate of our lender. As a result of such transfer, the historical
activities of the Tecstar Automotive Group business segment are now classified as discontinued operations. In addition, certain historical indirect expenses of the Corporate segment that were directly attributable to the Tecstar Automotive Group
business activities and would not have been incurred had the Tecstar Automotive Group business segment not existed, have been reclassified and are reported as discontinued operations.

We have acquired or obtained ownership interests in three businesses that are not included in our current reporting segments:



| |  |  | On January 4, 2008, we acquired a 24.9% ownership interest in asola Advanced and Automotive Solar Systems GmbH (Asola), a solar module manufacturer located in
Erfurt, Germany. We also have an option to acquire an additional 7.8% ownership interest in Asola in exchange for an additional payment of 0.1 million euro.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 7, 2007, we obtained a 62.0% interest in Fisker Automotive, Inc. (Fisker Automotive), a joint venture with Fisker Coachbuild, LLC. Our ownership
interest in Fisker Automotive as of January 31, 2009 had declined to 21.9% as a result of financing activities completed by the joint venture. Fisker Automotive is developing a production-intent high-performance plug-in hybrid electric vehicle
that it calls the Fisker Karma that is expected to have initial deliveries beginning in the fourth quarter of calendar year 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 24, 2006, we obtained a 35.5% ownership interest in Vancouver, British Columbia-based Advanced Lithium Power Inc. (ALP). ALP is developing
state-of-the-art lithium ion battery and control systems that control state-of-charge and provide for thermal management, resulting in high-performance energy storage. Our direct ownership interest in ALP as of January 31, 2009 was 16.1% as a
result of financing activities completed by ALP. On February 6, 2009, we, along with Fisker Automotive and other investors, provided additional equity capital to ALP. As a result of this financing activity, Fisker Automotive received an
ownership interest of 33.3% and our direct ownership interest decreased to 12.6%. We have also invested in convertible debentures that are convertible into ALPs common stock through December 31, 2009 and have warrants to purchase shares
of ALP common stock that, upon conversion and exercise, would increase our direct ownership interest to approximately 20.8% and decrease Fisker Automotives to 25.9%.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For each of these three businesses, our ownership does not rise to the level of a controlling interest but we are considered to be able to exert
significant influence over their respective operations and accordingly, we account for our equity interests in these businesses under the equity method of accounting. Our respective share of the results of their operations is discussed under
Non-Reporting Segment Results.

Quantum Fuel Systems Segment

Our Quantum Fuel Systems segment supplies our advanced propulsion and 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 20,000 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our propulsion systems and hydrogen storage products for
hybrid and fuel cell applications to major OEMs and certain governmental agencies through funded research and development contracts and on a prototype and production intent basis. These hydrogen systems and products are not currently manufactured in
high volumes and will require additional product development. We expect a commercial market to develop for our hydrogen and fuel cell vehicle products in the future only if OEMs produce fuel cell applications and hydrogen products on a commercial
basis and use our systems. We believe our plug-in electric hybrid propulsion system, referred to as the Q-Drive, will become a commercial product within the next year.

A number of domestic and international automotive and industrial manufacturers are developing alternative clean power systems using fuel cells, hybrid
systems or clean burning gaseous fuels in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. The U.S. Military has mandated a 5% per annum reduction in its internal fuel usage and is seeking
fuel-efficient applications/vehicles to meet this mandate. Our products for these markets consist primarily of fuel storage, fuel delivery, electronic vehicle control systems and battery control systems, as well as system integration of our products
into fuel cell, hybrid, and alternative fuel vehicles, and hydrogen refueling products, which includes the complete design of fuel cell and hybrid vehicles to demonstrate our advanced fuel systems expertise.



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In April 2008, we completed shipments of our packaged hydrogen fuel systems to General Motors in support
of their Equinox fuel cell vehicle program that consists of a fleet of approximately 100 vehicles and we continue to provide service support to General Motors under this program.

In June 2008, we announced that we were awarded a contract by EDAG Engineering + Design AG (EDAG) to develop advanced hybrid vehicle powertrains for the
Future Steel Vehicle program sponsored by World Auto Steel, the automotive group of the International Iron and Steel Institute (IISI). Under this contract, we designed, analyzed, and developed hybrid vehicle powertrain architectures that included
advanced plug-in hybrid electric vehicles (PHEV) and hydrogen fuel cell hybrid vehicles. We worked with our affiliate, ALP, in developing the advanced lithium-ion battery system and controls for each of the vehicle architectures.

In July 2008, we announced that we had designed, developed and shipped a new generation of ultra light-weight advanced composite hydrogen storage units
for Suzuki Motor Corporations Fuel Cell Vehicle Program. These unique systems for Suzuki were developed, analyzed, and tested to meet the Japanese Government requirements.

In October 2008, we announced that we had designed, developed and shipped a new generation of hybrid electric vehicles incorporating hydrogen internal
combustion engines to the US Army Tank Automotive Research Development and Engineering Center (TARDEC) for deployment at the Selfridge Air National Guard Base (SANGB). This deployment is part of a larger test and demonstration program involving
TARDEC joint service partners around the country, in support of the US Armys 21st Century Base Initiative. The hydrogen-powered vehicles will reduce emissions and provide an opportunity to verify and utilize the existing hydrogen refueling
infrastructure.

In December 2008, we submitted an application to the Department of Energy (DOE) under the Advanced Technology Vehicles
Manufacturer Assistance Program for a direct loan of approximately $175 million. The loan will support capital expenditures and engineering integration by Quantum to develop and manufacture second-generation versions of the Q-Drive
plug-in hybrid propulsion system for use in economical light-duty vehicles. The proposed project aims to significantly increase the U.S. average fuel economy of vehicles and includes assembly and testing of lithium ion battery packs and traction
motors in the U.S., and development and production of vehicle-integrated solar photovoltaic roof modules in the U.S. We are currently responding to comments and additional information requests from the DOE and expect to submit the data requested
within the next few weeks.

In January 2009 our affiliate, Fisker Automotive, showcased its first production car, a plug-in hybrid sports
sedan known as the Fisker KARMA, and a plug-in hybrid hardtop convertible concept vehicle known as the Fisker Karma S, at the 2009 North American International Auto Show in Detroit, Michigan. Both of these vehicles incorporated our proprietary
first-generation high-performance plug-in-hybrid electric vehicle architecture that we call Q Drive and we anticipate that future production of these and other Fisker models will incorporate our Q-Drive architecture.

Our Quantum Fuel Systems segment revenues and cash flows in the future will be highly dependent on the success of our plug-in hybrid
electric architecture, the incorporation of our architecture into the Fisker Karma and other Fisker Automotive PHEVs, the success of the Fisker Automotive PHEVs and future hybrid vehicle programs, further advancement of OEM fuel cell
technologies and our OEM customers internal plans, spending levels and timing for pre-production development programs and commercial production. This segment depends on the industry-wide growth of the hydrogen hybrid, plug-in electric hybrid,
fuel cell, and other alternative fuel markets, which in turn is dependent on regulations, laws, hydrogen availability and refueling, technology advancements (particularly battery technologies), and consumer adoption of alternative fuel, hybrid and
hydrogen technologies on a commercial scale.

Our fuel storage systems must be able to withstand rigorous testing as individual components
and as part of the fuel system of the vehicles. The fuel system as a whole, including the tank, regulator and fuel lines, need to comply with OEM vehicle requirements and applicable safety standards. Our systems are generally designed, validated and
certified for short-term life, approximately three years, and are produced in accordance with requirements specified by our OEM customers. We currently have programs with OEMs to design, validate and certify systems for longer durability and for
vehicles designed for commercialization.

Our Quantum Fuel Systems business is generally related to hybrid, hydrogen and alternative fuel
vehicle development programs and product sales, which vary directly with the program timing and production schedules of our OEM and other customers. The market for these vehicles is sensitive to general economic conditions, government agency and
commercial fleet spending and consumer preferences. The rate at which our customers sell hybrid, hydrogen or alternative fuel vehicles depends on their marketing and distribution strategy, as well as company specific inventory and incentive
programs. Any



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significant reduction or increase in production of these vehicles by our OEM customers may have a material effect on our business. In October 2008, we were
awarded an initial purchase order to supply prototype compressed natural gas (CNG) tanks to an OEM of passenger sedans targeted for taxi fleets in the United States. This initial purchase order could lead to a production level arrangement beginning
over the next 9-15 months that would increase our revenues from CNG applications significantly. We also anticipate that future programs for CNG applications can be established in international markets, specifically Europe, China and India. In April,
2007, we signed a memorandum of understanding to establish a cooperative joint venture with a major automaker in China for the development and commercialization of hybrid and alternative fuel vehicles, manufacture of gaseous fuel components, and
integration of advanced propulsion systems. We also signed a memorandum of understanding in May 2007 for the marketing, sales, and distribution in India of its leading alternative fuel vehicle products and systems for CNG, blends of natural gas and
hydrogen, and liquid petroleum gas (LPG). We are currently in discussions with other parties to modify existing components and systems to meet specific vehicle applications for those markets.

Our industry is also dependent upon a limited number of third party suppliers of materials and components for our products. Any quality problems or
supply shortages with respect to these components could negatively impact our business.

Corporate Segment

Our Corporate reportable segment consists of general and administrative expenses incurred at the corporate level that indirectly support our ongoing
Quantum Fuel Systems operating segment and our anticipated future operating segments. Corporate expenses consist primarily of personnel costs, share-based compensation costs and related general and administrative costs for executive, finance, legal,
human resources, investor relations and our board of directors.

On August 27, 2008, start-up activities were initiated in Quantum
Solar Energy, Inc. (Quantum Solar), a new venture formed by us along with Asolas majority shareholder, ConSolTec GmbH, based Irvine, CA for the production and distribution of mono and poly-crystalline silicon solar modules with initial
capacity of 45 MWp. We own 85% of Quantum Solar and ConSolTec owns the remaining 15%. All activities of the consolidated entity are included in our Corporate Segment and to date principally consist of partial payments on long lead assembly equipment
under construction for solar module production capability.

On November 11, 2008, we entered into a new facility lease arrangement
with Cartwright Real Estate Holdings, LLC (Cartwright LLC) and Klein Investments Family Limited Partnership for a facility that currently houses our corporate offices in Irvine, California which we plan to serve as the manufacturing facility for
Quantum Solars business activities. The lease has an effective date of November 1, 2008 and expires on October 31, 2015. Our Chief Executive Officer owns a 50% interest in Cartwright LLC and an irrevocable trust established by our
Chairman of the Board owns a 36.67% interest in Cartwright LLC.

Tecstar Automotive Group Segment

On January 16, 2008 we transferred substantially all the assets of our Tecstar Automotive Group, Inc. subsidiary to an affiliate of our secured
lender pursuant to a strict foreclosure under Article 9 of the Uniform Commercial Code. As a result of the transfer, the Tecstar Automotive Group business segment (formerly consisting of all of the Tecstar businesses and operating units) ceased
operations for purposes of our financial reporting. The Tecstar Automotive Group segment, prior to its disposal, engineered and integrated specialty equipment products into motor vehicle applications, primarily General Motors pick-up trucks
and sport utility vehicles, provided vehicle build capabilities associated with military vehicle projects and provided design and powertrain services for high performance cars.

As a result of the disposal of the Tecstar businesses, all historical activities of the Tecstar Automotive Group business segment have been classified as
discontinued operations in the accompanying consolidated statements of operations and consolidated statements of cash flows. Additionally, certain historical indirect expenses of the Corporate segment that were directly attributable to the Tecstar
Automotive Group business activities and would not have been incurred had the Tecstar Automotive Group business segment not existed, have been reclassified and reported as discontinued operations.

Financial Operations Overview

In managing our
business, our management uses several financial and non-financial factors to analyze our performance. Financial factors include forecast to actual comparisons, analysis of revenue and cost trends, backlog of customer programs, and changes in levels
of working capital. Non-financial factors include assessing 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 vehicle 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 propulsion systems and storage solutions. We also evaluate the number of units
shipped as part of current and new programs and evaluate the operations of our affiliates, Fisker Automotive, Asola and ALP.



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For the first nine months of fiscal 2008 and 2009, revenue related to sales of our products to and
contracts with General Motors and its affiliates represented 61% and 16%, and revenue related to contracts with Fisker Automotive represented 6% and 55%, respectively, of our total consolidated revenue for these periods.

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

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

General Motors Relationship / Impairment of Strategic Alliance Intangible Asset

In 2002, we entered into a ten-year strategic alliance with General Motors. 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 have co-developed technologies that are designed
to accelerate the commercialization of fuel cell applications. Additionally, General Motors will endorse Quantum as a recommended provider of hydrogen storage, hydrogen handling and associated electronic controls. This strategic alliance expands the
relationship that has been in place between General Motors and Quantum since 1993, through which we provided packaged natural gas and propane fuel systems for General Motors alternative fuel vehicle products.

We issued 3.5 million shares of Common Stock and 1.0 million shares of Series B Common Stock to General Motors in connection with entering the
strategic alliance. We recorded the value of the shares issued to General Motors as an intangible asset at fair market value on the dates of their respective issuances, amounting to $16.5 million. We had been amortizing this intangible asset over
the ten-year term of the strategic alliance with General Motors until January 31, 2009, at which time the Company wrote-off the remaining unamortized carry balance in connection with an updated impairment analysis discussed below.

General Motors has represented a significant portion of our historical revenue streams and although our relationship with General Motors and our
commitment to continue to develop hydrogen storage and handling systems for fuel cell vehicles together under the strategic alliance remains strong, certain existing programs are currently experiencing funding restraints as a result of General
Motors deteriorating financial condition. Specifically, activities on certain next generation hydrogen fuel system programs have declined or have been terminated by General Motors with indications that existing and proposed new programs could
experience extended delays. We and General Motors have expressed a mutual desire to continue the strategic alliance relationship, although at a significantly lower level of activity over the near term which includes the remainder of our fiscal 2009.
We continue to support development programs under the auspices of the strategic alliance and we believe that vehicle programs at General Motors utilizing alternative energy technologies are likely to receive enhanced focus in the future once the
financial condition of General Motors stabilizes.

In recent months, the U.S. and world economy and the automotive industry have
deteriorated further and measures implemented by the federal government to stabilize the domestic credit markets and the economy in late 2008 and early 2009 have not yet been realized to the extent expected. On December 31, 2008, General Motors
entered into a loan and security agreement with the United States Department of Treasury (UST), pursuant to which the UST agreed to provide General Motors with a $13.4 billion secured term loan facility. General Motors borrowed $4.0 billion on
December 31, 2008, $5.4 billion on January 21, 2009 and $4.0 billion on February 17, 2009. On February 17, 2009, General Motors submitted its viability plan to the United States Government wherein General Motors requested a total
of $22.5 billion (including the $13.4 billion already secured) in federal loan assistance and stated additional loan assistance could be needed if vehicle sales did not meet certain minimum levels. Furthermore, General Motorss recently
announced that sales for January 2009 and February 2009 were 49% and 53% lower than sales in the same period in 2008. On March 5, 2009, General Motors released its annual report for calendar 2008 in which their independent auditors raised
substantial doubt about General Motors ability to continue as a going concern in their audit opinion. The January and February sales results for General Motors further support the fact that the automotive industry is continuing to deteriorate
and suffering its worse economic conditions in decades as automakers are struggling due to the rise in unemployment, weakening consumer confidence, and lack of availability in the credit markets for consumer loans.



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As a result of this continuing deterioration in the automotive industry and the increased uncertainty
surrounding General Motors ability to continue as a going concern, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, we performed an
updated interim impairment analysis as of January 31, 2009 of our intangible asset associated with our strategic alliance with General Motors,. Although we believe the federal loan arrangement provided to General Motors in December 2008 and the
remarks of President Obama on February 24, 2009 in his address at a joint session of the U.S. Congress are indicators that the federal government will be inclined to continue to provide assistance to General Motors in maintaining sufficient
liquidity in the near term, there is an increasing level of uncertainty for General Motors ability to fund future hydrogen fuel cell projects under the strategic alliance. Given these increased uncertainties, we believe that we are no longer
able to reasonably forecast the long-term revenue streams under the strategic alliance and, as a result, we impaired the remaining $5.8 million unamortized balance of the intangible asset as of January 31, 2009.

Communications with Securities and Exchange Commission

On January 16, 2009, we received written comments from the Securities and Exchange Commission (the SEC Comment Letter) in reference to their review of our recent filings. Comments were received on the following filings:
(i) Form S-3 filed on December 22, 2008, (ii) Form 10-Q for the quarterly period ended October 31, 2008 filed on December 10, 2008, (iii) Definitive Proxy Statement on Schedule 14A filed on August 20, 2008 and,
(iv) Form 10-K for the fiscal year ended April 30, 2008 filed on July 3, 2008. We filed a written response to the SEC Comment Letter on February 11, 2009 and received a follow up letter from the Securities and Exchange Commission
on March 6, 2010 related to certain matters that remain open. Although, we anticipate that we will be able to satisfactory respond to the remaining open matters by the end of our fiscal fourth quarter, we cannot assure you that we will be able
to satisfy the Securities and Exchange Commission with our responses.

Critical Accounting Policies and Estimates

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

Management considers an accounting estimate to be critical if:



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



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

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



| |  |  | We generally manufacture products based on specific orders from customers. Revenue is recognized on product sales upon shipment or when the earnings process is
complete and collectibility is reasonably assured. The Company includes the costs of shipping and handling, when incurred, in cost of goods sold. We generally recognize revenue and profit as work progresses on long-term, fixed price contracts for
product application development using the percentage-of-completion method. Generally, we estimate percentage complete by determining cost incurred to date as a percentage of total estimated cost at completion. For certain other contracts, percentage
complete is determined by measuring progress towards contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings process. For contracts measured under the estimated cost approach, we believe we
can generally make dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to revisions as the contract progresses to completion. Our estimates of contract costs are based
on expectations of
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| | engineering development time and materials and other support costs. These estimates can change based on unforeseen technology and integration issues, but
known risk factors and contract challenges are generally allowed for in the initial scope and cost estimate of the program. Our historical final contract costs have usually approximated the initial estimates and any unforeseen changes in the
estimates have not normally resulted in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
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| |  |  | We conduct a major portion of our business with a limited number of customers. For the first nine months of fiscal 2009 and for the foreseeable future, our
affiliate, Fisker Automotive, has represented and is expected to continue to represent, a significant portion of our revenues and accounts receivables. General Motors represents a significant portion of our current accounts receivable and our
historical revenue streams. Credit is extended based upon an evaluation of each customers financial condition, with terms consistent with those present throughout the industry. Typically, we do not require collateral from customers. We have
recorded an allowance for uncollectible accounts receivable based on past experience and certain circumstances surrounding the composition of total accounts receivable, including amounts outstanding from General Motors. To the extent we increase
this allowance, 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.
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| |  |  | We provide for the estimated cost of product warranties at the time revenue is recognized based on past experience and expectations of future costs to be incurred.
Our Quantum Fuel Systems segment provides product warranties in certain circumstances depending on the platform and model year. For prototype components and systems that are not production intent, warranties are generally not provided. While we
engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred
in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
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| |  |  | We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. As part of our estimate, we rely upon future planned design configurations and projected alternative usage of certain components estimated by our engineering teams. We also
consider estimated demand for service and warranty parts based on historical information. If actual usage rates or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
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| |  |  | We periodically evaluate for impairment our long-lived assets, particularly goodwill and intangible assets relating to acquisitions and the intangible asset
relating to the strategic alliance with General Motors (see General Motors Relationship / Impairment of Strategic Alliance Intangible Assetdiscussed above). Our identifiable finite-lived intangible assets are amortized over their estimated
useful lives. Goodwill is not amortized, but is evaluated periodically for any impairment in the carrying value. We review our long-lived assets, which include property and equipment, goodwill and identifiable finite-lived intangible assets, 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. Goodwill and long-lived asset impairment assessments are generally determined based on fair value techniques, including determining the estimated
future discounted and undiscounted cash flows over the remaining useful life of the asset. Those models require estimates of future revenue, profits, capital expenditures and working capital for each reporting unit. We estimate these amounts by
evaluating historical trends, the current state of the automotive industry and the economy, current budgets, and operating plans. Discounted cash flows are calculated using a discount rate determined by management to be commensurate with the risk
inherent in the current business model. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results. Any resulting impairment loss could have a material
adverse impact on our financial condition and results of operations. During the third quarter of fiscal 2009, in addition to the impairment analysis and write off in connection with the General Motors Stategic Alliance intangible asset, we also
performed an interim impairment assessment of our goodwill recorded in the Quantum Fuel Systems reporting segment (our only continuing non-corporate reporting unit). The goodwill for this reporting unit has a carrying value of $30.4 million as of
January 31, 2009. We followed the guidance prescribed by paragraph 19 of SFAS No. 142, Goodwill and Other Intangible Assets, (FAS 142), known as the two-step test for our interim impairment assessment. In performing step one of
the two step assessment, we first estimated the fair value of the reporting unit as of January 31, 2009 based on a number of
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| | different factors, namely, the market capitalization of our common stock and a discounted cash flow analysis under the income approach based on operating
forecasts. Based on the factors analyzed, we determined that the fair value of our reporting unit exceeded our book value and, thus, the recorded goodwill is not considered to be impaired under the first step of the impairment assessment. As a
result, we believe no impairment existed as of January 31, 2009 and the step two test was not considered necessary.
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| |  |  | We evaluate whether modifications to and restructuring of existing debt instruments result in substantial changes as defined by EITF 96-19, Debtors
Accounting for a Modification or Exchange of Debt Instruments and/or in troubled debt restructurings as defined by FAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. Significant management
judgment is required and we use the assistance of independent valuation consultants to assist in these determinations and to estimate the fair value of the original and amended debt instruments as part of our evaluation. Different judgments could
yield different results. If we determine that a substantial change has occurred with respect to the modifications, we treat the transaction as an extinguishment of the original debt and recognize a gain or loss on the debt retirement. If we
determine that our lender has for economic or legal reasons related to our financial condition, granted us a concession that our lender would not otherwise consider, we treat the modifications as a troubled debt restructuring and record a gain equal
to the estimated concession granted.
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| |  |  | We account for stock compensation expense under SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires all share-based payments, including
grants of stock options and restricted stock, to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option is estimated on the date of grant using an
option-pricing model that meets certain requirements. We currently use the Black-Scholes option-pricing model to estimate the fair value of our share-based payments. The Black-Scholes model meets the requirements of SFAS No. 123R but the fair
values generated by the model may not be indicative of the actual fair values of our stock-based awards as it does not consider certain factors important to stock-based awards, such as continued employment, periodic vesting requirements and limited
transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate
and expected dividends. We estimate the expected volatility and estimated life of our stock options at grant date based on historical data trended into the future. The risk-free interest rate assumption is the Constant Maturity Treasury rate on
government securities with a remaining term equal to the expected term of the option. The dividend yield assumption is based on our history and expectation of dividend payouts. The fair value of our restricted stock is based on the fair market value
of our common stock on the date of grant. Stock-based compensation expense recognized in our financial statements is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense is reduced for estimated
forfeitures based on historical experience. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We evaluate the assumptions used to value
stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. To the extent that we grant additional equity securities to employees or we assume unvested securities in
connection with any acquisitions, our stock-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.
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| |  |  | As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the
determination of the net operating loss carry-forward that has resulted from our cumulative net operating loss. These differences result in an overall net deferred tax asset position before any valuation allowances are considered. We must assess the
likelihood that our deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change
this allowance in a period, we generally include an expense or benefit within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our deferred tax assets. We have recorded a valuation allowance on our deferred tax assets due to uncertainties related to our ability to fully utilize these assets, primarily
consisting of net operating losses and credits that may be carried forward before they expire, and that are subject to certain limitations. In the event that actual results differ from these estimates or we adjust these estimates in future periods,
we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. As of January 31, 2009, our net deferred tax assets have been offset in full by a valuation allowance.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (FAS 141R). FAS 141R replaces FAS No. 141, Business Combinations (FAS 141). FAS 141R retains the fundamental requirements of
FAS 141 that the purchase method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. FAS 141R expands the definition of
transactions and events that qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. FAS 141R broadens the fair value measurement and recognition of assets
acquired, liabilities assumed, and interests transferred as a result of business combinations. FAS 141R also increases the disclosure requirements for business combinations in the financial statements. This statement is effective for us at the
beginning of our 2010 fiscal year. We do not believe that the adoption of FAS 141R will have a material impact on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160). FAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest
holders. This statement is effective for us at the beginning of our 2010 fiscal year. We do not believe that the adoption of FAS 160 will have a material impact on our financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of SFAS
No. 133 (FAS 161). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. In addition, FAS 161 requires the cross-referencing of derivative disclosures within the financial statements and notes thereto. This statement is effective for us at the
beginning of the fourth quarter of our 2009 fiscal year. We are currently evaluating the impact of the provisions of FAS 161.

In May 2008,
the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion (Including Partial cash Settlement (APB 14-1). APB 14-1 requires that the liability and equity
components of convertible debt instruments that may be settled in cash (or other assets) upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuers nonconvertible debt borrowing rate.
The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. APB 14-1 is effective for us at the beginning of our 2010 fiscal year and early adoption is not
permitted. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were
outstanding during an earlier period. We are currently evaluating the impact adoption of this statement could have on our financial statements.

In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an
entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instruments contingent exercise and settlement provisions. It also
clarifies the impact that foreign currency denominated strike prices and market-based employee stock option valuation instruments have on the evaluation. EITF 07-5 is effective for us at the beginning of our 2010 fiscal year and cannot be adopted
early. We are currently assessing the impact that EITF 07-5 will have on our consolidated financial position and results of operations.



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Results of Operations

First nine months of fiscal 2008 and 2009

Total revenues and operating loss for our continuing
business segments and gross profit (loss) on our product sales for the first nine months of fiscal 2008 and 2009 were as follows (in thousands):



|                      |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|--------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                      |  | Three Months EndedJanuary 31, |        |   | Nine Months EndedJanuary 31, |  
|                      |  | 2008                          |        |   | 2009                         |   |         | 2008 |  |   | 2009    |  
|Total Revenue         |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems  |  | $                             | 7,146  |   |                              | $ | 5,881   |      |  | $ | 16,832  |   |  | $ | 17,016  |  
|Corporate             |  |                               |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                      |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                 |  | $                             | 7,146  |   |                              | $ | 5,881   |      |  | $ | 16,832  |   |  | $ | 17,016  |  
|                      |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                      |  |                               |        |  
|Operating Loss        |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems  |  | $                             | (1,367 | ) |                              | $ | (9,100  | )    |  | $ | (6,272  | ) |  | $ | (12,492 | )
|Corporate             |  |                               | (2,477 | ) |                              |   | (2,845  | )    |  |   | (7,867  | ) |  |   | (8,317  | )
|                      |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total                 |  | $                             | (3,844 | ) |                              | $ | (11,945 | )    |  | $ | (14,139 | ) |  | $ | (20,809 | )
|                      |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                      |  |                               |        |  
|Gross Profit (Loss)   |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Quantum Fuel Systems: |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Net product sales     |  | $                             | 2,521  |   |                              | $ | 216     |      |  | $ | 7,236   |   |  | $ | 814     |  
|Cost of product sales |  |                               | (2,009 | ) |                              |   | (1,048  | )    |  |   | (6,144  | ) |  |   | (2,124  | )
|                      |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Gross profit (loss)   |  | $                             | 512    |   |                              | $ | (832    | )    |  | $ | 1,092   |   |  | $ | (1,310  | )
|                      |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  

Revenues decreased $1.2 million, from $7.1 million in the third quarter of fiscal 2008 to $5.9
million in the third quarter of fiscal 2009 and increased $0.2 million, from $16.8 million in the first nine months of fiscal 2008 to $17.0 million in the first nine months of fiscal 2009. The decrease in revenue for the third quarter is primarily
related to a significant decline in product shipments and engineering services provided to General Motors during the third quarter of fiscal 2009 versus the prior year period. These declines have been partially offset by increased development
program activities provided to Fisker Automotive for the three and nine month periods in fiscal 2009 compared to the respective periods in fiscal 2008.

Our overall operating loss increased $8.1 million, from $3.8 million in the third quarter of fiscal 2008 to $11.9 million in the third quarter of fiscal 2009 and increased $6.7 million, from $14.1
million in the first nine months of fiscal 2008 to $20.8 million in the first nine months of fiscal 2009. The increase in operating losses was primarily due to the non-cash charge of $5.8 million in the third quarter of fiscal 2009 for the
impairment of the unamortized balance of the intangible asset associated with our Strategic Alliance Agreement with General Motors, in addition to lower revenues generated during the third quarter of fiscal 2009 as compared to the same prior year
period.

Quantum Fuel Systems Segment

Product sales for the Quantum Fuel Systems segment decreased $2.3 million, or 92%, from $2.5 million in the third quarter of fiscal 2008 to $0.2 million in the third quarter of fiscal 2009 and decreased $6.4 million, or 89%, from $7.2
million in the first nine months of fiscal 2008 to $0.8 million in the first nine months of fiscal 2009. Product sales in fiscal 2008 included shipments of hydrogen fuel storage systems associated with General Motors Equinox fuel cell vehicle
program. Product sales declined significantly in the first nine months of fiscal 2009 as a result of the last shipment of all units ordered under General Motors Equinox program at the end of the fourth quarter of fiscal 2008. Internal
resources previously dedicated to the Equinox production program were redirected near the beginning of fiscal 2009 to the development of General Motors next generation vehicle programs, military programs and development of the Q-Drive for
Fisker Automotive. We expect product revenue in the fourth quarter of fiscal 2009 to remain at a similar level to that realized in the third quarter of fiscal 2009.

Contract revenue for the Quantum Fuel Systems segment increased $1.1 million, or 24%, from $4.6 million in the third quarter of fiscal 2008 to $5.7 million in the third quarter of fiscal 2009 and increased $6.6
million, or 69%, from $9.6 million



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in the first nine months of fiscal 2008 to $16.2 million in the first nine months of fiscal 2009. Contract revenue is derived primarily from system
development and application engineering of our products under the funded Fisker Automotive contract, OEM contracts, and other funded contract work with the U.S. military and other government agencies. Contract revenue is recognized as work
progresses on fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. Recognized revenue is subject to revisions as the contracts progress to completion. Near the
beginning of our third quarter of fiscal 2009, activities on behalf of General Motors associated with next generation hydrogen fuel system programs have declined or have been terminated by General Motors with indications that existing and proposed
new programs could experience extended delays. Activities under the current Fisker Automotive program to develop the hybrid electric powertrain for the Fisker Karma have increased over the course of the first nine months of fiscal 2009 but we
anticipate fourth quarter development revenue for Fisker Automotive will be comparable to third quarter revenues. We also anticipate beginning the next phase of this development program in April 2009 which includes system validation, certification
and other pre-production development activities.

For the first nine months of fiscal 2009 and for the foreseeable future, our affiliate,
Fisker Automotive, represents a significant portion of our revenues. We anticipate that Fisker Automotive will represent a majority of our revenues during the fourth quarter of fiscal 2009.

Cost of product sales for the Quantum Fuel Systems segment decreased $1.0 million, or 50%, from $2.0 million in the third quarter of fiscal 2008 to $1.0
million in the third quarter of fiscal 2009 and decreased $4.0 million, or 66%, from $6.1 million in the first nine months of fiscal 2008 to $2.1 million in the first nine months of fiscal 2009. The decrease is mainly due to the lower overall
product sales volume, partially offset by an increase in inventory reserves and write-offs related to certain hydrogen and fuel cell vehicle programs.

Gross profits on product sales for the Quantum Fuel Systems segment decreased $1.3 million from positive $0.5 million in the third quarter of fiscal 2008 to negative $0.8 million in the third quarter of fiscal 2009
and decreased $2.4 million from a positive $1.1 million in the first nine months of fiscal 2008 to a negative $1.3 million in the first nine months of fiscal 2009. The decrease is mainly attributable to the lower overall product sales volume,
increases in inventory reserves, and reduced product margins as a result of higher absorption of fixed overhead costs per unit shipped.

Research and development expense associated with development contracts increased $2.1 million, or 88%, from $2.4 million in the third quarter of fiscal 2008 to $4.5 million in the third quarter of fiscal 2009 and increased $7.0 million, or
140%, from $5.0 million in the first nine months of fiscal 2008 to $12.0 million in the first nine months of fiscal 2009. The increase is primarily related to increased levels of design and engineering activities associated with the Fisker
Automotive Karma program during the first three quarters of fiscal 2009 and activities associated with General Motors next generation vehicle programs in the first half of fiscal 2009.

Internally funded research and development expense for the Quantum Fuel Systems segment decreased $0.1 million, or 4%, from $2.3 million in the third
quarter of fiscal 2008 to $2.2 million in the third quarter of fiscal 2009 and decreased $0.6 million, or 9%, from $6.7 million in the first nine months of fiscal 2008 to $6.1 million in the first nine months of fiscal 2009.

Selling, general and administrative expenses for the Quantum Fuel Systems segment decreased $0.4 million or 29%, from $1.4 million in the third quarter
of fiscal 2008 to $1.0 million realized in the third quarter of fiscal 2009 and decreased $1.7 million or 43%, from $4.0 million in the first nine months of fiscal 2008 to $2.3 million in the first nine months of fiscal 2009. The decrease during
fiscal 2009 primarily relates to a $1.2 million gain recognized during the second quarter of fiscal 2009 for an insurance settlement associated with facility damages and costs stemming from a flooding incident occurring in September 2007 that is
included as an offset to selling, general and administrative expenses in the Quantum Fuel Systems segment.

Amortization and impairment of
intangibles for the Quantum Fuel Systems segment relates to the Strategic Alliance Agreement with General Motors. The amortization expense in the third quarter of fiscal year 2009 was the same as in the third quarter of fiscal 2008 and amounted to
$0.4 million and the amortization expense in the first nine months of fiscal year 2009 was comparable to the first nine months of fiscal 2008 and amounted to $1.2 million. On January 31, 2009, the remaining unamortized balance of the intangible
asset was written off in connection with an updated impairment analysis (see General Motors Relationship / Impairment of Strategic Alliance Intangible Asset). As a result of the impairment, there will be no further amortization expense
reported in the fourth quarter or thereafter associated with the Strategic Alliance Agreement.

Operating loss for the Quantum Fuel Systems
segment increased $7.7 million in the quarter, from $1.4 million in the third quarter of fiscal 2008 to $9.1 million in the third quarter of fiscal 2009, and increased $6.2 million year to date, from $6.3 million in the first nine months of fiscal
2008 to $12.5 million in the first nine months of fiscal 2009. The increased losses were primarily due to the impairment of the intangible asset in the third quarter of fiscal 2009 and lower levels of



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revenues generated. We expect the Quantum Fuel Systems segment to incur an operating loss in the fourth quarter of fiscal 2009 at a similar level as realized
in the third quarter of fiscal 2009 after excluding the non-recurring impairment of the intangible asset.

Corporate Segment

Corporate expenses increased by $0.3 million in the third quarter of fiscal 2009 from $2.5 million in fiscal 2008 to $2.8 million in fiscal 2009 and
increased by $0.4 million in the first nine months of fiscal 2009 from $7.9 million in fiscal 2008 to $8.3 million in fiscal 2009. Corporate expenses reported for this segment reflect the general and administrative expenses that indirectly support
our ongoing Quantum Fuel Systems operating segment and our anticipated future operating segments. Corporate expenses consist primarily of personnel costs, share-based compensation costs and related general and administrative costs for executive,
finance, legal, human resources, investor relations and our board of directors. Certain historical indirect expenses of the Corporate segment that were directly attributable to the Tecstar Automotive Group business activities and would not have been
incurred had the Tecstar Automotive Group business segment not existed, have been reclassified and reported as discontinued operations on the accompanying consolidated statements of operations. Corporate expenses as a percentage of total
consolidated revenues increased slightly to 49% for the first nine months of fiscal 2009 as compared to 47% for the first nine months of fiscal 2008. We expect the level of corporate expenses for the fourth quarter of fiscal 2009 to be similar to
the level incurred in the third quarter of fiscal 2009.

Non-Reporting Segment Results

Interest Expense.Interest expense, net of interest income, amounted to $0.8 million in the third quarter of fiscal 2009 as compared to $0.6
million realized in the third quarter of fiscal 2008 and amounted to $2.8 million in the first nine months of fiscal 2009 as compared to $1.5 million realized in the first nine months of fiscal 2008. Interest expense primarily relates to debt
instruments payable to our current lender in which proceeds were initially provided in January 2007, as amended. Interest expense in the first nine months of fiscal 2009 included a $0.3 million charge for the recognition of the remaining deferred
debt issue fees related to debt instruments that were deemed to be extinguished as a result of substantial modifications made in May 2008. Interest earned on cash deposits was nominal for the first nine months of fiscal 2008 and was $0.2 million for
the first nine months of 2009.

Loss on Modification of Debt.As a result of the substantial changes made on May 30, 2008 to
the terms of a convertible note and a $10 million term loan, there was an implied exchange of debt instruments as prescribed in EITF 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. In accordance with
EITF 96-19, the convertible note and term note, with outstanding carrying balances of $21.6 million and $10.0 million, respectively, just prior to the amendments, were considered replaced by the amended debt instruments. The replacement of debt
instruments was accounted for as an early extinguishment of debt and the amended convertible note and the amended term note were required to be recorded at their estimated fair values of $45.1 million and $26.3 million, respectively. The replacement
of the debt instruments resulted in a total non-cash charge of $39.8 million recorded during the first quarter of fiscal 2009 that is included in loss from continuing operations. The charge represents the difference between the carrying balances of
the convertible note and term note and the estimated fair values of those notes, after given effect to the amendments. The fair values of these two notes were significantly higher than their carrying values primarily as a result of the substantial
premiums that result from the differences between the contractual conversion prices and principal multipliers in relation to the closing market price of the Companys common stock ($2.43 per share) on May 2008, the date the modifications
occurred. In accordance with Accounting Principals Board (APB) 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, if the implied premium is substantial, then the premium is presumed to represent equity and
is allocated to additional paid-in-capital. As the modifications resulted in the debt being issued at substantial premiums, the fair value of the amended convertible note was allocated $16.9 million to debt and $28.2 million to additional
paid-in-capital and the fair value of the amended term note was allocated $10.0 million to debt and $16.3 million to additional paid-in-capital.

Minority Interest in Losses of Subsidiaries.During the first nine months of fiscal 2008, our net losses were reduced by $1.3 million for the portion of losses incurred by our affiliate, ALP, which was allocated to ALPs
minority equity interests through the period that we consolidated our ownership interest in ALP. As a result of dilution in our equity voting interests in ALP below a controlling level on April 10, 2008, we deconsolidated ALP and began
recording our ownership interest in ALP under the equity method of accounting.

Equity in Earnings (Losses) of Affiliates.During
the first nine months of fiscal 2009 we recognized $0.1 million representing our equity share in earnings of our affiliate, Asola, and we recognized negative $0.8 million representing our equity share in losses of ALP. Our ownership in our
affiliate, Fisker Automotive, since its formation in August 2007, is also under the equity method of accounting; however, we have not recognized any losses realized by Fisker Automotive under the equity method as our net investment balance in this
affiliate is zero and we have no obligation to fund deficit balances of the business.



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Other income.We recorded other income of $2.0 million during the nine months ended
January 31, 2009 in connection with a life insurance settlement payment that was received in connection with the death of our Chief Operating Officer in September 2008 who had been on paid medical leave since December 2007.

Income Taxes. Our income tax expense is minor for both periods presented primarily as a result of our lack of earnings history. As a result of our
historical losses, we have generated significant net operating losses that we can carry forward to offset taxable earnings that we generate in the future. We expect that income taxes will continue to be nominal for the fourth quarter of fiscal 2009.

Discontinued Operations - Tecstar Automotive Group Segment

The Tecstar Automotive Group business segment ceased operations on January 16, 2008 in connection with the transfer of substantially all of its assets. Accordingly, the activities of the Tecstar Automotive Group
reporting segment are reported as a single line item in the accompanying consolidated statements of operations as loss from discontinued operations.

The discontinued operations of the Tecstar Automotive Group business segment generated income (losses), net of tax effects, of $2.5 million of income for the third quarter of fiscal 2008 and $66.1 million of losses
for the first nine months of fiscal 2008. Included in the third quarter of fiscal 2008 was a gain of $8.6 million recognized in connection with the disposal.



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Liquidity and Capital Resources

Cash Flow Activities

Net cash used in operating activities of our continuing operations
during the first nine months of fiscal 2009 was $13.3 million as compared to $14.6 million used during the first nine months of fiscal 2008, which excludes cash used in discontinued operations. The cash used during the first nine months of
fiscal 2009 is primarily due to a net loss from continuing operations of $9.7 million before the non-cash effects of loss on modification of debt, depreciation, and amortization, impairment of intangible asset, share-based compensation charges, and
other items. We also used $3.6 million in cash as a result of net changes in operating assets and liabilities. These changes included cash inflows from net reductions in accounts receivable of $4.3 million; net reduction in inventories of $1.0
million; cash outflows related to an increase in prepayments to affiliates of $4.7 million primarily associated with payments to Asola under the solar cell supply agreement; and a decrease of $3.8 million related to deferred revenue and other
accrued liabilities. We expect the level of cash to be used in operations during the fourth quarter to be consistent with the average levels of cash used over the first three quarters of fiscal 2009.

Net cash used in investing activities of our continuing operations during the first nine months of fiscal 2009 was $9.5 million as compared to net cash
used of $10.7 million during the first nine months of fiscal 2008. Cash used for investing activities in fiscal 2009 relates in part to the payment on our obligation to Asola of $1.9 million that was required as part of our acquisition of the
initial equity investment, a loan to Asola during the second quarter in the amount of $2.2 million, payments made on solar module manufacturing equipment under construction in the amount of $2.0 million for the U.S. based solar facility, and $1.8
million in tenant improvements and new equipment purchases associated with the relocation of our engineering and manufacturing operations to a new facility in Lake Forest, California. During fiscal 2009 we also invested $0.8 million in our affiliate
Advanced Lithium Power, Inc.

Net cash provided by financing activities of our continuing operations during the first nine months of fiscal
2009 was $24.4 million as compared to $30.2 million during the first nine months of fiscal 2008. Cash provided during fiscal 2009 consisted principally of $17.8 million in net proceeds received in connection with our sale of stock in a
registered direct offering that closed on August 25, 2008 and $7.5 million in proceeds received from our lender under a new term loan. We also received $0.6 million from the exercise of warrants of our common stock during the first nine of
fiscal 2009 and made principal payments of $1.2 million on our outstanding term debt.



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Capital Resources

Public Offering

On August 25, 2008, we completed a public offering of 9,000,000
units, with each unit consisting of one share of common stock and 1.5 warrants to purchase additional shares of common stock, at a purchase price of $2.12 per unit. The warrants have an initial exercise price of $4.00 per share, subject to
appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock and the exercise price and number of warrants held by a purchaser (or such purchasers direct or indirect
transferee) are subject to appropriate adjustment in the event of cash dividends or other distributions to holders of shares of our common stock. The warrants also contain a provision which, subject to certain exceptions, resets the exercise price
of such warrants if at any time while such warrants are outstanding we sell or issue shares of our common stock or rights, warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of our common stock at a
price below $4.00; provided, however, the exercise price for the warrants cannot be reset below $1.93 (as adjusted for stock dividends, stock splits, reorganizations and similar corporate events). In the event of any such reset, the number of shares
of our common stock that are subject to such warrants will be increased so that the aggregate purchase price applicable to the warrants is the same before and after the reset in the exercise price. The warrants expire on August 25, 2015.

The net proceeds to us from the public offering, after deducting placement agent fees and our estimated offering expenses, and excluding
the proceeds, if any, from the exercise of the warrants issued in the Offering, were approximately $17.8 million. The common stock and warrants to purchase common stock were issued pursuant to a prospectus supplement dated August 20, 2008, in
connection with a takedown from our shelf registration statement on Form S-3, which became effective on July 14, 2008.

Lender Commitment and Debt Obligations

On May 30, 2008, we secured a $10.0 million unconditional
commitment (May 2008 Commitment) from our lender that allows us to draw on the commitment at our option and also allows the lender to fund the commitment at the lenders option under certain defined structures. The option for either party
expires on August 31, 2009. To date, neither our lender nor us has exercised the option under the May 2008 Commitment.

Should we
choose to draw on the May 2008 Commitment, the lender has the option to choose between one of the following three investment structures: (i) receipt of our common stock at a 25.0% discount to market price with 100.0% warrant coverage at an
exercise price equal to market price at the time of funding, (ii) a two year secured convertible note, the conversion price equal to a 10.0% discount to the market price and the coupon on the note equal to 12.0% payable in our common stock, and
(iii) a senior secured straight note that redeems in cash at 120% of face value after one year. In exchange for extending the commitment, we granted to the lender the option to make a $10.0 million investment that will be structured as a
non-interest bearing convertible note priced at 100.0% of par and redeemable at 120.0% of par two years after the funding date. The note under this structure would convert into our common stock at a price equal to the market price.

As of January 31, 2009, we have outstanding debt obligations to our lender totaling $33.3 million, consisting of (i) a convertible note dated
May 30, 2008, as amended, with an initial principal balance of $16.2 (Convertible Note), (ii) a term note dated January 31, 2007, as amended, with an initial principal balance of $10 million (Term Note A), (iii) a term note dated
January 16, 2008, as amended, with an initial principal balance of $10 million (Term Note B), and (iv) a term note dated May 30, 2008, with an initial principal balance of $7.5 million (Term Note C).



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As of January 31, 2009, the Convertible Note, as amended, has an outstanding principal balance of
approximately $6.8 million. The Convertible Note has an annual interest rate of 11.5%, consisting of a required minimum payment-in-kind of 5.0% and a cash or PIK option of 6.5%. The Convertible Note matures on July 1, 2009 but the holder has
the right to extend the scheduled maturity date to July 1, 2012. If the maturity date is extended, then the interest rate is reduced to 9.5% (3% minimum payment-in-kind and 6.5% cash or payment-in-kind). The Convertible Note has scheduled
semi-annual interest payment dates on January 1 and July 1 of each year until maturity and the principal cannot be prepaid in part or whole by us without consent of the holder.

The principal due under the Convertible Note can be converted into shares of our common stock at a conversion price of $1.35 per share at any time until
maturity at the option of the note holder. If the holder converts prior to the maturity date, then the holder is also entitled to receive upon conversion of all or part of the balance due, the sum of each interest coupon that the holder would
otherwise have been paid through the extended maturity date (July 1, 2012) on the portion of the principal converted (referred to as the Make-Whole Amount). The Make-Whole Amount is payable in shares of our common stock. The number of
shares issuable in payment of the Make-Whole Amount is determined by dividing the Make-Whole Amount by $1.50.

Through January 31,
2009, the lender has converted a total of $10.2 million of principal on various dates beginning on June 30, 2008 and most recently on January 16, 2009. In exchange, we have issued a total of 7.6 million shares in satisfaction of the
principal amount converted and 2.7 million shares in satisfaction of the Make-Whole Amount.

Term Note A, as amended, was originally
issued on January 31, 2007 in the face amount of $10 million. The outstanding principal balance as of January 31, 2009 is $8.8 million. Term Note A requires monthly interest payments in cash in arrears at 12.0% through September 15,
2008, increasing by 1.0% each month thereafter, up to a maximum rate of 18.0%. The note requires monthly principal payments of $0.4 million which began on October 15, 2008 with an additional payment of $3.9 million required on March 15,
2009. Term Note A matures on February 28, 2010. We have the right to prepay all or part of the principal without penalty and have the option to repay the principal with shares of our common stock, subject to certain conditions. If we choose to
repay in common stock, the value of the shares delivered will be determined based on 95% of the volume weighted average price (VWAP) of our stock for the five business days prior to the scheduled payment date. We also have the option to delay any
scheduled principal reductions for a period up to two months with proper notice to our lender as long as the VWAP of our stock is below $1.50 for the five business days prior to the scheduled payment date. The portion of the outstanding principal
that is deferred at our option accrues interest at a rate of 2.0% above the stated interest rates. If the VWAP of our stock is below $0.50 per share for the first three business days of the five business day VWAP measurement period or if the lender
is unable to immediately trade such shares, our lender may instead choose to require us to add such payment to the outstanding principal amount by providing us with proper notice. The portion of the outstanding principal that is deferred at our
lenders option accrues interest at a fixed rate of 9.0% from the date such amount is deferred.

We have satisfied the October,
November and December 2008 principal requirements in cash and we elected to defer the January and February 2009 principal requirements. We anticipate satisfying the January and February principal requirements in cash on or about March 15,
2009 and deferring the $4.3 million scheduled March 2009 principal requirement for at least one month.

Term Note B, as amended, was
originally issued on January 16, 2008 in the face amount of $10 million. The outstanding principal balance as of January 31, 2009 is $10 million. Term Note B requires monthly interest payments in arrears at a fixed rate of 6.5%. The note
cannot be called by or put to the Company until January 17, 2010, at which time all or part of the note can be called by or put to the Company at any time and from time to time Term Note B matures on January 16, 2015. We have the option to
repay the principal with shares of our common stock, provided certain conditions are met, most notably, a share price of at least $0.50 for five consecutive business days prior to the payment date. When demand for payment is made, the principal
amount that is due and payable is equal to the principal amount so demanded multiplied by the greater of (A) 1.0 and (B) 1.5 multiplied by the lesser of (x) the VWAP for our common stock for the five business days immediately prior to
the repayment date and (y) $3.50. Under this formula, the minimum amount of principal due can never be less than $10 million and the maximum amount of principal due can never be greater than $52.5 million. Under any repayment scenario, if we
elected to pay the balance due under Term Note B in shares of our common stock, the maximum number of shares issuable in payment thereof cannot exceed 15.0 million shares.

Term Note C, in the face amount of $7.5 million, was issued on May 30, 2008. Term Note C calls for principal payments in monthly installments of
$1.25 million commencing on March 1, 2009 until maturity. Interest accrues at 9.0% per annum and is due and payable on the first day of each month commencing on July 1, 2008. We may elect to pay the interest in cash or add it to the
unpaid principal balance. We have the right to prepay all or part of the principal without penalty. We also have the option to repay the principal with shares of our common stock. If we choose to repay in common stock, the value of the shares
delivered will be determined based on the lower of: (i) 95% of the volume-weighted average price (VWAP) of our stock for the five business days prior to the payment date, and (ii) the closing share price on the day immediately preceding
the payment due date.



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On September 18, 2008, our shareholders approved the potential issuance of shares of common stock
upon conversion of convertible debt and in payment of three term notes. As a result of such shareholder approval, we can issue shares in satisfaction of the debt obligations in excess of 19.99% of our issued and outstanding shares and remain in
compliance with applicable NASDAQ Marketplace Rules.

Although each of the outstanding debt instruments with our lender have structures
that allow for the payment of scheduled principal payments with the issuance of shares of our common stock, the holder of our Convertible Note may chose not to execute any additional conversions and elect not to extend the scheduled maturity date.
In such case, the remaining principal and accrued interest due under the Convertible Note must be settled in cash on July 1, 2009. In addition, in order for us to be able to use shares of our common stock to satisfy the amount due under Term
Note B, our share price must be greater than $0.50 for five consecutive business days prior to the payment date. If our share price is below that $0.50 threshold at the time all or part of the amount due under Term Note B is demanded by our lender,
then we would be obligated to settle the amount so demanded in cash. As a result, we may be required to use up to approximately $17 million of additional cash over the next twelve months to service the Convertible Note and Term Note B.

Our obligations under the Convertible Note and the three term notes are secured by substantially all of our assets. Although we have continued to
satisfy the debt service requirements on the outstanding debt obligations under our Credit Agreement, we believe that we were not in compliance with certain affirmative and negative covenants as of January 31, 2009. We received a waiver from
our lender on March 12, 2009 waiving all such existing and potential defaults that existed, whether known or unknown, as of March 12, 2009. In connection with the waiver, Term Note A was amended to (i) extend the stated maturity date
from January 31, 2010 to February 28, 2010, (ii) to revise provisions under which we can use our shares to satisfy the payments of the outstanding principal, and (iii) to revise the interest rate for principal payments that are
deferred at our lenders option.



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Liquidity

Our principal sources of liquidity as of January 31, 2009 approximate $17.7 million, consisting of $7.7 million of cash and cash equivalents and $10.0 million of committed funding from our lender that is
available to be drawn through August 31, 2009.

The ratio of current assets to current liabilities decreased from 1.0 as of
April 30, 2008 to 0.5 as of January 31, 2009. During fiscal 2009, our total working capital decreased by $22.9 million, from a positive $0.9 million at April 30, 2008 to a negative $22.0 million at January 31, 2009. The decline
was mainly due to an increase in current maturities of long-term debt from $8.3 million as of April 30, 2008 to $33.4 million as of January 31, 2009.

Each of the outstanding debt instruments with our lender have structures that allow for the payment of scheduled principal payments with the issuance of shares of our common stock; however, our lender can elect to
forgo future conversions of principal under the Convertible Note and elect not to extend the scheduled maturity date of the Convertible Note. As such, a cash payment equal to the outstanding principal balance plus accrued interest, totaling
approximately $7 million, could be required on the scheduled maturity date of July 1, 2009 for the Convertible Note. In addition, repayment of all or a portion of the $10.0 million Term Note B can be demanded by our lender beginning on
January 17, 2009 and this obligation can only be satisfied in shares of common stock if our share price is greater than $0.50 for five consecutive business days prior to the payment date. Thus, it is possible that Term Note B will have to be
satisfied in cash.

We have incurred recurring operating losses and negative cash flows from our continuing operating activities. We have
used $13.9 million and $13.3 million in cash for continuing operating activities during the twelve-month period of fiscal 2008 and the first nine months of fiscal 2009, respectively. From our inception through January 31, 2009, we have funded
our operations and strategic investments primarily with proceeds from public and private offerings of our common stock and borrowings with financial institutions and our lender. Our historical operating results, capital resources and financial
position in combination with current projections and estimates were considered in our plan and intentions to fund operations over the next twelve months.

Although our current operating plan anticipates increased revenues and improved gross profits, we expect to continue incurring operating losses over the next twelve months. Our plan anticipates that we will have to
raise additional capital within the next twelve months to fund the operations and obligations of our business and to fund Quantum Solar Energy, Inc. We believe we will require approximately $5 million in additional capital for our operating
requirements and $10 million to complete our solar module manufacturing operation in Irvine, California. In addition to these funding requirements, we may also need to raise up to approximately $17 million in capital ($7 million associated with the
Convertible Note and $10 million associated with Term Note B) over the next twelve months to satisfy debt requirements if the lender doesnt convert or extend the maturity date of the Convertible Note or if we cannot use our shares to satisfy
obligations under Term Note B that are contingently payable in cash. We believe we can raise the necessary level of capital that will be required through public or private offerings of equity or debt securities and/or through the U.S. Department of
Energys Advanced Technology Vehicles Manufacturer Assistance Program or other governmental grants or loans; however, we cannot provide any assurances that we will be able to secure additional funding on terms acceptable to us, if at all. Our
inability to achieve our current operating plan or raise capital to cover any shortfall would have a material adverse affect on our ability to meet our obligations as they become due without substantial disposition of assets or other similar actions
outside the ordinary course of business.

Our long-term future cash requirements will depend on numerous factors, including our revenue
base, our profit margins, our product development activities, our ability to commercialize our fuel and hybrid propulsion systems, market acceptance of our products and controlling costs. We expect to devote substantial capital resources to fund
expected losses, continue development programs, developing a manufacturing infrastructure for our products and meeting our debt obligations. Additionally, we anticipate that we will need to raise additional funds for strategic business opportunities
(including raising funds at the parent or subsidiary level to establish the operations of Quantum Solar Energy), to achieve commercialization of our products, to develop facilities for mass production of those products, and to fund future operating
activities and contractual commitments. The amount of additional financing that we may need to raise for our long-term cash requirements cannot be reasonably estimated at this time but will be directly related to our ability to increase revenues,
control costs, secure Department of Energy and other governmental grants and loans, in addition to the contingent nature of funds that will be required to satisfy existing debt obligations. We believe such financing can be adequately sourced through
public or private offerings of equity or debt securities and/or through governmental grants or loans; however, we cannot provide any assurances that we will be able to secure additional funding on terms acceptable to us, if at all. Additionally, we
may sell certain long-lived assets to provide for a portion of our liquidity in the future.



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Quantitative and Qualitative Disclosures About Market Risk

We are not exposed to market risk from changes in interest rates due to the fixed nature of interest rates associated with our debt instruments. However,
we are exposed to market risk from changes in our common stock pursuant to the terms of our Term Note B note, as amended. The amount of the required payments under the note is subject to a multiplier as discussed under Lender Commitment and Debt
Obligations above. On May 30, 2008, our share price was $2.43 and the estimated fair value of the Term Note B obligation was $26.3 million. Our closing price as of January 31, 2009 was $0.86 per share. The minimum amount of principal
that is payable through the maturity date under the multiplier is $10.0 million if our share price is less than $0.67 and the maximum amount of principal that is payable under the multiplier is capped at $52.5 million if our share price reaches
$3.50 or above. Specifically, we are at risk that for each increase of $0.10 in the per share price of our common stock, the payment required on the outstanding principal will increase by $1.5 million. During the first quarter of fiscal 2009 we
recorded a charge of $16.3 million equal to the difference in the fair value of Term Note B from the January 16, 2008 issuance date to the date of the May 30, 2008 amendment to the note. Any future change in the upward adjustment of Term
Note B above the fair value on the date of the May 2008 amendment would require a charge to the statement of operations in the period such payments are made, and such charges could be substantial.

We are also exposed to risk from fluctuating currency exchange rates, primarily the U.S. dollar against the euro (Asola affiliate and solar manufacturing
equipment suppliers) and against the Canadian dollar (ALP affiliate). Specifically, we are at risk that a future decline in the U.S. dollar against the euro will increase the amount that we will have to pay to satisfy requirements of our long-term
supply agreement with Asola and other obligations that we enter into with European-based suppliers. The exchange rate was one euro equal to 1.28 U.S. dollars as of January 31, 2009. We have a remaining commitment to purchase solar cells with a
cumulative power of 77.5 MWp and make prepayments through December 31, 2017 at a fixed price of 113.3 million euro or US$145.2 million based on the currency exchange rate at January 31, 2009; a 10% decline in the U.S. dollar against
the euro could require us to pay an additional US$14.5 million over the course of the remaining agreement. We face transactional currency exposures that arise when our foreign subsidiaries and affiliates enter into transactions denominated in
currencies other than their own local currency. We also face currency exposure that arises from translating the results of our Canadian and German operations to the U.S. dollar. Net foreign currency transaction gains or losses were not significant
during the first nine months of fiscal 2009.

To date, we have not used any derivative financial instruments for the purpose of reducing
our exposure to adverse fluctuations in interest rates but we have entered into currency exchange arrangements for the purpose of reducing our exposure to adverse changes in currency exchange rates. As of January 31, 2009, we had outstanding
contractual commitments to purchase 0.6 million euros for the months of March 2009 (0.3 million euro) and September 2009 (0.3 million euro) at fixed exchange rates of one euro equal to 1.30 and 1.26 U.S. dollars, respectively.

Off Balance Sheet Disclosures

We have an
unconditional commitment under a November 2007 agreement with Asola to purchase solar cells from Asola and to provide our share of prepayments to Asola. As of January 31, 2009, we had provided Asola with 3.5 million euro of the
5.0 million euro cumulative required by September 1, 2009 for our share of prepayments under the agreement. We also have an unconditional commitment to guaranty up to $1 million of Asolas bank debt.

We anticipate establishing a solar photovoltaic module manufacturing operation in Irvine, California during fiscal 2010. As of January 31, 2009,
this operation will require approximately $10 million in additional capital for manufacturing equipment expenditures, facility improvements, and other costs to become operational. We do not plan to acquire these assets until we raise a level of
additional capital to be able to fund these new assets and provide for sufficient levels of working capital for our overall business (see Liquidity).

We provided warrants to investors in connection with a private placement in October 2006 and a public offering completed in August 2008. We believe the issuance of warrants in these transactions provide us with an
additional source of future equity capital. The outstanding warrants to purchase 3.4 million shares issued in October 2006 and the outstanding warrants to purchase 13.5 million shares issued in August 2008 contain provisions which, subject to
certain exceptions, resets the exercise price of such warrants if at any time while such warrants are outstanding we sell or issue shares of our common stock or rights, warrants, options or other securities or debt convertible, exercisable or
exchangeable for shares of our common stock at a price below $1.50 for the October 2006 warrants or $4.00 for the August 2008 warrants, provided that the exercise price for the August 2008 warrants cannot be reset below $1.93.

In the event of a price reset to the October 2006 warrants and/or the August 2008 warrants, the number of shares of the Companys common stock that
is subject to such warrants will increase so that the aggregate purchase price payable applicable to the exercise of the warrants after the reset of the exercise price is the same as the aggregate purchase price payable immediately prior to the
reset. Therefore, any such reset to the exercise price of the October 2006 warrants and/or August 2008 warrants will have a dilutive effect on the Companys existing shareholders.

We evaluate warrants provided in connection with each of our private placements or public offerings in accordance with EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, and have concluded that equity classification is appropriate for all of our outstanding warrants due to the fact that (i) the warrants are
required to be physically settled in shares of our common stock and (ii) the future issuance of shares that could trigger a potential reset of the exercise prices is within our control. The proceeds from the transactions have been allocated to the
stock and the warrants based on their relative fair values. We aggregate the values for financial reporting purposes as both types of instruments have been classified as permanent equity.

The classification as equity for the outstanding warrants could change as a result of either future modifications to the existing terms of settlement or
the issuance of new instruments that could be converted into an increased or unlimited number of shares. If a change in classification is required in the future, the warrants would be treated as derivatives, brought onto the balance sheet at their
estimated fair value, and marked to market at every period end.



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

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



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

(a) Disclosure
Controls and Procedures

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

(b) Design of Internal Control Over Financial Reporting

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

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



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



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



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



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

(c) Changes in Internal Control Over Financial Reporting

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



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PART IIOTHER INFORMATION



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

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

We have a history of operating losses and negative cash flow and anticipate continued net losses as we execute our long-term strategic plan and
commercialization plan for our products.

We have a history of operating losses and negative cash flow. We have incurred recurring net
losses, including net losses from continuing operations, of $18.3 million in fiscal 2006, $22.6 million in fiscal 2007, $19.0 million in fiscal 2008, and $62.1 million for the nine month period ending January 31, 2009. We expect to continue to
make significant expenditures and incur substantial expenses as we continue our research and development efforts, further commercialize our products, expansion into other renewable energy industries such as solar, and develop facilities to expand
the production capacity for our products. As a result, we expect to continue to incur significant losses as we execute our strategies and may never achieve or maintain profitability. We believe that we have a long-term strategy in place that will
allow us to operate profitably in the future. However, if we fail to execute our strategy or if there is a change in the alternative energy or hybrid vehicle market conditions or any other assumptions we used in formulating our business strategy,
our long-term strategy many not be successful and we may not be able to achieve and maintain profitability. As a result, investors could lose confidence in our company and the value of our common stock, which could cause our stock price to decline
and adversely affect our ability to raise additional capital.

We may not be able to maintain compliance with NASDAQs continued
listing requirements.

We must comply with NASDAQs continued listing requirements in order to maintain our listing on
NASDAQs Global Market. NASDAQs Global Market continued listing standards include a requirement that the minimum closing bid price for a share of our common stock not be less than $1.00 per share for thirty consecutive business days.
During the past several months, the closing bid price for a share of our common stock has been consistently near or below $1.00 per share including a period of forty six consecutive trading days, from October 7, 2008 through December 11,
2008, where it was below $1.00, which, ordinarily, would have been a violation of NASDAQs continued listing requirements. However, on October 16, 2008, NASDAQ suspended the $1.00 minimum bid rule due to market conditions. The rule is
scheduled to be reinstated on April 20, 2009. If NASDAQ reinstates the $1.00 minimum bid requirement on April 20, 2009 as scheduled and, thereafter, the closing bid for our common stock is below $1.00 per share for thirty consecutive days,
then we will not be in compliance with NASDAQs continued listing requirements and will receive a notice letter from NASDAQ stating that we will be delisted if we do not regain compliance. In order to regain compliance, we would have to attain
a closing stock price of at least $1.00 per share for a minimum of ten consecutive business days prior to the expiration of six months from the date of the notice letter from NASDAQ, but the NASDAQ may in its discretion require that we maintain a
bid price of at least $1.00 per share for a period in excess of ten consecutive business days. If we are unable to regain compliance with the minimum bid requirement, we would have the option to transfer to the NASDAQ Capital Market provided that we
qualify for listing and our application for transfer is approved; in addition, we must satisfy the Capital Markets initial listing standards, other than minimum bid price, as of that date we apply for such transfer. Our failure to regain
compliance with the NASDAQ Global Market continued listing standards could result in the delisting of our common stock and could adversely affect the per share price of our common stock and impair our ability to raise capital that may be needed for
future operations.

Our shareholders are subject to significant dilution upon the occurrence of certain events.

As of January 31, 2009, we had approximately 79.1 million shares of our common stock designated for future issuance consisting of:
(i) 4.8 million shares subject to outstanding stock options issued under our 2002 Stock Incentive Plan, (ii) 32.8 million shares subject to outstanding common stock purchase warrants, (iii) 6.6 million shares issuable
upon conversion of our outstanding convertible debt, and (iv) 35.0 million shares issuable in payment of the principal amount due under the terms notes issued under our credit facility based on our common stock price as of January 31,
2009. The actual number of shares issued in payment of our term notes could be much higher or lower depending on our share price at the time such payment is made. The potential issuance of the shares described above will be dilutive to our existing
shareholders.

In addition, the outstanding warrants to purchase 3.4 million shares issued on October 27, 2006 (October 2006
Warrants) and the outstanding warrants to purchase 13.5 million shares issued on August 25, 2008 (August 2008 Warrants) contain a provision which, subject to certain exceptions, resets the exercise price of such warrants
if at any time while such warrants are outstanding we sell or issue shares of our common stock or rights, warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of our common stock at a price below $1.50
for the October 2006 Warrants or $4.00 for the August 2008 Warrants, provided that the exercise price for the August 2008 Warrants cannot be reset below $1.93.



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In the event of a price reset to the October 2006 Warrants and/or the August 2008 Warrants, the number of
shares of our common stock that are subject to such warrants will increase so that the aggregate purchase price payable applicable to the exercise of the warrants after the reset of the exercise price is the same as the aggregate purchase price
payable immediately prior to the reset. Therefore, any such reset to the exercise price of the October 2006 Warrants and/or August 2008 Warrants will have a further dilutive effect on our existing shareholders.

Future sales of substantial amounts of our common stock could adversely affect its market price.

Future sales of substantial amounts of our common stock into the public market, including shares issued upon exercise of options and warrants, issued in
payment of debt obligations, and issued in subsequent offerings, could adversely affect the prevailing market price of our common stock. To the extent that holders of a significant number of shares of our common stock, including General Motors that
holds approximately 4.5 million shares of our common stock and Series B common stock, choose to liquidate their investments in us, sales of such shares could have a negative impact upon the price of our common stock, particularly in the short
term.

We do not expect to pay any dividends for the foreseeable future.

We do not anticipate paying any dividends to our shareholders for the foreseeable future. Accordingly, you may have to sell some or all of your common
stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell our common stock and may lose some or all of the amount of your investment. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, and other factors our board of directors deems relevant.

New technologies could render our existing products obsolete.

New developments in technology may negatively affect the development or sale of some or all of our products or make our products obsolete. A range of
other technologies could compete with fuel cell, hydrogen, hybrid or other technologies on which our automotive business is currently focused. Our success depends upon our ability to design, develop and market new or modified fuel cell products and
systems. Our inability to enhance existing products in a timely manner or to develop and introduce new products that incorporate new technologies, conform to increasingly stringent emission standards and performance requirements and achieve market
acceptance in a timely manner could negatively impact our competitive position. New product development or modification is costly, involves significant research, development, time and expense and may not necessarily result in the successful
commercialization of any new products.

Fisker Automotive represents a substantial portion of our anticipated revenues and will have to
raise substantial additional capital for their business for us to be able to realize these potential revenue streams.

We depend on our
services to and contracts with our affiliate Fisker Automotive for a substantial portion of our revenue and our anticipated hybrid electric propulsion systems development and production revenue will depend to a significant extent on Fisker
Automotives ability to raise substantial additional capital in order to complete future phases of development, testing and tooling for its new vehicle platform.

We depend on third-party suppliers for the supply of materials and components for our products, including our affiliate, ALP, particularly for our plug-in electric drive system.

We depend on third-party suppliers for the supply of materials and components for our products. In particular, we rely upon certain smaller, start-up
companies for the supply of key components on our hybrid propulsion system, including our affiliate, ALP, for advanced battery systems and technologies. These companies may experience resource and funding constraints that could impact their ability
to supply components in a timely manner, if at all. Also, some of these technologies, in particular ALPs battery technologies, are unproven and have not been mass produced. Further, it is anticipated that a failure of one of the OEMs could
have a crippling effect on the automotive supplier chain which, in turn, could impact our supplier base. A delay in the delivery of components, such as battery packs for our hybrid propulsion system or materials used in our other products, such as
high-strength fiber, from our current suppliers or a change to other suppliers or the failure of such components to perform as anticipated would likely delay the production of our products that use those components or materials, which could
negatively impact our business, results of operations and financial condition.



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Our fuel cell vehicle development and production revenue depends on our relationship with General
Motors and General Motors viability and commitment to the commercialization of fuel cell vehicles.

Our fuel cell vehicle
development and production revenue depends to a significant extent on our relationship with General Motors and General Motors commitment to the commercialization of fuel cell vehicles, which could be negatively impacted by the further
deterioration of General Motors financial condition or a change in General Motors executive management.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

On January 16, 2009, WB QT, LLC, the holder of our $16.2 million convertible promissory note, converted $0.5 million of principal at a conversion price of $1.35 per share.

As a result of such conversion, we issued to WB QT, LLC, a total of 484,537 shares of our common stock, consisting of 370,370 shares to satisfy the
principal amount converted and 114,167 shares to satisfy the Make-Whole Amount. As described in the Registrants Current Report on Form 8-K filed with the Commission on June 5, 2008 (Prior Filing), the Make-Whole Amount is the
amount of interest that would have been paid through the maturity date of the convertible promissory note on the $500,000 of principal had WB QT, LLC not converted. As disclosed in the Prior Filing, the number of shares issuable in satisfaction of
the Make-Whole Amount is based on a fixed price of $1.50 per share. The material conversion and other terms of the Registrants $16.2 million convertible promissory note are described in Item 1.01 of the Prior Filing.

The common shares issued by the Registrant as a result of the conversion described herein were issued to an accredited investor in a transaction exempt
from Registration pursuant to Section 4(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D. The transaction did not involve a public offering, was made without general solicitation or advertising, and there were no underwriting
commissions or discounts.

In addition to the issuance of unregistered securities described above, during the quarter ended
January 31, 2009, the holder of the $16.2 million convertible promissory note, converted a total of $1.0 million of principal (two separate conversions of $0.5 million each) and received a total of 988,241shares of our common stock. The
conversions occurred on January 9, 2009 and December 11, 2008, and were reported in the aggregate on a Current Report on Form 8-K filed with the Commission on January 15, 2009, which filing is incorporated herein by reference.



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

On March 12, 2009, we executed
a Fifth Amendment to Credit Agreement (Fifth Amendment) and a Waiver and Agreement (the Waiver) with our lender. Under the Fifth Amendment, the following material amendments were made with respect to Term Note A: (i) the
maturity date was changed from January 31, 2010 to February 28, 2010; (ii) if we elect to make principal payments in shares of our common stock, the shares so issued must be delivered on the payment date and be freely tradeable immediately; and
(iii) if we are unable to deliver freely tradeable shares or if the volume weighted average price of our common stock is below $.50 per share for a specified three day measurement period, then the lender has the option to by proper notice to have
the amount of the principal payment added to the outstanding principal balance, in which case it must be paid in cash on the maturity date; and (iv) interest on any principal amounts deferred until the maturity date at the option of the lender will
accrue interest at a rate of 9% rather than the stated interest rate then in effect.

In consideration of our execution of the Fifth
Amendment to Credit Agreement, the lender gave us a waiver of all existing and potential defaults, known or unknown, that existed on March 12, 2009 and gave us a continuing waiver for a period of ten days with respect to a particular default related
to account control agreements.



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

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



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SIGNATURES

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

Date: March 12, 2009



QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.By:

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




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EXHIBIT INDEX

Form 10-Q For Period Ended January 31, 2009.



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|10.1 |  | Lease Agreement, dated November 11, 2008, between the Registrant and Cartwright Real Estate Holdings, LLC (Incorporated herein by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed with the Commission on November 17, 2008).
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|10.2 |  | Fifth Amendment to Credit Agreement, dated March 12, 2009, between the Registrant and WB QT, LLC.                                                                                                                                                          
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|10.3 |  | Waiver and Agreement, dated March 12, 2009, between the Registrant and WB QT, LLC.                                                                                                                                                                         
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|31.1 |  | Certification of the Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                       
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|31.2 |  | Certification of the Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                       
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|32.1 |  | Certification of the Chief Executive Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.                                                                                                                             
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|32.2 |  | Certification of the Chief Financial Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.