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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended January 31, 2007,

or



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

For the transition period from  to

Commission File No.
0-49629



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Quantum Fuel Systems Technologies Worldwide, Inc.

(Exact name of registrant as specified in its charter)



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

17872 Cartwright Road, Irvine, CA 92614

(Address of principal executive offices) (Zip Code)

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



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

Number of shares outstanding of each of the issuers classes of common stock, as of March 5, 2007:

65,052,399 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, 2006 and January 31, 2007 (unaudited)                                    |  | 2 
|                                                                                                                           | 
|Condensed consolidated statements of operations (unaudited)  Three months and nine months ended January 31, 2006 and 2007 |  | 3 
|                                                                                                                           | 
|Condensed consolidated statements of cash flows (unaudited)  Nine months ended January 31, 2006 and 2007                  |  | 4 
|                                                                                                                           | 
|Notes to condensed consolidated financial statements (unaudited)  January 31, 2007                                        |  | 5 
|                                                                                                                           | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 25
|                                                                                                                           | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 43
|                                                                                                                           | 
|Item 4. Controls and Procedures                                                                                            |  | 43
|                                                                                                                           | 
|Part II. Other Information                                                                                                 |  | 44
|                                                                                                                           | 
|Item 1A. Risk Factors                                                                                                      |  | 44
|                                                                                                                           | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  |   
|                                                                                                                           | 
|Item 6. Exhibits                                                                                                           |  | 44
|                                                                                                                           | 
|Signatures                                                                                                                 |  | 45



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PART IFINANCIAL INFORMATION



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

QUANTUM FUEL SYSTEMS
TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ---------------- | - | ------------ | -
|                                                                                                                                                                           |  | April 30, 2006 |             |   | January 31, 2007 |  
|                                                                                                                                                                           |  |                |             |   | (unaudited)      |  
|ASSETS                                                                                                                                                                     |  |                |             |   |                  |   |              |  
|                                                                                                                                                                           |  |               
|Current assets:                                                                                                                                                            |  |                |             |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                                                  |  | $              | 9,012,610   |   |                  | $ | 12,747,537   |  
|Restricted cash equivalents                                                                                                                                                |  |                |            |   |                  |   | 1,000,000    |  
|Accounts receivable, net                                                                                                                                                   |  |                | 28,785,558  |   |                  |   | 22,376,783   |  
|Inventories, net                                                                                                                                                           |  |                | 34,965,750  |   |                  |   | 30,429,679   |  
|Tooling and engineering                                                                                                                                                    |  |                | 2,511,876   |   |                  |   | 681,106      |  
|Prepaids and other current assets                                                                                                                                          |  |                | 2,027,305   |   |                  |   | 2,203,849    |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total current assets                                                                                                                                                       |  |                | 77,303,099  |   |                  |   | 69,438,954   |  
|                                                                                                                                                                           |  |               
|Property and equipment, net                                                                                                                                                |  |                | 23,716,716  |   |                  |   | 22,249,466   |  
|Restricted cash equivalents and marketable securities                                                                                                                      |  |                | 15,000,000  |   |                  |   |             |  
|Deferred loan fees                                                                                                                                                         |  |                |            |   |                  |   | 1,656,921    |  
|Intangible assets, net                                                                                                                                                     |  |                | 59,954,867  |   |                  |   | 56,539,955   |  
|Goodwill                                                                                                                                                                   |  |                | 105,593,765 |   |                  |   | 33,276,259   |  
|Deposits and other assets                                                                                                                                                  |  |                | 740,154     |   |                  |   | 736,741      |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total assets                                                                                                                                                               |  | $              | 282,308,601 |   |                  | $ | 183,898,296  |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|                                                                                                                                                                           |  |               
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                       |  |                |             |   |                  |   |              |  
|                                                                                                                                                                           |  |               
|Current liabilities:                                                                                                                                                       |  |                |             |   |                  |   |              |  
|Accounts payable                                                                                                                                                           |  | $              | 26,881,031  |   |                  | $ | 28,865,401   |  
|Accrued payroll obligations                                                                                                                                                |  |                | 2,677,661   |   |                  |   | 2,574,059    |  
|Accrued interest                                                                                                                                                           |  |                | 739,996     |   |                  |   | 325,818      |  
|Notes payable                                                                                                                                                              |  |                | 2,225,574   |   |                  |   | 2,209,221    |  
|Deferred revenue                                                                                                                                                           |  |                | 796,037     |   |                  |   | 1,351,213    |  
|Accrued warranties                                                                                                                                                         |  |                | 804,518     |   |                  |   | 1,075,894    |  
|Customer deposits                                                                                                                                                          |  |                | 6,151,754   |   |                  |   | 1,556,555    |  
|Other accrued liabilities                                                                                                                                                  |  |                | 1,252,211   |   |                  |   | 2,322,937    |  
|Current maturities of long-term debt                                                                                                                                       |  |                | 9,339,212   |   |                  |   | 3,111,851    |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total current liabilities                                                                                                                                                  |  |                | 50,867,994  |   |                  |   | 43,392,949   |  
|                                                                                                                                                                           |  |               
|Long-term debt, net of current maturities                                                                                                                                  |  |                | 33,092,568  |   |                  |   | 42,045,903   |  
|Deferred income taxes                                                                                                                                                      |  |                | 5,885,143   |   |                  |   | 5,465,432    |  
|Other accrued liabilities                                                                                                                                                  |  |                | 401,227     |   |                  |   | 350,760      |  
|Commitments and contingencies                                                                                                                                              |  |                |             |   |                  |   |              |  
|Minority interests                                                                                                                                                         |  |                | 468,801     |   |                  |   |             |  
|                                                                                                                                                                           |  |               
|Stockholders' equity:                                                                                                                                                      |  |                |             |   |                  |   |              |  
|Preferred stock, $.001 par value, 20,000,000 shares authorized; none issued and outstanding for each period                                                                |  |                |            |   |                  |   |             |  
|Series B common stock, $.001 par value; 2,000,000 shares authorized; 999,969 issued and outstanding for each period                                                        |  |                | 1,000       |   |                  |   | 1,000        |  
|Common stock, $.001 par value; 98,000,000 shares authorized; 53,774,113 issued and outstanding at April 30, 2006 and 64,938,261 issued
and outstanding at January 31, 2007 |  |                | 53,774      |   |                  |   | 64,938       |  
|Additional paid-in-capital                                                                                                                                                 |  |                | 262,803,600 |   |                  |   | 287,946,050  |  
|Accumulated deficit                                                                                                                                                        |  |                | (71,076,473 | ) |                  |   | (195,421,741 | )
|Accumulated other comprehensive income (loss)                                                                                                                              |  |                | (189,033    | ) |                  |   | 53,005       |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total stockholders' equity                                                                                                                                                 |  |                | 191,592,868 |   |                  |   | 92,643,252   |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  
|Total liabilities and stockholders' equity                                                                                                                                 |  | $              | 282,308,601 |   |                  | $ | 183,898,296  |  
|                                                                                                                                                                           |  |                |             |   |                  |   |              |  

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 Ended January 31, |            |   | Nine Months Ended January 31, |  
|                                                                 | 
|                                                                 |  | 2006                           |            |   | 2007                          |   |             | 2006 |  |   | 2007        |  
|Revenue:                                                         |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Net product sales                                                |  | $                              | 31,738,395 |   |                               | $ | 30,205,051  |      |  | $ | 132,217,470 |   |  | $ | 102,988,345  |  
|Contract revenue                                                 |  |                                | 4,265,583  |   |                               |   | 2,828,052   |      |  |   | 14,275,529  |   |  |   | 9,163,239    |  
|                                                                 |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Total revenue                                                    |  |                                | 36,003,978 |   |                               |   | 33,033,103  |      |  |   | 146,492,999 |   |  |   | 112,151,584  |  
|                                                                 |  |                                |            |  
|Costs and expenses:                                              |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Cost of product sales                                            |  |                                | 30,855,032 |   |                               |   | 31,530,825  |      |  |   | 123,008,522 |   |  |   | 104,976,828  |  
|Research and development                                         |  |                                | 6,326,822  |   |                               |   | 4,602,605   |      |  |   | 18,934,816  |   |  |   | 15,127,527   |  
|Selling, general and administrative                              |  |                                | 7,774,137  |   |                               |   | 10,290,612  |      |  |   | 21,721,056  |   |  |   | 32,633,775   |  
|Amortization of intangibles                                      |  |                                | 708,723    |   |                               |   | 1,134,068   |      |  |   | 2,942,611   |   |  |   | 3,402,423    |  
|Impairment loss on goodwill                                      |  |                                |           |   |                               |   |            |      |  |   |            |   |  |   | 72,317,506   |  
|                                                                 |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Total costs and expenses                                         |  |                                | 45,664,714 |   |                               |   | 47,558,110  |      |  |   | 166,607,005 |   |  |   | 228,458,059  |  
|                                                                 |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Operating loss                                                   |  |                                | (9,660,736 | ) |                               |   | (14,525,007 | )    |  |   | (20,114,006 | ) |  |   | (116,306,475 | )
|                                                                 |  |                                |            |  
|Interest income                                                  |  |                                | 272,471    |   |                               |   | 159,985     |      |  |   | 814,290     |   |  |   | 635,208      |  
|Interest expense                                                 |  |                                | (628,076   | ) |                               |   | (1,207,374  | )    |  |   | (1,869,442  | ) |  |   | (3,676,316   | )
|Loss on early extinguishment of debt                             |  |                                |           |   |                               |   | (6,300,000  | )    |  |   |            |   |  |   | (6,300,000   | )
|Minority interest in losses (earnings) of subsidiaries           |  |                                | (219,985   | ) |                               |   | 216,358     |      |  |   | (280,264    | ) |  |   | 761,482      |  
|Other income (expense), net                                      |  |                                | (133,860   | ) |                               |   | (73,474     | )    |  |   | (94,786     | ) |  |   | 121,122      |  
|Income tax benefit                                               |  |                                | 528,483    |   |                               |   | 139,903     |      |  |   | 516,856     |   |  |   | 419,711      |  
|                                                                 |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Net loss                                                         |  | $                              | (9,841,703 | ) |                               | $ | (21,589,609 | )    |  | $ | (21,027,352 | ) |  | $ | (124,345,268 | )
|                                                                 |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Net loss per sharebasic and diluted                             |  | $                              | (0.19      | ) |                               | $ | (0.33       | )    |  | $ | (0.40       | ) |  | $ | (2.05        | )
|                                                                 |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Number of shares used in per share calculationbasic and diluted |  |                                | 52,879,832 |   |                               |   | 64,918,540  |      |  |   | 52,865,626  |   |  |   | 60,757,656   |  
|                                                                 |  |                                |            |   |                               |   |             |      |  |   |             |   |  |   |              |  

See accompanying notes to condensed consolidated financial statements.



3



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



|                                                                                            |  |                               |             |   |      |   |              |  
|------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ---- | - | ------------ | -
|                                                                                            |  | Nine months ended January 31, |            
|                                                                                            |  | 2006                          |             |   | 2007 |  
|Cash flows from operating activities:                                                       |  |                               |             |   |      |   |              |  
|Net loss                                                                                    |  | $                             | (21,027,352 | ) |      | $ | (124,345,268 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                 |  |                               |             |   |      |   |              |  
|Depreciation and amortization                                                               |  |                               | 7,846,232   |   |      |   | 8,940,206    |  
|Loss on disposal of property and equipment                                                  |  |                               |            |   |      |   | 107,195      |  
|Non-cash share-based compensation charges                                                   |  |                               | 81,324      |   |      |   | 3,194,557    |  
|Deferred income taxes                                                                       |  |                               | (531,483    | ) |      |   | (419,711     | )
|Loss (gain) on exchange rate changes                                                        |  |                               |            |   |      |   | 456,095      |  
|Minority interest in earnings (losses) of subsidiaries                                      |  |                               | 280,801     |   |      |   | (761,483     | )
|Gain recognized on sale of Concord Coatings                                                 |  |                               |            |   |      |   | (341,488     | )
|Loss on early extinguishment of debt                                                        |  |                               |            |   |      |   | 6,300,000    |  
|Impairment loss on goodwill                                                                 |  |                               |            |   |      |   | 72,317,506   |  
|Changes in operating assets and liabilities:                                                |  |                               |             |   |      |   |              |  
|Accounts receivable                                                                         |  |                               | (1,405,579  | ) |      |   | 8,023,918    |  
|Inventories                                                                                 |  |                               | (6,155,785  | ) |      |   | 4,073,402    |  
|Tooling and engineering                                                                     |  |                               | (519,031    | ) |      |   | 1,830,773    |  
|Refundable income taxes                                                                     |  |                               | 2,019,325   |   |      |   | (56,589      | )
|Deposits and other assets                                                                   |  |                               | (297,220    | ) |      |   | (32,018      | )
|Accounts payable                                                                            |  |                               | (12,827,296 | ) |      |   | 1,925,925    |  
|Deferred revenue                                                                            |  |                               |            |   |      |   | 555,176      |  
|Customer deposits                                                                           |  |                               |            |   |      |   | (4,595,199   | )
|Other accrued liabilities                                                                   |  |                               | 1,979,452   |   |      |   | 429,032      |  
|                                                                                            |  |                               |             |   |      |   |              |  
|Net cash used in operating activities                                                       |  |                               | (30,556,612 | ) |      |   | (22,397,971  | )
|                                                                                            |  |                               |             |   |      |   |              |  
|Cash flows from investing activities:                                                       |  |                               |             |   |      |   |              |  
|Purchases of property and equipment                                                         |  |                               | (4,021,606  | ) |      |   | (5,674,097   | )
|Proceeds from sale of property and equipment                                                |  |                               |            |   |      |   | 34,160       |  
|Acquisition transaction costs                                                               |  |                               | (403,011    | ) |      |   | (48,280      | )
|Acquisition of Empire Coach Enterprises                                                     |  |                               | (600,000    | ) |      |   |             |  
|Purchases of restricted cash equivalents and marketable securities                          |  |                               | (13,518,999 | ) |      |   | (6,138,584   | )
|Proceeds from sales and maturities of restricted cash equivalents and marketable securities |  |                               | 31,086,664  |   |      |   | 20,138,584   |  
|                                                                                            |  |                               |             |   |      |   |              |  
|Net cash provided by investing activities                                                   |  |                               | 12,543,248  |   |      |   | 8,311,783    |  
|                                                                                            |  |                               |             |   |      |   |              |  
|Cash flows from financing activities:                                                       |  |                               |             |   |      |   |              |  
|Proceeds (payments) on capital lease and other obligations                                  |  |                               | (17,566     | ) |      |   | 21,071       |  
|Net borrowings on notes and obligations payable                                             |  |                               | 1,130,420   |   |      |   | 8,515,161    |  
|Borrowings (payments) on revolving credit agreements, net of loan origination fees          |  |                               | 16,581,392  |   |      |   | (12,904,822  | )
|Proceeds from issuance of common stock, net of transaction fees                             |  |                               |            |   |      |   | 20,852,791   |  
|Proceeds from exercises of warrants and stock options                                       |  |                               | 179,202     |   |      |   | 1,106,266    |  
|Contributions from minority interest holders                                                |  |                               |            |   |      |   | 292,682      |  
|                                                                                            |  |                               |             |   |      |   |              |  
|Net cash provided by financing activities                                                   |  |                               | 17,873,448  |   |      |   | 17,883,149   |  
|                                                                                            |  |                              
|Effect of exchange rate changes on cash                                                     |  |                               | 80,188      |   |      |   | (62,034      | )
|                                                                                            |  |                               |             |   |      |   |              |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                               | (59,728     | ) |      |   | 3,734,927    |  
|Cash and cash equivalents at beginning of period                                            |  |                               | 11,736,688  |   |      |   | 9,012,610    |  
|                                                                                            |  |                               |             |   |      |   |              |  
|Cash and cash equivalents at end of period                                                  |  | $                             | 11,676,960  |   |      | $ | 12,747,537   |  
|                                                                                            |  |                               |             |   |      |   |              |  

See accompanying notes to condensed consolidated financial statements.



4



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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

January 31, 2007

1) Background and Basis of Presentation

Background

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

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

On March 3, 2005, the Company completed its acquisition of Tecstar Automotive Group, formally known as Starcraft Corporation, a Tier One second
stage manufacturer that designs, engineers and integrates specialty equipment products into motor vehicle applications. On September 15, 2005, Tecstar Automotive Group acquired a 51.0% interest in Empire Coach Enterprises, LLC (Empire
Coach), a second stage limousine manufacturer. On January 18, 2006, Tecstar Automotive Group obtained a 50.1% controlling interest in Unique Performance Concepts, LLC (UPC), a business venture formed with Unique Performance,
Inc. to manufacture limited edition high performance vehicles. On February 8, 2006, the Company acquired all of the stock of Regency Conversions, Inc. (Regency), a vehicle converter with extensive distribution channels for second
stage vehicle manufacturing and aftermarket parts. On March 24, 2006, the Company obtained an initial 35.5% interest in Advanced Lithium Power Inc. (ALP), a newly formed company developing lithium ion and advanced battery control
systems whose primary asset is intellectual property. The Companys interest in ALP was reduced to 23.1% on July 18, 2006 and to 23.0% on August 31, 2006 as a result of additional equity contributed from other minority shareholders.

On September 22, 2005, Tecstar Automotive Group sold substantially all the assets of its production paint facility, Tarxien Automotive
Products Ltd., to Concord Coatings, Inc. in exchange for a 20% equity interest in Concord Coatings, $250,000 in cash, and a promissory note with a principal amount of approximately $1.2 million. Tecstar Automotive Group, through its wholly-owned
subsidiary Tarxien, acted as one of the guarantors for Concord Coatings CAD$1,500,000 revolving credit facility with a commercial bank. Concord Coatings, Inc. was accounted by the Company as a variable interest entity and consolidated in its
financial statements due to the fact Concord Coatings required additional subordinated financial support from the Company. During the first quarter of fiscal 2007, it was determined that Concord Coatings was insolvent and could not repay the
promissory note owed to Tarxien nor the outstanding advances on the credit facility with the commercial bank. In light of this, Tecstar Automotive Group agreed to purchase Concord Coatings loan from the bank. Tecstar Automotive Groups
purchase of the loan allowed the Company to have a lead secured position over the remaining Concord Coatings assets in connection with the sale of the entire operations completed on December 31, 2006 to an unrelated third party. Total consideration
received by Tecstar Automotive Group on the sale of the operations amounted to CAD$250,000 (US$215,000). The disposal of Concord Coatings assets and liabilities resulted in a potential gain of $901,000, of which $341,000 was recognized through
January 31, 2007 and is included as a reduction of selling, general and administrative expenses on the condensed consolidated statement of operations. The transaction was accounted for as a divestiture of the business by the Company.

On January 12, 2007, Empire Coach filed for Chapter 11 bankruptcy protection (see note 2).

The Companys authorized capital stock at January 31, 2007 consists of 20,000,000 shares of preferred stock, par value $0.001 per share, no
shares issued and outstanding and 100,000,000 shares of common stock, par value $0.001 per share, 65,938,230 shares issued and outstanding (which includes 999,969 shares of Series B common stock). Of the 100,000,000 authorized shares of common
stock, 2,000,000 are designated as Series B common stock.

Basis of Presentation

The consolidated financial statements include the accounts of Quantum Fuel Systems Technologies Worldwide, Inc. and its wholly-owned subsidiary, Tecstar Automotive Group, for the period subsequent to the merger
completed on March 3, 2005. The consolidated financial statements also include the accounts of each of the following direct and indirect subsidiaries of Tecstar Automotive Group: Regency Conversions, LLC for the period subsequent to the
acquisition of Regency on February 8, 2006; Tecstar Partners, LLC, Tecstar, L.P., Tecstar Manufacturing Canada Limited, Tarxien Automotive Products Limited, Troy Tooling, LLC, Classic Design Concepts, LLC (formally known as Classic Acquisition
Company, LLC), Wheel to Wheel, LLC, Wheel to Wheel Powertrain, LLC, Powertrain Integration, LLC (Tecstar Automotive Groups ownership interest of Powertrain Integration increased from 51.0% to 100.0% effective August 31, 2005), Quantum
Power and Performance, LLC, Unique Performance Concepts, LLC, and Empire Coach Enterprises, LLC. Also included in the consolidated financial statements are the accounts of Amstar, LLC (Amstar) in which the Company holds an equity
ownership position of 50.0% and, since March 24, 2006, the accounts of Advanced Lithium Power Inc. (ALP) have also been included due to the controlling nature of the Companys equity position resulting from proxy agreements
between the Company and certain other shareholders of ALP.



5



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

Concord Coatings, Inc. was a variable interest entity as defined by FIN 46R due to the
fact Concord Coatings required additional subordinated financial support by the Company. The accounts of Concord Coatings were consolidated by the Company as required by FIN 46R through December 31, 2006, when the sale of the operations and
disposal of all remaining liabilities was effected. All significant intercompany accounts and transactions have been eliminated in consolidation through the date of the disposal.

Recent Accounting Pronouncements

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

Liquidity

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

On June 29, 2006, the Company completed a private investment in public entity (PIPE) transaction which yielded proceeds of $12.5 million from the sale of 4,403,000 shares of its common stock at a
price of $2.84 per share, which represented a 10% discount on the June 29, 2006 closing price of $3.15. On October 27, 2006, the Company completed a second PIPE transaction which yielded proceeds of $10.0 million from the sale of 6,098,000
shares of its common stock at a price of $1.64 per share, which represented a 20% discount on the October 27, 2006 closing price of $2.05. The investors also received warrants in connection with the PIPE transactions (see Note 11). In January
2007, the Company received $1.1 million from the exercise of a portion of the warrants issued in connection with the PIPE that closed on October 27, 2006.

In December 2006, the Company used approximately $15.0 million of proceeds from the sale of its marketable securities portfolio and other cash equivalents to reduce the outstanding borrowings under credit facilities
with a commercial bank. On January 31, 2007 the Company secured a new $30.6 million credit facility with an asset-based lender and used $9.6 million of proceeds from the new facility to repay the remaining principal and accrued interest owed
under commercial bank credit facilities. Outstanding borrowings under the new credit facility totaled $20.6 million at January 31, 2007 and the Company had the ability to borrow up to an additional $7.1 million of the $10.0 million of the
unused portion of the credit facility based upon its levels of eligible receivables and inventory.

In addition to the above mentioned
$30.6 million credit facility, the Companys principal sources of liquidity as of January 31, 2007 included cash and cash equivalents of $12.7 million and restricted cash equivalents of $1.0 million. The restricted cash equivalents are
collateralized for the benefit of General Motors Acceptance Corporation (GMAC) in connection with financing of vehicle chassis for Regencys operations.

During the first nine months of fiscal 2007, the Company reduced workforce levels and implemented certain other cost saving initiatives. The Company
intends to continue its efforts to implement a cost reduction program that includes consolidation of facilities, streamlining of functions, monitoring of workforce levels and various other cost saving measures. Despite the cost saving initiatives
already implemented and those the Company expects to implement in the fourth quarter of fiscal 2007 and in addition to securing a new $30.6 million credit facility, the Company believes that based on current projections and forecasts that it does
not have sufficient liquidity to fund its short-term cash needs. Accordingly, the Company anticipates that it will require additional equity or debt financing beginning in the second quarter of fiscal 2008 to fund its future operating activities.
The Company anticipates that it will require approximately $10 to $15 million in additional equity or debt financing to fund its operating activities over the next twelve months above its principal sources of liquidity at January 31, 2007. The
Companys actual financing requirements could be higher. The Company may also sell certain subsidiaries or other long-lived assets to provide for its liquidity needs over the next year. The Companys ability to secure additional financing
in this time period may be difficult due to its history of operating losses and negative cash flows; however, the continued implementation of its cost reduction program will help to mitigate this risk. Although management believes that the
Companys short-term cash requirements can be adequately sourced, the Company cannot assure the reader that such additional sources of financing will be available on acceptable terms, if at all. An inability by the Company to raise sufficient
capital to fund its operations would have a material adverse affect on the Company and would raise doubts about its ability to continue as a going concern.



6



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Use of Estimates in the Preparation of Consolidated Financial Statements

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

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 (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included.

Revenue Recognition

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

Contract revenue for
customer funded research and development is principally recognized by the percentage of completion method in accordance with Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Generally, the Company estimates percentage complete by determining cost incurred to date as a percentage of total estimated cost at completion. For certain other contracts, percentage 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.

Reclassification

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

2) Acquisitions

Regency Conversions,
Inc.

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

Regency is a vehicle converter and supplements the Companys second stage vehicle
manufacturing and aftermarket parts business by offering additional distribution channels directly to automotive dealers, and significantly broadens the Companys customer base beyond OEMs. In addition, the Companys manufacturing and
engineering expertise is anticipated to allow Regency to improve its product offerings and enter new vehicle markets.

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

The value assigned for the Companys common stock exchanged in the merger was based on the weighted average price of $4.31 of
Quantums common stock as reported on The Nasdaq National Market for the two day period before and



7



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after the date the acquisition was announced (February 10, 2006). The Companys common stock was issued in a private placement exempt from registration
under applicable provisions of the Securities Act of 1933 and Texas securities laws. Accordingly, the common stock is considered restricted securities as defined in Rule 144 under the Securities Act of 1933 and the shareholders cannot sell the
securities prior to registration. The restricted shareholders received registration rights in connection with the merger that provide, under applicable circumstances, that the non-registered shares can be included in connection with future
registration statements of the Company. The Company is responsible for all costs and expenses related to the registration of the restricted shares.

The Company has not yet obtained all information related to the acquisition, primarily related to completing income tax returns as of the acquisition date and settling incremental transaction costs. The final allocation will be completed in
the fourth quarter of fiscal 2007.

Empire Coach Enterprises

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

On January 12, 2007, Empire Coach filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court, Eastern District of Michigan. Empire Coach continues in possession of its property and will operate and
manage the business as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Act.

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

Pro Forma Data

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



|                    |  |                                          |        |   |                                    |   |         |             |  |   |                       |   |  |   |         |  
|------------------- |  | ---------------------------------------- | ------ | - | ---------------------------------- | - | ------- | ----------- |  | - | --------------------- | - |  | - | ------- | -
|                    |  | Three Months Ended January 31, 2006      |        |   | Nine Months Ended January 31, 2006 |  
|                    |  | As Reported                              |        |   | Pro Forma (unaudited)              |   |         | As Reported |  |   | Pro Forma (unaudited) |  
|                    |  |                                          |       
|                    |  | (in thousands, except per share amounts) |       
|Net revenue         |  | $                                        | 36,004 |   |                                    | $ | 45,420  |             |  | $ | 146,493               |   |  | $ | 179,786 |  
|Operating loss      |  | $                                        | (9,661 | ) |                                    | $ | (10,359 | )           |  | $ | (20,114               | ) |  | $ | (20,148 | )
|Net loss            |  | $                                        | (9,842 | ) |                                    | $ | (10,852 | )           |  | $ | (21,027               | ) |  | $ | (21,903 | )
|Net loss per share: |  |                                          |        |   |                                    |   |         |             |  |   |                       |   |  |   |         |  
|Basic               |  | $                                        | (0.19  | ) |                                    | $ | (0.20   | )           |  | $ | (0.40                 | ) |  | $ | (0.40   | )
|Diluted             |  | $                                        | (0.19  | ) |                                    | $ | (0.20   | )           |  | $ | (0.40                 | ) |  | $ | (0.40   | )
|Number of shares:   |  |                                          |        |   |                                    |   |         |             |  |   |                       |   |  |   |         |  
|Basic               |  |                                          | 52,880 |   |                                    |   | 54,695  |             |  |   | 52,866                |   |  |   | 54,681  |  
|Diluted             |  |                                          | 52,880 |   |                                    |   | 54,695  |             |  |   | 52,866                |   |  |   | 54,681  |  

The pro forma financial information is presented for informational purposes only and is not
indicative of what the actual consolidated results of operations might have been had the Regency transaction occurred on May 1, 2005.



8



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3) Restricted Cash Equivalents and Marketable Securities

As of April 30, 2006, the Company had collateralized approximately $15.0 million of cash equivalents and marketable securities in connection with
Tecstar Automotive Groups revolving credit facility with a commercial bank. During fiscal 2007, the Company also collateralized $1.0 million for the benefit of General Motors Acceptance Corporation (GMAC) in connection with
financing of vehicle chassis for Regencys operations.

In December 2006, the Company used approximately $15.0 million of proceeds
from the sale of its marketable securities portfolio and other cash equivalents to reduce the outstanding borrowings under the commercial bank credit facility. The loss on the sale of marketable securities prior to their stated maturity dates was
insignificant. As of January 31, 2007, the balance of restricted cash equivalents consists solely of the $1.0 million collateralized in connection with the GMAC arrangement.

4) Accounts Receivable

Accounts receivable consist of the following:



|                                |  |                |            |   |                 |   |            |  
|------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30, 2006 |            |   | January 31,2007 |  
|Customer accounts billed        |  | $              | 25,623,255 |   |                 | $ | 22,100,746 |  
|Customer accounts unbilled      |  |                | 3,687,551  |   |                 |   | 1,305,316  |  
|Allowance for doubtful accounts |  |                | (525,248   | ) |                 |   | (1,029,279 | )
|                                |  |                |            |   |                 |   |            |  
|Accounts receivable, net        |  | $              | 28,785,558 |   |                 | $ | 22,376,783 |  
|                                |  |                |            |   |                 |   |            |  

5) Inventories

Inventories consist of the following:



|                                |  |                |            |   |                 |   |            |  
|------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                |  | April 30, 2006 |            |   | January 31,2007 |  
|Materials and parts             |  | $              | 31,022,896 |   |                 | $ | 29,972,683 |  
|Work-in-process                 |  |                | 2,071,794  |   |                 |   | 1,926,866  |  
|Finished goods                  |  |                | 4,433,363  |   |                 |   | 2,816,322  |  
|                                |  |                |            |   |                 |   |            |  
|                                |  |                | 37,528,053 |   |                 |   | 34,715,871 |  
|Less provision for obsolescence |  |                | (2,562,303 | ) |                 |   | (4,286,192 | )
|                                |  |                |            |   |                 |   |            |  
|Inventories, net                |  | $              | 34,965,750 |   |                 | $ | 30,429,679 |  
|                                |  |                |            |   |                 |   |            |  



9



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6) Property and Equipment

Property and equipment consist of the following:



|                                               |  |                |             |   |                 |   |             |  
|---------------------------------------------- |  | -------------- | ----------- | - | --------------- | - | ----------- | -
|                                               |  | April 30, 2006 |             |   | January 31,2007 |  
|Land                                           |  | $              | 211,000     |   |                 | $ | 211,000     |  
|Buildings                                      |  |                | 972,222     |   |                 |   | 972,222     |  
|Tooling, dies and molds                        |  |                | 3,018,290   |   |                 |   | 5,198,065   |  
|Plant machinery and equipment                  |  |                | 16,407,171  |   |                 |   | 16,544,379  |  
|Information systems and office equipment       |  |                | 15,484,932  |   |                 |   | 16,241,139  |  
|Automobiles and trucks                         |  |                | 1,879,400   |   |                 |   | 2,045,446   |  
|Leasehold improvements                         |  |                | 6,253,133   |   |                 |   | 6,560,692   |  
|Construction in progress                       |  |                | 4,248,678   |   |                 |   | 4,481,948   |  
|                                               |  |                |             |   |                 |   |             |  
|                                               |  |                | 48,474,826  |   |                 |   | 52,254,891  |  
|Less accumulated depreciation and amortization |  |                | (24,758,110 | ) |                 |   | (30,005,425 | )
|                                               |  |                |             |   |                 |   |             |  
|Net property and equipment                     |  | $              | 23,716,716  |   |                 | $ | 22,249,466  |  
|                                               |  |                |             |   |                 |   |             |  

7) Goodwill and Other Intangible Assets

Acquisitions

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

The Company completed acquisitions of Tecstar Automotive Group, Empire Coach and Regency on March 3, 2005, September 15, 2005 and
February 8, 2006, respectively. In accordance with SFAS No. 141, the total estimated consideration for the transactions was allocated to the tangible assets acquired and liabilities assumed based on their fair values at the date of
acquisitions. In addition, certain identifiable intangible assets were recorded in connection with contractual or other legal rights acquired. The excess of the cost of acquiring Tecstar Automotive Group, Empire Coach and Regency over the net of the
amounts assigned to their assets acquired and liabilities assumed, amounting to $102,118,601, $598,905 and $2,876,259, respectively, was recognized as goodwill in connection with the acquisitions. Goodwill associated with the Tecstar Automotive
Group acquisition was allocated 30% to the Quantum Fuel Systems business segment and 70% to the Tecstar Automotive Group business segment. Goodwill associated with the Empire Coach and Regency acquisitions was allocated 100% to the Tecstar
Automotive Group business segment.

During the second quarter of fiscal 2007, indicators of goodwill impairment were noted and goodwill was
tested. These tests determined that goodwill was impaired related to the acquisitions of Tecstar Automotive Group and Empire Coach resulting in estimated charges to write-down goodwill totaling $72,317,506 which was recorded during the three months
ended October 31, 2006 (see Note 18). The portion of goodwill associated with the acquisition of Tecstar Automotive Group allocated to the Tecstar Automotive Group business segment, amounting to $71,718,601, has been determined to be fully
impaired and was written-off. Goodwill related to the acquisition of Empire Coach has also been determined to be fully impaired and was written off in the amount of $598,905. The Company completed its testing of goodwill impairment during the third
quarter which did not result any changes from the second quarter estimates.

Goodwill allocated to Quantum Fuel Systems business segment
associated with the acquisition of Tecstar Automotive Group has been evaluated with no impairment indicated and has a carrying value of $30,400,000 at January 31, 2007. Goodwill associated with the Regency acquisition has also been evaluated
with no impairment indicated and is reported in the Tecstar Automotive Group business segment.



10



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General Motors Strategic Alliance

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

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

Unique Performance Concepts

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

Advanced Lithium Power

On March 24, 2006, the Company and certain unaffiliated individuals formed Advanced Lithium
Power Inc. The Company initially held approximately 1.7 million shares or 35.5% of the Vancouver, British Columbia-based business of which its equity share was valued at $173,120 at the date of the formation. The Companys interest in ALP
was reduced to 23.1% on July 18, 2006 and to 23.0% on August 31, 2006 as a result of additional equity contributed from other minority shareholders. ALPs primary objective is to develop lithium ion and advanced battery control
systems that control state-of-charge and provide for thermal management, resulting in high-performance energy storage. ALPs primary assets are intellectual property contributed by other shareholders of ALP and its technology has significant
opportunities and applications in hybrid electric vehicles, fuel cell vehicles, uninterruptible power supplies, and energy storage for renewable energy, such as solar photovoltaic applications. The accounts of ALP have been included in the
consolidated financial statements for the period since the formation due to the controlling nature of the Companys equity position resulting from proxy agreements between the Company and certain other shareholders of ALP. As of the date of the
formation, the Company assigned $226,998 as intangible assets related to intellectual property and technology, $301,051 to tangible assets, $40,387 to accrued liabilities and $314,542 to the minority interest equity holders of ALP. The gross
carrying value of the intangible assets increased slightly to $234,866 at April 30, 2006 and subsequently declined to $221,832 at January 31, 2007 due to the effect of exchange rates.

Amortization of Intangibles

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



11



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Intangible assets consist of the following:



|                                         |  |                |            |   |                 |   |            |  
|---------------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                         |  | April 30, 2006 |            |   | January 31,2007 |  
|TAG contracts and customer relationship: |  |                |            |   |                 |   |            |  
|                                         |  |               
|Gross carrying value                     |  | $              | 44,600,000 |   |                 | $ | 44,600,000 |  
|Accumulated amortization                 |  |                | (1,880,445 | ) |                 |   | (2,995,446 | )
|                                         |  |                |            |   |                 |   |            |  
|Net carrying value                       |  |                | 42,719,555 |   |                 |   | 41,604,554 |  
|                                         |  |               
|TAG existing technology:                 |  |                |            |   |                 |   |            |  
|                                         |  |               
|Gross carrying value                     |  |                | 2,100,000  |   |                 |   | 2,100,000  |  
|Accumulated amortization                 |  |                | (876,000   | ) |                 |   | (1,533,000 | )
|                                         |  |                |            |   |                 |   |            |  
|Net carrying value                       |  |                | 1,224,000  |   |                 |   | 567,000    |  
|                                         |  |               
|Regency dealer network:                  |  |                |            |   |                 |   |            |  
|                                         |  |               
|Gross carrying value                     |  |                | 4,280,000  |   |                 |   | 4,280,000  |  
|Accumulated amortization                 |  |                | (89,166    | ) |                 |   | (356,664   | )
|                                         |  |                |            |   |                 |   |            |  
|Net carrying value                       |  |                | 4,190,834  |   |                 |   | 3,923,336  |  
|                                         |  |               
|Regency trade names:                     |  |                |            |   |                 |   |            |  
|                                         |  |               
|Gross carrying value                     |  |                | 1,040,000  |   |                 |   | 1,040,000  |  
|Accumulated amortization                 |  |                | (12,999    | ) |                 |   | (51,996    | )
|                                         |  |                |            |   |                 |   |            |  
|Net carrying value                       |  |                | 1,027,001  |   |                 |   | 988,004    |  
|                                         |  |               
|GM Strategic Alliance Agreement:         |  |                |            |   |                 |   |            |  
|                                         |  |               
|Gross carrying value                     |  |                | 16,479,358 |   |                 |   | 16,479,358 |  
|Accumulated amortization                 |  |                | (6,139,203 | ) |                 |   | (7,384,034 | )
|                                         |  |                |            |   |                 |   |            |  
|Net carrying value                       |  |                | 10,340,155 |   |                 |   | 9,095,324  |  
|                                         |  |               
|UPC dealer network and trade names:      |  |                |            |   |                 |   |            |  
|                                         |  |               
|Gross carrying value                     |  |                | 250,000    |   |                 |   | 250,000    |  
|Accumulated amortization                 |  |                | (30,320    | ) |                 |   | (98,540    | )
|                                         |  |                |            |   |                 |   |            |  
|Net carrying value                       |  |                | 219,680    |   |                 |   | 151,460    |  
|                                         |  |               
|ALP patents and technolgy:               |  |                |            |   |                 |   |            |  
|                                         |  |               
|Gross carrying value                     |  |                | 234,866    |   |                 |   | 221,832    |  
|Accumulated amortization                 |  |                | (1,224     | ) |                 |   | (11,555    | )
|                                         |  |                |            |   |                 |   |            |  
|Net carrying value                       |  |                | 233,642    |   |                 |   | 210,277    |  
|                                         |  |                |            |   |                 |   |            |  
|                                         |  | $              | 59,954,867 |   |                 | $ | 56,539,955 |  
|                                         |  |                |            |   |                 |   |            |  

8) Warranties

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

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



12



---

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



|                                    |  |   |           |  
|----------------------------------- |  | - | --------- | -
|Balance at April 30, 2006           |  | $ | 804,518   |  
|Warranties issued during the period |  |   | 587,847   |  
|Settlements made during the period  |  |   | (316,471  | )
|                                    |  |   |           |  
|Balance at January 31, 2007         |  | $ | 1,075,894 |  
|                                    |  |   |           |  

9) Long-term Debt

Long-term debt consists of the following:



|                                                                                                                                                                              |  |                |            |   |                 |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | --------------- | - | ---------- | -
|                                                                                                                                                                              |  | April 30, 2006 |            |   | January 31,2007 |  
|Convertible notes                                                                                                                                                             |  | $              | 15,000,000 |   |                 | $ | 21,300,000 |  
|Term note                                                                                                                                                                     |  |                |           |   |                 |   | 10,000,000 |  
|Revolving line of credit, asset-based lender                                                                                                                                  |  |                |           |   |                 |   | 10,637,500 |  
|Revolving line of credit, domestic bank                                                                                                                                       |  |                | 19,548,172 |   |                 |   |           |  
|Revolving line of credit, Canadian bank                                                                                                                                       |  |                | 3,215,000  |   |                 |   |           |  
|Mortgage note payable to bank, interest at bank's prime rate, repaid in full on January 31, 2007                                                                              |  |                | 1,157,475  |   |                 |   |           |  
|Promissory note payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $22,113 including interest at
5.38%, due May 1, 2013, unsecured   |  |                | 1,560,183  |   |                 |   | 1,421,626  |  
|Obligation payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $27,750 including imputed interest at
5.5%, due May 1, 2013, unsecured |  |                | 1,949,914  |   |                 |   | 1,777,460  |  
|Other                                                                                                                                                                         |  |                | 1,036      |   |                 |   | 21,168     |  
|                                                                                                                                                                              |  |                |            |   |                 |   |            |  
|                                                                                                                                                                              |  |                | 42,431,780 |   |                 |   | 45,157,754 |  
|Less current maturities                                                                                                                                                       |  |                | (9,339,212 | ) |                 |   | (3,111,851 | )
|                                                                                                                                                                              |  |                |            |   |                 |   |            |  
|Long-term debt                                                                                                                                                                |  | $              | 33,092,568 |   |                 | $ | 42,045,903 |  
|                                                                                                                                                                              |  |                |            |   |                 |   |            |  

On January 31, 2007, the Company entered into a $30.6 million Credit Agreement (Credit
Agreement) with an asset-based lender affiliated with the $15.0 million senior subordinated convertible note holders (Convertible Notes). The Credit Agreement provides for a $20.6 million revolving line of credit
(Revolver) and a $10.0 million term loan (Term Loan). The maturity date for the Revolver and Term Loan is January 31, 2010. The maximum principal amount that can be outstanding at any one time under the Revolver is
limited to the lesser of (i) $20.6 million and (ii) the sum of (x) 85% of eligible accounts receivable and (y) the lesser of (i) 30% of eligible inventory and (ii) $10.6 million. The annual interest rate on the
outstanding borrowings under the Revolver and the Term Loan is equal to the greater of (A) the prime rate plus 3.0% and (B) 10.0%. The prime rate was 8.25% at January 31, 2007. Repayment of the Term Loan is as follows: interest only until
August 1, 2007; then monthly installments of principal on the first day of each month, commencing on August 1, 2007, in the amount of $0.25 million for the period from August 1, 2007 through January 1, 2008 and in the amount of
$0.4 million thereafter. The Companys obligations under the Credit Agreement are guaranteed by all of its domestic subsidiaries with the exception of Empire Coach Enterprises, LLC and Amstar, LLC and are secured by substantially all the
Companys assets and the assets of its subsidiary guarantors. Transaction fees associated with the execution of the Credit Agreement, amounting to $1.6 million and reflected as deferred loan fees on the condensed consolidated balance sheet at
January 31, 2007, are being amortized against interest expense over the three year life of the Credit Agreement.

As of January 31,
2007, the Company had an eligible borrowing base of $17.7 million on the Revolver of which $7.1 million was available for additional borrowings.

The Credit Agreement contains a financial covenant that requires the Company to report in its 10-Q for the first quarter of fiscal 2008 consolidated revenues for such period equal to or greater than 90% of the Companys $50.1 million
in revenue projections



13



---

provided to the lender for that time period. If the Company fails to satisfy the financial covenant, it is obligated to raise at least $5.0 million of
additional equity within sixty days following the date it files the 10-Q for the first quarter of fiscal 2008, unless the Company has raised equity in an amount equal to or in excess of $5.0 million since January 31, 2007. The Credit Agreement
also contains reporting requirements, representations and warranties, and negative and affirmative covenants customary for a transaction of this nature.

In connection with the Credit Agreement and as an inducement to the holders of the Convertible Notes to amend certain negative debt covenants contained in the Convertible Notes, Tecstar Automotive Group, Inc. entered
into an amendment to the Convertible Notes that substantially changed the terms of the original notes. The Convertible Notes were originally dated July 12, 2004 and assumed by the Company in connection with the acquisition of the Tecstar
Automotive Group in March 2005. The significant amendments were: (i) the cash coupon rate was decreased from 8.5% to 6.5%, (ii) a 5.0% payment-in-kind was added thus increasing the total interest rate from 8.5% to 11.5%, (iii) the
holders of the Convertible Notes have the right to extend the maturity date of the Convertible Notes for an additional three years (if exercised, the payment-in-kind is thereafter lowered to 3.0%), (iv) the senior debt limitation covenant was
increased from $30.0 million to $35.0 million, (v) the aggregate senior and subordinate debt limitation covenant was increased from $45.0 million to $60.0 million, (vi) the conversion price was reset from $5.77 to $2.36 per share,
(vii) an anti-dilution provision was added which results in the conversion price being reset to the level of the issue price of shares issued, if issued for less than $1.50 per share, and (viii) the holders of the Convertible Notes cannot
convert prior to November 24, 2007.

Also in connection with the Credit Agreement and the amendment to the Convertible Notes, the
Company guaranteed all of Tectar Automotive Groups obligations under the Convertible Notes and the holders of the Convertible Notes were granted a security interest in substantially all of the assets of the Tecstar Automotive Group.

As a result of the substantial changes to the original Convertible Notes and the execution of the guaranty by the Company of the
obligations under the Convertible Notes, there is 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 Convertible Notes, with an outstanding balance of $15.0 million just prior to the amendment, were accounted for as an early extinguishment of debt and the amended Convertible Notes were accounted for as a new debt instrument and recorded at
an estimated fair value of $21.3 million. The replacement of the original debt instrument with the new debt instrument resulted in a charge of $6.3 million recorded in the third quarter in connection with the amendment of the Convertible Notes. The
Company utilized the services of independent valuation consultants to assist in determining the fair value of the new debt instrument. The difference between the fair value and face value of the Convertible Notes of $6.3 million as of
January 31, 2007 is being amortized against interest expense over the remaining 65 months of the expected life of the notes to reflect the effective interest rate of the new debt instrument.

The Company is in compliance with all material covenants, reporting and other requirements of the Credit Agreement and the Convertible Notes. The Company
anticipates that it will remain in compliance with the financial covenant or be able to meet the obligation to raise the required level of equity within the time period outlined in the financial covenant during fiscal 2008.

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

Maturities of long-term debt for each of the next five twelve month
periods ending January 31 are as follows:



|           |  |  |  |   |           
|---------- |  |  |  | - | ----------
|2008       |  |  |  | $ | 3,111,851 
|2009       |  |  |  |   | 6,429,541 
|2010       |  |  |  |   | 15,985,391
|2011       |  |  |  |   | 1,674,961 
|2012       |  |  |  |   | 1,703,543 
|Thereafter |  |  |  |   | 16,252,467
|           |  |  |  |   |           
|           |  |  |  | $ | 45,157,754
|           |  |  |  |   |           

10) Share-Based Compensation

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



14



---

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

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

As a result of adopting SFAS 123R on May 1, 2006, the Companys operating loss and net loss for the third quarter of fiscal 2007 is $1,038,448
higher and for the first nine months of fiscal 2007 is $3,113,332 higher, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted loss per share for the third quarter of fiscal 2007 is $0.02
higher and basic and diluted loss per share for the first nine months of fiscal 2007 is $0.05 higher, respectively, than if the Company had continued to account for share-based compensation under APB 25.

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



|                                                                                                                                                |  |                                    |             |   |                                   |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----------- | - | --------------------------------- | - | ----------- | -
|                                                                                                                                                |  | Three Months EndedJanuary 31, 2006 |             |   | Nine Months EndedJanuary 31, 2006 |  
|Net loss, as reported                                                                                                                           |  | $                                  | (9,841,703  | ) |                                   | $ | (21,027,352 | )
|Add: Stock-based employee compensation expense related to restricted stock included in reported net income, net of related tax
effects          |  |                                    | 27,075      |   |                                   |   | 81,225      |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                    | (1,350,863  | ) |                                   |   | (3,919,601  | )
|                                                                                                                                                |  |                                    |             |   |                                   |   |             |  
|Pro forma net loss                                                                                                                              |  | $                                  | (11,165,491 | ) |                                   | $ | (24,865,728 | )
|                                                                                                                                                |  |                                    |             |   |                                   |   |             |  
|Earnings per share:                                                                                                                             |  |                                    |             |   |                                   |   |             |  
|Basic and Dilutedas reported                                                                                                                   |  | $                                  | (0.19       | ) |                                   | $ | (0.40       | )
|                                                                                                                                                |  |                                    |             |   |                                   |   |             |  
|Basic and Dilutedpro forma                                                                                                                     |  | $                                  | (0.21       | ) |                                   | $ | (0.47       | )
|                                                                                                                                                |  |                                    |             |   |                                   |   |             |  

Share-Based Compensation Reported

The share-based compensation expense related to stock options and restricted stock included in the accompanying condensed consolidated statement of
operations and in the financial information by reportable business segment in Note 14 for the three and nine month periods ended January 31, 2007 is:



15



---

|                                    |                    |                                     |                        |  |           |         |        |   |         |  |   |          
|----------------------------------- | ------------------ | ----------------------------------- | ---------------------- |  | --------- | ------- | ------ | - | ------- |  | - | ---------
|                                    |                    | Three Months Ended January 31, 2007
|                                    | QuantumFuelSystems |                                     | TecstarAutomotiveGroup |  | Corporate |         | Totals
|Cost of product sales               |                    | $                                   | 32,896                 |  | $         |        |        | $ |        |  | $ | 32,896   
|Research and development            |                    |                                     | 59,608                 |  |           | 47,888  |        |   |        |  |   | 107,496  
|Selling, general and administrative |                    |                                     | 31,633                 |  |           | 144,240 |        |   | 749,258 |  |   | 925,131  
|                                    |                    |                                     |                        |  |           |         |        |   |         |  |   |          
|Total share-based compensation      |                    | $                                   | 124,137                |  | $         | 192,128 |        | $ | 749,258 |  | $ | 1,065,523
|                                    |                    |                                     |                        |  |           |         |        |   |         |  |   |          



|                                    |  |                                    |         |                        |   |           |  |        |           |  |   |          
|----------------------------------- |  | ---------------------------------- | ------- | ---------------------- | - | --------- |  | ------ | --------- |  | - | ---------
|                                    |  | Nine Months Ended January 31, 2007
|                                    |  | QuantumFuelSystems                 |         | TecstarAutomotiveGroup |   | Corporate |  | Totals
|Cost of product sales               |  | $                                  | 105,082 |                        | $ |          |  | $      |          |  | $ | 105,082  
|Research and development            |  |                                    | 193,176 |                        |   | 133,087   |  |        |          |  |   | 326,263  
|Selling, general and administrative |  |                                    | 103,813 |                        |   | 385,779   |  |        | 2,273,620 |  |   | 2,763,212
|                                    |  |                                    |         |                        |   |           |  |        |           |  |   |          
|Total share-based compensation      |  | $                                  | 402,071 |                        | $ | 518,866   |  | $      | 2,273,620 |  | $ | 3,194,557
|                                    |  |                                    |         |                        |   |           |  |        |           |  |   |          

Stock Incentive Plan

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

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



|                                                |  |                 |   |  |                              |      |                                         |     |                         |   |  
|----------------------------------------------- |  | --------------- | - |  | ---------------------------- | ---- | --------------------------------------- | --- | ----------------------- | - | -
|                                                |  | Number ofShares |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingLife (In Years) |     | AggregateIntrinsicValue
|Options outstanding at April 30, 2006           |  | 4,968,692       |   |  | $                            | 4.78 |                                         |     |                         |   |  
|Granted                                         |  | 1,582,000       |   |  | $                            | 1.96 |                                         |     |                         |   |  
|Exercised                                       |  | (10,400         | ) |  | $                            | 3.23 |                                         |     |                         |   |  
|Forfeited                                       |  | (156,900        | ) |  | $                            | 4.79 |                                         |     |                         |   |  
|Expired                                         |  | (96,233         | ) |  | $                            | 4.66 |                                         |     |                         |   |  
|                                                |  |                 |   |  |                              |      |                                         |     |                         |   |  
|Options outstanding at January 31, 2007         |  | 6,287,159       |   |  | $                            | 4.29 |                                         | 7.9 |                         | $ | 
|Vested and expected to vest at January 31, 2007 |  | 5,976,007       |   |  | $                            | 4.27 |                                         | 7.6 |                         | $ | 
|Options exercisable at January 31, 2007         |  | 2,151,634       |   |  | $                            | 4.48 |                                         | 6.4 |                         | $ | 

Shares Available for Grant

On May 1, 2006, an additional 1,613,223 shares of common stock became available for future grant under the Plan pursuant to an evergreen provision contained in the Plan. On August 22, 2006 and
January 8, 2007, the Company granted 1,572,000 and 10,000 additional options, respectively, under the 2002 Stock Incentive Plan. The exercise price of the options granted equaled the market price of the underlying stock on the date of the
grant. At January 31, 2007, there were 865,821 shares of common stock available for grant under the Plan.

Fair Value of Options

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



|                                                     |  |                               |  |                               |        |      |   |           |  |   |          
|---------------------------------------------------- |  | ----------------------------- |  | ----------------------------- | ------ | ---- | - | --------- |  | - | ---------
|                                                     |  | Three MonthsEnded January 31, |  | Nine Months Ended January 31,
|                                                     | 
|                                                     |  | 2006                          |  | 2007                          |        | 2006 |   | 2007     
|Weighted average grant date fair value per share     |  | na                            |  | $                             | 1.24   |      | $ | 3.09      |  | $ | 1.96     
|Intrinsic value of options exercised                 |  | na                            |  |                               | na     |      | $ | 68,344    |  | $ | 12,335   
|Total fair value of options vested during the period |  | na                            |  | $                             | 74,191 |      | $ | 1,123,446 |  | $ | 1,864,909



|(na) | not applicable
|---- | --------------



16



---

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



|                                    |  |                               |  |      |                              |  |      |   |  |      |  
|----------------------------------- |  | ----------------------------- |  | ---- | ---------------------------- |  | ---- | - |  | ---- | -
|                                    |  | Three Months EndedJanuary 31, |  |      | Nine Months EndedJanuary 31, | 
|                                    |  | 2006                          |  | 2007 |                              |  | 2006 |   |  | 2007 |  
|Dividend yield                      |  | na                            |  | 0.0  | %                            |  | 0.0  | % |  | 0.0  | %
|Expected lifeyears                 |  | na                            |  | 6.1  |                              |  | 6.4  |   |  | 5.7  |  
|Risk-free interest rate             |  | na                            |  | 4.7  | %                            |  | 3.7  | % |  | 4.8  | %
|Expected volatility of common stock |  | na                            |  | 82.7 |                              |  | 80.5 |   |  | 83.1 |  

Non-vested Options

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



|                                          |  |                 |   |  |                      |      |                                        |     |  |   |           
|----------------------------------------- |  | --------------- | - |  | -------------------- | ---- | -------------------------------------- | --- |  | - | ----------
|                                          |  |                 |   |  | Weighted-Average     |      | Remaining UnrecognizedCompensationCost
|                                          |  | Number ofShares |   |  | Grant-DateFair Value |      | RemainingYears ToVest                  |    
|Nonvested outstanding at April 30, 2006   |  | 3,336,750       |   |  | $                    | 3.83 |                                        |     |  |   |           
|Granted                                   |  | 1,582,000       |   |  | $                    | 1.96 |                                        |     |  |   |           
|Vested                                    |  | (599,600        | ) |  | $                    | 3.76 |                                        |     |  |   |           
|Forfeited                                 |  | (156,900        | ) |  | $                    | 4.74 |                                        |     |  |   |           
|                                          |  |                 |   |  |                      |      |                                        |     |  |   |           
|Nonvested outstanding at January 31, 2007 |  | 4,162,250       |   |  | $                    | 4.18 |                                        | 3.3 |  | $ | 12,669,874
|                                          |  |                 |   |  |                      |      |                                        |     |  |   |           

Restricted Stock

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



|                                                 |  |                 |  |                      |      |                                       |     |  |   |        
|------------------------------------------------ |  | --------------- |  | -------------------- | ---- | ------------------------------------- | --- |  | - | -------
|                                                 |  |                 |  | Weighted-Average     |      | RemainingUnrecognizedCompensationCost
|                                                 |  | Number ofShares |  | Grant-DateFair Value |      | RemainingYears ToVest                 |    
|Restricted stock outstanding at April 30, 2006   |  | 91,806          |  | $                    | 3.54 |                                       |     |  |   |        
|Granted                                          |  | 0               |  |                      |      |                                       |     |  |   |        
|Vested                                           |  | 0               |  |                      |      |                                       |     |  |   |        
|Forfeited                                        |  | 0               |  |                      |      |                                       |     |  |   |        
|                                                 |  |                 |  |                      |      |                                       |     |  |   |        
|Restricted stock outstanding at January 31, 2007 |  | 91,806          |  | $                    | 3.54 |                                       | 1.3 |  | $ | 135,376
|                                                 |  |                 |  |                      |      |                                       |     |  |   |        

11) Warrants

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



17



---

On October 27, 2006, the Company completed a second PIPE transaction which yielded gross proceeds of
$10.0 million from the sale of 6.1 million shares of its common stock at a price of $1.64 per share, which represented a 20% discount on the October 27, 2006 closing price of $2.05. Proceeds from the sale of stock, net of issuance costs of
$0.8 million for the placement agents fees, amounted to $9.2 million. The investors also received 2.1 million A warrants to purchase common stock at an exercise price of $2.36 and 1.8 million B warrants to
purchase additional shares of the Companys common stock at $1.64 per share. Upon exercise of the B warrants, the investors could have received up to 0.6 million additional warrants identical to the A warrants. The
A warrants expire in April 2014 and have a fair value of $3.5 million. The B warrants expired on February 2, 2007, and had a fair value of $0.9 million.

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

In January 2007, certain PIPE investors exercised 653,659 of B warrants
and therefore received 228,780 of additional A warrants. Gross proceeds from the exercise amounted to $1.1 million. As of January 31, 2007 the following warrants remained outstanding:



|                                  |  |               |      |                 |               |                      |           |                        |         |           |          |   |             |          
|--------------------------------- |  | ------------- | ---- | --------------- | ------------- | -------------------- | --------- | ---------------------- | ------- | --------- | -------- | - | ----------- | ---------
|Warrant Type                      |  | ExercisePrice |      | Expiration Date |               | OriginalNumberIssued |           | AdditionalNumberIssued |         | Exercised |          |   | Outstanding
|June 29, 2006 Warrants            |  | $             | 3.94 |                 | June 2011     |                      | 880,506   |                        |        |           |         |   |             | 880,506  
|October 31, 2006 "A" Warrants     |  | $             | 2.36 |                 | April 2014    |                      | 2,134,146 |                        | 228,780 |           |         |   |             | 2,362,926
|October 31, 2006 "B" Warrants (1) |  | $             | 1.64 |                 | February 2007 |                      | 1,829,179 |                        |        |           | (653,659 | ) |             | 1,175,520
|                                  |  |               |      |                 |               |                      |           |                        |         |           |          |   |             |          
|                                  |  |               |      |                 |               |                      | 4,843,831 |                        | 228,780 |           | (653,659 | ) |             | 4,418,952
|                                  |  |               |      |                 |               |                      |           |                        |         |           |          |   |             |          



| | (1) | 114,138 B warrants were exercised on February 2, 2007, resulting in the issuance of 39,948 additional A warrants.
| | --- | ---------------------------------------------------------------------------------------------------------------------

12) Earnings (Loss) Per Share

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

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

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



|                                                                          |      |                                |            |      |                               |   |             |   |  |      |             |   |  |   |              |  
|------------------------------------------------------------------------- | ---- | ------------------------------ | ---------- | ---- | ----------------------------- | - | ----------- | - |  | ---- | ----------- | - |  | - | ------------ | -
|                                                                          |      | Three Months Ended January 31, |            |      | Nine Months Ended January 31, |  
|                                                                          | 2006 |                                |            | 2007 |                               |   | 2006        |   |  | 2007 |            
|Numerator:                                                                |      |                                |            |      |                               |   |             |   |  |      |             |   |  |   |              |  
|Net loss                                                                  |      | $                              | (9,841,703 | )    |                               | $ | (21,589,609 | ) |  | $    | (21,027,352 | ) |  | $ | (124,345,268 | )
|Numerator for basic and diluted loss per share  to common stockholders   |      | $                              | (9,841,703 | )    |                               | $ | (21,589,609 | ) |  | $    | (21,027,352 | ) |  | $ | (124,345,268 | )
|Denominator for basic and diluted loss per share weighted-average shares |      |                                | 52,879,832 |      |                               |   | 64,918,540  |   |  |      | 52,865,626  |   |  |   | 60,757,656   |  
|                                                                          |      |                                |            |      |                               |   |             |   |  |      |             |   |  |   |              |  
|Basic and diluted loss per share                                          |      | $                              | (0.19      | )    |                               | $ | (0.33       | ) |  | $    | (0.40       | ) |  | $ | (2.05        | )
|                                                                          |      |                                |            |      |                               |   |             |   |  |      |             |   |  |   |              |  



18



---

For the three and nine months ended January 31, 2007, options to purchase approximately 6.3 million and
warrants to purchase approximately 4.8 million shares of common stock, respectively, were excluded in the computation of diluted net income per share, as the effect would be anti-dilutive. In addition, for the three and nine months ended
January 31, 2007, senior subordinated notes payable convertible into approximately 6.4 million shares of common stock were excluded in the computation of diluted net loss per share, as the effect would be anti-dilutive.

13) Income Taxes

Income tax benefit for the three
and nine months ended January 31, 2007 was computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The current period income tax benefit results
from utilization of operating losses against income from reversal of the deferred tax liability from the Tecstar Automotive Group acquisition (discussed below).

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

14) Business Segment and Geographic Information

Business Segments

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

The Quantum Fuel Systems business operations primarily consist of design, manufacture
and supply of packaged fuel systems for use in alternative fuel vehicles and hydrogen fuel cell applications. This segment generates product revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control systems
to OEMs, and the installation of its hydrogen fuel cell products into OEM vehicles. Product revenues are also generated through the sale of compressed natural gas, and hydrogen fuel storage, fuel delivery, and electronic control systems for internal
combustion engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic control systems
integrate and operate with their fuel cell and alternative fuel applications. General Motors comprised 78.9% and 80.1% of the total Quantum Fuel Systems segment revenue reported for the three-month periods ended January 31, 2006 and 2007 and
comprised 73.1% and 79.7% of the total Quantum Fuel Systems segment revenue reported for the nine-month periods ended January 31, 2006 and 2007, respectively.

The Tecstar Automotive Group business operations are focused on the automotive supply industry and primarily consist of second stage manufacturing of pick-up trucks, sport utility vehicles and vans. Vehicle chassis
are received from the OEM and certain appearance items such as ground effects, wheels and badging are added to the chassis. The Tecstar Automotive Group also has engineering and design capabilities for concept vehicles and distributes automotive
accessories through a dealer network. General Motors comprised 87.5% and 81.0% of the total Tecstar Automotive Group segment revenue reported for the three-month periods ended January 31, 2006 and 2007 and comprised 90.6% and 74.8% of the total
segment revenue reported for the nine-month periods ended January 31, 2006 and 2007, respectively .



19



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Intangible assets associated with the Tecstar Automotive Group and Regency acquisitions are reported in
the Tecstar Automotive Group business segment. Goodwill associated with the Tecstar Automotive Group acquisition was allocated 30% to the Quantum Fuel Systems business segment and 70% to the Tecstar Automotive Group business segment (See Note 18).
Goodwill associated with the Regency acquisition is reported in the Tecstar Automotive Group business segment. Changes in the carrying values of goodwill for the nine months ended January 31, 2007 are as follows:



|                                                |  |                      |            |                         |   |             |        |  |   |             |  
|----------------------------------------------- |  | -------------------- | ---------- | ----------------------- | - | ----------- | ------ |  | - | ----------- | -
|                                                |  | Quantum Fuel Systems |            | Tecstar AutomotiveGroup |   |             | Totals | 
|Balance as of April 30, 2006                    |  | $                    | 30,400,000 |                         | $ | 75,193,765  |        |  | $ | 105,593,765 |  
|Impairment charge related to TAG acquisition    |  |                      |           |                         |   | (71,718,601 | )      |  |   | (71,718,601 | )
|Impairment charge related to Empire acquisition |  |                      |           |                         |   | (598,905    | )      |  |   | (598,905    | )
|                                                |  |                      |            |                         |   |             |        |  |   |             |  
|Balance as of January 31, 2007                  |  | $                    | 30,400,000 |                         | $ | 2,876,259   |        |  | $ | 33,276,259  |  
|                                                |  |                      |            |                         |   |             |        |  |   |             |  

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

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

Geographic Information

The Companys long-lived
assets are primarily based in facilities in Texas, California, Michigan, Indiana, Missouri, and Ontario, Canada at January 31, 2007. The Companys foreign assets, which are all located in Canada, represented 2.8% and 1.9% of the
Companys consolidated total assets at April 30, 2006 and January 31, 2007, respectively.



20



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Financial Information by Business Segment

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



|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|----------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                              |  | Three months ended January 31, |        |   | Nine months ended January 31, |  
|                              |  | 2006                           |        |   | 2007                          |   |         | 2006 |  |   | 2007    |  
|Product revenue               |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 1,514  |   |                               | $ | 765     |      |  | $ | 5,574   |   |  | $ | 9,090    |  
|Tecstar Automotive Group      |  |                                | 30,224 |   |                               |   | 29,440  |      |  |   | 126,643 |   |  |   | 93,898   |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 31,738 |   |                               | $ | 30,205  |      |  | $ | 132,217 |   |  | $ | 102,988  |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|                              |  |                                |        |  
|Contract revenue              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 2,175  |   |                               | $ | 1,496   |      |  | $ | 7,253   |   |  | $ | 5,488    |  
|Tecstar Automotive Group      |  |                                | 2,091  |   |                               |   | 1,332   |      |  |   | 7,023   |   |  |   | 3,675    |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 4,266  |   |                               | $ | 2,828   |      |  | $ | 14,276  |   |  | $ | 9,163    |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|                              |  |                                |        |  
|Operating Loss                |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | (3,642 | ) |                               | $ | (3,025  | )    |  | $ | (11,104 | ) |  | $ | (9,815   | )
|Tecstar Automotive Group      |  |                                | (3,390 | ) |                               |   | (7,791  | )    |  |   | (1,699  | ) |  |   | (95,051  | )
|Corporate Expenses            |  |                                | (2,629 | ) |                               |   | (3,709  | )    |  |   | (7,311  | ) |  |   | (11,440  | )
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | (9,661 | ) |                               | $ | (14,525 | )    |  | $ | (20,114 | ) |  | $ | (116,306 | )
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|                              |  |                                |        |  
|Capital Expenditures          |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 33     |   |                               | $ | 20      |      |  | $ | 531     |   |  | $ | 129      |  
|Tecstar Automotive Group      |  |                                | 1,556  |   |                               |   | 1,317   |      |  |   | 3,303   |   |  |   | 5,407    |  
|Corporate Expenses            |  | $                              | 20     |   |                               |   | 35      |      |  |   | 187     |   |  | $ | 138      |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 1,609  |   |                               | $ | 1,372   |      |  | $ | 4,021   |   |  | $ | 5,674    |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|                              |  |                                |        |  
|Depreciation and Amortization |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems          |  | $                              | 997    |   |                               | $ | 947     |      |  | $ | 3,064   |   |  | $ | 3,453    |  
|Tecstar Automotive Group      |  |                                | 1,090  |   |                               |   | 1,351   |      |  |   | 3,737   |   |  |   | 4,136    |  
|Corporate Expenses            |  |                                | 290    |   |                               |   | 623     |      |  |   | 1,045   |   |  | $ | 1,351    |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                         |  | $                              | 2,377  |   |                               | $ | 2,921   |      |  | $ | 7,846   |   |  | $ | 8,940    |  
|                              |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  



|                         |  |                |         |                  |   |        
|------------------------ |  | -------------- | ------- | ---------------- | - | -------
|                         |  | April 30, 2006 |         | January 31, 2007
|                         | 
|Identifiable Assets      |  |                |         |                  |   |        
|Quantum Fuel Systems     |  | $              | 60,347  |                  | $ | 53,082 
|Tecstar Automotive Group |  |                | 196,122 |                  |   | 112,323
|Corporate                |  |                | 25,840  |                  |   | 18,493 
|                         |  |                |         |                  |   |        
|Total assets             |  | $              | 282,309 |                  | $ | 183,898
|                         |  |                |         |                  |   |        



21



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15) Minority Interests

Amstar

AM General LLC holds a minority interest equity position in the accounts of Amstar. As of April 30, 2006 and
January 31, 2007, Amstar had accumulated deficits of $466,603 and $338,172, respectively.

In connection with the start up of
operations in February 2005, AM General provided their initial and only capital contribution to date of $50,000 to Amstar. AM General has no obligation to provide additional capital contributions to cover a deficit equity position. Accordingly, the
portion of the accumulated deficits that exceed AM Generals capital contribution has been allocated to the Company and as a result there is no balance to be reported as minority interest for the periods ended April 30, 2006 and
January 31, 2007 for AM General.

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

Empire Coach

The former Chief Operating Officer of Empire Coach owns a 49% minority interest position in the accounts of Empire Coach and has not provided or been required to provide any capital contributions to date. As of
April 30, 2006 and January 31, 2007, Empire Coach has incurred accumulated deficits of $1,268,512 and $3,779,755, respectively. The minority interest is not required to provide capital resources to cover accumulated deficits. Accordingly,
the accumulated deficit has been entirely allocated to the Company and there is no balance to be reported as minority interest as of April 30, 2006 and January 31, 2007 for Empire Coach.

Unique Performance Concepts

Unique Performance,
Inc., a Texas-based builder of special edition high performance vehicles owns a minority interest equity position of 49.9% in the accounts of UPC, a venture formed in January 2006. Pursuant to UPCs operating agreement, the Company provided
capital contributions totaling $300,000 that consisted of tooling assets under construction of $250,000 and cash of $50,000 and the minority interest provided capital contributions totaling $300,000 that consisted of trade name and dealer network
intangibles of $250,000 and cash of $50,000. The minority interest in net losses of UPC amounted to $100,071 from the date of formation to the end of fiscal 2006 and $694,806 for the nine-month period ended January 31, 2007. As a result of
losses applicable to the minority interest that have exceeded its net capital contributions, the amount reflected for minority interest on the condensed consolidated balance sheet for UPC decreased from $199,929 as of April 30, 2006 to zero as
of January 31, 2007.

Advanced Lithium Power

The Chief Executive and other officers of ALP, along with other unaffiliated parties, hold minority equity interests in ALP. On July 18, 2006 and August 31, 2006, ALP received a total of $264,740 and $27,000
respectively in proceeds from other unaffiliated parties in exchange for shares of common stock of ALP. The transactions increased the minority interest holdings from 64.5% to 76.9% in July and to 77.0% in August. On July 5, 2006, the Company
advanced $181,000 to ALP and in the third quarter of fiscal 2007 the Company advanced another $261,320 to ALP in exchange for convertible subordinated notes with interest at 4.0% per annum. The Company has the right, at its option, to convert
the whole or any part of the advance into voting shares of ALP at the earlier of December 31, 2007 or an initial public offering of ALP stock.

The net equity of ALP as of April 30, 2006 and January 31, 2007 was positive $416,855 and negative $62,596, respectively. The minority interest position amounted to $268,872 as of April 30, 2006 and as a result of losses
applicable to the minority interest that have exceeded its net capital contributions, the amount reflected for minority interest on the condensed consolidated balance sheet for ALP is zero as of January 31, 2007.

Concord Coatings

On September 22, 2005, Tecstar
Automotive Group sold substantially all the assets of its production paint facility, Tarxien Automotive Products Ltd., to Concord Coatings, Inc. in exchange for a 20% equity interest in Concord Coatings, $250,000 in cash from the 80% equity
interest, LJW Holdings, LTD., and a promissory note from Concord in the principal amount of $1,242,279. The total consideration of $1,865,349 equaled the book value of the net assets sold. The accounts of Concord Coatings were included in the
condensed consolidated financial statements subsequent to the September 2005 transaction through the date the business was sold to an unrelated third party effective December 31, 2006. As a result of operating losses since the date of the
September 2005 transaction and impairment of assets identified during the fourth quarter of fiscal 2006, Concord Coatings had a deficit equity position as of April 30, 2006. The accumulated deficit above the



22



---

cash received in connection with the sale of assets in September 2005 had been allocated to Tarxien and as such, there was no balance to be reported as
minority interest as of April 30, 2006. The Company has no further ownership interest the business effective with the December 31, 2006 sale of the assets and as such, will not report a minority interest thereafter.

16) Comprehensive Income or Loss

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



|                                     |  |                                |             |   |                               |   |             |      |  |   |             |   |  |   |              |  
|------------------------------------ |  | ------------------------------ | ----------- | - | ----------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ------------ | -
|                                     |  | Three Months Ended January 31, |             |   | Nine Months Ended January 31, |  
|                                     |  | 2006                           |             |   | 2007                          |   |             | 2006 |  |   | 2007        |  
|Comprehensive loss, net of tax:      |  |                                |             |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Net loss, as reported                |  | $                              | (9,841,703  | ) |                               | $ | (21,589,609 | )    |  | $ | (21,027,352 | ) |  | $ | (124,345,268 | )
|Currency translation adjustments (1) |  |                                | (180,275    | ) |                               |   | 316,763     |      |  |   | (394,288    | ) |  |   | 242,038      |  
|                                     |  |                                |             |   |                               |   |             |      |  |   |             |   |  |   |              |  
|Comprehensive loss, net of tax:      |  | $                              | (10,021,978 | ) |                               | $ | (21,272,846 | )    |  |   | (21,421,640 | ) |  | $ | (124,103,230 | )
|                                     |  |                                |             |   |                               |   |             |      |  |   |             |   |  |   |              |  

---

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

17) Customer Deposit

The Company had deposits on hand from customers totaling approximately $6.2 million and $1.6 million at the end of fiscal 2006 and the
third quarter of fiscal 2007, respectively. Included in the deposits at April 30, 2006 is approximately $4.7 million representing overpayments on certain second-stage assembly product sales from General Motors that resulted from a temporary
error in General Motors electronic vendor payment system. Pursuant to an arrangement with General Motors in August 2006, the overpayments were applied against open receivables related to other similar programs with General Motors, resulting in
the elimination of the deposit.

18) Impairment of Goodwill

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

The goodwill impairment test was performed as of October 31, 2006 and was completed in early March of 2007 with no change required to adjust the
estimate recorded during the second quarter. Under FAS 142, the goodwill impairment test is a two-step process. Under the first step, the fair value of the Companys reporting units was compared with their respective carrying values (including
goodwill). The fair value of certain reporting units using a discounted cash flow approach was determined to be less than their carrying values, which indicated that a goodwill impairment existed. As a result, the Company then performed step two of
the impairment test. In step two, the implied fair value of goodwill was calculated and then compared to the carrying amount of that goodwill. Since the goodwill carrying amount exceeded the implied fair value, an impairment loss was recognized
equal to that excess. The implied goodwill amount was determined by allocating the fair value of the Company to all of the assets and liabilities as if the Company had been acquired in a business combination as of the date of the impairment test. In
the step two test, fair value was allocated to tangible net assets and to both recognized and unrecognized intangible assets as of the test date. Factors or indicators that led to the goodwill impairment testing as of October 31, 2006 included
the following:



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



23



---

| |  |  | the expected benefits of the Companys acquisition of Tecstar Automotive Group had not yet been realized to the extent and within the timeframe initially
anticipated due to sustained operating losses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

19) Contingencies

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



24



---

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

Forward-Looking Statements

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

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

Risks Related to Liquidity and Capital Resources:



| |  |  | As discussed in the section entitled Liquidity and Capital Resources, we recently secured a new credit facility with an asset-based lender and although
the new credit facility will provide a significant source of available funds for our short-term operating needs, we anticipate that we will require additional financing to fund future operating activities beginning in the second quarter of fiscal
2008. Management anticipates issuing stock in private or public offerings or issuing additional debt. Management may also sell certain subsidiaries or other long-lived assets to provide for our liquidity needs over the next year. Our ability to
secure additional financing in this time period may be difficult due to our history of operating losses and negative cash flows and we cannot assure you that such additional sources of financing will be available on acceptable terms, if at all. An
inability to raise sufficient capital to fund our operations would have a material adverse affect on our business and would raise doubts about our ability to continue as a going concern;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the market price and trading volume of our common stock may be volatile and future sales of substantial amounts of our common stock could affect its market price;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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Other Risks Related to our Business:



| |  |  | We incurred a goodwill impairment charge in the second quarter of fiscal 2007 primarily related to the acquisition of Tecstar Automotive Group as we have not
realized the expected benefits to the extent and within the timeframe initially anticipated. If this unfavorable trend continues in our Tecstar Automotive Group operations it could lead to further impairment of goodwill and other specifically
identified intangibles associated with the Tecstar Automotive Group acquisition;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | General Motors and other OEMs continue to put significant pressures on its suppliers to reduce costs;
| | - |  | -----------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



| |  |  | the disposition of businesses that do not fit with our evolving strategy can be highly uncertain in regards to timing and costs involved to effectuate the sale or
closure;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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

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

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



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Overview

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

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

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

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

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

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

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

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

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



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Quantum Fuel Systems Segment

Our Quantum Fuel Systems segment supplies our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold
approximately 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 gaseous fuel systems and hydrogen products for fuel cell
applications to major OEMs through funded research and development contracts and on a prototype and production intent basis. These fuel cell and hydrogen products are not currently manufactured in high volumes and will require additional product
development; however, we believe that a commercial market will begin to develop for these products over the next five to seven years. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and
hydrogen products using our systems on a commercial basis.

A number of 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. Our products for these markets consist
primarily of fuel storage, fuel delivery, electronic vehicle control systems and battery control systems, as well as system integration of our products into fuel cell, hybrid, and alternative fuel vehicles, and hydrogen refueling products, which
includes the complete design of fuel cell and hybrid vehicles to demonstrate our advanced fuel systems expertise.

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

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

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

Our Quantum Fuel Systems segment has grown its programs with the U.S. military to develop advanced fuel cell and hybrid electric vehicle technologies.
Quantums Alternative Mobility Vehicle (AMV) and Mobile Hydrogen Infrastructure programs received approximately $5.9 million of a total $7.0 million in program funding under the fiscal year 2006 Appropriations Bill for the
Department of Defense. With this funding, pre-production prototypes of diesel hybrid AMVs will be developed and built for testing and evaluation by selected commands to assess mission suitability, supportability, performance objectives, and guidance
on final vehicle configuration. Also, in February 2006, the U.S. Army selected Quantum to develop the Hydrogen Escape Hybrid concept, which will continue our expansion into the hybrid vehicle market.

During the third quarter, we announced that we are supplying Ford Motor Company hydrogen fuel injectors for its hydrogen internal combustion engine
powered shuttle bus program, including the three vehicles delivered December 7th to Parliament Hill in Ottawa, Canada for a unique pilot project that will test the vehicles in real-life conditions.

Our Quantum Fuel Systems segment revenues and cash flows are dependent on the advancement of OEM fuel cell technologies and our OEM customers
internal plans, spending levels and timing for pre-production development programs and commercial production. This segment depends on the industry-wide growth of the hydrogen, fuel cell and alternative fuel markets, which in turn is dependent on
regulations, laws, hydrogen availability and refueling, technology advancements, and consumer adoption of alternative fuel and 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 on the vehicle. The fuel
system as a whole, including the tank, regulator and fuel lines, need to comply with OEM vehicle requirements and applicable safety standards. Our systems are generally designed, validated and certified for short-term life, approximately three
years, and are produced in accordance with requirements specified by our OEM customers. We currently have programs with OEMs to design, validate and certify systems for longer durability and for vehicles designed for commercialization.



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

On March 24, 2006, we obtained a 35.5% stake (reduced to 23.1% as of July 18, 2006 and 23.0% as of
August 31, 2006) in Vancouver, British Columbia-based Advanced Lithium Power Inc. (ALP), a newly formed company whose primary asset is intellectual property. ALP is developing state-of-the-art lithium ion battery and control systems
that control state-of-charge and provide for thermal management, resulting in high-performance energy storage. ALPs technology has significant opportunities and applications in hybrid electric vehicles, fuel cell vehicles, uninterruptible
power supplies, and energy storage for renewable energy, such as solar photovoltaic applications. ALP has initiated a comprehensive testing program to demonstrate and validate the application of its lithium ion battery systems for hybrid and plug-in
hybrid electric vehicles. The testing program includes industry standard test protocols established by the United States Advanced Battery Consortium (USABC), Society of Automotive Engineers (SAE), and Underwriters Laboratories (UL). In addition to
these industry standards, ALP and Quantum have developed and are implementing additional test procedures for the battery pack to ensure safety under extreme, beyond-industry-standard operating conditions of the battery pack.

Tecstar Automotive Group Segment

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

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

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

Most of our second stage assembly programs with General Motors expired in April 2006 for model year 2006. The 2007 model year vehicles produced by General Motors represent a model changeover and are not anticipated to
include our



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specialty equipment products on significant platforms until the 2008 or future model years. Certain other second stage assembly programs that have continued
into fiscal 2007 include a sport utility vehicle platform and a pick-up truck platform along with related accessory and service parts. We also have a full-size van platform that began production during the fourth quarter of fiscal 2006 and a
mid-sized truck platform that started production in December 2006. We are in discussions with General Motors on targeted second stage vehicle platforms, vehicles and accessory parts programs, and introductory timing. Any discontinuance of a
specialty vehicle program or an extended transitional period in redesigning a performance package for these new model year vehicles by General Motors would likely have a material adverse effect on our business if not replaced with other OEM programs
or revenues from aftermarket programs, dealer network programs, dual-invoice programs or other strategic initiatives.

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

In February 2006, we acquired all of the stock of Regency Conversions, Inc. (Regency). Regency is one of the largest vehicle converters in North America and supplements our second stage vehicle manufacturing and aftermarket
parts business by offering additional distribution channels directly to automotive dealers, and significantly broadens our customer base beyond OEMs. In addition, it is anticipated that the Tecstar Automotive Group segments manufacturing and
engineering expertise will allow Regency to improve its product offerings and enter new vehicle markets. The addition of Regency enables us to assemble a specialty equipment package on a new vehicle and directly sell our system in conjunction with a
vehicle sale from the OEM to high-volume customers or dealerships under a QVM-Quality Vehicle Manufacturing arrangement but without utilizing the OEM marketing network.

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

In September 2005, we acquired a 51% interest in Empire Coach Enterprises, LLC (Empire Coach), a second stage limousine manufacturer. On January 12, 2007, Empire Coach filed for Chapter 11 bankruptcy
protection in the U.S. Bankruptcy Court, Eastern District of Michigan. Empire Coach continues in possession of its property and will operate and manage the business as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Act.

The Tecstar Automotive Group is also involved in other special programs such as designing and constructing second stage production and
assembly operations for other companies involved in non-traditional consumer automotive markets. In August 2005 and January 2007, we were contracted by Force Protection Industries to assist in second stage assembly programs for special military
vehicle assembly.

In September 2005, we sold substantially all the assets of our production paint facility, Tarxien Automotive Products
Ltd., to Concord Coatings, Inc. in exchange for a 20% equity interest in Concord Coatings, $250,000 in cash, and a promissory note with a principal amount of approximately $1.2 million. Tecstar Automotive Group, through its wholly-owned subsidiary
Tarxien, acted as one of the guarantors for Concord Coatings CAD$1,500,000 revolving credit facility with Comerica Bank. Concord Coatings, Inc. was accounted for as a variable interest entity as defined by FIN 46R and consolidated in our
financial statements due to the fact Concord Coatings, Inc. required additional subordinated financial support from us through the date of disposal on December 31, 2006. During the first quarter of fiscal 2007, it was determined that Concord
Coatings was insolvent and could not repay the promissory note owed to Tarxien nor the outstanding advances on the credit facility with Comerica Bank. In light of this, Tecstar Automotive Group agreed to purchase Concord Coatings loan from
Comerica Bank. Tecstar Automotive Groups purchase of the loan allowed us to have a lead secured position over the remaining Concord Coatings assets in connection with the sale of the entire operations completed on December 31, 2006 to an
unrelated third party. Total consideration received by Tecstar Automotive Group on the sale of the operations amounted to $215,000. The disposal of Concord Coatings assets and liabilities resulted in a potential gain of $901,000, of which $341,000
was recognized through January 31, 2007 and is included as a reduction of selling, general and administrative expenses.

In November
2006, a new OEM customer for the Tecstar Automotive Group, who had previously signed a letter of intent with us to produce a special edition pick-up truck, formally notified us that the program had been cancelled by the OEMs management. We are
currently in discussions with the OEM to come to a mutually agreed upon settlement for Tecstar Automotive Groups development work on the special edition pick-up truck. We expect the settlement to approximate our development costs incurred.



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Financial Operations Overview

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

For the third quarters of fiscal 2006 and 2007, consolidated revenue related to sales of our products to and contracts with General Motors and its
affiliates represented 87% and 65%, respectively, of our total revenue for these periods. For the first nine months of 2006 and 2007, consolidated revenue related to sales of our products to and contracts with General Motors represented 89% and 58%,
respectively, of our total revenue for these periods.

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

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

General Motors Relationship

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

In connection with our strategic alliance, we issued stock to General Motors, representing 19.9% (since diluted to
6.8% as of January 31, 2007) of our total outstanding equity following our January 2003 public offering, for consideration of a nominal cash contribution and access to certain of General Motors proprietary information. Under the alliance,
we have committed to spend $4.0 million annually for specific research and development projects directed by General Motors to speed the commercialization of our fuel cell related products. Since this commitment was waived or partially waived by
General Motors for calendar years 2002 through 2006, the Company anticipates that this commitment will be waived or partially waived in the future. During the first nine months of fiscal 2007, we spent approximately $0.6 million for directed
research and development activities at the direction of GM. We plan to use jointly created technologies in certain aspects of our business but will be required to share revenue with General Motors on fuel cell system-related products that are sold
to General Motors or third parties.

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

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



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Critical Accounting Policies and Estimates

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

Management considers an accounting estimate to be critical if:



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



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

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



| |  |  | We generally manufacture products based on specific orders from customers. Revenue is recognized on product sales upon shipment or when the earnings process is
complete and collectibility is reasonably assured. For product sales in connection with second stage manufacturing, consisting of assembly and integration of specialty equipment products into motor vehicle applications, revenue is recognized upon
completion of the integration activities when the vehicles are ready to be delivered to our customers in accordance with contract terms. The Company includes the costs of shipping and handling, when incurred, in cost of goods sold. We recognize
revenue and profit as work progresses on long-term, fixed price contracts for product application development using the percentage-of-completion method. Generally, we estimate percentage complete by determining cost incurred to date as a percentage
of total estimated cost at completion. For certain other contracts, percentage complete is determined by measuring progress towards contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings
process. For contracts measured under the estimated cost approach, we believe we can generally make dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to revisions as
the contract progresses to completion. Our estimates of contract costs are based on expectations of engineering development time and materials and other support costs. These estimates can change based on unforeseen technology and integration issues,
but known risk factors and contract challenges are generally allowed for in the initial scope and cost estimate of the program. Our historical final contract costs have usually approximated the initial estimates and any unforeseen changes in the
estimates have not normally resulted in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
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| |  |  | We conduct a major portion of our business with a limited number of customers. For the past fiscal year and for the foreseeable future, General Motors has
represented, and is expected to continue to represent, a significant portion of our sales and outstanding accounts receivable. Credit is extended based upon an evaluation of each customers financial condition, with terms consistent with those
present throughout the industry. Typically, we do not require collateral from customers. We have recorded an allowance for uncollectible accounts receivable based on past experience and certain circumstances surrounding the composition of total
accounts receivable. To the extent we increase this allowance in a period, we must include an expense in the statement of operations. If commercial conditions differ from managements estimates, an additional write-off may be required.
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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 Tecstar Automotive Group segment provides product warranties to OEMs under terms similar to those offered by the OEMs to their customers, which are generally three years. While we engage in product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product
failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
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33



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| |  |  | We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. As part of our estimate, we rely upon future planned design configurations and projected alternative usage of certain components estimated by engineering. We also consider
estimated demand for service and warranty parts based on historical information. If actual usage rates or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
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| |  |  | We recorded our acquisitions of Tecstar Automotive Group, Empire Coach and Regency Conversions in accordance with Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations. In determining the fair value of the assets acquired and liabilities assumed in connection with our acquisitions, we consider the evaluations of independent valuation consultants
and other estimates.
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| |  |  | We periodically evaluate for impairment our long-lived assets, particularly our goodwill and intangible assets relating to the acquisition of Tecstar Automotive
Group and the intangible asset relating to the strategic alliance with General Motors. Our identifiable finite-lived intangible assets are amortized over their estimated useful lives. Goodwill is not amortized, but is evaluated periodically for any
impairment in the carrying value. We review our long-lived assets, which include property and equipment, goodwill and identifiable finite-lived intangible assets, for impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following: significant underperformance relative to expected
historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; and a significant decline in our stock
price for a sustained period. During the second quarter of fiscal 2007, certain indicators of impairment led us to perform an impairment test of our goodwill and other intangible assets. Based upon the results of this initial test, we determined
that an impairment of our goodwill existed. The amount of the impairment to be recorded was based upon an estimate recorded in the second quarter based on a second test that calculated the difference between the fair value of the goodwill and its
carrying value. This second test was finalized in the third quarter and did not change the estimate previously recorded. Goodwill and long-lived asset impairment assessments are generally determined based on fair value techniques, including
determining the estimated future discounted and undiscounted cash flows over the remaining useful life of the asset. Those models require estimates of future revenue, profits, capital expenditures and working capital for each reporting unit. We
estimate these amounts by evaluating historical trends, current budgets, operating plans, and industry averages. Discounted cash flows are calculated using a discount rate determined by management to be commensurate with the risk inherent in the
current business model. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results. If these estimates or their related assumptions change in the
future, we might be required to record additional impairment charges. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
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| |  |  | We evaluate whether modifications to existing debt instruments result in substantial changes as defined by EITF 96-19, Debtors Accounting for a
Modification or Exchange of Debt Instruments. 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.
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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 since our spin-off from IMPCO. In addition, we have estimated the temporary differences resulting from our merger with Tecstar Automotive
Group as of and subsequent to the March 3, 2005 acquisition date. These differences result in an overall net deferred tax asset position before any valuation allowances are considered. We must assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we generally
include an expense or benefit within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. We have recorded a valuation allowance on a portion of our deferred tax assets due to uncertainties related to our ability to fully utilize these assets, primarily consisting of net operating
losses and credits which may be carried forward before they expire, and that are subject to certain limitations. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the
recorded valuation allowance, which could materially impact our financial position and results of operations. At January 31, 2007, our gross deferred tax assets have been partially offset by a valuation allowance, resulting in an overall net
deferred tax liability position that is recorded on the consolidated balance sheet.
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34



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Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS 123R). This Statement requires companies to
expense the estimated fair value of stock options and similar equity instruments issued to employees over the requisite vesting period. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25), which generally results in no compensation expense recorded in the financial statements related to the grant of stock options to
employees if certain conditions were met. Effective for the first quarter of fiscal 2007, we adopted SFAS 123R using the modified prospective method, which requires us to record compensation expense for all awards granted, modified, repurchased, or
cancelled after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. We did not incur a charge upon the adoption nor have prior period amounts presented herein been restated
to reflect the adoption of SFAS 123R. For the first nine months of fiscal 2007, we granted 1,582,000 in stock options and did not modify any previously issued awards. We recorded total compensation charges of $1.0 million and $3.1 million related to
the unvested portion of stock option grants for the third quarter and first nine months of fiscal 2007, respectively.

In November 2004,
the FASB issued SFAS No. 151, Inventory Cost. SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (scrap). SFAS No. 151 requires that those items be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. As such, we adopted these
provisions as of the beginning of our current fiscal year effective May 1, 2006. No significant changes resulted in our accounting for inventory from the adoption of SFAS 151 in the first nine months of fiscal 2007.

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

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



35



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Results of Operations

Three and nine months ended January 31, 2006 and 2007

Net revenues and operating loss for our
business segments for the three and nine months ended January 31, 2006 and 2007 were as follows:



|                         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|------------------------ |  | ------------------------------ | ------ | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                         |  | Three months ended January 31, |        |   | Nine months ended January 31, |  
|                         |  | 2006                           |        |   | 2007                          |   |         | 2006 |  |   | 2007    |  
|Product revenue          |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems     |  | $                              | 1,514  |   |                               | $ | 765     |      |  | $ | 5,574   |   |  | $ | 9,090    |  
|Tecstar Automotive Group |  |                                | 30,224 |   |                               |   | 29,440  |      |  |   | 126,643 |   |  |   | 93,898   |  
|                         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                    |  | $                              | 31,738 |   |                               | $ | 30,205  |      |  | $ | 132,217 |   |  | $ | 102,988  |  
|                         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Contract revenue         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems     |  | $                              | 2,175  |   |                               | $ | 1,496   |      |  | $ | 7,253   |   |  | $ | 5,488    |  
|Tecstar Automotive Group |  |                                | 2,091  |   |                               |   | 1,332   |      |  |   | 7,023   |   |  |   | 3,675    |  
|                         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                    |  | $                              | 4,266  |   |                               | $ | 2,828   |      |  | $ | 14,276  |   |  | $ | 9,163    |  
|                         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Operating Loss           |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Quantum Fuel Systems     |  | $                              | (3,642 | ) |                               | $ | (3,025  | )    |  | $ | (11,104 | ) |  | $ | (9,815   | )
|Tecstar Automotive Group |  |                                | (3,390 | ) |                               |   | (7,791  | )    |  |   | (1,699  | ) |  |   | (95,051  | )
|Corporate Expenses       |  |                                | (2,629 | ) |                               |   | (3,709  | )    |  |   | (7,311  | ) |  |   | (11,440  | )
|                         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  
|Total                    |  | $                              | (9,661 | ) |                               | $ | (14,525 | )    |  | $ | (20,114 | ) |  | $ | (116,306 | )
|                         |  |                                |        |   |                               |   |         |      |  |   |         |   |  |   |          |  

Overall revenue decreased $3.0 million from $36.0 million in the third quarter of fiscal 2006 to
$33.0 million in the third quarter of fiscal 2007 and decreased $34.3 million from $146.5 million in the first nine months of fiscal 2006 to $112.2 million in the first nine months of fiscal 2007. This decrease is mainly due to declines in our
Tecstar Automotive Group segment product revenues of $32.7 million in the first nine months of fiscal 2007 as a result of the expiration of certain second stage contracts and changeovers in vehicle platforms by General Motors that have occurred
since the second half of fiscal 2006.

Overall operating loss increased $4.8 million, from $9.7 million in the third quarter of fiscal 2006
to $14.5 million in the third quarter of fiscal 2007 and increased $96.2 million from $20.1 million in the first nine months of fiscal 2006 to $116.3 million in the first nine months of fiscal 2007 primarily due to impairment charges of $72.3
million in the second quarter of fiscal 2007 for the estimated impairment of goodwill related to our acquisition of Tecstar Automotive Group and to our acquisition of Empire Coach. The higher overall operating loss in the third quarter and first
nine months of fiscal 2007 is also due to increases in operating losses in our Tecstar Automotive Group of $4.4 million and $21.0 million (excluding goodwill impairment), respectively, resulting from the decline in second stage product revenues and
increased selling, general and administrative expenses as a result of the Regency acquisition. Additionally, our Corporate segment had a $1.1 million and $4.1 million increase in expenses for the third quarter and the first nine months of fiscal
2007, respectively, as a result of expanded support to administer a larger base of subsidiaries of the overall operations in fiscal 2007 as compared to fiscal 2006 and higher compensation charges as a result of the adoption of SFAS 123R at the
beginning of fiscal 2007.

Quantum Fuel Systems Segment

Product sales for the Quantum Fuel Systems segment decreased $0.7 million, or 47%, from $1.5 million in the third quarter of fiscal 2006 to $0.8 million in the third quarter of fiscal 2007 and increased $3.5 million,
or 63%, from $5.6 million in the first nine months of fiscal 2006 to $9.1 million in the first nine months of fiscal 2007. Product sales during fiscal 2007 primarily consist of orders associated with General Motors pick-up trucks equipped with
our bi-fuel and compressed natural gas fuel systems. Sales related to compressed natural gas fuel systems decreased $0.7 million, or 47%, from $1.5 million in the third quarter of fiscal 2006 to $0.8 million in the third quarter of fiscal 2007. The
decrease in the third quarter of fiscal 2007 is mainly due to the end of the General Motors pick-up truck program. We expect compressed natural gas product sales to decline significantly during the fourth quarter of fiscal 2007 in connection
with the expiration of the current natural gas vehicle program with General Motors. Overall, we expect Quantum Fuel Systems revenues in fiscal 2007 to be lower than fiscal 2006.



36



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Cost of product sales for the Quantum Fuel Systems segment decreased $1.2 million, or 71%, from $1.7
million in the third quarter of fiscal 2006 to $0.5 million in the third quarter of fiscal 2007 and increased $1.8 million, or 28%, from $6.5 million in the first nine months of fiscal 2006 to $8.3 million in the first nine months of fiscal 2007.
The decrease in the third quarter of fiscal 2007 is mainly due to the lower overall sales volume in the segment and reductions in variable overhead costs.

Gross profits on product sales for the Quantum Fuel Systems segment increased $0.5 million from a negative $0.2 million in the third quarter of fiscal 2006 to a positive $0.3 million in the third quarter of fiscal
2007 and increased $1.7 million from a negative $0.9 million in the first nine months of fiscal 2006 to a positive $0.8 million in the first nine months of fiscal 2007. The increase in the first nine months of fiscal 2007 is mainly attributable to
the increased sales volume and reductions in variable overhead costs in the first nine months of fiscal 2007.

Contract revenue for the
Quantum Fuel Systems segment decreased $0.7 million, or 32%, from $2.2 million in the third quarter of fiscal 2006 to $1.5 million in the third quarter of fiscal 2007 and decreased $1.8 million, or 25%, from $7.3 million in the first nine months of
fiscal 2006 to $5.5 million in the first nine months of fiscal 2007. Contract revenue is derived primarily from system development and application engineering of our products under funded General Motors and other OEM contracts, and other funded
contract work with the U.S. military and other government agencies. Contract revenue is recognized as work progresses on fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue
and costs. Recognized revenue is subject to revisions as the contracts progress to completion.

Research and development expense associated
with development contracts decreased $0.3 million, or 16%, from $1.9 million in the third quarter of fiscal 2006 to $1.6 million in the third quarter of fiscal 2007 and decreased $1.3 million, or 19%, from $6.7 million in the first nine months of
fiscal 2006 to $5.4 million in the first nine months of fiscal 2007. Internally funded research and development expense for the Quantum Fuel Systems segment decreased by $0.5 million, or 23%, from $2.2 million in the third quarter of fiscal
2006 to $1.7 million in the third quarter of fiscal 2007 and decreased by $0.5 million, or 8%, from $6.3 million in the first nine months of fiscal 2006 to $5.8 million in the first nine months of fiscal 2007.

Selling, general and administrative expenses for the Quantum Fuel Systems segment remained the same in the third quarter of fiscal 2006 to the third
quarter of fiscal 2007 at $1.1 million and increased $0.3 million, or 9%, from $3.3 million in the first nine months of fiscal 2006 to $3.6 million in the first nine months of fiscal 2007. Selling, general and administrative expenses as a percentage
of total Quantum Fuel Systems segment operating costs and expenses was 29% for the third quarter of fiscal 2007 compared to 19% for the third quarter of fiscal 2006 and increased for the first nine months of fiscal 2007 from 17% in fiscal 2006 to
18% in fiscal 2007.

Amortization of intangibles for the Quantum Fuel Systems segment relates to the Corporate Alliance Agreement with
General Motors. The expense in the third quarter of fiscal year 2007 was the same as in the third quarter of fiscal 2006 and amounted to $0.4 million. The expense in the first nine months of fiscal 2007 increased $0.1 million as compared to the
first nine months of fiscal 2006 and amounted to $1.3 million.

Operating loss for the Quantum Fuel Systems segment in the third quarter of
fiscal 2007 was $3.0 million, a decrease of $0.6 million, from the third quarter of fiscal 2006 loss of $3.6 million. The first nine months of fiscal 2007 operating losses were $9.8 million, a decrease of $1.3 million, from $11.1 million in the
first nine months of fiscal 2006. We expect the Quantum Fuel Systems segment to incur continued operating losses in the fourth quarter of fiscal 2007.

Tecstar Automotive Group Segment

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

Overall revenues for the Tecstar Automotive
Group of $30.8 million for the third quarter of fiscal 2007 decreased $1.5 million or 5% from the third quarter of fiscal 2006 revenues of $32.3 million. This decrease is mainly due to declines in product revenues as a result of the expiration of
certain second stage contracts and changeovers in vehicle platforms by General Motors that have occurred since the second half of fiscal 2006 that were nearly offset by $6.5 million in additional revenues generated by our Regency operations in the
third quarter of fiscal 2007. Overall revenues for the first nine months of fiscal 2006 totaled $133.7 million compared to $97.6 million for the first nine months of 2007.



37



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Product sales for the Tecstar Automotive Group decreased $0.8 million, or 3%, from $30.2 million in the
third quarter of fiscal 2006 to $29.4 million in the third quarter of fiscal 2007. Product sales decreased $32.7 million, or 26% from $126.6 million in the first nine months of fiscal 2006 to $93.9 million in the first nine months of fiscal 2007.
Product sales include second stage assembly revenues that are associated with second stage automotive manufacturing facilities located in Louisiana, Missouri, Texas and Indiana in the United States and in Ontario, Canada. All of these facilities are
located near General Motors assembly plants. Second stage assembly revenues decreased $4.0 million, or 24%, from $16.5 million in the third quarter of fiscal 2006 to $12.5 million in the third quarter of 2007 due to the expiration of programs noted
above. Product sales for automotive OEM accessory parts distributed through OEM distribution channels and dealer networks were $12.6 million and $14.5 million for the third quarters of fiscal 2006 and 2007, respectively. Other revenues totaled $1.1
million and $2.4 million for the third quarters of fiscal 2006 and 2007, respectively. We expect overall product sales in the fourth quarter of fiscal 2007 to be comparable to product sales in the third quarter of fiscal 2007.

Cost of product sales for the Tecstar Automotive Group increased $1.8 million, or 6%, from $29.2 million in the third quarter of fiscal 2006 to $31.0
million in the third quarter of fiscal 2007. Cost of product sales was $116.5 million and $96.7 million in the first nine months of fiscal 2006 and 2007, respectively. Cost of product sales primarily represents the cost of raw material, labor and
assembly facility overhead required in the second stage manufacturing process and material costs related to parts distribution. Gross profit on product sales was $1.0 million and $10.1 million of sales for the three-month and nine-month periods
ended January 31, 2006 as compared to gross loss of $1.6 and $2.8 million for the three-month and nine-month period ended January 31, 2007. The decrease is primarily due to the lower volumes of second-stage activities in the first nine
months of fiscal 2007 and product mix.

Contract revenue for the Tecstar Automotive Group decreased $0.8 million, or 38%, from $2.1 million
in the third quarter of 2006 to $1.3 million in the third quarter of 2007. There was also a decrease of $3.3 million, or 47%, from $7.0 million in the first nine months of fiscal 2006 compared to $3.7 million in the first nine months of fiscal 2007.
This decrease is primarily related to revenues recognized in fiscal 2006 for work performed on the Force Protection program. Revenue is associated with design and engineering services for concept vehicles. Research and development expense associated
with cost of contract revenue decreased $0.8 million, or 36%, from $2.2 million in the third quarter of fiscal 2006 to $1.4 million in the third quarter of fiscal 2007. There was also a decrease in research and development expense associated with
cost of contract revenue of $2.2 million, or 37%, from $6.0 million in the first nine months of fiscal 2006 to $3.8 million in the first nine months of fiscal 2007.

Selling, general and administrative expenses for the Tecstar Automotive Group were $5.5 million and $17.8 million for the three-month and nine-month periods, respectively, ended January 31, 2007 compared to $4.0
million and $11.1 million for the three-month and nine-month periods, respectively, ended January 31, 2006. These expenses represent those costs that directly support the business segment and consist mainly of selling and administrative
salaries, business development costs, insurance and travel related costs. The increase in the current year is mainly due to the expanded activities related to the operations of Regency and Unique Performance that were not included in the third
quarter of the prior fiscal year. Selling, general and administrative expenses attributable to these two entities were $1.7 million and $4.9 million for the three and nine months ended January 31, 2007, respectively. Selling, general and
administrative expenses for the Tecstar Automotive Group also includes $0.1 million and $0.4 million, for the three and nine months of fiscal 2007, of share-based compensation expense related to unvested options previously granted that are required
to be expensed beginning in fiscal 2007.

Amortization of intangibles was $0.3 million and $0.7 million in the third quarters of fiscal
2006 and 2007, respectively, and $1.7 million and $2.1 million in the first nine months of fiscal 2006 and 2007, respectively. This primarily relates to specifically identified customer related intangibles and existing technology acquired by Quantum
in the acquisitions of Tecstar Automotive Group and also includes dealer network and other intangible assets acquired in the acquisition of Regency and the start up of Unique Performance Concepts.

Operating loss for the Tecstar Automotive Group segment was $7.8 million and $95.1 million for the three and nine month periods for fiscal 2007, compared
to a loss of $3.4 million and $1.7 million for the three and nine month periods of fiscal 2006, respectively. We expect our Tecstar Automotive Group segment to continue incurring losses during the fourth quarter of fiscal 2007; however, we
anticipate those losses will be less than the trend over the first nine months of fiscal 2007 as a result of cost reduction initiatives implemented during the third quarter and additional reductions targeted in the fourth quarter. Additionally, we
expect these initiatives to favorably impact this segments performance in fiscal 2008.



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Corporate

Corporate expenses increased by $1.1 million, or 42%, from $2.6 million in the third quarter of fiscal 2006 to $3.7 million in the third quarter of fiscal 2007 and increased $4.1 million, or 56% from $7.3 million in
the first nine months of fiscal 2006 to $11.4 million in the first nine months of fiscal 2007. Increases in the first nine months of fiscal 2007 compared to fiscal 2006 were due in part to share-based compensation expense of $2.2 million resulting
from the new accounting change for unvested options effective beginning in fiscal 2007, increased audit related fees and services of $0.6 million and $0.2 million for investor relation expenses. Expansion of corporate activities related to
subsidiaries added over the past year has contributed to the increased level of costs incurred in fiscal 2007. Corporate expenses as a percentage of total revenues increased to 10% for the first nine months of fiscal 2007 as compared to 5% for the
first nine months of fiscal 2006.

Non-Reporting Segment Results

Interest Income and Expense. Interest income decreased $0.2 million, from $0.8 million in the first nine months of fiscal 2006 to $0.6 million in
the first nine months of fiscal 2007. Interest expense amounted to $3.7 million in the first nine months of fiscal 2007 as compared to $1.9 million in the first nine months of fiscal 2006. Interest expense primarily relates to debt obligations that
were assumed in connection with the Tecstar Automotive Group acquisition in March 2005 and the Regency acquisition in February 2006. The increase in interest expense is attributable to higher prime interest rates and higher levels of borrowing under
the credit facility with Comerica Bank as compared to the first nine months of the previous fiscal year. All credit facilities with Comerica Bank were repaid and terminated during the third quarter of fiscal 2007. We expect interest expense to
increase in the fourth quarter due to the higher interest rates on the new credit facility and anticipated higher levels of amounts borrowed.

Extinguishment of Debt.On January 31, 2007, we secured a $30.6 million credit facility with an asset-based lender affiliated with the senior subordinated convertible note holders. In connection with the new credit facility, we
agreed to amend the convertible notes and we guaranteed all of Tectar Automotive Groups obligations under the convertible notes (see Liquidity and Capital Resources below). As a result of the substantial changes to the original convertible
notes and the execution of the guaranty, there is an implied exchange of debt instruments as prescribed in EITF 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. The replacement of the original debt
instrument with the new debt instrument resulted in a one-time charge of $6.3 million in connection with the amendment of the convertible notes for the three and nine months ended January 31, 2007.

Income Taxes.During the three and nine month periods ended January 31, 2007, we realized a tax benefit of approximately $0.1 million and
$0.4 million primarily as a result of the declining temporary difference between the book basis and tax basis related to intangible assets recorded in connection with the Tecstar Automotive Group acquisition. A partial valuation allowance has been
established for our net deferred tax assets due to our lack of earnings history. We anticipate incurring net losses and to continue to realize a tax benefit as a result of the declining temporary difference related to intangible assets over the next
twelve months.

Liquidity and Capital Resources

Net cash used in operating activities for the first nine months of fiscal 2007 was $22.4 million as compared to a cash use of $30.6 million during the first nine months of fiscal 2006. The cash used during the
first nine months of fiscal 2007 is primarily due to a net loss of $34.5 million before the non-cash effects of goodwill impairments, depreciation and amortization, loss on extinguishment of debt, stock compensation charges, and other items. The
loss from operations was offset by favorable changes in levels of operating assets and liabilities of $12.1 million, primarily related to a decrease in levels of accounts receivable that resulted from non-recurring collections related to programs
with General Motors in the first quarter of fiscal 2007. Net cash used in operations declined to $10.4 million during the third quarter of fiscal 2007 as compared to $12.9 million in the second quarter. We expect levels of cash used during the third
quarter to continue through the fourth quarter of fiscal 2007, exclusive of any one-time cash requirements that may be required in connection with anticipated cost reduction initiatives.

Net cash provided by investing activities during the first nine months of fiscal 2007 was $8.3 million as compared to net cash provided of $12.5 million
during the first nine months of fiscal 2006. The net cash provided in the current fiscal year mainly results from a net reduction of marketable securities of $14.0 million as offset by purchases of property and equipment of $5.7 million. The decline
of marketable securities primarily resulted from a sale of our remaining portfolio of marketable securities in December 2006 that netted cash proceeds of $15.0 million that were used to reduce outstanding borrowings under credit facilities with
Comerica Bank. Purchases of property and equipment were mainly related to the development of tooling for new aftermarket programs.

Net
cash provided by financing activities during the first nine months of fiscal 2007 was $17.9 million as compared to $17.9 million during the first nine months of fiscal 2006. Cash provided during the first nine months of fiscal 2007 was
principally from the sales of our common stock and from borrowings under a new credit facility. We sold 4.4 million and 6.0



39



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million shares of our stock to investors in private placements during the months of June and October 2006 that provided $12.5 million and $10.0 million
in gross proceeds, respectively. Transaction fees related to the stock sales amounted to $1.6 million in the aggregate. During the third quarter, certain investors exercised warrants issued in connection with the October private placement that
provided cash proceeds of $1.1 million. In December 2006, we used $15.0 million of the net proceeds from the sale of our marketable securities to reduce the outstanding borrowings under credit facilities with Comerica Bank. In January 2007, we
secured a new $30.6 million credit facility with an asset based lender. We borrowed $20.6 million in connection with the new credit facility and used $9.6 million of the funds to repay the remaining outstanding borrowings and accrued interest under
the credit facilities with Comerica Bank. The facilities with Comerica Bank terminated in connection with the repayment.

The ratio of
current assets to current liabilities was 1.6:1 at January 31, 2007 versus 1.5:1 at April 30, 2006. During the first nine months of fiscal 2007, our total working capital decreased by $0.5 million, from $26.4 million at April 30, 2006
to $25.9 million at January 31, 2007.

In July 2002, we received $15.0 million in cash in connection with our spin-off from IMPCO. In
January 2003, we completed a public equity offering of an aggregate of 4,025,000 shares of our common stock at a price of $2.25 per share, which yielded net proceeds of $8.0 million, all of which has been used for working capital purposes. In
October 2003, we completed a public equity offering of an aggregate of 8,050,000 shares of our common stock at a price of $8.00 per share, which yielded net proceeds of $60.1 million. On June 29, 2006, we completed a private investment in
public entity (PIPE) transaction which yielded proceeds of $12.5 million from the sale of 4,403,000 shares of our common stock at a price of $2.84 per share, which represented a 10% discount on the June 29, 2006 closing price of
$3.15. On October 27, 2006, we completed a second PIPE transaction which yielded proceeds of $10.0 million from the sale of 6,098,000 shares of our common stock at a price of $1.64 per share, which represented a 20% discount on the
October 27, 2006 closing price of $2.05.

Our principal sources of liquidity as of January 31, 2007 included cash and cash
equivalents of $12.7 million, restricted cash equivalents of $1.0 million, and a new revolving line of credit with an asset-based lender which provides for a maximum availability totaling $20.6 million. Advances outstanding under the revolving line
of credit totaled $10.6 million at January 31, 2007. The restricted cash equivalents and marketable securities consist $1.0 million collateralized for the benefit of General Motors Acceptance Corporation (GMAC) in connection
with financing of vehicle chassis for Regencys operations.

On January 31, 2007, we entered into a $30.6 million Credit
Agreement (Credit Agreement) with an asset-based lender affiliated with the $15.0 million senior subordinated convertible note holders (Convertible Notes). The Credit Agreement provides for a $20.6 million revolving line of
credit (Revolver) and a $10.0 million term loan (Term Loan). The maturity date for the Revolver and Term Loan is January 31, 2010. The maximum principal amount that can be outstanding at any one time under the Revolver
is limited to the lesser of (i) $20.6 million and (ii) the sum of (x) 85% of eligible accounts receivable and (y) the lesser of (i) 30% of eligible inventory and (ii) $10.6 million. The annual interest rate on the
outstanding borrowings under the Revolver and the Term Loan is equal to the greater of (A) the prime rate plus 3.0% and (B) 10.0%. The prime rate was 8.25% at January 31, 2007. Repayment of the Term Loan is as follows: interest only until
August 1, 2007; then monthly installments of principal on the first day of each month, commencing on August 1, 2007, in the amount of $0.25 million for the period from August 1, 2007 through January 1, 2008 and in the amount of
$0.4 million thereafter. Our obligations under the Credit Agreement are guaranteed by all of our domestic subsidiaries with the exception of Empire Coach Enterprises, LLC and Amstar, LLC and are secured by substantially all of our assets and the
assets of our subsidiary guarantors. Transaction fees associated with the execution of the Credit Agreement, amounting to $1.6 million and reflected as deferred loan fees on the condensed consolidated balance sheet at January 31, 2007, are being
amortized against interest expense over the three year life of the Credit Agreement.

As of January 31, 2007, we had an eligible borrowing
base of $17.7 million on the Revolver of which $7.1 million was available for additional borrowings.

The Credit Agreement contains a
financial covenant that requires us to report in our 10-Q for the first quarter of fiscal 2008 that our consolidated revenues for such period were equal to or greater than 90% of our $50.1 million in revenue projections provided to the lender for
that time period. If we fail to satisfy the financial covenant, we are obligated to raise at least $5.0 million of additional equity within sixty days following the date we file our 10-Q for the first quarter of fiscal 2008, unless we have raised
equity in an amount equal to or in excess of $5.0 million since January 31, 2007. The Credit Agreement also contains reporting requirements, representations and warranties, and negative and affirmative covenants customary for a transaction of
this nature.

In connection with the Credit Agreement and as an inducement to the holders of the Convertible Notes to amend certain
negative debt covenants contained in the Convertible Notes, Tecstar Automotive Group, Inc. entered into an amendment to the Convertible Notes. The Convertible Notes were originally dated July 12, 2004 and assumed by us in connection with our
acquisition of the Tecstar Automotive Group in March 2005. The significant amendments were: (i) the cash coupon rate was decreased from 8.5% to 6.5%, (ii) a 5.0% payment-in-kind was added thus increasing the total interest rate from 8.5%
to 11.5%, (iii) the holders of the Convertible Notes have the right to extend the maturity date of the Convertible Notes for an additional three years (if exercised, the payment-in-kind is thereafter lowered to 3.0%), (iv) the senior debt
limitation covenant was increased from $30.0 million to $35.0 million, (v) the aggregate senior and subordinate debt limitation covenant was increased from $45.0 million to $60.0 million, (vi) the conversion price was reset from $5.77 to



40



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$2.36 per share, (vii) an anti-dilution provision was added which results in the conversion price being reset to the level of the issue price of shares
issued if issued for less than $1.50 per share, and (viii) the holders of the Convertible Notes cannot convert prior to November 24, 2007.

Also in connection with the Credit Agreement and the amendment to the Convertible Notes, Quantum guaranteed all of Tectar Automotive Groups obligations under the Convertible Notes and the holders of the
Convertible Notes were granted a security interest in substantially all of the assets of the Tecstar Automotive Group.

We are in
compliance with all material covenants, reporting and other requirements of the Credit Agreement and the Convertible Notes. We anticipate that we will remain in compliance with the financial covenant or be able to meet the obligation to raise the
required level of equity within the time period outlined in the financial covenant during fiscal 2008.

During the first nine months of
fiscal 2007, we reduced workforce levels and implemented certain other cost saving initiatives. We intend to continue its efforts to implement a cost reduction program that includes consolidation of facilities, streamlining of functions, monitoring
of workforce levels and various other cost saving measures. Despite the cost saving initiatives already implemented and those we expect to implement in the fourth quarter of fiscal 2007 and in addition to securing a new $30.6 million credit
facility, we believe that based on current projections and forecasts that we do not have sufficient liquidity to fund our short-term cash needs. Accordingly, we anticipate that we will require additional equity or debt financing beginning in the
second quarter of fiscal 2008 to fund our future operating activities. We anticipate that we will require approximately $10 to $15 million in additional equity or debt financing to fund our operating activities over the next twelve months above our
principal sources of liquidity at January 31, 2007. Our actual financing requirements could be higher. We may also sell certain subsidiaries or other long-lived assets to provide for our liquidity needs over the next year. Our ability to secure
additional financing in this time period may be difficult due to our history of operating losses and negative cash flows; however, the continued implementation of our cost reduction program will help to mitigate this risk. Although we believe that
our short-term cash requirements can be adequately sourced, we cannot assure the reader that such additional sources of financing will be available on acceptable terms, if at all. An inability by us to raise sufficient capital to fund our operations
would have a material adverse affect on us and would raise doubts about our ability to continue as a going concern. We have also agreed that, subject to limited exceptions, we will not issue any stock in a private placement transaction without the
prior written consent of General Motors. As of January 31, 2007, we had no material commitments for capital expenditures.

Our
long-term cash requirements depend on numerous factors. Our Quantum Fuel Systems segment is dependent on factors such as the advancement of OEM fuel cell technologies, development and commercialization timing of our products, customer funding of
application development programs, and other industry-wide growth factors. Our Tecstar Automotive Group segment is dependent on factors such as model year changeover of vehicle platforms by General Motors, economic conditions, including levels of
disposable consumer income, the availability and price of gasoline, the level of interest rates, and the availability of consumer financing. Our cash and levels of borrowing are also impacted by the timing of Tecstar Automotive Groups
once-a-month cash collections on product sales to General Motors. Competition and a reliance on a few customers, particularly General Motors, are additional factors that may impact our future operations.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates due to our financing, investing and cash management activities. Specifically, we are at risk due to the variable nature of our $30.6 million in credit facilities with an
asset-based lender. A 1% increase in the interest rate could result in an annual increase in interest expense of up to approximately $306,000, assuming the maximum amount was outstanding on the credit facilities during an entire year.

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

We are exposed to risk from
fluctuating currency exchange rates, primarily the U.S. dollar against the Canadian dollar. We face transactional currency exposures that arise when our foreign subsidiaries enter into transactions denominated in currencies other than their own
local currency. We also face currency exposure that arises from translating the results of our Canadian operations to the U.S. dollar. Net foreign currency transaction losses aggregated approximately $0.5 million for the first nine months of fiscal
2007.



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Off Balance Sheet Disclosures

Consigned Inventories

Our wholly-owned subsidiary, Regency, obtains vehicle chassis for its specialized vehicle products
directly from OEMs under converter pool agreements. Chassis are obtained from the OEMs based on orders from customers, and to a lesser extent, for unallocated orders. Although each OEM agreement has different terms and conditions, the agreements
generally provide that the OEM will provide a supply of chassis to be maintained from time to time at Regencys facility under the conditions that Regency will store such chassis and will not move, sell or otherwise dispose of such chassis,
except under the terms of the agreement. The OEM does not transfer the certificate of origin to Regency and, accordingly, Regency accounts for the chassis as consigned inventory belonging to the OEM. Under these agreements, Regency is required to
pay a finance charge on the chassis inventory equal to a fixed rate of zero to 2.0% for the first 90 days and a variable rate of prime plus 1.0% for days 91 and thereafter. The finance charges incurred on consigned chassis inventory, included in
interest expense in the consolidated statement of income, aggregated $0.9 million for the first nine months of fiscal 2007. Chassis inventory, accounted for as consigned inventory to Regency by the OEMs, aggregated approximately $24.3 million at
April 30, 2006 and $15.9 million at January 31, 2007. Typically, chassis are converted and delivered to the customers within 90 days of the receipt of the chassis by Regency.



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

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



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

(a) Disclosure
Controls and Procedures

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

(b) Design of Internal Control Over Financial Reporting

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

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



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



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



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



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

Status of Managements Remedial Action

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

(c) Changes
in Internal Control Over Financial Reporting

Other than the remediation plan that is discussed above, there have been no other changes
in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



43



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PART IIOTHER INFORMATION



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

The following risk 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:

As discussed in the section entitled Liquidity and Capital Resources, we recently secured a new credit facility with an asset-based lender and
although the new credit facility will provide a significant source of available funds for our short-term operating needs, we anticipate that we will require additional equity or debt financing to fund future operating activities beginning in the
second quarter of fiscal 2008. Management anticipates issuing stock in private or public offerings. Management may also sell certain subsidiaries or other long-lived assets to provide for our liquidity needs over the next year. Our ability to secure
additional financing in this time period may be difficult due to our history of operating losses and negative cash flows and we cannot assure you that such additional sources of financing will be available on acceptable terms, if at all. An
inability to raise sufficient capital to fund our operations would have a material adverse affect on our business and would raise doubts about our ability to continue as a going concern.



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

As previously reported in the Companys current report on Form 8-K filed October 31, 2006, the Company completed a private placement of its common stock on October 27, 2006, which included the issuance of
A and B warrants to the accredited investors who participated in the private placement. On December 11, 2006, the Company issued 45,732 shares of common stock upon the exercise of B warrants for total
consideration of $75,000. On January 18, 2007, the Company issued 290,000 shares of common stock upon the exercise of B warrants for total consideration of $475,600. On January 25, 2007, the Company issued 180,732 shares of common stock
upon the exercise of B warrants for total consideration of $296,400. On January 30, 2007, the Company issued 137,195 shares of common stock upon the exercise of B warrants for total consideration of $225,000. On February 2,
2007, the Company issued 114,138 shares of common stock upon the exercise of B warrants for total consideration of $187,186. In conjunction with the warrant exercises described above, and pursuant to the Securities Purchase Agreement
governing the October 2006 private placement, the Company issued an aggregate of 268,728 additional A warrants to the persons exercising the B warrants (35 A warrants for every 100 B warrants
exercised). Subject to anti-dilution and adjustment provisions, the A warrants are exercisable at a price of $2.36 per share. The A warrants may be exercised no earlier than April 30, 2007, and expire on April 30, 2014.

Each transaction reported was with an accredited investor and is exempt from registration pursuant to Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D as not involving a public offering. Each transaction was made without general solicitation or advertising and was not underwritten. Each security certificate bears a legend providing, in substance, that the
securities have been acquired for investment only and may not be sold, transferred, or assigned in the absence of an effective registration statement or an opinion of the Companys counsel that registration is not required under the Securities
Act of 1933.



|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, 2007



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, 2007.



|      |  |                                                                                                                                                                                                                                             
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.1  |  | Forbearance Agreement, dated December 15, 2006, between Registrant, each of its subsidiaries and Comerica Bank. (Incorporated herein by reference to Exhibit 10.3 of Registrants
Quarterly Report on Form 10-Q filed on December 18, 2006).
|      | 
|10.2  |  | Guaranty, dated December 15, 2006, executed by Tecstar Automotive Group in favor of Comerica Bank (Incorporated herein by reference to Exhibit 10.4 of Registrants Quarterly Report on Form
10-Q filed on December 18, 2006).              
|      | 
|10.3  |  | Credit Agreement, dated January 31, 2007, between Registrant and WB QT, LLC, as agent. (Incorporated herein by reference to Exhibit 99.2 of Registrants Current Report on Form 8-K filed on
February 6, 2007).                             
|      | 
|10.4  |  | Term Note, dated January 31, 2007, issued by Registrant to WB QT, LLC.                                                                                                                                                                      
|      | 
|10.5  |  | Revolving Credit Note, dated January 31, 2007, issued by Registrant to WB QT, LLC.                                                                                                                                                          
|      | 
|10.6  |  | Guaranty, dated January 31, 2007, executed by Registrant in favor of WB QT, LLC.                                                                                                                                                            
|      | 
|10.7  |  | Security Agreement, dated January 31, 2007, between Registrant and its subsidiaries and WB QT, LLC.                                                                                                                                         
|      | 
|10.8  |  | Pledge Agreement, dated January 31, 2007, between Registrant and certain of its subsidiaries and WB QT, LLC.                                                                                                                                
|      | 
|10.9  |  | Mortgage, dated January 31, 2007, granted by Wheel to Wheel, LLC to and in favor of WB QT, LLC.                                                                                                                                             
|      | 
|10.10 |  | Amendment to Subordinated Convertible Promissory Note Purchase Agreement, dated January 31, 2007, between Tecstar Automotive Group, Inc. and the investors named therein.                                                                   
|      | 
|10.11 |  | Amended and Restated Subordinated Convertible Promissory Note, dated January 31, 2007, issued by Tecstar Automotive Group, Inc. to the investors identified therein.                                                                        
|      | 
|10.12 |  | Guaranty, dated January 31, 2007, executed by the Registrant with respect to Tecstar Automotive Group Inc.s obligations under the Subordinated Convertible Notes.                                                                          
|      | 
|10.13 |  | Security Agreement, dated January 31, 2007, executed by Tecstar Automotive Group, Inc.                                                                                                                                                      
|      | 
|31.1  |  | Certification of the Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                        
|      | 
|31.2  |  | Certification of the Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                        
|      | 
|32.1  |  | Certification of the Chief Executive Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.                                                                                                              
|      | 
|32.2  |  | Certification of the Chief Financial Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.