Quantum Fuel Systems Technologies Worldwide (QTWW) 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 31, 2006,

or

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

For the transition period from            to            

Commission File No. 0-49629

Quantum Fuel Systems Technologies Worldwide, Inc.

(Exact name of registrant as specified in its charter)

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

17872 Cartwright Road, Irvine, CA 92614

(Address of principal executive offices) (Zip Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 September 8, 2006:

58,187,041 shares of Common Stock, $.001 par value per share, and 999,969 shares of Series B Common Stock, $.001 par value per share.

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 July 31, 2006 (unaudited)	2
Condensed consolidated statements of operations (unaudited) – Three months ended July 31, 2005 and 2006	3
Condensed consolidated statements of cash flows (unaudited) – Three months ended July 31, 2005 and 2006	4
Notes to condensed consolidated financial statements (unaudited) – July 31, 2006	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	35
Item 4. Controls and Procedures	35
Part II. Other Information	35
Item 6. Exhibits	35
Signatures	36
Exhibit Index

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	April 30, 2006			July 31, 2006
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	9,012,610		$	19,062,240
Restricted cash equivalents and marketable securities held-to-maturity		—			14,274,503
Accounts receivable, net		28,785,558			22,656,972
Inventories, net		34,965,750			34,330,528
Tooling and engineering		2,511,876			544,085
Refundable income taxes		38,671			12,610
Prepaids and other current assets		1,988,634			1,389,073
Total current assets		77,303,099			92,270,011
Property and equipment, net		23,716,716			25,137,471
Restricted cash equivalents and marketable securities held-to-maturity		15,000,000			1,725,497
Intangible assets, net		59,954,867			58,817,703
Goodwill		105,593,765			105,593,765
Deposits and other assets		740,154			724,211
Total assets	$	282,308,601		$	284,268,658
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,881,031		$	26,015,869
Accrued payroll obligations		2,677,661			2,344,034
Accrued interest		739,996			506,387
Notes payable		2,225,574			2,220,157
Deferred revenue		796,037			3,239,993
Accrued warranties		804,518			1,001,046
Customer deposits		6,151,754			6,245,565
Other accrued liabilities		1,252,211			2,318,012
Current maturities of long-term debt		9,339,212			25,070,537
Total current liabilities		50,867,994			68,961,600
Long-term debt, net of current maturities		33,092,568			17,998,050
Deferred income taxes		5,885,143			5,740,193
Other accrued liabilities		401,227			292,971
Commitments and contingencies
Minority interests		468,801			444,428
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 58,187,041 issued and outstanding at July 31, 2006		53,774			58,187
Additional paid-in-capital		262,803,600			275,693,915
Accumulated deficit		(71,076,473	)		(84,501,986	)
Accumulated other comprehensive income (loss)		(189,033	)		(419,700	)
Total stockholders’ equity		191,592,868			190,831,416
Total liabilities and stockholders’ equity	$	282,308,601		$	284,268,658

See accompanying notes to condensed consolidated financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended July 31,
	2005			2006
Revenue:
Net product sales	$	43,273,992		$	38,996,038
Contract revenue		4,098,352			3,506,126
Total revenue		47,372,344			42,502,164
Costs and expenses:
Cost of product sales		40,441,322			37,605,628
Research and development		6,626,699			5,658,503
Selling, general and administrative		7,051,312			10,989,757
Amortization of intangibles		1,116,944			1,134,183
Total costs and expenses		55,236,277			55,388,071
Operating loss		(7,863,933	)		(12,885,907	)
Interest income		290,433			182,146
Interest expense		(575,283	)		(1,143,496	)
Minority interest in losses of subsidiaries		—			286,145
Other income, net		—			14,160
Income tax benefit (provision)		(221	)		121,439
Net loss	$	(8,149,004	)	$	(13,425,513	)
Net loss per share - basic and diluted	$	(0.15	)	$	(0.23	)
Number of shares used in per share calculation - basic and diluted		52,844,605			57,655,500

See accompanying notes to condensed consolidated financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended July 31,
	2005			2006
Cash flows from operating activities:
Net loss	$	(8,149,004	)	$	(13,425,513	)
Adjustments to reconcile net loss to net cash provided (used) in operating activities:
Depreciation and amortization		2,686,119			2,989,143
Loss on disposal of property and equipment		—			340
Non-cash share-based compensation charges		27,083			1,121,932
Deferred income taxes		—			(144,950	)
Gain (loss) on exchange rate changes		—			(76,849	)
Minority interest in losses of subsidiaries		—			(286,145	)
Changes in operating assets and liabilities:
Accounts receivable		(9,599,285	)		6,128,586
Inventories		(5,600,237	)		635,222
Tooling and engineering		(41,886	)		1,967,791
Refundable income taxes		1,181,507			26,061
Deposits and other assets		(146,190	)		615,504
Accounts payable		(2,880,145	)		(1,795,253	)
Deferred revenue		679,411			2,443,956
Customer deposits		—			93,811
Other accrued liabilities		(906,505	)		630,117
Net cash provided by (used in) operating activities		(22,749,132	)		923,753
Cash flows from investing activities:
Purchases of property and equipment		(1,178,668	)		(3,242,677	)
Proceeds from sale of property and equipment		—			14,160
Acquisition transaction costs		(403,011	)		(43,280	)
Purchases of marketable securities		(6,845,956	)		(1,462,378	)
Maturities of marketable securities		11,558,619			462,378
Net cash provided by (used in) investing activities		3,130,984			(4,271,797	)
Cash flows from financing activities:
Payments on capital lease and other obligations		(10,381	)		(3,036	)
Proceeds from issuance of notes payable		750,000			—
Payments on notes and obligations payable		(123,216	)		(129,724	)
Borrowings on revolving credit agreement		12,671,184			735,452
Proceeds from issuance of common stock and warrants, net		—			12,503,181
Proceeds from exercises of stock options		127,130			33,612
Contributions from minority interest holders		—			261,772
Net cash provided by financing activities		13,414,717			13,401,257
Effect of exchange rate changes on cash		16,220			(3,583	)
Net increase (decrease) in cash and cash equivalents		(6,187,211	)		10,049,630
Cash and cash equivalents at beginning of period		11,736,688			9,012,610
Cash and cash equivalents at end of period	$	5,549,477		$	19,062,240

See accompanying notes to condensed consolidated financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

July 31, 2006

1) Background and Basis of Presentation

Background

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

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

On March 3, 2005, the Company completed its acquisition of Tecstar Automotive Group (“TAG”), formally known as Starcraft Corporation, a Tier One second stage manufacturer that designs, engineers and integrates specialty equipment products into motor vehicle applications. On September 15, 2005, TAG acquired a 51.0% interest in Empire Coach Enterprises, LLC (“Empire Coach”), a second stage limousine manufacturer. On September 22, 2005, TAG sold substantially all the assets of its production paint facility, Tarxien Automotive Products Ltd., to Concord Coatings, Inc. in exchange for a 20.0% equity interest in Concord Coatings, cash and a promissory note. On January 18, 2006, TAG obtained a 50.1% controlling interest in Unique Performance Concepts, LLC (“UPC”), a business venture formed with Unique Performance, Inc. to manufacture limited edition high performance vehicles. On February 8, 2006, the Company acquired all of the stock of Regency Conversions, Inc. (“Regency”), a vehicle converter with extensive distribution channels for second stage vehicle manufacturing and aftermarket parts. On March 24, 2006, the Company obtained an initial 35.5% interest in Advanced Lithium Power Inc. (“ALP”), a newly formed company developing lithium ion and advanced battery control systems whose primary asset is intellectual property. The Company’s interest in ALP was reduced to 23.1% on July 18, 2006 as a result of additional equity contributed from another minority shareholder.

The Company’s authorized capital stock at July 31, 2006 consists of 20,000,000 shares of preferred stock, par value $0.001 per share, no shares issued and outstanding and 100,000,000 shares of common stock, par value $0.001 per share, 59,187,010 shares issued and outstanding (which includes 999,969 shares of Series B common stock). Of the 100,000,000 authorized shares of common stock, 2,000,000 are designated as Series B common stock.

Basis of Presentation

The consolidated financial statements include the accounts of Quantum Fuel Systems Technologies Worldwide, Inc. and its wholly-owned subsidiary TAG for the period subsequent to the merger completed on March 3, 2005 and TAG’s wholly-owned subsidiary Regency Conversions, LLC for the period subsequent to the acquisition of Regency on February 8, 2006. The consolidated financial statements also include TAG’s wholly-owned subsidiaries Tecstar Partners, LLC, Tecstar, L.P., Tecstar Manufacturing Canada Limited, Tarxien Automotive Products Limited, Troy Tooling, LLC, Classic Design Concepts, LLC (formally known as Classic Acquisition Company, LLC), Wheel to Wheel, LLC, Wheel to Wheel Powertrain, LLC, Powertrain Integration, LLC, Quantum Power and Performance, LLC, a 50.1% ownership interest in Unique Performance Concepts, LLC, and a 51.0% ownership interest in Empire Coach Enterprises, LLC. The ownership position of Powertrain Integration increased from 51.0% to 100.0% effective August 31, 2005 pursuant to an Assignment of Capital Units. Also acquired in connection with the TAG merger is the operating activities of Amstar, LLC (“Amstar”) in which the Company holds an equity ownership position of 50.0%. The accounts of Advanced Lithium Power Inc. (“ALP”) have been included in the consolidated financial statements for the period since the Company obtained a 35.5% equity share of ALP on March 24, 2006 due to the controlling nature of the Company’s equity position resulting from proxy agreements between the Company and certain other shareholders of ALP. Although the Company’s equity share declined to 23.1% during the first quarter of fiscal 2007, the decline did not change the controlling nature of the Company’s equity position in ALP due to existing voting arrangements and other control features established by a shareholder agreement.

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Amstar is a variable interest entity as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R”). Tecstar L.P. has a 50.0% equity position in Amstar with AM General LLC holding the remaining 50.0% equity position. Amstar’s operations are similar in nature to TAG’s primary business of second stage manufacturing for automotive applications. Tecstar L.P. acts as a guarantor for certain facility lease and other agreements of Amstar and has been determined to be Amstar’s primary beneficiary. The accounts of Amstar are consolidated by the Company as required by FIN 46R. The Company accounts for AM General’s equity position as minority interest (see Note 7).

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

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

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. The Company has available revolving lines of credit (as amended) with a financial institution totaling $25.0 million with terms expiring in February 2009 that were assumed in connection with the acquisition of TAG. Available borrowings under the lines were approximately $1.5 million at July 31, 2006.

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.

Use of Estimates in the Preparation of Consolidated Financial Statements

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

Revenue Recognition

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

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

6

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 is expected to supplement the Company’s second stage vehicle manufacturing and aftermarket parts business by offering additional distribution channels directly to automotive dealers, and significantly broaden the Company’s customer base beyond OEMs. In addition, the Company’s manufacturing and engineering expertise is anticipated to allow Regency to improve its product offerings and enter new vehicle markets. Regency’s unaudited revenues for calendar year 2005 were reported in excess of $40 million.

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

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

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

Empire Coach Enterprises

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

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Pro Forma Data

The operating results of Regency have been included in the Company’s consolidated financial statements from the date of the acquisition on February 8, 2006. The pro forma financial data set forth below gives effect to the Company’s merger with Regency as if the acquisition had been completed on May 1, 2005. The pro forma financial data includes an adjustment to increase in 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 value 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 July 31, 2005
	As Reported			Pro Forma (unaudited)
Net revenue	$	47,372		$	60,389
Operating loss	$	(7,864	)	$	(7,547	)
Net loss applicable to common stock	$	(8,149	)	$	(8,120	)
Net loss per share:
Basic	$	(0.15	)	$	(0.15	)
Diluted	$	(0.15	)	$	(0.15	)
Number of shares:
Basic		52,845			54,660
Diluted		52,845			54,660

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

3) Restricted Cash Equivalents and Marketable Securities

The Company has collateralized $15.0 million of its portfolio of marketable securities held-to-maturity in connection with TAG’s long-term revolving credit facility pursuant to recent amendments executed with the Company’s financial institution on May 19, 2006 and June 30, 2006 (see Note 9) and collateralized $1.0 million for the benefit of General Motors Acceptance Corporation (“GMAC”) in connection with financing of vehicle chassis for Regency’s operations. The Company expects to maintain a level of $16.0 million in collateralized marketable securities under the revolving credit facility and related to the financing arrangement with GMAC over the next twelve-month period ending July 31, 2007. Restricted cash equivalents and marketable securities with maturity dates ranging from August 2006 to October 2007 consisted of the following as of July 31, 2006:

			Gross Unrealized
	Amortized Cost		Gains		Losses			Fair Value
Maturing within one year:
Cash equivalents	$	5,542,712	$	—	$	—		$	5,542,712
Corporate bonds		3,883,431		—		(13,859	)		3,869,572
U.S. government securities		4,848,360		—		(28,102	)		4,820,258
		14,274,503		—		(41,961	)		14,232,542
Maturing after one year:
U.S. government securities		1,725,497		—		(14,512	)		1,710,985
Total	$	16,000,000	$	—	$	(56,473	)	$	15,943,527

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4) Accounts Receivable

Accounts receivable consist of the following:

	April 30, 2006			July 31, 2006
Customer accounts billed	$	25,623,255		$	21,556,600
Customer accounts unbilled		3,687,551			1,635,696
Allowance for doubtful accounts		(525,248	)		(535,324	)
Accounts receivable, net	$	28,785,558		$	22,656,972

5) Inventories

Inventories consist of the following:

	April 30, 2006			July 31, 2006
Materials and parts	$	31,022,896		$	32,169,658
Work-in-process		2,071,794			2,217,795
Finished goods		4,433,363			3,237,294
		37,528,053			37,624,747
Less provision for obsolescence		(2,562,303	)		(3,294,219	)
Inventories, net	$	34,965,750		$	34,330,528

6) Property and Equipment

Property and equipment consist of the following:

	April 30, 2006		July 31, 2006
Land	211,000		211,000
Buildings	972,222		972,222
Tooling, dies and molds	3,018,290		3,018,290
Plant machinery and equipment	16,407,171		17,068,329
Information systems and office equipment	15,484,932		17,514,786
Automobiles and trucks	1,879,400		1,911,456
Leasehold improvements	6,253,133		6,489,374
Construction in progress	4,248,678		4,524,534
	48,474,826		51,709,991
Less accumulated depreciation and amortization	(24,758,110	)	(26,572,520	)
Net property and equipment	23,716,716		25,137,471

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7) Goodwill and Other Intangible Assets

Acquisitions

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

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

General Motors Strategic Alliance

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

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

Unique Performance Concepts

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

Advanced Lithium Power

On March 24, 2006, the Company and certain unaffiliated individuals formed Advanced Lithium Power Inc. The Company initially held approximately 1.7 million shares or 35.5% of the Vancouver, British Columbia-based business of which its equity share was valued at $173,120 at the date of the formation. The Company’s interest in ALP was reduced to 23.1% on July 18, 2006 as a result of additional equity contributed from another minority shareholder. 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 $231,823 at July 31, 2006 due to the effect of exchange rates.

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Amortization of Intangibles

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

Intangible assets consist of the following:

	April 30, 2006			July 31, 2006
TAG contracts and customer relationship:
Gross carrying value	$	44,600,000		$	44,600,000
Accumulated amortization		(1,880,445	)		(2,252,112	)
Net carrying value		42,719,555			42,347,888
TAG existing technology:
Gross carrying value		2,100,000			2,100,000
Accumulated amortization		(876,000	)		(1,095,000	)
Net carrying value		1,224,000			1,005,000
Regency dealer network:
Gross carrying value		4,280,000			4,280,000
Accumulated amortization		(89,166	)		(178,332	)
Net carrying value		4,190,834			4,101,668
Regency trade names:
Gross carrying value		1,040,000			1,040,000
Accumulated amortization		(12,999	)		(25,998	)
Net carrying value		1,027,001			1,014,002
GM Strategic Alliance Agreement:
Gross carrying value		16,479,358			16,479,358
Accumulated amortization		(6,139,203	)		(6,554,146	)
Net carrying value		10,340,155			9,925,212
UPC dealer network and trade names:
Gross carrying value		250,000			250,000
Accumulated amortization		(30,320	)		(53,060	)
Net carrying value		219,680			196,940
ALP patents and technology:
Gross carrying value		234,866			231,823
Accumulated amortization		(1,224	)		(4,830	)
Net carrying value		233,642			226,993
	$	59,954,867		$	58,817,703

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8) Warranties

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

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

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

Balance at April 30, 2006	$	804,518
Warranties issued during the period		256,845
Settlements made during the period		(60,317	)
Balance at July 31, 2006	$	1,001,046

9) Long-term Debt

Long-term debt consists of the following:

	April 30, 2006			July 31, 2006
Senior subordinated convertible notes	$	15,000,000		$	15,000,000
Domestic bank revolving line of credit		19,548,172			20,599,282
Canadian revolving line of credit		3,215,000			2,899,342
Mortgage note payable to bank, due in monthly installments of $15,000 including interest at the bank’s prime rate (effective rate of 8.25% at July 31, 2006), due December 1, 2006, collateralized by related building		1,157,475			1,135,434
Promisory note payable to a former shareholder of Wheel to Wheel, Inc., payable in monthly installments of $22,113 including interest at 5.38%, due May 1, 2013, unsecured		1,560,183			1,514,615
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			1,893,216
Other		1,036			26,698
		42,431,780			43,068,587
Less current maturities		(9,339,212	)		(25,070,537	)
Long-term debt	$	33,092,568		$	17,998,050

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

The Company has a revolving credit facility with Comerica Bank that was assumed in connection with the acquisition of TAG. The credit facility consists of a domestic line of credit and a Canadian line of credit. On May 19, 2006, the credit facility was amended and restated for a second time (the “Second Amended Credit Agreement”). On June 30, 2006, the Second Amended Credit Agreement was further amended (the “Third Amended Credit Agreement”). Under the terms of the Third

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Amended Credit Agreement, maximum availability under the credit facility is a combined $25.0 million for the domestic and Canadian revolvers. The amount of available advances is subject to limitations based upon the Company’s eligible accounts receivables and collateralized marketable securities determined on a consolidated basis. Advances under the credit facility bear interest at the greater of prime rate (8.25% at July 31, 2006) minus 1.25% or the federal funds rate plus 1.00%. There is also a Euro currency based rate option as defined in the agreement. The Third Amended Credit Agreement expires on February 1, 2009. Advances under the Third Amended Credit Agreement require the Company to meet tangible net worth covenants on a quarterly basis and a requirement to maintain less than a $15.0 million balance in the aggregate amount of advances and credit extensions during a five consecutive business day period each month. The Company is prohibited from making investments in, merging or acquiring, any other unrelated entity or business without the approval of Comerica Bank. Quantum and each of its direct and indirect subsidiaries provided Comerica Bank with an unlimited guaranty for TAG’s obligations and granted a security interest in all of the Company’s assets to Comerica Bank under the Third Amended Credit Agreement.

The Company did not meet the monthly requirement to maintain less than a $15.0 million balance in the aggregate amount of advances and credit extensions during a five consecutive business day period for the months of July and August 2006. The Company was in compliance with the minimum net worth covenant and all other requirements of the credit facility and other debt obligations, including the unsecured senior subordinated convertible notes at July 31, 2006. Comerica Bank has waived the monthly requirement to maintain less than a $15.0 million in the aggregate for July and August 2006. The Company anticipates that it will not be able to meet all requirements under the Third Amended Credit Agreement through July 31, 2007. Accordingly, the Company has classified the outstanding balances under the credit facility as a current liability at July 31, 2006.

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

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

10) Share-Based Compensation

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

Effective for the first quarter 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 financing activities.

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The following table illustrates (i) the impact of adopting SFAS 123R on operating loss, net loss and basic and diluted net loss per share and (ii) as if the Company had continued to account for share –based compensation under APB 25:

	Three Months Ended July 31, 2006
	As Reported Under SFAS 123R			Pro-Forma Under APB 25
Operating loss	$	(12,885,907	)	$	(11,791,050	)
Net loss	$	(13,425,513	)	$	(12,330,656	)
Basic and diluted net loss per share	$	(0.23	)	$	(0.21	)

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement 123 to options granted under the Company’s stock option plans in all periods presented. 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 Ended July 31, 2005
Net loss, as reported	$	(8,149,004	)
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(1,175,851	)
Pro forma net loss	$	(9,324,855	)
Net loss per share, as reported – basic and diluted	$	(0.15	)
Stock-based employee compensation cost per share		(0.03	)
Pro forma net loss per share – basic and diluted	$	(0.18	)
Number of shares used in the calculation of pro forma per share		52,844,605

Share-Based Compensation Reported

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

	Reportable Segment
	Quantum Fuel Systems		Tecstar Automotive Group		Corporate		Totals
Cost of product sales	$	40,940	$	—	$	—	$	40,940
Research and development		83,118		42,661		—		125,779
Selling, general and administrative		44,013		115,152		768,973		928,138
Total share-based compensation	$	168,071	$	157,813	$	768,973	$	1,094,857

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, 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 quarter of fiscal 2007 is presented as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Life (In Years)	Aggregate Intrinsic Value
Options outstanding at April 30, 2006	4,968,692		$	4.80
Granted	—		$	—
Exercised	(10,400	)	$	3.23
Forfeited	(53,000	)	$	4.65
Expired	(19,900	)	$	5.67
Options outstanding at July 31, 2006	4,885,392		$	4.80	7.8	$	13,612
Vested and expected to vest at July 31, 2006	4,730,553		$	4.74	7.6	$	17,298
Options exercisable at July 31, 2006	2,031,592		$	4.61	6.9	$	9,712

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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. At July 31, 2006, there were 2,267,688 shares of common stock available for grant under the Plan.

On August 21, 2006, the Company granted an additional 1,570,000 options under the 2002 Stock Incentive Plan. The exercise price of the options granted equaled the market price of the underlying stock on the date of the grant.

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. There were no options granted during the first quarter of fiscal 2007. The fair value of options granted for the first quarter of fiscal 2006 were estimated using the following weighted–average assumptions:

	Three Months Ended July 31, 2005
Dividend yield	0	%
Expected life - years	6.97
Risk-free interest rate	4.03	%
Expected volatility of common stock	87.65

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

	Three Months Ended
	2005		2006
Weighted average grant date fair value per share	$	3.37
Intrinsic value of of options exercised	$	48,981	$	12,335
Total fair value of options vested during the period	$	599,097	$	1,290,809

Non-vested Options

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

	Number of Shares		Weighted-Average			Remaining Unrecognized Compensation Cost
			Grant-Date Fair Value		Remaining Years To Vest
Nonvested outstanding at April 30, 2006	3,336,750		$	3.83
Granted	0
Vested	(396,950	)		3.25
Forfeited	(73,000	)		3.64
Nonvested outstanding at July 31, 2006	2,866,800		$	3.91	2.2	$	8,820,125

Restricted Stock

On May 1, 2005 the Company issued a total of 91,806 shares of restricted stock to the Chairman of the Board of Directors, the Chief Executive Officer and the Chief Financial Officer of the Company. The aggregate value of these shares, measured on the date of award based upon the closing price of Quantum’s common stock of $3.54, was $325,000 and is

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being recorded as compensation expense ratably over the three year restricted period until they vest in full on May 1, 2008. During the three months ended July 31, 2006, the Company recorded $27,025 in compensation expense related to the restricted stock. As of July 31, 2006, $189,526 of remaining unearned compensation is reported as part of additional paid-in-capital on the consolidated balance sheet.

11) Warrants

On June 29, 2006, the Company completed a PIPE transaction which yielded gross proceeds of $12.5 million from the sale of 4,403,000 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. 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 880,506 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.

In connection with the PIPE, the Company entered into a registration rights agreement 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 date. The Company filed the required registration statement with the SEC on July 28, 2006 and the registration statement became effective on August 4, 2006. The Company evaluated the warrants and related registration rights agreement 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 contract is required to be physically settled in shares of the Company’s common stock. The proceeds from the transaction 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 instruments have been classified as permanent equity.

12) Earnings (Loss) Per Share

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

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

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

	Three Months Ended July 31,
	2005			2006
Numerator:
Net loss	$	(8,149,004	)	$	(13,425,513	)
Numerator for basic and diluted loss per share — to common stockholders	$	(8,149,004	)	$	(13,425,513	)
Denominator for basic and diluted loss per share—weighted-average shares		52,844,605			57,655,500
Basic and diluted loss per share	$	(0.15	)	$	(0.23	)

For the three months ended July 31, 2006 and 2007, options to purchase approximately 5,095,931 and 4,885,392 and warrants to purchase approximately 245,444 and 880,506 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 months ended July 31, 2006 and 2007, senior subordinated notes payable convertible into approximately 2,600,000 shares of common stock were excluded in the computation of diluted net income per share, as the effect would be anti-dilutive.

13) Income Taxes

Income tax benefit for the three months ended July 31, 2006 was computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The current period income tax benefit results from utilization of operating losses against income from reversal of the deferred tax liability from the TAG acquisition (discussed below).

The Company has established a valuation allowance against a portion of its deferred tax assets since based on the Company’s lack of earnings history and current evidence, it is unlikely that the assets will be fully realized. There is a

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deferred tax liability resulting from purchase accounting relating to the Company’s acquisition of TAG in March 2005 where the amortization of identifiable assets exceed the carryforward period. The federal deferred tax liability from the Regency business combination in February 2006 was recorded with a corresponding reduction of valuation allowance.

14) Business Segment and Geographic Information

Business Segments

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

The Quantum Fuel Systems business operations primarily consist of design, manufacture and supply of packaged fuel systems for use in alternative fuel vehicles and fuel cell applications. This segment generates product revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control systems to OEMs, and the installation of its fuel cell products into OEM vehicles. Product revenues are also generated through the sale of compressed natural gas, and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and operate with their fuel cell and alternative fuel applications. General Motors comprised 70.3% and 75.9% and Toyota Motor Corporation (“Toyota”) comprised 3.0% and 14.2% of the total Quantum Fuel Systems segment revenue reported for the three-month periods ended July 31, 2005 and 2006, respectively.

The Tecstar Automotive Group business operations are focused on the automotive supply industry and primarily consist of second stage manufacturing of pick-up trucks, sport utility vehicles and vans. Vehicle chassis are received from the OEM and certain appearance items such as ground effects, wheels and badging are added to the chassis. The Tecstar Automotive Group also has engineering and design capabilities for concept vehicles and distributes automotive accessories through a dealer network. General Motors comprised 90.4% and 72.5% of the total Tecstar Automotive Group segment revenue reported for the three-month periods ended July 31, 2005 and 2006, respectively.

Intangible assets associated with the TAG and Regency acquisitions are reported in the Tecstar Automotive Group business segment. Goodwill associated with the TAG acquisition is allocated 30% to the Quantum Fuel Systems business segment and 70% to the Tecstar Automotive Group business segment. Goodwill associated with the Regency and Empire Coach acquisitions are reported in the Tecstar Automotive Group business segment.

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

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 July 31, 2006. The Company’s foreign assets, which are all located in Canada, represented 2.8% and 2.5% of the Company’s consolidated total assets at April 30, 2006 and July 31, 2006, respectively.

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Financial Information by Business Segment

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

	Three months ended July 31,
	2005			2006
Product revenue
Quantum Fuel Systems	$	2,035		$	4,561
Tecstar Automotive Group		41,239			34,435
Total	$	43,274		$	38,996
Contract revenue
Quantum Fuel Systems	$	2,346		$	2,515
Tecstar Automotive Group		1,753			991
Total	$	4,099		$	3,506
Operating Loss
Quantum Fuel Systems	$	(4,153	)	$	(3,019	)
Tecstar Automotive Group		(1,261	)		(5,769	)
Corporate Expenses		(2,450	)		(4,098	)
Total	$	(7,864	)	$	(12,886	)
Capital Expenditures
Quantum Fuel Systems	$	284		$	78
Tecstar Automotive Group		803			3,138
Corporate Expenses		92			27
Total	$	1,179		$	3,243
Depreciation and Amortization
Quantum Fuel Systems	$	1,058		$	1,042
Tecstar Automotive Group		1,266			1,517
Corporate Expenses		362			430
Total	$	2,686		$	2,989
	April 30, 2006			July 31, 2006
Identifiable Assets
Quantum Fuel Systems	$	60,347		$	56,028
Tecstar Automotive Group		196,122			191,489
Corporate		25,840			36,752
Total assets	$	282,309		$	284,269
Goodwill
Quantum Fuel Systems	$	30,400		$	30,400
Tecstar Automotive Group		75,194			75,194
Total goodwill	$	105,594		$	105,594

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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 July 31, 2006, Amstar had accumulated deficits of $466,603 and $989,417, 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 July 31, 2006 for AM General.

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

Empire Coach

The Chief Executive Officer & President of Empire Coach owns a 49% minority interest position in the accounts of Empire Coach and has not provided or been required to provide any capital contributions to date. As of April 30, 2006 and July 31, 2006, Empire Coach has incurred accumulated deficits of $1,268,512 and $1,643,506, 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 July 31, 2006 for Empire Coach.

Unique Performance Concepts

Unique Performance, Inc., a Texas-based builder of special edition high performance vehicles owns a minority interest equity position of 49.9% in the accounts of UPC, a venture formed in January 2006. Pursuant to UPC’s operating agreement, the Company provided capital contributions totaling $300,000 that consisted of tooling assets under construction of $250,000 and cash of $50,000 and the minority interest provided capital contributions totaling $300,000 that consisted of trade name and dealer network intangibles of $250,000 and cash of $50,000. The minority interest in net losses of UPC amounted to $100,071 from the date of formation to the end of fiscal 2006 and $213,212 for the three-month period ended July 31, 2006. As a result of losses applicable to the minority interest that have exceeded its net capital contributions, the amount reflected for minority interest on the condensed consolidated balance sheet for UPC decreased from $199,929 as of April 30, 2006 to zero as of July 31, 2006.

Advanced Lithium Power

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

The net equity of ALP as of April 30, 2006 and July 31, 2006 was $416,855 and $525,521, of which the minority interest position amounted to $268,872 and $444,428, respectively.

Concord Coatings

On September 22, 2005, TAG sold substantially all the assets of its production paint facility, Tarxien Automotive Products Ltd., to Concord Coatings, Inc. in exchange for a 20% equity interest in Concord Coatings, $250,000 in cash from the 80% equity interest, LJW Holdings, LTD., and a promissory note from Concord in the principal amount of $1,242,279. The total consideration of $1,865,349 equaled the book value of the net assets sold. The accounts of Concord Coatings have been included in the condensed consolidated financial statements subsequent to the September 2005 transaction. The promissory note between Concord and Tarxien is eliminated in consolidation. As a result of operating losses since the date of the transaction and impairment of assets identified during the fourth quarter of fiscal 2006, Concord Coatings had deficit equity position as of April 30, 2006 and July 31, 2006 of $1,519,000 and $1,770,083, respectively. Accumulated deficits above the cash received in connection with the sale of assets have been allocated to Tarxien and there is no balance to be reported as minority interest as of April 30, 2006 and July 31, 2006. TAG anticipates that the operations of Concord Coatings will cease in the second quarter of fiscal 2007 and its assets will be liquidated.

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16) Comprehensive Income or Loss

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

	Three Months Ended July 31,
	2005			2006
Comprehensive loss, net of tax:
Net loss, as reported	$	(8,149,004	)	$	(13,425,513	)
Other comprehensive loss - currency translation adjustments (1)		(23,026	)		(230,667	)
Comprehensive loss, net of tax:	$	(8,172,030	)	$	(13,656,180	)

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

17) Customer Deposit

As of July 31, 2006, the Company had deposits on hand from customers totaling approximately $6.2 million. Included in these deposits are 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 will be applied against open receivables related to other similar programs with General Motors, resulting in the elimination of the deposit during the second quarter of fiscal 2007.

18) Contingencies

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

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

Forward-Looking Statements

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

The following risks and other factors, in addition to those identified in this annual report under the heading “Risk Factors,” could cause actual results, and actual events that occur, to differ materially from those contemplated by the forward-looking statements:

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

• General Motors has publicized its interest to put significant pressures on its suppliers to reduce costs, including General Motors’ intention to change suppliers if suppliers do not comply;

• our revenue is highly concentrated among a small number of customers;

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

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

• we expect our mergers with TAG and Regency to result in benefits to the combined company, but we may not realize those benefits due to challenges associated with integrating the operations and employees of the companies, which potentially could lead to an impairment of goodwill and other intangible assets;

• our financial results could suffer if the goodwill and other intangible assets acquired in our mergers with TAG and Regency become impaired;

• we could become subject to stockholder litigation associated with our merger with TAG and our restatement of financials;

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

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

• we may never be able to introduce commercially viable hydrogen and hybrid products and systems;

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

• our business depends upon General Motors’ and other OEMs’ commitment to the commercialization of fuel cell vehicles;

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

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

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

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

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

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

• we currently face and will continue to face significant competition;

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

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

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

• our ability to raise capital in the future may be difficult due to operating losses;

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

• we may not meet our product development and commercialization milestones;

• our business could suffer if we fail to attract and maintain key personnel;

• we may be affected by skilled labor shortages and labor disputes at OEM facilities;

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

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

• our insurance may not be sufficient;

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

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

• new technologies could render our existing products obsolete;

• changes in environmental policies could hurt the market for our products;

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

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

• future sales of substantial amounts of our common stock could affect its market price;

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

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

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

• the market price and trading volume of our common stock may be volatile;

• past acquisitions and any future acquisitions or transactions may not be successful;

• our recent acquisitions and any future acquisitions could harm our operating results and share price;

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

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

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

• We depend upon the availability of vehicle chassis for our Regency 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 section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended April 30, 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.

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Overview

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

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

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

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

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

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

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

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

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

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Quantum Fuel Systems Segment

Our Quantum Fuel Systems segment supplies our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 19,200 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our gaseous fuel systems and hydrogen products for fuel cell applications to major OEMs through funded research and development contracts and on a prototype and production intent basis. These fuel cell and hydrogen products are not currently manufactured in high volumes and will require additional product development; however, we believe that a commercial market will begin to develop for these products over the next five to seven years. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen products using our systems on a commercial basis.

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

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

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

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

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

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

Our Quantum Fuel Systems business is generally related to fuel cell, hybrid and alternative fuel vehicle development programs and product sales, which vary directly with the program timing and production schedules of our OEM customers. The market for these vehicles is sensitive to general economic conditions, government agency and commercial fleet spending and consumer preferences. The rate at which our customers sell fuel cell or alternative fuel vehicles depends on their marketing strategy, as well as company specific inventory and incentive programs. Any significant reduction or increase in production of these vehicles by our OEM customers may have a material effect on our business. Our CNG program with General Motors extends through September 2006. We anticipate that future programs for CNG applications will be under a dual-invoice

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program. A dual-invoice structure would allow us to assemble the CNG fuel system and directly sell our systems in conjunction with the General Motors vehicle to General Motors’ customers under a QVM-Quality Vehicle Manufacturing arrangement without utilizing its marketing network.

Our industry is also dependent upon a limited number of third party suppliers of materials and components for our products. Any quality problems or supply shortages with respect to these components could negatively impact our business. In the past year, we have experienced pressure on the availability of high-strength fiber from our primary supplier, and we are looking for alternative suppliers to fulfill our needs in the event of any potential shortages. Any issues with respect to the availability of raw materials such as high-strength fiber could negatively impact our ability to develop and manufacture fuel storage systems for our customers.

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

Tecstar Automotive Group Segment

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

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

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

Most of our second stage assembly programs with General Motors expired in April 2006 for model year 2006. The 2007 model year vehicles produced by General Motors represent a model changeover and may not include our specialty equipment products until future model years. Certain other second stage assembly programs that are continuing into fiscal 2007 include a sport utility vehicle platform and a pick-up truck platform along with related accessory and service parts. We also have a full-size van platform that began production during the fourth quarter of fiscal 2006. 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. To this end, we recently received a letter of intent from Nissan North America, Inc. (“Nissan”) to produce a special edition of Nissan’s full-size Titan pick-up truck that is expected to provide diversification of a significant portion of our future second stage assembly product sales beyond General Motors beginning in late fiscal 2007.

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

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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. Among other business opportunities, Empire Coach will pursue “qualified vehicle modifier” status with Ford Motor Company (“Ford QVM”) in order to modify Lincoln Town Cars to limousines. Empire Coach will also be able to offer alternative fuel limousines using Quantum’s advanced fuel system technologies for compressed natural gas, propane, and hydrogen applications.

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

In September 2005, we sold substantially all the assets of our production paint facility, Tarxien Automotive Products Ltd., to Concord Coatings, Inc. in exchange for a 20% equity interest in Concord Coatings, $250,000 in cash, and a promissory note with a principal amount of approximately $1.2 million. Tecstar Automotive Group, through its wholly-owned subsidiary Tarxien, acted as one of the guarantors for Concord Coating’s CAD$1,500,000 (US$1,199,342 advanced as of July 31, 2006) revolving credit facility with Comerica Bank.

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

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

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 first quarters of fiscal 2006 and 2007, consolidated revenue related to sales of our products to and contracts with General Motors and its affiliates represented 88.6% and 54.1%, respectively, of our total revenue for these periods.

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

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

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General Motors Relationship

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

In connection with our strategic alliance, we issued stock to General Motors, representing 19.9% (since diluted to 7.6% as of July 31, 2006) of our total outstanding equity following our January 2003 public offering, for consideration of a nominal cash contribution and access to certain of General Motors’ proprietary information. Under the alliance, we have committed to spend $4.0 million annually for specific research and development projects directed by General Motors to speed the commercialization of our fuel cell related products. Since this commitment was waived or partially waived by General Motors for calendar years 2002 through 2005, the Company anticipates that this commitment will be waived or partially waived in the future. During the first quarter of fiscal 2007, we spent approximately $0.2 million for directed research and development activities at the direction of GM. We plan to use jointly created technologies in certain aspects of our business but will be required to share revenue with General Motors on fuel cell system-related products that are sold to General Motors or third parties.

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

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

Critical Accounting Policies and Estimates

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

Management considers an accounting estimate to be critical if:

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

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

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

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• 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. Except as discussed below related to our first quarter of fiscal 2006, our historical final contract costs have approximated the initial estimates and any unforeseen changes in the estimates have not resulted in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.

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

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

• We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. As part of our estimate, we rely upon future planned design configurations and projected alternative usage of certain components estimated by engineering. We also consider estimated demand for service and warranty parts based on historical information. If actual usage rates or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

• We recorded our acquisitions of Tecstar Automotive Group, Empire Coach and Regency Conversions in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” In determining the fair value of the assets acquired and liabilities assumed in connection with our acquisitions, we consider the evaluations of independent valuation consultants and other estimates.

• We periodically evaluate for impairment our long-lived assets, particularly our goodwill and intangible assets relating to the acquisition of Tecstar Automotive Group and the intangible asset relating to the strategic alliance with General Motors. Our identifiable finite-lived intangible assets are amortized over their estimated useful lives. Goodwill is not amortized, but is evaluated periodically for any impairment in the carrying value. We review our long-lived assets, which include property and equipment, goodwill and identifiable finite-lived intangible assets, for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; and a significant decline in our stock price for a sustained period. An impairment would be recognized based on the difference between the fair value of the asset and its carrying value. Future events could cause us to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

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• As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of the net operating loss carryforward that has resulted from our cumulative net operating loss since our spin-off from IMPCO. In addition, we have estimated the temporary differences resulting from our merger with 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 July 31, 2006, our gross deferred tax assets have been partially offset by a valuation allowance, resulting in an overall net deferred tax liability position that is recorded on the consolidated balance sheet.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the requisite vesting period. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”), which generally results in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met. Effective for the first quarter of fiscal 2007, we adopted SFAS 123R using the modified prospective method, which requires us to record compensation expense for all awards granted, modified, repurchased, or cancelled after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. We did not incur a charge upon the adoption nor have prior period amounts presented herein been restated to reflect the adoption of SFAS 123R. For the quarter ended July 31, 2006, there were no stock options awarded or modified; however, we recorded total compensation charges of $1.1 million related to the unvested portion of previously granted stock options.

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 quarter 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.

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Results of Operations

Three months ended July 31, 2005 and 2006

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

	Three months ended July 31,
	2005			2006
Product revenue
Quantum Fuel Systems	$	2,035		$	4,561
Tecstar Automotive Group		41,239			34,435
Total	$	43,274		$	38,996
Contract revenue
Quantum Fuel Systems	$	2,346		$	2,515
Tecstar Automotive Group		1,753			991
Total	$	4,099		$	3,506
Operating Loss
Quantum Fuel Systems	$	(4,153	)	$	(3,019	)
Tecstar Automotive Group		(1,261	)		(5,769	)
Corporate Expenses		(2,450	)		(4,098	)
Total	$	(7,864	)	$	(12,886	)

Overall revenue decreased $4.9 million from $47.4 million in the first quarter of fiscal 2006 to $42.5 million in the first quarter of fiscal 2007. This decrease is mainly due to declines in our Tecstar Automotive Group segment product revenues of $6.8 million 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. This decline was offset by an increase in overall revenues from our Quantum Fuel Systems segment of $2.7 million primarily as a result of increased product sales to General Motors and Toyota.

Overall operating loss increased $5.0 million, from $7.9 million in the first quarter of fiscal 2006 to $12.9 million in the first quarter of fiscal 2007. The higher operating loss in the first quarter of fiscal 2007 is due to increased operating losses in our Tecstar Automotive Group of $4.5 million resulting from the decline in revenues and increased selling, general and administrative expenses as a result of the Regency acquisition. Additionally, our Corporate segment had a $1.6 million increase in losses 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 in fiscal 2007. These increased operating losses were partially offset by an improvement in our Quantum Fuel Systems segment which lowered its operating loss by $1.1 million on a higher revenue base in the first quarter of fiscal 2007 as compared to the prior year first quarter.

Quantum Fuel Systems Segment 

Product sales for the Quantum Fuel Systems segment increased $2.6 million, or 130%, from $2.0 million in the first quarter of fiscal 2006 to $4.6 million in the first quarter of fiscal 2007. Product sales during fiscal 2007 primarily consisted of our hydrogen fuel metering and fuel storage systems for Toyota’s fuel cell bus platform and sales associated with General Motors’ pick-up trucks equipped with our bi-fuel and compressed natural gas fuel systems. Shipments of all remaining orders for the current generation of hydrogen fuel storage systems for Toyota’s bus platform, which began in the fourth quarter of fiscal 2006, were completed in the first quarter of fiscal 2007 and amounted to $1.0 million. There were no shipments in the first quarter of fiscal 2006 to Toyota. Sales related to compressed natural gas fuel systems increased $1.2 million, or 60%, from $2.0 million in the first quarter of fiscal 2006 to $3.2 million in the first quarter of fiscal 2007. The increase in the first quarter of fiscal 2007 is mainly due to increased sales volume and increased average unit prices related to the General Motors’ pick-up truck program. We expect compressed natural gas product sales to decline significantly during the third quarter of fiscal 2007 in connection with the anticipated expiration of the current natural gas vehicle program with General Motors.

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Cost of product sales for the Quantum Fuel Systems segment increased $1.3 million, or 52%, from $2.5 million in the first quarter of fiscal 2006 to $3.8 million in the first quarter of fiscal 2007. The increase in the first quarter of fiscal 2007 is mainly due to the higher overall sales volume in the segment and an increase in average unit costs related to the compressed natural gas fuel system program.

Gross profits on product sales for the Quantum Fuel Systems segment increased $1.3 million from a negative $0.5 million in the first quarter of fiscal 2006 to a positive $0.8 million in the first quarter of fiscal 2007. The increase in the first quarter of fiscal 2007 is mainly attributable to the increased sales volume.

Contract revenue for the Quantum Fuel Systems segment increased $0.2 million, or 9%, from $2.3 million in the first quarter of fiscal 2006 to $2.5 million in the first quarter of fiscal 2007. Contract revenue is derived primarily from system development and application engineering of our products under funded General Motors, Toyota and other OEM contracts, and other funded contract work with the U.S. military and other government agencies. Contract revenue is recognized as work progresses on fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. Recognized revenue is subject to revisions as the contracts progress to completion. The increase in contract revenue in the first quarter of fiscal 2007 compared to fiscal 2006 is due largely to revisions of estimates of total expected project costs that occurred during the first quarter of fiscal 2006 which negatively impacted contract revenue.

Research and development expense associated with development contracts decreased $0.3 million, or 12%, from $2.5 million in the first quarter of fiscal 2006 to $2.2 million in the first quarter of fiscal 2007. Internally funded research and development expense for the Quantum Fuel Systems segment increased slightly by $0.4 million, or 19%, from $2.1 million in the first quarter of fiscal 2006 to $2.5 million in the first quarter of fiscal 2007 in part due to research and development activities at the newly formed Advanced Lithium Power and share-based compensation expense related to unvested options previously granted that are required to be expensed beginning in fiscal 2007 as a result of the Company’s adoption of SFAS 123R.

Selling, general and administrative expenses for the Quantum Fuel Systems segment increased $0.1 million, or 9%, from $1.1 million in the first quarter of fiscal 2006 to $1.2 million in the first quarter of fiscal 2007. Selling, general and administrative expenses as a percentage of total Quantum Fuel Systems segment operating costs and expenses was 12% for the first quarter of fiscal 2007 compared to 12% for the first quarter of fiscal 2006.

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

Operating loss for the Quantum Fuel Systems segment in the first quarter of fiscal 2007 was $3.0 million, a decrease of $1.2 million from the first quarter of fiscal 2006 loss of $4.2 million mainly resulting from the increase in revenue. We expect the Quantum Fuel System segment to incur continued operating losses in fiscal 2007 and a decline in quarterly revenues over the remainder of fiscal 2007 as compared to the first quarter of fiscal 2007 due to the upcoming expiration of the compressed natural gas program with General Motors. However, we do expect revenues for Quantum Fuel Systems to be higher in fiscal 2007 compared to fiscal 2006.

Tecstar Automotive Group Segment

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

Overall revenues for the Tecstar Automotive Group of $35.4 million for the first quarter of fiscal 2007 decreased $7.6 million or 18% from the first quarter of fiscal 2006 revenues of $43.0 million. This decrease is mainly due to declines in product revenues as a result of the expiration of certain second stage contracts and changeovers in vehicle platforms by General Motors that have occurred since the second half of fiscal 2006 that were partially offset by $11.1 million in additional revenues generated by our Regency operations in the current fiscal year.

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Product sales for the Tecstar Automotive Group decreased $6.8 million, or 17%, from $41.2 million in the first quarter of fiscal 2006 to $34.4 million in the first quarter of 2007. Product sales include second stage assembly revenues which are associated with second stage automotive manufacturing facilities located in Louisiana, Texas and Indiana in the United States and in Ontario, Canada. All of these facilities are located near General Motors assembly plants. Second stage assembly revenues decreased $5.4 million, or 25.0%, from $23.5 million in the first quarter of fiscal 2006 to $18.1 million in the first 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 $15.5 million and $12.8 million for the first quarters of fiscal 2006 and 2007, respectively. Other revenues totaled $2.2 million and $3.5 million for the first quarters of fiscal 2006 and 2007, respectively. We expect overall product sales in fiscal 2007 as compared to fiscal 2006 to continue to be negatively impacted by the expiration of certain second stage contracts and changeovers in vehicle platforms by General Motors that occurred in the second half of fiscal 2006; however, we anticipate that overall product revenues for fiscal 2007 will approximate fiscal 2006 as a result of the Regency acquisition and other dealer network and specialty vehicle programs as anticipated volumes increase in our Unique Performance Concepts business venture and the introduction of new vehicle and parts programs with General Motors.

Cost of product sales for the Tecstar Automotive Group decreased $4.1 million, or 11.0%, from $37.9 million in the first quarter of fiscal 2006 to $33.8 million in the first quarter of fiscal 2007. 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 $0.7 million or 2% of sales in the current quarter as compared to $3.3 million or 8% of sales in the first quarter of the prior year. The decrease is primarily due to the lower volumes of second-stage activities in the first quarter of fiscal 2007.

Contract revenue for the Tecstar Automotive Group decreased $0.8 million, or 44%, from $1.8 million in the first quarter of 2006 to $1.0 million in the first quarter of 2007. Revenue is associated with design and engineering services for concept vehicles. Research and development expense associated with cost of contract revenue decreased $1.1 million, or 52%, from $2.1 million in the first quarter of 2006 to $1.0 million in the first quarter of 2007.

Selling, general and administrative expenses for the Tecstar Automotive Group increased $2.1 million, or 58%, from $3.6 million in the first quarter of 2006 to $5.7 million in the first quarter of 2007. These expenses represent those costs that directly support the business segment and consist mainly of selling and administrative salaries, business development costs, insurance and travel related costs. The increase in the current year is mainly due to the expanded activities related to the operations of Regency, Empire and Unique Performance which were not included in the first quarter of the prior year. Selling, general and administrative expenses attributable to these three entities were $2.1 million. The first quarter of fiscal 2007 also includes $0.1 million of share-based compensation expense related to unvested options previously granted that are required to be expensed beginning in fiscal 2007.

Amortization of intangibles was $0.7 million in both the first quarter of fiscal 2006 and 2007. 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 increased $4.5 million, from $1.3 million in the first quarter of 2006 to $5.8 million in the first quarter of 2007. We expect our Tecstar Automotive Group segment to realize improved operating results as compared to the first quarter of fiscal 2007 during the remaining quarters of fiscal 2007 as a result of higher-margin revenues from our dealer network programs and the implementation of cost reductions.

Corporate

Corporate expenses increased by $1.6 million, or 64%, from $2.5 million in the first quarter of fiscal 2006 to $4.1 million in the first quarter of fiscal 2007 due in part to increased audit related fees and services of $0.3 million and share-based compensation expense of $0.8 million resulting from the new accounting change for unvested options effective beginning in fiscal 2007. Expansion of corporate activities related to subsidiaries added over the past year has contributed to the increased level of costs incurred in the first quarter of fiscal 2007. Corporate expenses as a percentage of total revenues increased to 10.0% in the first three months of fiscal 2007 as compared to 5.0% in the first three months of fiscal 2006.

Non-Reporting Segment Results

Interest Income and Expense. Interest income decreased by $0.1 million, or 33%, from $0.3 million in first three months of fiscal 2006 to $0.2 million in the first three months of fiscal 2007. Interest expense amounted to $1.1 million in the first quarter of fiscal 2007 as compared to $0.6 million in the first quarter of fiscal 2006. Interest expense

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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 quarter of the previous year.

Income Taxes.During the three month period ended July 31, 2006, we realized a tax benefit of approximately $0.1 million primarily as a result of the declining temporary difference between the book basis and tax basis related to intangible assets recorded in connection with the Tecstar Automotive Group acquisition. A partial valuation allowance has been established for our net deferred tax assets due to our lack of earnings history. We anticipate incurring net losses to continue through fiscal 2007 and to continue to realize a tax benefit as a result of the declining temporary difference related to intangible assets.

Liquidity and Capital Resources

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.

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

Our principal sources of liquidity as of July 31, 2006 included cash and cash equivalents of $19.1 million, short-term restricted cash equivalents and marketable securities of $14.3 million, long-term restricted cash equivalents and marketable securities of $1.7 million, and revolving lines of credit with maximum availability totaling $25.0 million. Advances outstanding under the lines totaled $23.5 million at July 31, 2006. As discussed further below, $15.0 million of our marketable securities are now pledged as collateral under the terms of our credit facility with a financial institution as amended on May 19, 2006 and June 30, 2006 and $1.0 million of cash is now pledged as collateral under an arrangement with General Motors Acceptance Corporation (“GMAC”) in connection with financing of vehicle chassis for our operations at Regency.

We have a revolving credit facility with Comerica Bank that was assumed in connection with the acquisition of TAG. The credit facility consists of a domestic line of credit and a Canadian line of credit. On May 19, 2006, the credit facility was amended and restated for a second time (the “Second Amended Credit Agreement”). On June 30, 2006, the Second Amended Credit Agreement was further amended (the “Third Amended Credit Agreement”). Under the terms of the Third Amended Credit Agreement, maximum availability under the credit facility is a combined $25.0 million for the domestic and Canadian revolvers. The amount of available advances is subject to limitations based upon our eligible accounts receivables and collateralized marketable securities determined on a consolidated basis. Advances under the credit facility bear interest at the greater of prime rate (8.25% at July 31, 2006) minus 1.25% or the federal funds rate plus 1.00%. There is also a Euro currency based rate option as defined in the agreement. The Third Amended Credit Agreement expires on February 1, 2009. Advances under the Third Amended Credit Agreement require us to meet tangible net worth covenants on a quarterly basis and a requirement to maintain less than a $15.0 million balance in the aggregate amount of advances and credit extensions during a five consecutive business day period each month. We are prohibited from making investments in, merging or acquiring, any other unrelated entity or business without the approval of Comerica Bank. Quantum and each of our direct and indirect subsidiaries provided Comerica Bank with an unlimited guaranty for TAG’s obligations and granted a security interest in all of our assets to Comerica Bank under the Third Amended Credit Agreement.

We did not meet the monthly requirement to maintain less than a $15.0 million balance in the aggregate amount of advances and credit extensions during a five consecutive business day period for the months of July and August. We were in compliance with the minimum net worth covenant and all other requirements of the credit facility and other debt obligations, including the unsecured senior subordinated convertible notes at July 31, 2006. Comerica Bank has waived the monthly requirement to maintain less than a $15.0 million in the aggregate for July and August 2006. We anticipate that we will not be able to meet all requirements, including financial covenants, under the Third Amended Credit Agreement through July 31, 2007. Accordingly, we have classified the outstanding balances under the credit facility as a current liability at July 31, 2006.

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We anticipate implementing a cost reduction program that includes efforts to consolidate facilities, streamline functions, evaluate workforce levels and apply other cost saving measures. We anticipate that we will require additional financing to supplement our current working capital to fund future operating activities over the next twelve months and to take advantage of strategic opportunities, complete product and application development, or to develop facilities for commercialization and limited production of our products and systems. We believe such financing can be adequately sourced through financial institutions and public or private offerings of equity or debt securities. Although we believe those requirements can be adequately sourced, we cannot assure you that such additional sources of financing will be available on acceptable terms, if at all. We have also agreed that, subject to limited exceptions, we will not issue any stock in a private placement transaction without the prior written consent of General Motors. As of July 31, 2006, 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.

Net cash provided by operating activities was $0.9 million during the first quarter of fiscal 2007 as compared to a cash use of $22.7 million during the first quarter of fiscal 2006. The cash provided during the first quarter of fiscal 2007 is primarily due to favorable changes in levels of operating assets and liabilities of $10.7 million. We do not expect this same level of change in the next couple of quarters. Our net loss was $13.4 million for the first quarter of fiscal 2007 of which $3.6 million related to non-cash items mainly consisting of depreciation, amortization and share-based compensation charges. Accounts receivable declined $6.1 million and deferred revenue increased $2.4 million during the first quarter of fiscal 2007, respectively, as a result of collections on long-term programs with General Motors.

Net cash used in investing activities during the first quarter of fiscal 2007 was $4.3 million as compared to cash provided of $3.1 million during the first quarter of fiscal 2006. The net cash used in the current fiscal quarter is mainly a result of purchases of property and equipment of $3.2 million mainly relating to the development of tooling for our new programs at Unique Performance and our upcoming second-stage program with Nissan. Cash of $1.0 million was also used for the net purchases of marketable securities during the first quarter of the current fiscal year.

Net cash provided by financing activities during the first quarter of fiscal 2007 was $13.4 million as compared to $13.4 million during the first quarter of fiscal 2006. Cash provided during the first quarter of fiscal 2007 was principally from the sale of 4.4 million shares of stock to private investors that provided $12.5 million in gross proceeds. We also received $0.3 million from a minority interest holder in Advanced Lithium Power.

The ratio of current assets to current liabilities was 1.3:1 at July 31, 2006 versus 1.5:1 at April 30, 2006. During the first quarter of fiscal 2007, our total working capital decreased by $3.1 million, from $26.4 million at April 30, 2006 to $23.3 million at July 31, 2006 primarily as a result of the change in classification of the outstanding balances under our revolving credit facility from long-term to current.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates due to our financing, investing and cash management activities. Specifically, our cash and marketable securities are subject to fluctuations in interest rates. Based on our cash and marketable securities balance at July 31, 2006, a 1% decrease in interest rates would result in reduced annual interest income of approximately $351,000.

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

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

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We are exposed to risk from fluctuating currency exchange rates, primarily the U.S. dollar against the Canadian dollar. We face transactional currency exposures that arise when our foreign subsidiaries enter into transactions denominated in currencies other than their own local currency. We also face currency exposure that arises from translating the results of our Canadian operations to the U.S. dollar. Net foreign currency transaction gains aggregated approximately $77,000 for the first three months of fiscal 2007.

Off Balance Sheet Disclosures

Consigned Inventories

Our wholly-owned subsidiary, Regency, obtains vehicle chassis for its specialized vehicle products directly from OEMs under converter pool agreements. Chassis are obtained from the OEMs based on orders from customers, and to a lesser extent, for unallocated orders. Although each OEM agreement has different terms and conditions, the agreements generally provide that the OEM will provide a supply of chassis to be maintained from time to time at Regency’s facility under the conditions that Regency will store such chassis and will not move, sell or otherwise dispose of such chassis, except under the terms of the agreement. The OEM does not transfer the certificate of origin to Regency and, accordingly, Regency accounts for the chassis as consigned inventory belonging to the OEM. Under these agreements, Regency is required to pay a finance charge on the chassis inventory equal to a fixed rate of zero to 2.0% for the first 90 days and a variable rate of prime plus 1.0% for days 91 and thereafter. The finance charges incurred on consigned chassis inventory, included in interest expense in the consolidated statement of income, aggregated $282,510 for the first quarter 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 $18.9 million at July 31, 2006. Typically, chassis are converted and delivered to the customers within 90 days of the receipt of the chassis by Regency.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures

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

(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 anticipate implementing this plan over the second and third quarters of fiscal 2007 and 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.

PART II—OTHER INFORMATION

Item 6. Exhibits.

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

35

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: September 11, 2006

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
By:	/s/ WILLIAM B. OLSON
	William B. Olson, Chief Financial Officer and Treasurer [Authorized Signatory and Principal Financial Officer]

36

EXHIBIT INDEX

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

10.1	*	Amended and Restated Employment Agreement, dated May 1, 2006, by and between Quantum Fuel Systems Technologies Worldwide, Inc. and Alan P. Niedzwiecki (Incorporated herein by reference to Exhibit 10.22(a) of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.2	*	Employment Agreement, dated May 1, 2006, by and between Quantum Fuel Systems Technologies Worldwide, Inc. and Dale L. Rasmussen. (Incorporated herein by reference to Exhibit 10.25(a) of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.3	*	Employment Agreement, effective May 1, 2006, by and between Quantum Fuel Systems Technologies Worldwide, Inc. and Jeffrey P. Beitzel. (Incorporated herein by reference to Exhibit 10.26(a) of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.4	*	Employment Agreement, effective May 1, 2006, by and between Quantum Fuel Systems Technologies Worldwide, Inc. and Bradley J. Timon. (Incorporated herein by reference to Exhibit 10.62 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.5	*	Employment Agreement, effective May 1, 2006, by and between Tecstar Automotive Group, Inc. and Richard C. Anderson. (Incorporated herein by reference to Exhibit 10.28(a) of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.6	*	Employment Agreement, effective May 1, 2006, by and between Tecstar Automotive Group, Inc. and Douglass C. Goad. (Incorporated herein by reference to Exhibit 10.29(a) of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.7	*	Employment Agreement, effective May 1, 2006, by and between Tecstar Automotive Group, Inc. and Joseph E. Katona. (Incorporated herein by reference to Exhibit 10.30(a) of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.8	*	Directors Compensation Summary for Fiscal Year 2007 (Incorporated herein by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on June 1, 2006).
10.9		Second Amended and Restated Credit Agreement, dated May 19, 2006. (Incorporated herein by reference to Exhibit 10.65 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.10		Security Agreement (Securities Account), dated May 19, 2006, by and between Quantum Fuel Systems Technologies Worldwide, Inc. and Comerica Bank. (Incorporated herein by reference to Exhibit 10.66 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006)
10.11		Security Agreement (Securities Account), dated May 19, 2006, by and between Quantum Fuel Systems Technologies Worldwide, Inc. and Comerica Bank. (Incorporated herein by reference to Exhibit 10.67 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006)
10.12		Security Agreement, dated May 19, 2006, by and among Quantum Fuel Systems Technologies Worldwide, Inc., each of its Subsidiaries, and Comerica Bank. (Incorporated herein by reference to Exhibit 10.68 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.13		Guaranty, dated May 19, 2006, by and among Registrant, each of its subsidiaries, and Comerica Bank. (Incorporated herein by reference to Exhibit 10.69 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006)
10.14		Amended and Restated Credit Agreement, dated May 19, 2006, by and between Tecstar Manufacturing Canada and Comerica Bank. (Incorporated herein by reference to Exhibit 10.70 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.15		Security Agreement, dated May 19, 2006, by and between Tecstar Manufacturing Canada and Comerica Bank. (Incorporated herein by reference to Exhibit 10.71 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.16		Guarantee, dated May 19, 2006, by and between Tecstar Automotive Group, Inc. and Comerica Bank. (Incorporated herein by reference to Exhibit 10.72 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.17		Third Amended Credit Facility dated June 30, 2006 (Amendment No. 1 to Credit Agreement and Waiver). (Incorporated herein by reference to Exhibit 10.73 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).

10.18		Agreement, dated June 30, 2006, between Tecstar Automotive Group, Inc. and Comerica Bank. (Incorporated herein by reference to Exhibit 10.74 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.19		Form of Securities Purchase Agreement executed in connection with Registrant’s Private Placement of Securities dated June 29, 2006. (Incorporated herein by reference to Exhibit 10.76 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.20		Form of Registrations Rights Agreement executed in connection with Registrant’s Private Placement of Securities dated June 29, 2006. (Incorporated herein by reference to Exhibit 10.77 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.21		Form of Common Stock Purchase Warrant issued in connection with Registrant’s Private Placement of Securities dated June 29, 2006. (Incorporated herein by reference to Exhibit 10.78 of Registrant’s Annual Report on Form 10-K filed on July 28, 2006).
10.22	*	Form of Stock Award Agreement.
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.

* The referenced exhibit is a compensatory contract, plan or arrangement.