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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

    For the quarterly period ended January 31, 2004, or

    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)

17872 Cartwright Road, Irvine, CA 92614

(Address of principal executive offices) (Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares outstanding of each of the issuer’s classes of common stock, as of March 8, 2004:

30,512,389 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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED BALANCE SHEETS

April 30, 2003 and January 31, 2004

See accompanying notes to condensed financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED BALANCE SHEETS

April 30, 2003 and January 31, 2004

(Continued)

See accompanying notes to condensed financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED STATEMENTS OF OPERATIONS

Unaudited

Three and nine months ended January 31, 2003 and 2004

See accompanying notes to condensed financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

Unaudited

Nine months ended January 31, 2003 and 2004

See accompanying notes to condensed financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

January 31, 2004

1) BASIS OF PRESENTATION

On July 23, 2002, IMPCO Technologies, Inc. (IMPCO) completed the distribution and spin-off of Quantum Fuel Systems Technologies Worldwide, Inc. (the Company) to its stockholders. The Company designs, manufactures and supplies integrated fuel systems to OEMs for use in alternative fuel vehicles and fuel cell applications. The Company’s fuel systems enable cars, trucks and buses powered by internal combustion engines to operate on hydrogen, natural gas or propane.

On the date of the distribution and spin-off, IMPCO distributed the stock of the Company to stockholders of IMPCO based on a distribution ratio of one share of the Company’s common stock for every share of IMPCO common stock outstanding on the record date. In addition, IMPCO contributed $15 million in cash to the Company and assumed the Company’s debt facility of $8.6 million on the date of distribution. Furthermore, as discussed in Note 8, immediately following the spin-off the Company issued 3,513,439 shares of its Series A common stock to General Motors (GM) in connection with a strategic alliance between the Company and GM. The Company’s accumulated deficit at January 31, 2004 of $20,409,940 represents its operating results from the distribution date to January 31, 2004.

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

The accompanying condensed financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and operating results for the interim periods. The condensed financial statements should be read in conjunction with the financial statements and notes thereto, together with management’s discussion and analysis of financial condition and the results of operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2003. The results of operations for the three and nine months ended January 31, 2004 are not necessarily indicative of the results that may be expected for the entire year ending April 30, 2004.

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

2) EQUITY OFFERING

On October 24, 2003, the Company completed a public equity offering of 7,000,000 shares of common stock at a price of $8.00 per share for $56.0 million in gross proceeds. The Company also granted the underwriters a 30-day option to purchase up to an additional 1,050,000 shares of common stock at the public offering price, less the underwriting discount, to cover any over-allotments. On October 31, 2003, the Company sold 1,050,000 additional shares of common stock pursuant to the underwriters over-allotment option at a price of $8.00 per share for $8.4 million in gross proceeds.

3) EARNINGS PER SHARE

The Company computes net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share,” and SEC Staff Accounting Bulletin (“SAB”) No. 98. 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.

Under the provisions of SAB No. 98, common shares issued for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. The Company initially issued 1,000 shares to IMPCO for nominal consideration. Prior to the spin-off, the Company declared a stock split to increase the number of shares outstanding to match the number of shares outstanding of IMPCO’s common stock. In July 2002, IMPCO’s Board of Directors declared a 1-for-1 stock dividend whereby every shareholder of IMPCO Common Stock received a corresponding share of the Company’s common stock. On July 24, 2002, the Company issued 3,513,439 shares of Series A common stock to General Motors. 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. For the three months ended January 31, 2004, warrants to acquire common stock were excluded from the computation of diluted net income per share, as the effect would be anti-dilutive. For the nine months ended January 31, 2004, options to purchase 308,719 shares of common stock and 275,000 warrants to acquire common stock, respectively, were excluded from the computation of diluted net income per share, as the effect would be anti-dilutive.

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

4) BUSINESS SEGMENT INFORMATION

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

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

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

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

All of the Company’s product revenues are generated from alternative fuel systems and fuel cell-related hydrogen storage systems for automotive OEM applications. The Company’s revenue from unaffiliated customers is primarily derived from within the United States. All of the Company’s long-lived assets are based in its offices in Sterling Heights, Michigan; Irvine, California; and Lake Forest, California.

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Net revenues and operating income/(loss) for the Company’s business segments for the three and nine months ended January 31, 2003 and 2004 are as follows:

Identifiable assets for the Company’s business segments at April 30, 2003 and January 31, 2004 are as follows:

5) WARRANTS

In connection with the spin-off from IMPCO, the Company issued warrants to purchase an aggregate of 300,000 shares of the Company’s common stock to holders of outstanding IMPCO warrants as of the distribution date, which was July 23, 2002. The Company issued these warrants at an exercise price of $5.83 with a term expiring in January 2006. During the third quarter of fiscal 2004, warrants to purchase an aggregate of 25,000 shares of common stock were exercised on a cashless basis, which resulted in the issuance of 9,195 shares of common stock.

The Company issued a warrant to purchase 100,000 shares of the Company’s common stock to a consulting firm on August 27, 2002 for services related to investor relations. This warrant was issued at an exercise price of $5.10 with a four-year term. The Company valued the warrant at fair value (in accordance with FASB Statement No. 123, “Accounting for Stock Based Compensation”) based on a Black-Scholes fair value calculation. The warrant was valued at date of grant and was re-measured at fair value at each subsequent reporting period, and changes in value were recorded over the performance period. The Company has recorded an expense of approximately $16,000 for the first nine months of fiscal year 2004 in connection with the issuance of this warrant. During the third quarter of fiscal year 2004, the warrant was exercised in full on a cashless or “net issue” basis, resulting in the issuance of an aggregate of 49,414 shares of common stock.

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6) STOCK OPTION PLANS

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

On May 1, 2003, an additional 650,414 shares of common stock became available for future grant under the 2002 Stock Incentive Plan pursuant to an “evergreen” provision contained in the plan.

7) INCOME TAXES

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

8) INTANGIBLE ASSET

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 $14.2 million, in accordance with Statement of Financial Accounting Standards 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 Emerging Issues Task Force 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 was increased by $2.2 million.

The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.142, “Goodwill and Other Intangible Assets,” effective May 1, 2002. SFAS 142 requires that intangible assets other than goodwill be amortized over their useful lives. Accordingly, the Company is amortizing the intangible asset, subject to periodic evaluations for impairment, over the ten-year term of the Corporate Alliance Agreement with General Motors.

On May 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or

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Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” Accordingly, the intangible asset will be reviewed on an annual basis for impairment or on a more frequent basis if events or circumstances change that might indicate that impairment exists. In accordance with the requirements of SFAS 144, the Company believes that no event or circumstance currently exists that would indicate impairment of this asset. The amortization expense during the first nine months of fiscal year 2004 was approximately $1,245,000.

9) INVESTMENTS

SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that all applicable investments be classified as trading securities, available-for-sale securities or held-to-maturity securities. The company has determined that its investment portfolio will be held-to-maturity and is therefore carried at amortized cost.

At January 31, 2004, the Company’s marketable securities were classified as follows:

At January 31, 2004, marketable securities classified as long-term have maturity dates from one to three years.

10) WARRANTIES

The Company offers a warranty for all of its alternative fuel products. The specific terms and conditions of those warranties varies depending on the platform and model year. For most products, the Company provides a limited warranty, including parts and labor, extending 3 years or 36,000 miles, whichever is achieved first. 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 installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s product warranty liability during the first nine months of fiscal year 2004 are as follows (in thousands):

11) TERMINATION OF COMBINATION WITH GLOBAL THERMOELECTRIC

Combination with Global Thermoelectric . On April 8, 2003, the Company entered into a Combination Agreement with Global Thermoelectric Inc. (“Global”) to combine Global with the Company in a share-for-share exchange pursuant to a Plan of Arrangement submitted to the Court of Queen’s Bench of Alberta, Canada for approval. On July 14, 2003, Global announced that it had received a competing proposal from FuelCell Energy, Inc (“FuelCell”). On July 31, 2003, upon reviewing the terms of the competing proposal and after full consideration of the possible alternative terms that could have been offered by the Company, the Companys’ board of directors concluded that it was not in the best interest of Quantum or its stockholders to propose any adjustments or improvements to the terms and conditions of the transaction contemplated by the Combination Agreement between us and Global. On August 4, 2003, the Company announced that Global had terminated the Combination Agreement with the Company as a result of the proposed combination between Global and FuelCell. As a result of the termination of the Combination Agreement, the Company received a US $2 million break-up fee from Global on August 4, 2003. This fee was netted against the accumulated transaction costs of approximately $2,127,000, which resulted in a $127,000 charge to earnings during the three months ended July 31, 2003.

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

Forward-Looking Statements

This Report, including the Management’s Discussion and Analysis that follows, contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. We use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, the following: we have a history of operating losses and negative cash flow and anticipate that we will continue to incur operating losses for the foreseeable future; if we fail to achieve and to maintain profitability in the future, investors could lose confidence in the value of our stock, which could cause it to decline; we may need to raise additional capital in order to complete our commercialization plans; we may be required to indemnify IMPCO for taxes arising in connection with the spin-off, and the tax characteristics of the spin-off may interfere with our ability to engage in desirable strategic transactions and issue our equity securities; the market price and trading volume of our common stock may be volatile; we may never be able to introduce commercially viable fuel storage, fuel delivery or electronic control products for fuel cell systems; a mass market for fuel storage, fuel delivery and electronic control systems for fuel cells may never develop or may take longer to develop than we anticipate; sales of our alternative fuel vehicles may be subject to variances in government and commercial fleet spending and any OEM or government sponsored incentive programs; the market for alternative fuel vehicles and fuel cell vehicles may be sensitive to general economic conditions or consumer preferences; our revenue depends to a great extent on our relationships with and revenues from a small number of customers; our revenue depends to a great extent on General Motors and Toyota Motor Corporation and their financial and marketing commitments to the commercialization of fuel cell and alternative fuel automotive markets; our business depends on the growth of the fuel cell and alternative fuel markets, which in turn is dependent on government regulations, hydrogen availability, consumer adoption of our technologies, and refueling technology advancements; 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; we currently face and will continue to face significant competition, which could result in a decrease in our revenue; 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 be insufficient; our business may become subject to future product certification regulations, which may impair our ability to market our products; new technologies could render our existing products obsolete; we depend on our intellectual property, and our failure to protect our intellectual property rights could adversely affect our future growth and success; if third parties claim that our products infringe their intellectual property rights, we may be forced to expend significant financial resources and management time and our operating results would suffer; we depend on relationships with strategic partners, and the terms and enforceability of many of these relationships are not certain; we have limited experience manufacturing fuel cell-related systems on a commercial basis; we may not meet our product development or commercialization milestones; we depend on third-party suppliers for the supply of key materials and components for our products; we could lose or fail to attract the personnel necessary to run our business; we may be affected by skilled labor shortages and labor disputes at OEM facilities; our business could be harmed if we fail to meet OEM specifications; we may be subject to increased warranty claims due to longer warranty periods; changes in environmental policies could hurt the market for our products; our business is dependent on the advancement of OEM fuel cell technologies and OEM internal plans, spending levels and timing for pre-production programs and commercial production; and the development of uniform codes and standards for hydrogen fuel cell vehicles and related hydrogen refueling infrastructure may not develop in a timely fashion. This list of factors 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, 2003. All forward-looking statements in this report are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any of its forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.

Overview

We design, manufacture and supply integrated fuel systems to OEMs for use in alternative fuel vehicles and fuel cell applications. Our fuel systems enable cars, trucks and buses powered by internal combustion engines to operate on hydrogen, natural gas or propane. Our advanced enabling products for fuel cell systems are used in transportation and industrial vehicles, stationary and portable power generation, and hydrogen refueling products for the infrastructure to support fuel cell vehicles. Our advanced fuel systems comprise the storage, monitoring, control and injection of gaseous fuels to improve efficiency, enhance power output, and reduce pollutant emissions from internal combustion engines and fuel cell systems.

We supply our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 17,000 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn has sold substantially all of those vehicles to its customers. We also provide our gaseous fuel systems and hydrogen refueling products for fuel cell applications to major OEMs through funded research and development contracts and on a prototype basis. These fuel cell

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and hydrogen refueling products are not currently used on a commercial basis and will require additional product development over the next five years; however, we believe that a commercial market will begin to develop for these products in the next two years. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen refueling products using our systems on a commercial basis. Our revenues and cash flows are dependent on the advancement of OEM fuel cell technologies and our OEM customers’ internal plans, spending levels and timing for pre-production development programs and commercial production. Our business depends on the industry-wide growth of the fuel cell and alternative fuel markets, which in turn is dependent on regulations, laws, hydrogen availability and refueling, technology advancements and consumer adoption of alternative fuel and fuel cell technologies on a commercial scale. In evaluating financial condition and operating results, we assess these industry-wide factors and the potential impact on our business.

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

In managing our business, our management utilizes several non-financial factors to analyze our performance. We assess the extent to which current programs are progressing in terms of timing and deliverables and the success to which our systems are interfacing with our customers’ fuel cell applications. We also assess the degree to which we secure additional programs or new programs from our current or new OEM customers and the level of government funding we receive for hydrogen-based systems and storage solutions.

We classify our business operations into four reporting segments: the Alternative Fuels division, Fuel Cell Systems division, Advanced Research & Product Development and Corporate Expenses. The Alternative Fuels division generates revenue through the sale of compressed natural gas (“CNG”) and propane (“LPG”) fuel storage, fuel delivery and electronic control systems to OEMs, primarily General Motors, and the installation of our products into OEM vehicles. The Alternative Fuels division also generates contract revenue by providing engineering design and support to OEMs, so that our fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their alternative fuel vehicles. The Fuel Cell Systems division generates revenue through the sale of compressed hydrogen storage, fuel delivery and electronic control systems to OEMs and the installation of our products into OEM fuel cell vehicles and hydrogen refueling systems. The Fuel Cell Systems division also generates contract revenue by providing engineering design and support to OEMs so that our fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their fuel cell applications.

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

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

We recognize revenue for product sales when goods are shipped in accordance with our shipping terms and collectability is reasonably assured. Contract revenue is recognized based on the percentage of completion method. For the nine months ended January 31, 2003 and 2004, revenue related to sales of our products, to and contracts with General Motors and its affiliates, represented 66.0% and 37.7% of our total revenue for these periods. For the nine months ended January 31, 2003 and 2004, revenue related to sales of our products to, and contracts with Toyota, represented 18.5% and 41.2% of our total revenue.

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 integrated natural gas and propane fuel systems for General Motors’ alternative fuel vehicle products.

In connection with our strategic alliance, immediately following our spin-off from IMPCO, we issued to General Motors an aggregate of 3,513,439 shares of our Series A common stock, representing 19.9% of our total outstanding equity following such issuance, for consideration of a nominal cash contribution and access to certain of General Motors’ proprietary information. Under the alliance, we have committed to provide minimum amounts of annual funding to projects approved under the alliance. Each party will retain the ownership of its existing technology and will jointly own technology that is jointly created under the alliance. We will be free 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.

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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 will amortize this intangible asset over the ten-year term of the strategic alliance with General Motors, subject to periodic evaluations for impairment.

Separation from IMPCO. We were incorporated under the laws of the State of Delaware on October 13, 2000, as a wholly-owned subsidiary of IMPCO. IMPCO conducted our business through various departments, first as a division (the Automotive OEM Division) and most recently as a subsidiary (Quantum Fuel Systems Technologies Worldwide, Inc.). On July 23, 2002, IMPCO completed the distribution and spin-off of our company by distributing to IMPCO stockholders one share of Quantum common stock for every share of IMPCO common stock held on the record date, which was July 5, 2002. Prior to the distribution, we entered into several agreements with IMPCO with respect to, among other things, intellectual property, interim services and a number of ongoing commercial relationships. The interim services agreement provided for specified charges generally intended to allow the providing company to fully recover the allocated direct costs of providing the services, plus all out-of-pocket costs and expenses, but without any profit. The pricing terms for goods and services covered by the commercial agreements reflected negotiated prices.

Our financial statements, which are discussed below, reflect the historical financial position, results of operations and cash flows of the business transferred to us from IMPCO as part of the distribution. The financial information included herein, however, may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been a stand-alone company during the periods prior to July 23, 2002.

Combination with Global Thermoelectric . On April 8, 2003, we entered into a Combination Agreement with Global Thermoelectric Inc. (“Global”) to combine Global with our company in a share-for-share exchange pursuant to a Plan of Arrangement submitted to the Court of Queen’s Bench of Alberta, Canada for approval. On July 14, 2003, Global announced that it had received a competing proposal from FuelCell Energy, Inc (“FuelCell”). On July 31, 2003, upon reviewing the terms of the competing proposal and after full consideration of the possible alternative terms that could have been offered by us, our board of directors concluded that it was not in the best interest of Quantum or its stockholders to propose any adjustments or improvements to the terms and conditions of the transaction contemplated by the Combination Agreement between us and Global. On August 4, 2003, we announced that Global had terminated the Combination Agreement with us as a result of the proposed combination between Global and FuelCell. As a result of the termination of the Combination Agreement, we received a US $2 million break-up fee from Global on August 4, 2003. This fee was netted against the accumulated transaction costs of approximately $2,127,000, which resulted in a $127,000 charge to earnings during the three months ended July 31, 2003.

Critical Accounting Policies and Estimates

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

Management considers an accounting estimate to be critical if:

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

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Results of Operations

Three and nine months ended January 31, 2003 and 2004

Net revenues and operating income/(loss) for our business segments for the three and nine months ended January 31, 2003 and 2004 were as follows:

Net revenues decreased $1.6 million, or 26.7%, from $6.0 million in the third quarter of fiscal year 2003 to $4.4 million in the third quarter of fiscal year 2004. Net revenues increased $2.8 million, or 17.3%, from $16.2 million in the first nine months of fiscal year 2003 to $19.0 million in the first three quarters of fiscal year 2004.

Operating losses decreased by $1.0 million, or 23.8%, from $4.2 million in the third quarter of fiscal year 2003 to $3.2 million in the third quarter of fiscal year 2004. Operating losses decreased $7.3 million, or 50.7%, from $14.4 million in the first nine months of fiscal year 2003 to $7.1 million in the first nine months of fiscal year 2004. For the nine month period, the decrease in loss was attributable to a $3.4 million decrease in the operating loss of the Alternative Fuels segment, a $1.6 million operating profit as compared to a $1.5 million operating loss in the prior year for the Fuel Cell Systems segment, and a $1.6 million decrease in the loss of the Corporate Expenses segment, partially offset by a $0.8 million increase in the operating loss of the Advanced Research & Product Development segment.

Alternative Fuels. Product sales for the Alternative Fuels segment decreased by $1.1 million, or 44.0%, from $2.5 million in the third quarter of fiscal year 2003 to $1.4 million in the third quarter of fiscal year 2004. Product sales decreased $1.7 million, or 20.2%, from $8.4 million in the first nine months of fiscal year 2003 to $6.7 million in the first nine months of fiscal year 2004. Product sales consist of sales associated with General Motors’ mid-size automobiles, pick-up trucks, and vans equipped with our bi-fuel and compressed natural gas fuel systems and General Motors’ medium duty trucks equipped with dedicated liquid propane gas kits. Product sales during the third quarter of fiscal year 2004 were lower due to lower volumes of mid-size automobiles and lower for the nine month period primarily due to the discontinuation of the GM van and medium duty truck platforms during the third quarter of fiscal year 2003, partially offset during the third quarter and nine month period of fiscal year 2004 by higher product sales of GM pick-up trucks primarily due to improved pricing on these platforms.

Cost of product sales decreased $2.1 million, or 63.6%, from $3.3 million in the third quarter of fiscal year 2003 to $1.2 million in the third quarter of fiscal year 2004. The decrease in cost of product sales was due to a $0.8 million decrease in material costs related to lower unit sales as a result of the discontinuation of two platforms and a $1.3 million decrease in direct labor, manufacturing overhead and other indirect production costs, including warranty reserve, inventory obsolescence, and freight charges. In the first nine months of fiscal year 2004, cost of product sales decreased $5.1 million, or 44.7%, from $11.4 million in the first nine months of fiscal year 2003 to $6.3 million in the first nine months of fiscal year 2004. The decrease in cost of product sales was due to a $2.5 million decrease in material costs related to the lower sales volume and positive material cost variances, a $1.3 decrease in manufacturing overhead due to efficiencies and absorption of overhead into inventories, $0.4 million in lower obsolete inventory charges, $0.3 million in direct labor, $0.2 million in lower warranty charges, and $0.4 million in lower freight and other expenses.

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Gross profits on product sales increased $0.9 million, or 128.6%, from a negative $0.7 million in the third quarter of fiscal year 2003 to a positive $0.2 million in the third quarter of fiscal year 2004, due to a 33.3% decrease in cost of product sales as a percentage of sales. Gross profits on product sales increased $3.4 million, or 113.3%, from a negative $3.0 million in the first nine months of fiscal year 2003 to a positive $0.4 million in the first nine months of fiscal year 2004, due to a 30.9% decrease in cost of product sales as a percentage of sales.

Contract revenue related to alternative fuels decreased by $0.1 million, or 20.0%, from $0.5 million in the third quarter of fiscal year 2003 to $0.4 million in the third quarter of fiscal year 2004. Contract revenues increased $0.4 million, or 26.7%, from $1.5 million in the first nine months of fiscal year 2003 to $1.9 million in the first nine months of fiscal year 2004. Contract revenues from emissions testing, environmental testing and contract engine calibration services increased $0.2 million in the third quarter of fiscal year 2004 and $0.8 million in the first nine months of fiscal year 2004. Other contract revenue is derived primarily from system development and application engineering of our products under funded General Motors contracts. For the nine month period, General Motors contracts decreased $0.4 million due to the discontinuance of the GM van and medium duty platforms.

Research and development associated with cost of contract revenues, included in our Alternative Fuels segment, remained flat at $0.3 million in the third quarter of fiscal year 2004. Research and development, associated with cost of contract revenues, decreased $0.2 million, or 25.0%, from $0.8 million in the first nine months of fiscal year 2003 to $0.6 million in the first nine months of fiscal year 2004. The decrease is primarily due to higher margins related to the emissions testing, environmental testing and contract engine calibration services.

Internally funded research and development expense for the Alternative Fuels segment increased by $0.1 million, or 25.0%, from $0.4 million in the third quarter of fiscal year 2003 to $0.5 million in the third quarter of fiscal year 2004. Internally funded research and development expense decreased $0.4 million, or 19.0%, from $2.1 million in the first nine months of fiscal year 2003 to $1.7 million in the first nine months of fiscal year 2004.

Operating loss for the Alternative Fuels segment decreased by $0.6 million, or 40.0%, from $1.5 million in the third quarter of fiscal year 2003 to $0.9 million in the third quarter of fiscal year 2004. The decrease in loss was attributable to a $0.2 million gross profit on product sales in fiscal year 2004 as compared to a $0.7 million negative gross profit on product sales in fiscal year 2003, partially offset by a $0.1 million decrease in contract revenues and a $0.2 million increase in general and administrative expenses.

Operating loss for the Alternative Fuels segment decreased by $3.4 million, or 57.6%, from $5.9 million in the first nine months of fiscal year 2003 to $2.5 million in the first nine months of fiscal year 2004. The decrease in loss was attributable to a $0.4 million gross profit on product sales in the first nine months of fiscal year 2003 as compared to a $3.0 million negative gross profit on product sales in the first nine months of fiscal year 2003, a $0.4 million increase in contract revenues, and a $0.6 million decrease in research and development expenses, partially offset by a $1.0 million increase in sales and administrative expenses.

Fuel Cell Systems. Revenues for the Fuel Cell Systems segment decreased by $0.4 million, or 13.8%, from $2.9 million in the third quarter of fiscal year 2003 to $2.5 million in the third quarter of fiscal year 2004. Revenues increased by $4.1 million, or 65.1%, from $6.3 million in the first nine months of fiscal year 2003 to $10.4 million in the first nine months of fiscal year 2004. Product sales were $1.3 million in the third quarter of fiscal year 2004 compared to $1.1 million in the third quarter of fiscal year 2003, representing a 27.3% increase, and $8.0 million in the first nine months of fiscal year 2004 compared to $1.9 million in the first nine months of fiscal year 2003, representing a 321.1% increase. Product sales consist of sales associated with Toyota Motor Corporation’s fuel cell platforms equipped with our hydrogen fuel metering and fuel storage systems. These product sales contributed $0.9 million in gross profit during the third quarter of 2004 and $5.1 million in gross profit in the first nine months of fiscal year 2004.

Contract revenue for the Fuel Cell Systems segment decreased $0.6 million, or 33.3%, from $1.8 million in the third quarter of fiscal year 2003 to $1.2 million in the third quarter of fiscal year 2004. Contract revenues decreased $2.0 million, or 45.5%, from $4.4 million in the first nine months of fiscal year 2003 to $2.4 million in the first nine months of fiscal year 2004. The decrease is primarily related to OEM program timing and certain programs advancing into pre-production phases with efforts focused on process engineering instead of product development. Contract revenue is derived primarily from system development and application engineering of our products under funded OEM contracts, and other funded contract work with state and federal agencies.

Research and development expenses, associated with cost of contract revenues, included in our Fuel Cell Systems segment decreased $0.1 million, or 11.1%, from $0.9 million in the third quarter of fiscal year 2003 to $0.8 million in the third quarter of fiscal year 2004. Research and development, associated with cost of contract revenues, decreased $0.7 million, or 30.4%, from $2.3 million in the first nine months of fiscal year 2003 to $1.6 million in the third quarter of fiscal year 2004. The decrease is primarily due to the lower level of contract revenues compared to the same periods of fiscal year 2003.

Internally funded research and development expense for the Fuel Cell Systems segment remained flat at $1.5 million in the third quarter of fiscal year 2004. Internally funded research and development expense decreased by $0.1 million, or 2.4%, from $4.1 million in the first nine months of fiscal year 2003 to $4.0 million in the first nine months of fiscal year 2004.

Operating loss for the Fuel Cell Systems segment increased by $0.2 million, or 200.0%, from $0.1 million in the third quarter fiscal year 2003 to $0.3 million in the third quarter of fiscal year 2004. This increase was attributable to a $0.6 million decrease in contract revenue and a $0.1 million increase in sales and marketing expenses, partially offset by a $0.5 million increase in gross profit from product sales.

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Operating income for the Fuel Cell Systems segment increased by $3.1 million, or 206.7%, from $1.5 million in operating loss in the first nine months of fiscal year 2003 to $1.6 million operating profit in the first nine months of fiscal year 2004. The decrease in loss was attributable to a $4.5 million increase in gross profit on product sales and a $0.8 million decrease in research and development expenses, partially offset by a $2.0 million decrease in contract revenue and a $0.2 million increase in sales and marketing expenses.

Advanced Research & Product Development. Research and development expense decreased by $0.1 million, or 11.1%, from $0.9 million in the third quarter of fiscal year 2003 to $0.8 million in the third quarter of fiscal year 2004. Research and development expense increased by $0.8 million, or 47.1%, from $1.7 million in the first nine months of fiscal year 2003 to $2.5 million in the first nine months of fiscal year 2004. The increase is due to higher development costs to commercialize our injectors, advanced vehicle design and related support costs.

Corporate Expense. Corporate expenses decreased by $0.5 million, or 29.4%, from $1.7 million in the third quarter of fiscal year 2003 to $1.2 million in the third quarter of fiscal year 2004. Corporate expenses decreased by $1.6 million, or 30.2%, from $5.3 million in the first nine months of fiscal year 2003 to $3.7 million in the first nine months of fiscal year 2004. The decrease in the third quarter is primarily due to lower legal and investor relations expenses experienced in the third quarter of fiscal year 2004 compared to the same period in the prior year.

Interest Expense (Income), Net. During the third quarter of fiscal year 2004, we recorded approximately $159,000 in interest income. In the third quarter of fiscal year 2003, we recorded approximately $35,000 in interest income. In the first nine months of fiscal year 2004, we recorded approximately $214,000 in interest income and we had interest expense of $26,000 in the first nine months of fiscal year 2003 from the loan outstanding under IMPCO’s credit facility. The higher level of interest income earned is due to the investment of the proceeds of our public equity offering completed in the second quarter of fiscal year 2004.

Provision for Income Taxes. Income tax expense increased due to a provision for international taxes in Korea. A valuation allowance has been established for deferred tax assets due to our lack of earnings history. We expect that income tax expense for fiscal year 2004 will be approximately the same as fiscal year 2003 as we expect to continue to incur operating losses.

Liquidity and Capital Resources

Prior to our spin-off from IMPCO, we used cash generated from IMPCO’s operations, bank financings and investments from IMPCO to fund capital expenditures and research and development, as well as to invest in and operate our existing operations and new businesses. Until fiscal year 2002, we had been funded entirely from IMPCO in the form of equity investments. In fiscal year 2002, we became a co-borrower with IMPCO on a credit facility with Bank of America. On June 24, 2002, IMPCO amended its credit facility with Bank of America to remove us as a co-borrower under the line of credit and to release the pledge of our assets under the facility, effective upon completion of the distribution.

Prior to the distribution, IMPCO made an additional capital investment of $15.0 million in cash, plus an assumption of our debt facility of $8.6 million. As of January 31, 2004, we had no material indebtedness or commitments for capital expenditures.

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 after underwriting discounts and commissions and offering expenses. 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 approximately $60.1 million after underwriting discounts and commissions and offering expenses.

We believe that our working capital will be adequate to meet our liquidity needs for at least the next twelve months. We may require additional sources of financing to develop facilities for commercialization and mass production of our products and systems. These additional sources of financing may include bank borrowings or public or private offerings of equity or debt securities. We cannot assure you that such additional sources of financing will be available on acceptable terms, if at all.

Net cash used in operating activities was approximately $4.5 million in the first nine months of fiscal year 2004 as compared to $11.0 million in the first nine months of fiscal year 2003. The decrease in cash used in operating activities resulted primarily from the net operating loss in the first nine months of fiscal year 2004 of $6.9 million as compared to the net operating loss of $14.3 million in the first nine months of fiscal year 2003. During the first nine months of fiscal year 2004, accounts receivable decreased $1.8 million as compared to a $2.1 million decrease in the first nine months of fiscal year 2003, inventory increased $1.4 million as compared to a $1.6 million decrease in the first nine months of fiscal year 2003. The increase in inventory during the first nine months of fiscal 2004 is related to a build out of fuel storage systems to be delivered over the next six months for integration into fuel cell passenger vehicles. Accounts payable decreased $0.9 million as compared to $3.7 million decrease in the first nine months of fiscal year 2003, and accrued liabilities decreased $0.5 million as compared to a $0.1 million increase in the first nine months of fiscal year 2003.

Net cash used in investing activities in the first nine months of fiscal year 2004 was $38.4 million, an increase of $37.6 million from the first nine months of fiscal year 2003. The company completed a public equity offering in October 2003 netting proceeds of approximately $60.1 million of which $37.5 million are invested in marketable securities classified as held-to-maturity. During the first nine months of fiscal year 2003, we realized net proceeds from the sale of property and equipment of $115,000.

Net cash provided by financing activities in the first nine months of fiscal year 2004 was $62.7 million as compared to $25.6 million of net cash provided in the first nine months of fiscal year 2003. During the second quarter of fiscal year 2004, we completed a public equity offering

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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 approximately $60.1 million after underwriting discounts and commissions and offering expenses. Proceeds from stock option exercises was $2.8 million during the first nine months of fiscal year 2004. During the first nine months of fiscal year of 2003, we benefited from certain one-time financing activities, such as $2.7 million of net advances from IMPCO and a $15.0 million cash infusion from IMPCO as part of the spin-off.

The ratio of current assets to current liabilities was 2.9:1 at April 30, 2003 and 11.9:1 at January 31, 2004. During the first nine months of fiscal year 2004, our total working capital increased by $43.5 million, from $15.5 million at the end of fiscal year 2003 to $59.0 million at January 31, 2004.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from exposures to changes in interest rates due to our financing, investing and cash management activities. Specifically, our cash and cash equivalents are subject to fluctuations in interest rates. Based on our cash balance at January 31, 2004, a 1% decrease in interest rates would result in reduced annual interest income of approximately $313,000.

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

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Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. This interpretation required variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack specific characteristics. The adoption of this FIN 46 does not have an impact on our financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material impact on our financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the third interim period beginning after June 15, 2003. The adoption of SFAS No. 150 is not expected to have a material impact on our results of operations or our financial position.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

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

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

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PART II—OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds.

On January 16, 2003, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (No. 333-101668). The Registration Statement covered the sale of 4,025,000 shares of our common stock (including an option to purchase 525,000 shares to cover over-allotments) at an offering price of $2.25 per share. After deducting the underwriting discounts and commissions and offering expenses, we received aggregate net proceeds of approximately $8.0 million in connection with the offering. Through the date of the filing of this report, none of the net proceeds from the offering have been used. Pending use of the net proceeds from the offering, we have invested them in short-term, investment grade, interest-bearing securities.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits:

(b) Reports on Form 8-K:

Although we did not file any reports on Form 8-K during the quarter, we furnished to the SEC a report on Form 8-K on December 11, 2003 (pursuant to Item 12 of Form 8-K) disclosing an earnings release announcing our financial results for the quarter ended October 31, 2003.

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SIGNATURES

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

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EXHIBIT INDEX

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