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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

or

Commission File No.: 001-15143

IMPCO TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

16804 Gridley Place Cerritos, California 90703

(Address of principal executive offices, including zip code)

(562) 860-6666

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

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 ¨ No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June 30, 2003, the end of the registrant’s most recent second fiscal quarter, was approximately $101.0 million based upon the closing sale price of the Registrant’s Common Stock on such date, as reported on the Nasdaq National Market.

As of March 18, 2004, the Registrant had 18,591,021 shares of Common Stock, $0.001 par value per share, outstanding.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Statements about our plans, intentions and expectations 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 help identify forward-looking statements. These statements are not guarantees of future performance or courses of actions 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 those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors” and elsewhere in this Annual Report. You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this Annual Report.

PART I

Item 1.    Business.

Overview

We design, manufacture and supply advanced systems that store gaseous fuels and monitor and control the pressure and flow of those fuels for use in internal combustion engines. Our components and systems enable internal combustion engines to operate on natural gas or propane. Our products improve efficiency, enhance power output, and reduce emissions by electronically sensing and regulating the proper proportion of fuel and air required by the internal combustion engine. Additionally, we have extensive engineering, design and systems integration experience with our customers’ requirements for product performance, durability and physical configuration. Based on over 45 years of technology development and expertise in producing cost-effective, safe and durable fuel technology systems, we believe we are positioned to provide enabling products and technologies in the rapidly expanding alternative fuel industry.

Our customers use our components and systems on engines ranging from one to 4,000 horsepower. We provide gaseous fuel components and systems to the transportation market and the industrial market, which includes the material handling and stationary and portable power generation markets.

A number of original equipment manufacturers, or OEMs, in the automotive, industrial and power generation industries, who are our customers, are developing alternative clean power systems using clean burning gaseous fuels, which decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions of internal combustion engines. We offer the following products, kits and systems to these customers:

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We have been producing and selling gaseous fuel systems and components for over 45 years. We sell these systems and components directly to end users, OEMs and the aftermarket through more than 400 distributors and dealers worldwide.

Our periodic and current reports are available, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC, on our website: www.impco.ws. Contents of our website are not incorporated into this report nor are they filed with or furnished to the SEC.

We were incorporated in Delaware in 1985 after having provided automotive and alternative fuel solutions in a variety of organizational structures since 1959.

Net consolidated revenues for the fiscal year ended December 31, 2003 were approximately $74.7 million with a net loss of $6.9 million. As discussed below in greater detail, on July 23, 2002 we spun off our Quantum division to our stockholders by distributing one share of Quantum Fuel Systems Technologies Worldwide, Inc. (“Quantum”), common stock for every share of IMPCO common stock to holders of record as of July 5, 2002. Since July 23, 2002 we no longer own any interest in Quantum, and we are no longer involved in developing and marketing fuel cell technologies, although we have entered into a three-year strategic alliance agreement with Quantum, under which we and Quantum may use jointly developed technologies in our respective markets.

Recent Developments

Capital Transactions.

On December 19, 2003 we concluded the issuance and sale of 1,500,000 shares of common stock to the selling stockholders for a price of $6.40 per share, yielding net proceeds of approximately $9.0 million after discounts and commissions. The offering was conducted as a private placement under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. The proceeds of this offering were used to retire short-term debt and for working capital.

On July 22, 2003 we refinanced our debt to retire our $11.3 million debt to Bank of America, to finance the $7.0 million deferred payment to complete the 50% acquisition of B.R.C. Societá Responsabilitá Limitata (“BRC”) and to provide working capital. The debt restructuring consisted of two new loans. First, we entered into a senior subordinated secured promissory note and a related securities purchase agreement with Bison Capital Structured Equity Partners, LLC (“Bison”) for an aggregate borrowing of $20.0 million, with net proceeds of $17.3 million, and we issued to an affiliate of Bison warrants to purchase up to 500,000 shares of our common stock. The Bison loan has a nominal interest rate of 11.25%, subject to certain adjustments, and matures on July 22, 2007. Interest on the Bison loan is payable monthly in arrears. During periods in which an event of default exists under the Bison loan agreement, the interest rate increases at a rate of 0.50% per month up to a maximum of 6 months or 3%, and in certain circumstances, interest payments during an event of default can be capitalized, or added to the principal amount outstanding. Additionally, we entered into a revolving loan and security agreement and a related secured promissory note with LaSalle Business Credit, LLC (“LaSalle”). The LaSalle loan has a maximum borrowing limit of $12.0 million, with availability based upon a percentage of eligible inventory and eligible accounts receivable, and has an adjustable interest rate of 1% above LaSalle’s prime rate as announced

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from time to time and matures on July 22, 2006. Interest on the LaSalle loan is payable monthly in arrears. During periods in which an event of default exists under the LaSalle loan agreement, the interest rate increases to 2% above LaSalle’s prime rate. The Bison and LaSalle loans contain cross-default provisions such that an event of default existing under one loan generally constitutes an event of default under the other.

Business Acquisition.

On October 3, 2002, we entered into an option agreement with the equity holders of BRC. Under the option agreement, we obtained the right to purchase from those equity holders 50% of the outstanding equity interest of BRC for approximately $23.8 million, which included the issuance of approximately 2.3 million shares of Company common stock (which the parties acknowledged and agreed were valued at $10.0 million). We announced on May 8, 2003 that we had exercised the option and that the purchase of 50% of BRC was completed pending a $7.0 million payment that represented a deferred portion of the purchase price due on September 30, 2003. On July 22, 2003, in conjunction with the refinancing of our debt as discussed above, we paid the deferred payment of $7.0 million to the equity holders of BRC completing the acquisition of the 50% equity interest in BRC. As of December 31, 2003, we incurred acquisition costs of approximately $24.6 million, which are shown on the consolidated balance sheets as part of investment in affiliates. The corresponding costs incurred as of December 31, 2002 totaled $12.5 million. We use the equity method of accounting to recognize the investment in and the results of BRC in our consolidated financial results.

In accordance with the sale and purchase agreement executed in connection with the BRC investment, and subject to certain specified conditions, we have the option to acquire from the BRC equity holders at least 90% ownership in BRC after the 2006 calendar year based upon a price determined by a multiple of Earnings Before Interest and Taxes adjusted by Depreciation and Amortization (“EBITDA”) and other quantitative factors.

Change in fiscal year.

Our fiscal year had traditionally ended on April 30, and our fiscal quarters on July 31, October 31 and January 31. On November 14, 2002 we changed our fiscal year so that effective January 1, 2003 our fiscal year will be the calendar year. As a result, we filed a transition report on Form 10-K covering the transition period from May 1, 2002 through December 31, 2002.

Alternative Fuel Industry

Overview.

We focus on the alternative fuel industry. Three independent market factors—economics, energy independence and environmental concerns—are driving the development of alternative fuel industry technology and markets. We believe the historic price differential between propane or natural gas and gasoline drives the economics of the alternative fuel market. The price of clean fuels such as natural gas or propane are typically 40% to 60% that of traditional liquid fuels such as gasoline. By converting an internal combustion engine to run on propane or natural gas customers can capitalize on the fuel price differential and reduce harmful vehicle emissions emitted from liquid fueled engines.

End users typically can recoup the cost of the conversion within six to eighteen months, depending on the fuel cost disparity prevailing at the time. Transportation companies in various countries, including Australia, Mexico, India and China, are taking advantage of these economics.

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Among our most active customers are taxi companies, transit and shuttle bus companies, and companies with extensive delivery fleets such as Coca Cola, Frito-Lay, Pepsi Cola and United Parcel Service. Small and large industrial engine users in the power generation market capitalize on the cost benefits of using alternative fuels and their low-pollutant capabilities. For example, forklift users often operate equipment indoors where toxic emissions are a concern. In all these situations, it is relatively easy to establish centralized fueling stations. Because of the global price differential in favor of gaseous fuels compared to gasoline, their availability in third-world markets and their lower pollutants, the alternative fuel industry market potential is growing rapidly. Approximately 57% of our revenues are derived from sales outside the United States, of which Mexico accounted for 16% of sales and Europe accounted for 29% of sales for the fiscal year ended December 31, 2003.

In addition to economics, energy independence is a significant driver for the alternative fuel market. Many countries have significant natural gas reserves and seek to use alternative fuels to reduce their dependence on imported oil and reduce their unfavorable balance of payments. Natural gas is generally consumed domestically since it is difficult to transport internationally in a gaseous state and liquefying natural gas tends to be costly. Implementing OEM alternative fuel vehicles that operate on natural gas or propane can lessen the demand for gasoline. For example, the Egyptian and Chinese governments realized that rather than relying solely on petroleum for its transportation needs, each could use natural gas in vehicles to free some of its oil production for export.

Governmental emission regulations, which support the use of clean burning alternative fuels, are also expanding the alternative fuel industry growth. The negative environmental impact associated with liquid fossil fuels further increases the demand for systems that use clean burning fuels. Internal combustion engines are a major source of air pollution, which has led to increased government regulation and oversight on vehicle and industrial engine emissions. The U.S. Department of Energy estimates that conventional motor vehicles fueled with natural gas emit 80% less carbon monoxide and nitrogen oxide than vehicles fueled by reformulated gasoline. Most major international cities are experiencing significant pollution from gasoline and diesel emissions. These cities also have the largest concentrations of fleet operators, and many of these cities are taking steps to reduce emissions, typically by implementing natural gas or propane-fueled vehicles. For example, in Mexico City, Milan and Rome, Italy the governments have taken steps such as prohibiting the use of certain vehicles on designated days of the week.

In the United States, legislative and administrative policies such as the Comprehensive National Energy Strategy, the Clean Air Act Amendments of 1990; the Energy Policy Act of 1992; and the Organization for Economic Cooperation and Development (OECD) Environmental Committee’s Report on Environmentally Sustainable Transport provide goals for energy efficiency and coupled with the Environmental Protection Agency and the California Air Resource Board’s Large Spark Ignited Off-Highway Emission regulation for industrial equipment afford strict emission standards and promote the development and implementation of alternative fuels and related technologies. All states, including California, Massachusetts, New York and Texas, have also adopted legislation targeted at reducing harmful emissions from motor vehicles, industrial equipment, industry and consumer products. In addition, several countries, including Argentina, Canada, China, Colombia, Egypt, France, Germany, Greece, India, Italy, Mexico, Russia and the United Kingdom, have enacted air pollution regulations or programs favoring the use of alternative fuels, including gaseous fuels such as low-carbon content propane and natural gas.

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Markets.

IMPCO is directly involved in three key-energy use market segments (transportation, industrial equipment and power generation equipment), which have seen growth in the use of clean-burning gaseous fuels in association with other lower-emission fuel-components.

Transportation.    According to the most recent statistics from the World LP Gas Association, the International Association for Natural Gas Vehicles (IANGV) and the European Natural Gas Association, there are over 5.7 million gaseous fuel vehicles in use worldwide: either for personal mobility, fleet conveyance or public transportation. As the world’s vehicle population increases from 800 million to over 1.3 billion by 2020, most growth will occur in developing countries within Asia, North Africa, and areas of the Middle East. These regions currently have the lowest ratio of vehicles per one thousand people, and are slated to grow rapidly over the next ten years as economic improvements stimulate personal vehicle ownership.

The Energy Information Administration of the U.S. Department of Energy, the World Bank, the Office of Economic and Community Development, the fifteen countries of the European Union (EU15) and the Asian Development Bank suggests that interest in expanding the use of alternative fuel vehicles is mounting in many parts of the developed and developing world. Growth projections, reported by the Energy Information Administration and the IANGV in comparison with current data available from the European Natural Gas Vehicle Association, indicate that over two million additional alternative fuel vehicles will be introduced worldwide by 2010. In Europe, alternative fuel vehicles have rapidly penetrated the transportation market. The European Union’s four largest natural gas-consuming members, the United Kingdom, Germany, France, and Italy, all have introduced incentives for gaseous-fueled vehicles. The European Union has established a target to replace 20% of their liquid fueled vehicles with gaseous fuels by 2020. The Mexican Regulatory Commission of Energy estimates that Mexico will be able to increase the use of natural gas vehicles from 2,000 in 2000 to 100,000 by 2008.

The Asia region is emerging as a significant growth market for alternative fuel vehicles. China, already the world’s second-largest energy consumer, will continue to grow in importance on world energy markets as many forecasts suggest that strong economic growth will drive up demand.

Industrial.    Equipment such as forklifts, aerial platforms, sweepers, turf equipment, light-duty construction equipment, mobile wood-processing equipment and other mobile industrial equipment have long been the workhorses of developed countries, and are a significant portion of IMPCO’s global activities. With developed countries such as the United States and the EU15 seeking a broader incorporation of emission sources in an attempt to further reduce air pollution, many countries have and will legislate emission standards for this type of equipment. In the United States, the Environmental Protection Agency has enacted emission regulations for industrial off-highway equipment starting in 2004 that follows suit with California’s Large Spark Ignited mobile off-highway emission regulation initiated in 2001.

In North America alone there are more than 100,000 pieces of industrial off-highway equipment manufactured each year that use internal combustion engines. With new emission regulations being imposed, these OEMs will require advanced technologies that permit the use of gaseous fuels in order to satisfy not only the regulation, but also the customers’ requirements for durability, performance and reliability. IMPCO has developed and is currently supplying a series of advanced technology fuel systems to the industrial OEM market under the brand name Spectrum. IMPCO and its industrial brands focus on serving over 70% of the market with fuel systems, services and emission certified engine packages.

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Power Generation.    The World Energy Outlook 2002 projects the global primary energy demand will increase by 1.7% per year from 2000 to 2030, reaching 15.3 billion tons of oil equivalent. Even though the earth’s energy resources are adequate to meet this demand, the amount of investment that will be needed for these resources to be exploited is significantly higher than has occurred in the past. For example, investment needs in the power sector are expected to be almost three times larger over the coming three decades than over the last three. Investment in the oil industry will also have to rise sharply, as demand rises and the surplus capacity in crude oil production and refining that has characterized the industry since the 1970s is used up. Gaseous fuels such as propane and natural gas have significant reserves available worldwide which are less costly to refine compared to crude oil and have historically been less expensive than liquid fuels. Countries like China, for example, are actively developing their infrastructure to utilize their natural gas reserves rather than import liquid fuels.

Competitive Advantages

We believe we can extend our technological leadership position in the alternative fuel industry based on our history of success in the designing, manufacturing and commercializing advanced fuel delivery systems and components, our relationships with leading companies in transportation and industrial markets, our financial commitment to research and development and our proven ability to develop and commercialize new products. We believe our competitive strengths include:

Industry Leader.    We have derived a technology and product leadership position from the broad application and integration of our technologies and enabling systems into the established and expanding alternative fuel industry. Over the past nine years we have invested approximately $130 million in research and development. This investment, coupled with our history and experience in this industry, has provided us with a strong technology base for new product innovation for internal combustion engines, particularly in our industrial markets. Additionally, we believe our acquisition of 50% of BRC will expand our technology and product leadership position. BRC has been developing, manufacturing and marketing alternative gaseous fuel products and systems for automobiles for more than twenty years.

Proven Manufacturing Methods.    We have more than four decades of experience in the manufacture, development and integration of alternative fuel technologies and products. We currently maintain manufacturing and production facilities in the United States, Europe, Mexico and Australia, which produce a broad range of products and services, including components, systems and specialty vehicle assembly. Our U.S., Australian and European facilities have achieved ISO-9000 or QS-9000 certification. QS-9000 is the common supplier quality standard for Chrysler Corporation, Ford Motor Company and General Motors. QS-9000 applies to suppliers of production materials, production and service parts, heat-treating, painting and plating and other finishing services. ISO-9000 is a set of three individual, but related, international standards on quality management and quality assurance. These standards were developed to document effectively the quality controls necessary to maintain efficient systems. Our 50% acquisition of BRC further expands our ability to manufacture and produce products in Europe and South America. Additionally, BRC provides a broader manufacturing capability such as machining centers and electronic circuit board production to enable us to more readily realize cost reductions as opposed to purchasing from outside vendors.

Strong OEM Customer Relationships.    We currently sell products to more than 100 OEM customers in domestic and international alternative fuel markets. To date, we have sold over four million fuel systems or sub-systems globally to our customers. We believe that the successful historic use of our products and our reputation as a leader in our industry provides a strong competitive position.

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Established Systems Integration Expertise.    As more OEMs seek to reduce costs by outsourcing key tasks and reducing the number of suppliers, we have focused increasingly on capturing additional revenue opportunities by expanding our systems integration capabilities. In 1998, we established our Industrial Engine Systems business in Sterling Heights, Michigan, which provides systems integration of our low-emission products for engines that are subsequently sold to industrial OEMs. We believe that our systems integration expertise, together with our proprietary and patented technologies, give us a significant advantage in the alternative fuel markets.

Positioned for Global Growth.    With ten foreign facilities and over 400 distributors and dealers in more than 30 countries outside the United States, we believe that we are positioned to capitalize on global growth opportunities. We believe that the alternative fuel markets will grow dramatically internationally, particularly in China, India, Japan, Mexico and Southeast Asia, because of the existing urban pollution problems and economics that favor alternative fuels versus gasoline. Our acquisition of the BRC equity interest strengthens our global position by adding an additional 200 distributors and dealers in all 15 European nations, as well as ten Eastern European countries, and a number of developing countries including Brazil, Argentina, Chile, Australia, India, China, Thailand and South Korea.

Business Strategy

We believe that the successful execution of the following strategic objectives will enable us to maintain and expand our leadership position in the advanced fuel technologies industry.

Capitalize on our Strong Technology Leadership Position.    We are a leading developer and manufacturer of fuel metering and electronic control systems for the alternative fuel industry. Management believes our position results from our current technology advantage and our investment in research and development. Our investment has permitted us to develop and supply new technology and products to our target markets, which are transitioning to gaseous-fueled internal combustion engines, and management believes these trends will continue to grow as liquid fossil fuels become increasingly scarce and expensive to develop. We also plan to develop new technologies and expand our product and system integration capabilities to an increasingly larger and more diversified customer base. Our 50% acquisition of BRC strengthens and broadens our leadership position.

Focus on Advanced Fuel Technologies and Products.    We intend to focus on advanced electronic and fuel metering technologies and products. We plan to continue our research and product development in fuel delivery and electronic control systems for alternative fuels. We actively seek to establish joint development programs and strategic alliances with the major engine designers, manufacturers and industry leaders in these markets.

Develop and Expand Key Industry Relationships.    We plan to utilize the successful technical and business relationships and reputation we have established worldwide with major industry leaders using alternative fuel products to enable us to establish and maintain strategic alliances, joint product development programs and joint ventures with these companies in our target markets. We will concentrate our efforts on broadening our OEM relationships in an effort to establish strong top-tier supplier positions based on our belief that OEMs will drive industry growth in the alternative fuel industry. The 50% purchase of BRC expands our OEM relations with countries, particularly in Latin America, Europe and Asia.

Expand and Broaden Systems Integration Expertise.    We expect to continue to broaden our capabilities to provide integration, testing, validation and manufacturing of our products and systems into the transportation, material handling, stationary and portable power generation

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and general industrial markets. As more OEMs seek to reduce costs and shorten time to market by outsourcing key tasks and reducing numbers of suppliers, we are focused increasingly on capturing additional revenue opportunities by expanding into value-added services, such as systems integration. For example, we have established an industrial systems unit in Michigan to integrate our products into engines that will be sold to industrial OEMs, who in turn will install these engines into end products.

Increase Bases of Business Operations and Distributor Network in High-Growth Global Regions.    We plan to expand our operating network in high-growth regions, such as Asia, Europe and Latin America, to take advantage of significant growth opportunities that we believe exist in those areas. We intend to capitalize on these growth opportunities through acquisitions and joint ventures, strengthening of our distributor network and developing key local business and governmental support and recognition. In addition, our recent joint venture agreements with Minda Industries Limited India and with CNGC, a subsidiary of China National Petroleum Co., expand our presence in the Indian and Chinese markets, respectively. Additionally, we are developing working relationships with several foreign governments. We believe that working with local governments and establishing joint ventures with local business leaders is essential to expanding into international markets. For example, our discussions with government officials have led to our involvement in developing regulations in Mexico. Management expects that our acquisition of BRC equity interest will further expand our presence in the global transportation market.

Expand our Global Manufacturing Operations.    We plan to expand our current QS-9000 manufacturing operations in the United States and Mexico by establishing manufacturing sites in low-cost locations with a continued focus on quality, timely delivery and operating efficiency. In addition, we anticipate that the manufacturing strengths of BRC, coupled with the additional product volume will result in productivity improvements.

Customers and Strategic Relationships

Our customers include some of the world’s largest OEMs and engine manufacturers, including Ashok Leyland, Boss Manufacturing, Caterpillar, Clark, Cummins, Daewoo, Detroit Diesel, Ford Australia, GM Holden, Kohler, Komatsu, Mazda, Mitsubishi, Onan, Still and Toyota.

We are working with a number of these customers to address their future product and application requirements as they integrate more advanced, certified gaseous fuel systems and engines into their business strategies. Additionally, we continually survey and evaluate the benefits of joint ventures, acquisitions and strategic alliances with our customers and other participants in the alternative fuel industry to strengthen our global business position.

We have focused our strategic alliances on our marketing strategy and/or on our development strategy. Our marketing strategy seeks to expand the distribution channels and OEM customer base for our gaseous fuel system technologies. Our development strategy is to advance the state of technology and its application.

Quantum Collaboration.    Our three-year agreement with Quantum provides that we will collaborate with Quantum to identify and conduct research and development programs of mutual interest. As part of those research and development activities, we may develop technology and products separately or jointly with Quantum. The agreement also allows us to acquire and sell into our alternative fuel markets Quantum’s advanced technology products, including CNG storage tanks, fuel injectors, in-tank regulators and other products, for use in automotive, bus and truck and industrial aftermarket applications and in the bus and truck and industrial OEM markets. For jointly developed products, we and Quantum will jointly own any

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patent or other intellectual property rights and will issue royalty-free cross licenses covering our respective markets. For separately developed products, each party will grant the other a right to sell the affected products in their respective markets. The developing party will retain sole intellectual property ownership.

We believe that the ongoing Quantum alliance will expedite the commercialization and integration of advanced gaseous storage and handling systems and products into our broader global alternative fuel markets, including automotive after-market, material handling, portable and stationary internal combustion engine-based power generation, and general industrial markets. In addition, we believe that the spin-off will enable IMPCO to optimize its growth strategies as a separate, stand-alone entity, based on its capitalization and financing requirements, acquisition strategies, working capital requirements, projected cash flows from operations and credit ratings.

Management plans to establish similar relationships with leading manufacturers by using our systems integration capabilities and our leading technology position in gaseous fuel products and systems.

Products and Services

Our products include gaseous fuel regulators, fuel metering, fuel shut-off valves, fuel delivery systems, complete engine systems, and electronic controls for use in internal combustion engines for the transportation, material handling, stationary and portable power generator and general industrial markets. In addition to these core products, which we manufacture, we also design, assemble and market ancillary components required for complete systems operation on alternative fuels.

All of our products are designed, tested and validated in accordance with our own internal requirements, as well as tested and certified with major regulatory and safety agencies throughout the world, including Underwriters Laboratories (UL) in North America and TÜV in Europe. The following table describes the features of our products:

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Services.    We provide a broad range of services to both our product customer base and the broader service marketplace. These services fall into the following key areas:

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Sales and Distribution

We sell products through a worldwide network encompassing more than 400 distributors and dealers in over 30 countries and through a sales force that develops sales with OEMs and large end-users. We focus on two markets: 1) the industrial market which includes material handling OEMs and aftermarket and stationary and portable power generation OEMs and aftermarket, and 2) the transportation OEM and aftermarket. Of these markets, we believe that the greatest potential for immediate growth is in the Latin America and Asia Pacific regions in the transportation OEM and aftermarket and in North America in the industrial OEM and aftermarket.

For the fiscal year ended December 31, 2003, sales to distributors (including company-owned distributors) accounted for 45% of our net revenue and sales to OEM customers accounted for approximately 55% of our net revenue. During the transition period beginning May 1, 2002 and ending December 31, 2002, sales to distributors accounted for 56% of our net revenue and sales to OEM customers accounted for 44% of net revenues. This change is due to increased revenues to OEM domestic customers.

Our company-owned distributors are included in our International Operations segment and consist of our subsidiaries located in Europe, Australia, Mexico, Japan, India and China, which are responsible for sales, application and market development and technical service. Additionally, these subsidiaries provide sales support, application development and technical support to aftermarket and OEM customers.

Manufacturing

We manufacture and assemble products at our facilities in Cerritos, California, Sterling Heights, Michigan and at our international facilities. Current manufacturing operations consist primarily of mechanical assembly and light machining. We rely on outside suppliers for parts and components and obtain components for products from a variety of domestic and foreign

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automotive and electronics suppliers, die casters, stamping operations, specialized diaphragm manufacturers and machine shops. For the fiscal year ended December 31, 2003, ten suppliers accounted for approximately 71% of our raw material purchases. During our fiscal years 2001 and 2002, the transition period ended December 31, 2002, and the fiscal year ended December 31, 2003, General Motors Corporation, and affiliates of General Motors, accounted for approximately 29%, 9%, 12% and 33% respectively, of purchases. . During our fiscal years 2001 and 2002, the transition period ended December 31, 2002, and the fiscal year ended December 31, 2003, Rangers Die Casting Company accounted for approximately 12%, 8%, 8% and 7%, respectively, of purchases.

Material costs and machined die cast aluminum parts represent the major components of cost of sales. Coordination with suppliers for quality control and timely shipments is a high priority to maximize inventory management. We use a computerized material requirement planning system to schedule material flow and balance the competing demands of timely shipments, productivity and inventory management. All of our U.S. manufacturing facilities are ISO-9001 or QS-9001 certified.

Research and Development

Our research and development facility near Seattle, Washington is dedicated to the research and development of systems and products that support the use of gaseous fuels in internal combustion engines. This facility has sophisticated, state-of-the-art research laboratories, emissions control equipment, and testing equipment. Our research and development is focused on fuel delivery and electronic control systems and products for motor vehicles, engines, forklifts, stationary engines and small industrial engines.

We have the following technical capabilities:

We believe this facility is a critical component in our ability to maintain our technological leadership position in alternative fuel enabling systems.

We conduct alternative fuel application development at the following facilities:

These facilities encompass a total of approximately 100,000 square feet of laboratory space, and we have more than 50 employees at these facilities.

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Competition

We are a leading provider of alternative fuel systems. We provide products and integrated services for all gaseous fuels in our target markets for use in all end user applications in the alternative fuel industry.

Our key competitors in gaseous fuel delivery products, accessory components and engine conversions markets include Aisan, Koltec-Necam, Landi Renzo, Lovato, OMVL and Tartarini, which together with us account for a majority of the world market for alternative fuel products and services. These competitors compete with us primarily in the transportation markets. In the future, we may face competition from traditional automotive component suppliers, such as Bosch, Delphi, Siemens and Visteon, and from motor vehicle OEMs that develop fuel systems internally.

We believe that our competitive advantage over current and future competitors is our technology leadership derived from many years of experience with alternative gaseous fuels. Our current competitors typically focus on fuel injection and individual components. We are unique in being able to offer complete integrated fuel systems based on our own advanced technologies, including gaseous fuel storage, fuel metering, and electronic controls.

Product Certification

We must obtain emission compliance certification from the Environmental Protection Agency to sell certain of our products in the United States and from the California Air Resources Board to sell certain products in California. Each car, truck or van sold in the U.S. market must be certified by the Environmental Protection Agency before it can be introduced into commerce and its products must meet component, subsystem and system level durability, emission, refueling and various idle tests. In California, both on-road and off-road vehicles have emission compliance regulation. We have also obtained international emissions compliance certification in Argentina, Australia, Brazil, Canada, Chile, Europe and Mexico.

We strive to meet stringent industry standards set by various regulatory bodies, including the Federal Motor Vehicle Safety Standards of the United States, the National Highway and Transportation Safety Administration, the National Fire Protection Association, Underwriters Laboratories and American Gas. Approvals enhance the acceptability of our products in the domestic marketplace. Many foreign countries also accept these agency approvals as satisfying the “approval for sale” requirements in their markets.

Backlog

As of March 8, 2004, our backlog for our products was $32.0 million as compared to $13.5 million on February 28, 2003. We measure backlog for our product sales from the time orders become irrevocable, which generally occurs 90 days prior to the planned delivery date. Some of our backlog may not be shipped, and revenues from such shipments may not be recognized in Fiscal 2004, or not at all.

Employees

As of December 31, 2003, we employed approximately 373 persons. Of these employees, our U.S. Operations employed approximately 245 and 128 were employed by our International Operations. None of our employees are represented in a collective bargaining agreement. Management considers our relations with our employees to be good.

Intellectual Property

We currently rely primarily on patent and trade secret laws to protect our intellectual property. We currently have 11 U.S. patents and 15 foreign patents issued. Our U.S. patents began expiring in October 2002 and will expire on various dates until May 2020. We do not expect the expiration of our patents to have a material affect on our revenues.

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We also rely on a combination of trademark, trade secret and other intellectual property laws and various contract rights to protect our proprietary rights. However, we cannot be sure that these intellectual property rights provide sufficient protection from competition. We believe that copyright, trademark and trade secret protection are less significant than our patents and that our growth and future success will be more dependent on factors such as the knowledge, ability and experience of our personnel, new product introductions and continued emphasis on research and development. We believe that establishing and maintaining strong strategic relationships with valued customers and OEMs are the most significant factors protecting us from new competitors.

Item 2.    Properties.

Facilities

Our executive offices and our Gaseous Fuel Products division are located in Cerritos, California. We currently lease additional manufacturing, research and development and general office facilities in the following locations set forth below:

*The Cherasco, Italy facility is operated by our unconsolidated subsidiary, BRC.

We also lease nominal amounts of office space in France and the United Kingdom.

We believe our facilities are presently adequate for our current core product manufacturing operations and OEM development programs and production.

Item 3.    Legal Proceedings.

We are not currently a party to any material legal proceeding. However, we may from time to time become involved in litigation relating to claims arising in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

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

No Matters were submitted for the vote or approval of our security holders during the quarter ended December 31, 2003.

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PART II

Item 5.    Market for Company’s Common Equity and Related Stockholder Matters.

Our common stock is traded on the Nasdaq National Market under the symbol “IMCO.” The following table sets forth, for the periods indicated, the closing high and low sale prices of our common stock as reported on the Nasdaq National Market. Closing high and low sale prices for fiscal year 2002 and the eight-month transition period ended December 31, 2002 have been adjusted for the Quantum spin-off on July 23, 2002.

On March 17, 2004 the closing sale price of our common stock on The Nasdaq National Market was $5.08 per share. As of January 9, 2004, there were approximately 517 holders of record of our common stock.

Dividend Policy

The Company has never paid dividends on its common stock. We previously paid cumulative cash dividends to the holders of our 1993 Series 1 Preferred Stock. On March 31, 1999, each share of preferred stock was converted into shares of our common stock. As a result, after March 31, 1999, we have no shares of preferred stock outstanding and have no obligation to pay any further dividends on those shares.

We currently intend to retain any earnings for use in developing and growing our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors deemed relevant by the board of directors.

Item 6.    Selected Financial Data.

The following table sets forth our selected consolidated financial data for the year ended December 31, 2003 and each of the four fiscal years ended April 30, 2002, 2001, 2000, 1999 and for the eight-month transition period ended December 31, 2002, as well as a comparative eight-month period ended December 31, 2001. With the exception of the comparative eight month period ended December 31, 2001, which has been derived from our unaudited financial data, this data has been derived from our audited consolidated financial

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statements and should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. The financial results of Quantum are shown below as a loss on discontinued operation, net of tax.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read this discussion together with the financial statements and notes thereto and the other financial information included in this Annual Report on Form 10-K. Some of the information discussed in this section represents “forward looking statements” within the meaning of federal securities laws. Please refer to the Note Regarding Forward Looking Statements at the top of page 1 when reviewing the following discussions.

Overview

We design, manufacture and supply components that store gaseous fuels and monitor and control the pressure and flow of those fuels for use in internal combustion engines. Historically, most of our revenues have been derived from the sale of the products that enable traditional internal combustion engines to run on clean burning alternative fuels such as propane and natural gas instead of gasoline. Based on over 45 years of technology development and expertise in producing cost-effective, safe, and durable fuel technology systems for engines, we believe that we are positioned to provide enabling products and technologies in the rapidly expanding alternative fuel industry.

Our U.S. Operations division sells products, including parts and conversion systems, for applications in the transportation and industrial markets, which include the material handling, stationary and portable power generator and general industrial markets. Our International Operations division provides distribution for our products in Asia, Australia, Europe, India, Japan and Mexico, predominantly from our U.S. Operations division and some product assembly. We classify the results of the Quantum division, which was spun-off in July 2002, as a discontinued operation on our consolidated financial statements.

Recent Developments

Quantum Spin-off.

On July 23, 2002, we completed the distribution and spin-off of our Quantum division by distributing one share of Quantum common stock for every share of IMPCO common stock held on the record date, which was July 5, 2002. Since we completed the Quantum spin-off in July 2002 we no longer are engaged in fuel cell technology research, although we do have a continuing collaboration arrangement for certain research and development activities. We believe that the spin-off enables IMPCO to optimize its growth strategies as a separate, stand-alone entity, based on its prospective capitalization and financing requirements, acquisition strategies, working capital requirements, projected cash flows from operations and desired credit ratings.

We have included a discussion on the Quantum reporting segment since the financial results of Quantum were included in the transition period ended December 31, 2002 and our fiscal years ended April 30, 2001 and 2002 consolidated results of operations. As a result of the spin-off of Quantum, we have reported Quantum as a discontinued operation. Readers should note that financial data that includes periods before the Quantum spin-off may not present a meaningful comparison with later periods because of the effect of the discontinued operation. Management expects the Quantum spin-off to have a favorable effect on our results of operations and cash flows from operations.

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Capital Transactions.

On December 19, 2003 we concluded the issuance and sale of 1,500,000 shares of common stock to certain institutional investors at $6.40 per share, yielding net proceeds of approximately $9.0 million after discounts and commissions. The offering was conducted as a private placement under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. The proceeds of this offering were used to retire short-term debt and for working capital.

On July 22, 2003 we refinanced our debt to retire our $11.3 million debt to Bank of America, to finance the $7.0 million deferred payment to complete the 50% acquisition of B.R.C. Societá Responsabilitá Limitata (“BRC”), and to provide working capital. The debt restructuring consisted of two new loans. First, we entered into a senior subordinated secured promissory note and a related securities purchase agreement with Bison Capital Structured Equity Partners, LLC (“Bison”) for an aggregate borrowing of $20.0 million, with net proceeds of approximately $17.3 million, and we issued to an affiliate of Bison warrants to purchase up to 500,000 shares of our common stock. The Bison loan has a nominal interest rate of 11.25%, subject to certain adjustments, and matures on July 22, 2007. Interest on the Bison loan is payable monthly in arrears. During periods in which an event of default exists under the Bison loan agreement, the interest rate increases at a rate of 0.50% per month up to a maximum of 6 months or 3%, and in certain circumstances, interest payments during an event of default can be capitalized, or added to the principal amount outstanding. Additionally, we entered into a revolving loan and security agreement and a related secured promissory note with LaSalle Business Credit, LLC (“LaSalle”). The LaSalle loan has a maximum borrowing limit of $12.0 million, with availability based upon a percentage of eligible inventory and eligible accounts receivable, and has an adjustable interest rate of 1% above LaSalle’s prime rate as announced from time to time and matures on July 22, 2006. Interest on the LaSalle loan is payable monthly in arrears. During periods in which an event of default exists under the LaSalle loan agreement, the interest rate increases to 2% above LaSalle’s prime rate. The Bison and LaSalle loans contain cross-default provisions such that an event of default existing under one loan generally constitutes an event of default under the other. At December 31, 2003 the amount borrowed under the LaSalle facility was $5.2 million with $1.8 million of availability. See also “Liquidity and Capital Resources.”

On October 3, 2002, we entered into an option agreement with the equity holders of BRC. Under the option agreement, we obtained the right to purchase from those equity holders 50% of the outstanding equity interest of BRC for approximately $23.8 million, which included the issuance of approximately 2.3 million shares of Company common stock (which the parties acknowledged and agreed were valued at $10.0 million). We announced on May 8, 2003 that we had exercised the option and that the purchase of 50% of BRC was completed pending a $7.0 million payment that represented a deferred portion of the purchase price due on September 30, 2003. On July 22, 2003, immediately after the refinancing of our debt as discussed above, we paid the deferred payment of $7.0 million to the equity holders of BRC completing the acquisition of the 50% equity interest in BRC. As of December 31, 2003, we had incurred acquisition costs of approximately $24.6 million, which are shown on the consolidated balance sheet as part of investment in affiliates. The corresponding costs incurred as of December 31, 2002 totaled $12.5 million. We use the equity method of accounting to recognize the investment in and the results of BRC in our consolidated financial results.

In accordance with the sale and purchase agreement executed in connection with the BRC investment, and subject to certain specified conditions, we have the option to acquire from the BRC equity holders at least 90% ownership in BRC after the 2006 calendar year based upon a price determined by a multiple of Earnings Before Interest and Taxes adjusted by Depreciation and Amortization (“EBITDA”) and other quantitative factors. We believe the acquisition of 50%

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of BRC affords us a valuable strategic opportunity to expand in markets that are complementary to the traditional IMPCO markets for industrial applications. M.T.M. S.r.l., a subsidiary of BRC, has been developing, manufacturing and marketing alternative gaseous fuel products and systems for automobiles for more than twenty years. We believe BRC is a leader in the transportation sector of the gaseous fuels products market. BRC conducts business in all fifteen European Union nations, as well as ten Eastern European countries and a number of developing nations including Brazil, Argentina, Chile, Australia, India, China, Thailand and South Korea. We believe this relationship with BRC will enable us to expand our position in end-user markets across a vast portion of the world. In addition, we anticipate that the manufacturing strengths of BRC, coupled with the additional product volume we hope to derive from the relationship, should result in significant productivity improvements. Furthermore, we believe that this agreement places us in the position to exploit our combined technology and product strengths through a strong global representation in the emerging alternative fuels industry.

Change of Fiscal Year

Our fiscal year had traditionally ended on April 30, and our fiscal quarters on July 31, October 31 and January 31. On November 14, 2002 we changed our fiscal year so that effective January 1, 2003 our fiscal year will be the calendar year. Accordingly, we filed a transition report for the eight-month period ended December 31, 2002 and this Annual Report for the fiscal year ended December 31, 2003 on Form 10-K, respectively.

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 accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, goodwill, taxes, inventories, warranty obligations, long-term service contracts, and contingencies and litigation. 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.

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

We recognize revenue for product sales when title is transferred, ordinarily when products are shipped, and when management is reasonably assured of collectibility. We provide for returns and allowances as circumstances and facts require.

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

We write down our inventory for estimated obsolescence and 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. If actual market conditions are less

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favorable than those projected by management, additional inventory write-downs may be required.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

We annually evaluate the carrying value of goodwill and other intangible assets using the impairment method. If the carrying value of the net assets and liabilities underlying the goodwill recorded on the financial statements exceeds the fair value of the net assets and liabilities based on discounted cash flows, an impairment charge is recognized against goodwill following a restatement of the tangible assets and liabilities at fair values.

We operate wholly owned and majority owned subsidiaries. We recorded goodwill at the time of purchase for the amount of the purchase price over the fair value of the assets and liabilities acquired. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the goodwill, thereby possibly requiring an impairment charge in the future.

We record a deferred tax asset and assess the adequacy of a valuation allowance for the purpose of carrying a net deferred tax asset at an amount that we believe will be recovered in the next three years. During the transition period ended December 31, 2002 and during the year ended December 31, 2003, we recorded $24.0 million and $2.5 million, respectively, for valuation allowances for that portion of deferred tax assets that we believe is less likely than not to be realized in the next three years. We consider our recent operating results, future taxable income and ongoing prudent and feasible tax planning strategies in determining the amount of the valuation allowance required for the portion of the deferred tax asset that is not likely to be realized in the next three years, notwithstanding that a significant portion of our deferred tax assets may have a longer life under applicable tax laws. On a quarterly basis, we continue to analyze the deferred tax asset and the reserve required for the portion of the asset that is unlikely to be realized in the next three years. Future adverse changes in market conditions, poor operating results or a decline in our projections about future profitability may affect our assessment of the adequacy of the reserve. In the event that we determine that it is more likely than not that we would be unable to realize an additional portion of our net deferred tax asset, an additional adjustment to the deferred tax asset valuation allowance would be charged to income in the period such determination was made.

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Results of Operations

Fiscal Year Ended December 31, 2003 and Twelve-Month Period ended December 31, 2002

In November 2002, we changed our fiscal year-end from April 30 to December 31. The basis of comparison for the discussion that follows for the fiscal year ended December 31, 2003 consists of the eight months ended December 31, 2002, the three months ended April 30, 2002 and the month ended January 31, 2002. We have provided (in thousands of dollars) summary of the consolidated statement of operations for 2002:

Net revenue increased $6.3 million, or 9.3%, to $74.7 million in the fiscal year ended December 31, 2003 from $68.4 million for the twelve months ended December 31, 2002. Unless otherwise noted, comparisons for fiscal 2003 are to the unaudited 12 month period ended December 31, 2002. Revenue in the three months ended December 31, 2003 was $18.2 million or 21.3% higher than revenues of $15.0 million during the corresponding period of 2002. The annual revenue increase was due to a $7.6 million increase in net sales to the industrial market partially offset by a $1.3 million decline in net sales to the transportation market. The increase in the industrial market was due primarily to the continued economic recovery affecting the industrial markets in the United States and in Europe since the downturn that followed the events of September 11, 2001. The quarterly increase in revenues is attributable to the launch of our new Spectrum product line. During the fourth quarter of 2003, we began shipping the Spectrum product line including certified engine packages and fuel systems in response to the new federal regulations, effective January 1, 2004, requiring that certain “off-road” vehicles and industrial applications meet more stringent exhaust standards. Additionally, we expect that revenues will increase during the first part of 2004 as compared to the same period of 2003 in response to increased deliveries of Spectrum and improved economic conditions in the markets we serve.

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Net revenues and operating income for our reporting segments for the fiscal year 2003 as compared to 2002 are as follows (in thousands of dollars):

The following table sets forth our product revenues by application across all reporting segments for 2003 and the corresponding period of 2002:

During the twelve month periods ended December 31, 2003 and 2002, our revenue was generated in the following geographic regions by percent proportions:

Operating loss improved by $2.2 million, or 82%, from a loss of $2.7 million in 2002 to a loss of $0.5 million in 2003. This decrease in operating loss is the result of increased revenues of approximately $6.3 million, which contributed $1.8 million in additional operating income; higher gross margin percentage of 2% (compared to 29% in 2002), which contributed $1.2 million; partially offset by increased operating expenses of approximately $0.8 million.

U.S. Operations.    Net revenues from U.S. Operations increased $2.6 million, or 5.3%, to $52.0 million in the twelve months ended December 31, 2003 from net revenues of $49.3 million in the same period in 2002. The increase in sales during 2003 is due primarily to a $5.5 million increase in gross revenue for the industrial market offset by a $2.9 million decline in revenues for the transportation market. We believe that U.S. Operations will benefit beginning in the fourth quarter of 2003 and 2004 from an anticipated increase in revenues attributed to the new federal regulations affecting certain “off-road” vehicles and industrial applications requiring more stringent exhaust standards.

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Gross profit in this segment increased by $0.1 million in 2003 due to $0.6 million in higher margin contribution from the $2.6 million in higher revenues offset by approximately $0.5 million due to reduced gross profit percentages resulting from unfavorable changes in product mix.

For 2003, operating income increased by $2.3 million, or 105.8%, as compared to the same period in 2002. The increase in operating income was due to an increase in gross profit of $0.1 million and a decrease in operating expenses of $2.2 million. Significant cost reductions occurred in sales and marketing and the research functions since the third quarter of 2002 following the Quantum spin-off.

International Operations.    For the fiscal year ended December 31, 2003, net revenue increased by approximately $0.2 million to $36.1 million, compared to $35.9 million reported for the same period in the prior calendar year. The growth in revenue was due primarily to a 30% increase in revenues from our European and Asian subsidiaries offset by a reduction of 32% in revenues from our Mexican subsidiary. By market segment, the increase in sales during 2003 as compared to 2002 was caused primarily by a $2.9 million increase in gross revenue from the industrial market offset by a $2.7 million decline in revenues from the transportation market. Foreign currency fluctuations had the effect of increasing revenue in U.S. dollars by approximately $2.2 million.

Gross profit for 2003 increased by approximately $2.6 million, or 32.8%, as compared to the same period in 2002. The increase in gross margin was attributed primarily to changes in product mix that contributed positively to gross margin.

During 2003, operating income from international operations increased by approximately $1.4 million, or 622%, as compared to 2002. The increase in operating profit was due to the increase in gross profit of $2.6 million offset by increases in operating expenses of $1.2 million. The increase in operating expenses was associated partly with amounts recognized as bad debt expense in our Mexican subsidiary for $0.5 million and higher expenses in our European subsidiaries related to the weakening of the dollar against the euro throughout 2003. During 2003, we recognized $0.5 million in higher bad debt expense in Mexico primarily due to the write-off of another receivable of $0.4 million which we believe to be substantially uncollectible.

Corporate Expenses.    Corporate expenses consists of general and administrative expenses at the corporate level to support our operating segments in areas such as executive management, finance, human resources, management information systems, legal services and investor relations. Corporate expenses for 2003 were approximately $2.4 million more than the corresponding period of 2002 and are attributable to higher insurance premiums, higher depreciation expense for installation of new information systems, higher legal, investment banking and accounting expenses associated with LaSalle credit facility and the Bison notes to refinance the Bank of America debt, higher consulting fees and outside services, and reduced recoveries of corporate overhead in 2003 to Quantum and the foreign affiliates.

Interest Expense.    Net interest expense for 2003 was approximately $4.0 million compared to $1.0 million for 2002 due primarily to the carrying value of our debt increasing from $14.3 million at December 31, 2002 to $23.7 million at December 31, 2003. In July 2003, we entered into lending agreements with Bison and LaSalle for $20.0 million and $12.0 million, respectively, for the primary purposes of repaying the Bank of America debt and financing the deferred portion of the BRC 50% acquisition of $7.0 million. The interest rates for Bison and LaSalle were an effective interest rate of 15.9% and a variable interest rate equal to LaSalle Bank’s prime plus 1%, respectively. As of December 31, 2003, the amount borrowed under the LaSalle line was approximately $5.2 million and the interest expense recognized in

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the statement of operations for the year ended December 31, 2003 was $0.2 million, which included $77,000 in amortization expense related to debt issuance costs of approximately $0.3 million. Under the Bison loan agreement interest expense was approximately $1.8 million of which $0.8 million was attributed to the amortization of $2.2 million in deferred debt issuance costs, $2.6 million associated with the fair value of 500,000 warrants issued in connection with the notes, and the $2.7 million loan discount associated with the difference between the $20.0 million loan amount and the actual net proceeds of $17.3 million. During 2003, we also incurred interest expense in connection with several bridge loans totaling approximately $4.1 million that were repaid completely by December 2003. Interest expense for the bridge loans included cash payments of approximately $0.5 million and amortization expense of $0.7 million associated with warrants issued to the holders of the bridge loans. Interest expense in the amount of approximately $0.7 million was recognized during 2003 for the Bank of American terms loans and lines of credit, all of which were repaid in July 2003.

Provision For Income Taxes.    During 2002, we established a $24.0 million valuation allowance for deferred tax assets on the basis that we believed that it is more likely than not that a portion of our deferred tax asset will not be realized and established a valuation allowance for those assets that are not likely to be utilized in the next three years, notwithstanding that some of these may have longer lives under applicable tax laws. During 2003, we increased by approximately $2.5 million the valuation allowance to $26.5 million on the basis that the increase in deferred tax asset and related net operating losses from the domestic pre-tax loss in 2003 of $6.1 million would more likely than not be unrecoverable over the next three years. The effect of the increase in the valuation allowance was that no income tax benefit was recognized for domestic tax purposes during 2003. Federal net operating loss carryforwards of $72.0 million will begin to expire in 2021. We have federal and state research and development credit carryforwards aggregating approximately $9.7 million. Federal research and development credits totaling $5.1 million will begin to expire in 2009. State research and development credits of $4.6 million have no expiration. As of December 31, 2003, the deferred tax asset, net of the $26.5 million reserve, was $9.8 million. The income tax expense of $0.7 million during 2003 was attributed to our international operations, which had a pre-tax income of approximately $1.6 million. We believe that, based on our history of prior operating earnings and our expectations for the future, our operating income will more likely than not be sufficient to recognize fully the net deferred tax assets within the next three years. Future adverse changes in market conditions, poor operating results or a decline in our projections about future profitability may affect our assessment of the adequacy of the reserve. In the event that we determine that it is more likely than not that we would be unable to realize an additional portion of our net deferred tax asset, an additional adjustment to the deferred tax asset valuation allowance would be charged to income in the period such determination was made.

Equity Share of Income (Loss) of Unconsolidated Affiliates.    We recognized a $1.1 million expense before tax corresponding to our share in the losses of unconsolidated affiliates primarily due to our 50% ownership in BRC of Italy for the period of July 22, 2003 to December 31, 2003. Our share of the BRC loss was approximately $0.5 million. The BRC loss was attributed to reduced revenues of €2.6 million ($3.0 million) and reduced operating income of €2.1 million ($2.4 million) for the twelve months ended December 31, 2003 compared to the corresponding period of 2002. Foreign exchange transaction loss totaled €0.3 million ($0.3 million) during the fourth quarter of 2003 due to the continued strengthening of the euro relative to other currencies in which BRC settled transactions. In accordance with the equity method of accounting for business combinations, we recognized amortization expense of $0.3 million for the difference between the book value and the fair value of our share of the net assets acquired. This amortization expense will continue to be recognized until 2008 at an annual rate of approximately $0.7 million.

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Discontinued Operation.    We completed the spin-off of Quantum on July 23, 2002. We did not recognize any activity during 2003 related to the discontinued operation. The loss from discontinued operation during the twelve months ended December 31, 2002 was $10.3 million.

Eight-Month Periods Ended December 31, 2002 and 2001

Net revenues and operating income for our reporting segments for the eight-month period ended December 31, 2002 (“2002”) or “transition period” and the corresponding period of 2001 are as follows:

The following table sets forth our product revenues by application across all reporting segments for the transition period and the corresponding period of 2001:

During the transition period and the corresponding period of 2001, our revenue was generated in the following geographic regions by percent proportions:

Net revenue increased $0.7 million, or 1.6%, to $46.4 million in the transition period from $45.7 million in 2001. The revenue increase was primarily due to a $5.7 million increase in net sales of our products to the transportation market partially offset by a $5.0 million decline in net sales of our products to the industrial market. The decline in the industrial market was due primarily to the continued economic slowdown affecting the industrial markets in the United States, particularly following the events of September 11, 2001. We believe our sales into the transportation market have continued to grow, particularly in Mexico, due to a favorable price differential between conventional and alternative fuels.

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Our operating loss increased by approximately $0.9 million, or 352.5% from a $0.3 million loss in 2001 to a $1.2 million operating loss in 2002. The increase in operating loss in 2002 is due primarily to reduced gross profit on product shipments from both the U.S. and International operations partially offset by reduced expenses for research and development and selling, general and administrative expenses.

U.S. Operations.    Net revenues from U.S. Operations decreased $2.7 million, or 7.6%, to $33.2 million in the eight-month transition period ended December 31, 2002 from net revenues of $35.9 million in the same period in 2001. The decrease in sales during the current period is due primarily to a $9.0 million decline in gross revenue for the industrial market offset by a $6.3 million increase in revenues for the transportation market.

Gross profit in this segment decreased $2.5 million, or 24.7%, to $7.6 million in the transition period of 2002 from $10.0 million in 2001. Approximately $0.8 million of the decline in gross profit was due to a decline in revenue and approximately $1.7 million of the decline was due to comparably lower margins in the transportation market than the industrial market.

For the transition period ended 2002, operating income decreased by $1.2 million, or 41%, as compared to the same period in 2001. The reduction in operating profit was due to a reduction in gross profit of $2.5 million offset by a reduction in operating expenses of $1.3 million. Approximately $1.0 million of the reduction in operating expenses was due to lower research and development expenses.

International Operations.    For the eight months ended December 31, 2002, net revenue increased by approximately $3.1 million to $25.3 million, compared to $22.2 million reported for the same period in the prior calendar year. The growth in revenue was due primarily to a 97% increase in revenues from our Mexican subsidiary offset by a reduction of 24% in revenues from our European subsidiary. By market segment, the increase in sales during 2002 was caused primarily by a $5.0 million increase in gross revenue from the transportation market offset by a $1.9 million decline in revenues from the industrial market.

Gross profit for the transition period of 2002 decreased approximately $0.4 million, or 5.9%, as compared to the same period in 2001. Approximately $1.2 million of the decline in gross profit was due to changes in product mix offset by approximately $0.8 million attributable to the increase in revenue.

During the transition period of 2002, operating income decreased by approximately $0.4 million, or 37.3%, as compared to the same periods in the prior calendar year. The reduction in operating profit was due to a reduction in gross profit of $0.4 million.

Corporate Expenses.    Corporate expenses consists of general and administrative expenses at the corporate level to support our operating segments in areas such as executive management, finance, human resources, management information systems, legal services and investor relations. As of May 1, 2002, the amortization of goodwill and other intangible assets is no longer recorded as a corporate expense due to the implementation of Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets”. During 2001, approximately $0.5 million of amortization of goodwill and other intangibles was charged to corporate expense. Corporate expenses for 2002 were approximately $1.0 million less than the corresponding period of calendar year 2001 and are attributable to legal and consulting expenses totaling approximately $1.2 million that were incurred during 2001 in connection with Quantum spin-off costs and an S-3 registration statement filing that was withdrawn on September 20, 2001 offset by higher one-time expenses for severance,

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accelerated accruals for audit fees and investor relations expenses due to the change in the fiscal year and not recognized in the eight months ended December 31, 2001, and other non-recurring expenses related to employee training expenses, insurance and administrative costs.

Interest Expense.    Net interest expense for 2002 was $0.7 million compared to $0.8 million for the corresponding period of 2001. As of December 31, 2002 and April 30, 2002, total amounts due for bank lines of credit and term loans were $14.2 million and $19.4 million, respectively.

Provision For Income Taxes.    During 2002 we established a $24.0 million valuation allowance for deferred tax assets, which affected our estimated effective annual tax rate of 1,111.7% for the transition period ended December 31, 2002. We believe it is more likely than not that a portion of our deferred tax asset will not be realized and established a reserve for those assets that are not likely to be utilized in the next three years, notwithstanding that some of these may have longer lives under applicable tax laws. Federal net operating loss carryforwards of $66.5 million, as of December 31, 2002, begin to expire in 2021. We have federal and state research and development credit carryforwards aggregating approximately $9.3 million. Federal research and development credits totaling $4.9 million as of December 31, 2002 begin to expire in 2009. State research and development credits of $4.4 million have no expiration. As of December 31, 2002, the deferred tax asset, net of the $24.0 million reserve, was $9.4 million. We believe that, based on our history of prior operating earnings, our completed spin-off of Quantum and our expectations for the future, our operating income will more likely than not be sufficient to recognize fully the net deferred tax assets within the next three years.

Discontinued Operation.    We completed the spin-off of Quantum on July 23, 2002. The loss from discontinued operation during the transition period ended December 31, 2002 was $5.2 million or $3.1 million, net of a $2.1 million tax benefit. For the same period ended December 31, 2001, the loss from discontinued operation was approximately $28.7 million or $17.2 million, net of a $11.5 million tax benefit.

Years Ended April 30, 2002 and 2001

Net revenues and operating income for our reporting segments for the twelve-month period ended April 30, 2001 and 2002 are as follows (in thousands):

Net revenue decreased $12.8 million, or 15.9%, to $67.7 million in the twelve-month period ended April 30, 2002 from $80.5 million in the twelve-month period ended April 30, 2001. This decrease was primarily due to the decline in sales of conversion kits and components to the material handling market, which were attributable to unfavorable economic conditions.

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The following table sets forth our product revenues by application across all reporting segments:

During fiscal years 2001 and 2002, our revenue was generated in the following geographic regions in the following percent proportions:

U.S. Operations.    Net revenues in this segment decreased $14.9 million, or 22.2%, to $52.1 million in the twelve-month period ended April 30, 2002 from $66.9 million in the twelve-month period ended April 30, 2001. Revenues were lower primarily due to the decline in sales of our products to the material handling market. We believe this decline in sales was caused by the current economic slowdown. The increase in our large stationary engine market was largely offset by the decline in our small industrial engine market.

Gross profit in this segment decreased $8.0 million, or 35.9%, to $14.3 million in the twelve-month period ended April 30, 2002 from $22.3 million in the twelve-month period ended April 30, 2001. The decline in revenues negatively impacted gross profit by $5.0 million. The remaining $3.0 million decline in gross profit was due to product mix consisting of a higher percentage of lower margin complete engine systems sales and lower margin sales to our foreign subsidiaries.

Operating income in this segment decreased $7.7 million, or 69.4%, to $3.4 million in the twelve-month period ended April 30, 2002 from $11.1 million in the twelve-month period ended April 30, 2001. This decrease was due to lower gross profits offset by a net $0.3 million reduction in operating expenses.

International Operations.    Net revenues in this segment increased by $1.7 million, or 5.5%, to $32.8 million in the twelve-month period ended April 30, 2002 from $31.1 million in the twelve-month period ended April 30, 2001. In the twelve-month period ended April 30, 2002, net revenues increased $4.1 million at our Mexico subsidiary, $0.7 million in Asia, and $0.4 million at our European subsidiary. These increases were partially offset by decreases of $2.5 million at our Australian subsidiary and $1.0 million at our Japan subsidiary. In the twelve-month period ended April 30, 2002, revenues for our International Operations segment would have increased an additional $0.4 million if not for the strengthening of the U.S. Dollar. A strong U.S. Dollar has a negative effect on the conversion of foreign currency denominated sales.

Gross profit in this segment decreased $0.6 million, or 6.2%, to $8.3 million in the twelve-month period ended April 30, 2002 from $8.9 million in the twelve-month period ended April 30,

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2001. Gross profit declined $1.1 million due to lower margins due to differences in product mix, which was partially offset by a $0.5 million increase in gross profit due to higher revenues.

Operating income for this segment decreased $0.8 million, or 57.1%, to $0.6 million in the twelve-month period ended April 30, 2002 from $1.4 million in the twelve-month period ended April 30, 2001 as all foreign subsidiaries except Mexico experienced lower operating income. This was primarily a result of lower gross margins due to the higher cost of U.S. goods purchased with their weakening local currencies. Additionally, we added marketing and technical personnel to support new and expanding markets in Asia, which resulted in increased operating expenses in the twelve-month period ended April 30, 2002 as compared to the twelve-month period ended April 30, 2001.

Corporate Expenses.    Corporate expenses consists of general and administrative expenses at the corporate level to support our operating segments in areas such as executive management, finance, human resources, management information systems, legal services and investor relations. Additionally, amortization of goodwill and other intangible assets was recorded as a corporate expense. Corporate expenses increased $0.9 million, or 15.3%, to $6.8 million in the twelve-month period ended April 30, 2002 from $5.9 million in the twelve-month period ended April 30, 2001. During the twelve month period ended April 30, 2002, the increase in corporate expenses were attributable to $1.2 million in legal fees and consulting services primarily related to Quantum spin-off costs and our From S-3 filing in connection with a follow-on equity offering, which was withdrawn on September 20, 2001.

Interest Expense (Net).    Net interest expense increased by $0.8 million, to $0.9 million, in the twelve-month period ended April 30, 2002 from $0.1 million in the twelve-month period ended April 30, 2001. The increase was primarily due to a higher outstanding balance from our line of credit with Bank of America, as compared to the interest income generated from the proceeds of the July 2000 equity offering in the first quarter of the prior fiscal year.

Provision for Income Taxes.    The estimated effective annual tax benefit rate of 40% for the twelve-month period ended April 30, 2002 was less than the tax benefit rate of 41% in the twelve-month period ended April 30, 2001. The effective tax benefit rate represents the federal statutory income tax rate, state income taxes and foreign income taxes increased by research and development credits. For the twelve-month period ended April 30, 2002, including the effects of the discontinued operation, we have incurred a $45.5 million loss before income taxes and minority interest. Also, we had federal and state research and development credit carryforwards aggregating approximately $9.2 million. Federal research and development credits totaling $5.0 million begin to expire in 2009. State research and development credits of $4.2 million have no expiration date. As of April 30, 2002, the net deferred tax asset was $31.9 million.

Discontinued Operation.    Prior to the completed spin-off of Quantum on July 23, 2002, the loss from discontinued operation during the fiscal year ended April 31, 2002 was $41.7 million, or $25.0 million net of a $16.7 million tax benefit. For the same period ended April 30, 2001, the loss from discontinued operation was approximately $28.6 million, or $16.8 million net of a $11.8 million tax benefit.

Liquidity and Capital Resources

Our ongoing operations are funded by cash generated from operations, debt financings and sales of our equity securities. In addition, these sources of cash provide for capital expenditures and research and development, as well as to invest in and operate our existing operations and prospective new lines of business.

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As of December 31, 2003, our cash and cash equivalents totaled $9.5 million, compared to cash and cash equivalents of $2.0 million at December 31, 2002. On July 22, 2003 we refinanced our debt to retire our $11.3 million debt to Bank of America, to finance the $7.0 million deferred payment to complete the 50% acquisition of B.R.C. Societá Responsabilitá Limitata (“BRC”), and to provide working capital. The debt restructuring consisted of two new loans. First, we entered into a senior subordinated secured promissory note and a related securities purchase agreement with Bison Capital Structured Equity Partners, LLC (“Bison”) for an aggregate borrowing of $20.0 million, with net proceeds of $17.3 million, and we issued to an affiliate of Bison warrants to purchase up to 500,000 shares of our common stock. The Bison loan has a nominal interest rate of 11.25%, subject to certain adjustments, and matures on July 22, 2007. Interest on the Bison loan is payable monthly in arrears. During periods in which an event of default exists under the Bison loan agreement, the interest rate increases at a rate of 0.50% per month up to a maximum of 6 months or 3%, and in certain circumstances, interest payments during an event of default can be capitalized, or added to the principal amount outstanding. At the same time, we entered into a revolving loan and security agreement and a related secured promissory note with LaSalle Business Credit, LLC (“LaSalle”). The LaSalle loan has a maximum borrowing limit of $12.0 million, with availability based upon a percentage of eligible inventory and eligible accounts receivable, and has an adjustable interest rate of 1% above LaSalle’s prime rate as announced from time to time and matures on July 22, 2006. Interest on the LaSalle loan is payable monthly in arrears. During periods in which an event of default exists under the LaSalle loan agreement, the interest rate increases to 2% above LaSalle’s prime rate. The Bison and LaSalle loans contain cross-default provisions such that an event of default existing under one loan generally constitutes an event of default under the other. As of December 31, 2003, our borrowing under the line of credit was approximately $5.2 million with approximately $1.6 million unused and available under the line. On March 12, 2004, we received an amendment to the LaSalle loan agreement to expand the eligible accounts receivable, resulting in an additional $2.6 million of available additional borrowing under this loan. On December 19, 2003 we sold 1,500,000 shares of common stock to certain institutional investors at $6.40 per share, yielding net proceeds of approximately $9.0 million after discounts and commissions. The offering was conducted as a private placement under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. The proceeds of this offering were used to retire short-term debt and for working capital.

Our subsidiary in Japan has a ¥64 million (US$0.6 million at December 31, 2003) short-term loan facility with the Hong Kong and Shanghai Banking Corporation Ltd., Osaka Branch. At December 31, 2003, a balance of $0.6 million was outstanding. Our subsidiary in the Netherlands has a secured €2.3 million ($2.9 million) revocable credit facility with Fortis Bank. At December 31, 2003 there were no borrowings on this facility.

On October 3, 2002, we entered into an option agreement with the equity holders of BRC. Under the option agreement, we obtained the right to purchase from those equity holders 50% of the outstanding equity interest of BRC for approximately $23.8 million, which included the issuance of approximately 2.3 million shares of Company common stock (which the parties acknowledged and agreed were valued at $10.0 million). We announced on May 8, 2003 that we had exercised the option and that the purchase of 50% of BRC was completed pending a $7.0 million payment that represented a deferred portion of the purchase price due on September 30, 2003. On July 22, 2003, immediately after the refinancing of our debt as discussed above, we paid the deferred payment of $7.0 million to the equity holders of BRC completing the acquisition of the 50% equity interest in BRC. As of December 31, 2003, we had incurred acquisition costs of approximately $24.8 million, which are shown on the consolidated balance sheet as part of investment in affiliates. The corresponding costs incurred as of December 31, 2002 totaled $12.6 million. We use the equity method of accounting to recognize the investment in and the results of BRC in our consolidated financial results.

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As a result of the refinancing of the Bank of America debt and the acquisition of our 50% equity interest in BRC, we have assumed additional long-term debt, which has increased our financial leverage. Interest costs and related charges since July 2003 have been higher than in prior years and will continue to be a significant use of funds. The LaSalle and Bison notes have loan terms of three and four years, respectively. Under the Bison agreement, we are obligated to pay off the note in July 2007 in the amount of $20.0 million. Under the LaSalle agreement, which has a maturity date of July 2006, we are obligated to repay the balance owed at that time under the revolving line of credit, not to exceed $12.0 million. At December 31, 2003 the Company was in default under terms of the LaSalle agreement in failure to maintain minimum consolidated EBITDA of $4,000,000, to maintain a consolidated fixed charge coverage ratio of not less than 0.25:1.00, and to maintain a consolidated leverage ratio not to exceed 8.45:1.00. LaSalle has waived these financial covenant non-compliance conditions at December 31, 2003. The Company was also in default under terms of the Bison agreement in failure to maintain minimum consolidated EBITDA of $3,500,000 and minimum consolidated leverage ratio not to exceed 8.50:1.00. Bison has waived these covenant non-compliance conditions at December 31, 2003. The events of default under these loans will cause our applicable interest rates to increase as long as the circumstances continue unless we are successful in negotiating amendments to these covenants. The LaSalle loan increases the interest rate to prime plus 2%, which will increase our interest expense and our cash outflows by approximately $25,000 per quarter. Under the Bison loan, the applicable interest rate increases by 0.5% per month up to a maximum of 3% or six months. We expect that the increase in the Bison interest rate will increase our interest expense by approximately $150,000 during the first quarter of 2004, although in certain circumstances we are permitted to capitalize those interest payments by adding them to the principal balance outstanding under the Bison loan. We also are seeking to revise our financial covenants in both loans to reflect more conservative estimates of future financial performance. However, we cannot be assured that the lenders will agree to amend our financial covenants or grant further or continuing waivers in the future. If we cannot obtain the necessary waivers or amendments, or return to compliance with these and all other loan covenants, our lenders may accelerate our debt, foreclose on our assets, or take other legal actions against us which, alone or in the aggregate, may have a material adverse effect on our business. During 2003, we received proceeds of approximately $4.1 million in bridge loans and $8.0 million in loan commitments. As of December 31, 2003, we had repaid all of the bridge loans and the loan commitment expired without us exercising our option to borrow under its terms.

Our ratio of current assets to current liabilities was 2.0:1.0 at December 31, 2003 as compared to 1.5:1.0 at December 31, 2002. During this same period our total working capital increased by $10.9 million from $11.2 million at December 31, 2002 to $22.1 million at December 31, 2003. Current assets increased by $8.9 million due primarily to the stock offering in December 2003 yielding net proceeds of $9.0 million and current liabilities decreased by $2.0 million due primarily to payment of the Bank of America debt that was classified as a current liability at December 31, 2002.

Net cash provided by operating activities for fiscal 2003 was $0.8 million, compared to cash provided by operations for the eight months ended December 31, 2002 of $1.7 million. The decline in cash flow was attributed to the launch of the Spectrum product line during 2003, which required working capital investments in accounts receivable and inventory in the amounts of $2.4 million and $0.6 million, respectively. Increases in accounts payable and accrued expenses during 2003 resulted in a $6.2 million source of cash, which provided the necessary working capital to fund the Spectrum launch and to fund the loss from continuing operations of approximately $2.1 million after the effect of non-cash items totaling $4.8 million. In the eight months ended December 31, 2002, cash flow from operating activities benefited

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from reductions in inventory and accounts receivables totaling $2.8 million attributed primarily to the 19% decline in revenues during the three months ended December 31, 2002.

Net cash used in investing activities for the fiscal year ended December 31, 2003 was $15.4 million, an increase of $11.2 million from $4.2 million for the eight months ended December 31, 2002. This increase is due primarily to costs related to the 50% acquisition of BRC.

Net cash provided by financing activities for the fiscal year ended December 31, 2003 was $20.7 million or an increase of $9.2 million from $11.5 million for the eight months ended December 31, 2002. During December 2003, we raised approximately $9.0 million in net proceeds from the issuance of 1.5 million shares of common stock to institutional investors.

For the fiscal year ended December 31, 2003, cash provided by continuing operations totaled $6.1 million or a decrease of $2.9 million from the eight months ended December 31, 2002.

At December 31, 2003 the Company had received waivers from its two lenders, LaSalle and Bison, for covenant non-compliance conditions at December 31, 2003. In addition: a) Bison granted the Company a modified EBITDA calculation for 2004 and a further waiver in maintaining its Term Loan status as a long term liability throughout 2004; b) LaSalle granted the Company a favorable amendment on March 12, 2004 which resulted in additional borrowing line capacity of $2.6 million; and c) we believe that LaSalle will work with the Company to amend its credit arrangement for the remainder of its term. Accordingly, we believe that the Company has sufficient resources to meet its current financial obligations and finance its operations over the next twelve months.

Should we be unable to obtain waivers or amendments, the Company believes that its current cash balances, available cash drawn from its subsidiaries, other financing alternatives, our history of being able to raise equity, and our ability to obtain bridge loans will result in adequate liquidity to continue operations through December 31, 2004.

Derivative Financial Instruments

We have used derivative financial instruments for the purpose of reducing our exposure to adverse fluctuations in interest and foreign exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. We are not a party to leveraged derivatives and do not hold or issue financial instruments for speculative purposes. As of December 31, 2003, we did not utilize any derivative financial instruments.

Foreign Currency Management.    The results and financial condition of our international operations are affected by changes in exchange rates between certain foreign currencies and the U.S. Dollar. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. The functional currency for all of our international subsidiaries is the local currency of the subsidiary. An increase in the value of the U.S. Dollar increases the costs incurred by our subsidiaries because most of our international subsidiaries’ inventory purchases are U.S. Dollar denominated. We monitor this risk and attempt to minimize the exposure through forward currency contracts and the management of cash disbursements in local currencies. At December 31, 2003, we have a single foreign exchange forward contract of approximately $0.5 million in which gains and losses are recognized in the statement of operations as the fair value of the contracts fluctuates. We seek to manage our foreign currency economic risk by minimizing our U.S. Dollar investment in foreign operations using foreign currency term-loans to finance the operations of our foreign subsidiaries.

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Debt Obligations.    The following table summarizes our debt obligations at December 31, 2003. The interest rates represent weighted average rates, with the period end rate used for the variable rate debt obligations. The fair value of the debt obligations approximated the recorded value as of December 31, 2003 (in thousands of dollars).

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, (“FIN 46”). FIN 46 introduces a new consolidation model, the variable interests model, which determines control (and consolidation) based on potential variability in gains and losses of the entity being evaluated for consolidation. The requirements for FIN 46, including its disclosures, apply immediately.

FIN 46 provides guidance for determining whether an entity qualifies as a variable interest entity (“VIE”) by considering, among other considerations, whether the entity lacks sufficient equity or its equity holders lack adequate decision-making ability. If the entity does not qualify as a VIE, then the consolidation criteria is based on previously established accounting standards. Qualifying VIEs are covered by FIN 46 and are individually evaluated for consolidation based on their variable interests. FIN 46 requires consideration and estimates of a significant number of possible future outcomes of the VIE as well as the probability of each outcome occurring. Based on the allocation of possible outcomes, a calculation is performed to determine which party, if any, has a majority of potential negative outcomes (expected losses) or a majority of the potential positive outcomes (expected residual returns), with an emphasis on negative outcomes. That party, if any, is the primary beneficiary and is required to consolidate the VIE. We have evaluated the potential impact of FIN 46 as of December 31, 2003 and have concluded that there was no impact on our consolidated financial statements.

We adopted the new rules on accounting for goodwill and other intangible assets beginning with the transition period ended December 31, 2002. Application of the nonamortization

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provisions of the Statement resulted in an increase in net income on an annual basis of approximately $0.4 million ($.03 per share). We performed the first of the required impairment tests of goodwill and indefinite lived intangible assets effective May 1, 2002 and determined that there was no impact on the Company’s financial position during the period ended July 31, 2002. We also conducted the goodwill impairment tests as of December 31, 2002 and 2003 and similarly determined that there were no impacts on our financial position.

Contractual Obligations

The following table contains supplemental information regarding total contractual obligations as of December 31, 2003. The capital lease obligations are undiscounted and represent total minimum lease payments. The Bison term loan is shown at its face value of $20.0 million, which differs from its carrying value of $17.5 million by the unamortized portion of the loan discount of $2.7 million.