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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended January 31, 2005,

or

For the transition period from              to             

Commission File No. 0-49629

Quantum Fuel Systems Technologies Worldwide, Inc.

(Exact name of registrant as specified in its charter)

17872 Cartwright Road, Irvine, CA 92614

(Address of principal executive offices) (Zip Code)

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of March 4, 2005:

51,732,980 shares of Common Stock, $.001 par value per share, and 999,969 shares of Series B Common Stock, $.001 par value per share.

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INDEX

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED BALANCE SHEETS

See accompanying notes to condensed financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

See accompanying notes to condensed financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to condensed financial statements.

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

January 31, 2005

1) Basis of Presentation and Background

Quantum Fuel Systems Technologies Worldwide, Inc. (“Quantum” or the “Company”) designs, manufactures, and supplies packaged fuel systems to Original Equipment Manufacturers (“OEMs”) for use in alternative fuel vehicles and fuel cell applications. For automotive OEMs, the Company provides hydrogen systems for both internal combustion engine and fuel cell vehicles, and natural gas fuel systems for internal combustion engine vehicles. In the area of hydrogen refueling infrastructure, the Company offers several hydrogen refueling systems focused on early infrastructure development.

The accompanying condensed financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and operating results for the interim periods. The condensed balance sheet at April 30, 2004 has been derived from the audited financial statements of the Company at that date. The condensed financial statements should be read in conjunction with the financial statements and notes thereto, together with management’s discussion and analysis of financial condition and the results of operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2004. The results of operations for the three and nine months ended January 31, 2005 are not necessarily indicative of the results that may be expected for the entire year ending April 30, 2005.

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

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

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

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2) Marketable Securities

Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that all applicable investments be classified as trading securities, available-for-sale securities or held-to-maturity securities. The Company has determined that its investment portfolio is held-to-maturity and is therefore carrying marketable securities at amortized cost.

At January 31, 2005, the Company’s marketable securities held-to-maturity consist of the following:

At January 31, 2005, marketable securities held-to-maturity classified as long-term have maturity dates ranging from February 2006 to October 2007.

3) Accounts Receivable

Accounts receivable consist of the following:

4) Inventories

Inventories consist of the following:

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5) Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:

6) Intangible Asset

The Company has an intangible asset representing the fair value of common stock issued to General Motors Corporation (“General Motors”) in connection with a strategic alliance that became effective upon the distribution of the Company by IMPCO. The asset is being amortized over the ten-year term of the strategic alliance with General Motors ending July 22, 2012.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” the Company reviews the intangible asset on an annual basis for impairment or more frequent basis if events or circumstances change that might indicate that impairment exists. The Company believes that no event or circumstance currently exists that would indicate impairment of this asset. Amortization expense was approximately $415,000 and $1,245,000 for the three and nine-months ended January 31, 2005, respectively.

7) Warranties

The Company offers a warranty for all of its alternative fuel products. The specific terms and conditions of those warranties vary depending on the platform and model year. For most alternative fuel products, the Company provides a limited warranty, including parts and labor, extending three years or 36,000 miles, whichever is achieved first.

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

The Company estimates the costs that may be incurred under its limited warranty or discretionary warranty programs and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s product warranty liability during the first nine months of fiscal 2005 are as follows:

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8) Stock Option Plans

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

On March 3, 2005 the Company granted an additional 1,530,000 options under the 2002 Stock Incentive Plan. The exercise price of the options granted equaled the market price of the underlying stock on the date of the grant.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, supersedes APB No. 25 and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R will require the expensing of unvested stock options in the first interim or annual reporting period that begins after June 15, 2005. As such, the Company plans to adopt the provisions of SFAS No. 123R for the second quarter of fiscal 2006 beginning August 1, 2005. The Company is currently analyzing which method will be the most appropriate to estimate fair value of stock-based compensation upon adoption of SFAS 123R. The Company anticipates that fair value estimates will be consistent with pro forma disclosures reported above, although actual compensation expense will be higher as a result of the additional options granted on March 3, 2005.

9) Warrants

In connection with the spin-off from IMPCO, the Company issued warrants to purchase an aggregate of 300,000 shares of the Company’s common stock to holders of outstanding IMPCO warrants as of the distribution date, July 23, 2002. The Company issued these warrants at an exercise price of $5.83 with a term expiring in January 2006. During the second quarter of fiscal 2005, warrants to purchase an aggregate of 3,556 shares of common stock were exercised on a cashless basis, which resulted in the issuance of 691 shares of common stock. Warrants to purchase an aggregate of 245,444 shares of common stock are outstanding at January 31, 2005.

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10) Earnings Per Share

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

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

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

As further discussed in Note 13, on March 3, 2005, the Company issued approximately 21.0 million shares in connection with completing the acquisition of Starcraft Corporation.

11) Income Taxes

Income taxes for the three and nine month periods ended January 31, 2005 were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. At January 31, 2005, the Company had an estimated net operating loss of approximately $30 million available to offset future federal taxable income. The Company has established a full valuation allowance for deferred income tax assets due to the lack of earnings history.

12) Business Segment Information

The Company classifies its business operations into four reporting segments: the Fuel Cell Systems segment, the Alternative Fuels segment, Advanced Research & Product Development, and Corporate.

The Fuel Cell Systems segment generates revenues through the sale of fuel cell-related fuel storage, fuel delivery, and electronic control systems to OEMs, and the installation of its products into OEM vehicles. The Fuel Cell Systems segment also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and operate with their fuel cell applications.

The Alternative Fuels segment generates revenues through the sale of compressed natural gas (CNG), propane (LPG), and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. The Alternative Fuels segment also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery, and electronic control systems integrate and operate with certain of their alternative fuel vehicles. The chief operating decision maker allocates resources and tracks performance by the four reporting segments.

All research and development is expensed as incurred. Research and development expense includes both customer-funded research and development and Company-sponsored research and development. For segment reporting purposes, research and development expense is allocated to the Fuel Cell Systems and the Alternative Fuels segments when the expense can be identified with those segments. Advanced Research & Product Development is a sub-category of research and development expense and represents Company-

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sponsored research and development that is not allocated to the Fuel Cell Systems or the Alternative Fuels reporting segments. Customer-funded research and development consists primarily of expenses associated with contract revenue. These expenses include applications development costs in the Company funded under customer contracts.

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

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

All of the Company’s product revenues are generated from fuel cell-related hydrogen storage systems and alternative fuel systems for automotive OEM applications. The Company’s revenue from unaffiliated customers is primarily derived from within the United States.

The Company leases facilities in Irvine, California; Lake Forest, California; and Troy, Michigan. The Company’s long-lived assets are principally based in its Irvine and Lake Forest facilities.

Net revenues and operating income (loss) for the Company’s business segments are as follows:

Identifiable assets for the Company’s business segments are as follows:

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13) Subsequent Events

Merger with Starcraft

On March 3, 2005, at a reconvened Special Meeting of Quantum stockholders held in Irvine, California, the Company’s stockholders approved a proposal to issue shares of Quantum common stock in connection with and pursuant to the previously announced Agreement and Plan of Merger dated as of November 23, 2004 with Starcraft Corporation (“Starcraft”).

On March 3, 2005, the Company completed its planned merger with Starcraft. Pursuant to the terms set forth in the merger agreement, the Company will operate Starcraft as a wholly-owned subsidiary. The Company will record the transaction as a purchase/acquisition of Starcraft.

In connection with the merger, each share of Starcraft common stock that was outstanding at the effective time of the merger was converted into the right to receive 2.341 shares of Quantum common stock. Total Quantum shares issued in connection with the merger amounted to approximately 21.0 million shares and represent approximately 40% of the total Quantum shares outstanding following the completion of the merger.

Under the purchase method of accounting, the total estimated consideration for the transaction is $145.9 million and consists of the exchange of Starcraft shares for the Company’s common stock valued at $134.6 million, cash payments for Starcraft stock options and directors’ shares of $7.1 million, direct transaction fees and expenses of $3.2 million, and a separation agreement with Starcraft’s chairman of the board valued at $1.0 million.

The long-term indebtedness of Starcraft remained outstanding following the merger, including Starcraft’s 8.5% convertible subordinated promissory notes due July 1, 2009 in the aggregate principal amount of $15.0 million and approximately $14.7 million in other indebtedness (as of January 2, 2005).

Included in the Company’s other assets at January 31, 2005, were capitalized pre-merger transaction costs totaling $967,270.

The selected pro forma financial data set forth below gives effect to the Company’s merger with Starcraft as if the acquisition had been completed on May 1, 2004. Due to different fiscal periods, the pro forma financial data combines the results of the Company for the three and nine month periods ended January 31, 2005 and the historical results of Starcraft for the three and nine months ended January 2, 2005, respectively. The pro forma financial data includes adjustments to eliminate the operating revenues and expenses associated with Starcraft’s kit and parts business that was transferred to the outgoing chairman of Starcraft, incremental changes in amortization expense resulting from fair value adjustments to amortizable intangible assets, and an increase in the number of shares used in per share calculations as a result of shares issued in connection with the transaction.

Quantum Charter

At the reconvened Special Meeting of stockholders, the stockholders also approved a proposal pursuant to which the Company’s Amended and Restated Certificate of Incorporation (the “Quantum Charter”) will be amended and restated to increase from 60.0 million to 100.0 million the number of authorized shares of common stock. The Quantum Charter will also be amended and restated to reduce from 6.0 million to 2.0 million the authorized shares of Series B common stock and to eliminate the currently authorized shares of Series A common stock.

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

Forward-Looking Statements

This Report, including the Management’s Discussion and Analysis that follows, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not historical facts but rather are based on current expectations, estimates, and projections about our industry, our beliefs, and assumptions. We use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

These risks and uncertainties include, but are not limited to, the following:

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This list of factors above is not intended to be exhaustive. Reference should also be made to the factors set forth from time to time in our SEC reports, including but not limited to those set forth in the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended April 30, 2004 and in the Registration Statement on Form S-4 (No. 333-121436) that we filed with the SEC on January 19, 2005 in connection with our acquisition of Starcraft. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update or revise any of these forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.

Merger with Starcraft Corporation

On March 3, 2005, at a reconvened Special Meeting of Quantum stockholders held in Irvine, California, our stockholders approved a proposal to issue shares of Quantum common stock in connection with and pursuant to the previously announced Agreement and Plan of Merger with Starcraft.

On March 3, 2005, we completed the planned merger with Starcraft. Pursuant to the terms set forth in the merger agreement, we will operate Starcraft as our wholly-owned subsidiary.

In connection with the merger, each share of Starcraft common stock that was outstanding at the effective time of the merger was converted into the right to receive 2.341 shares of Quantum common stock. Total Quantum shares issued in connection with the merger amounted to approximately 21.0 million shares and represent approximately 40% of the total Quantum shares outstanding following the completion of the merger.

Under the purchase method of accounting, the total estimated consideration for the transaction is $145.9 million and consists of the exchange of Starcraft shares for our common stock valued at $134.6 million, cash payments for Starcraft stock options and directors’ shares of $7.1 million, direct transaction fees and expenses of $3.2 million, and a separation agreement with Starcraft’s chairman of the board valued at $1.0 million.

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The long-term indebtedness of Starcraft and its subsidiaries remained outstanding following the merger, including Starcraft’s 8.5% convertible subordinated promissory notes due July 1, 2009 in the aggregate principal amount of $15.0 million and approximately $14.7 million in other long-term indebtedness (as of January 2, 2005).

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Overview

Prior to our merger with Starcraft, our primary business consisted of design, manufacture, and supply of packaged fuel systems to Original Equipment Manufacturers (“OEMs”) for use in alternative fuel vehicles and fuel cell applications. With the addition of Starcraft, our combined business will include Starcraft’s automotive supply operations, primarily consisting of second-stage manufacturing of pick-up trucks and sport utility vehicles. Starcraft also has engineering and design capabilities for concept vehicles and distributes automotive accessories through a dealer network. The discussion that follows describes our operations exclusive of Starcraft as the merger was completed subsequent to the period covered by this report.

For automotive OEMs, we provide hydrogen systems for both internal combustion engine and fuel cell vehicles, and natural gas fuel systems for internal combustion engine vehicles. In the area of hydrogen refueling infrastructure, we offer several hydrogen refueling systems focused on early infrastructure development.

Our advanced fuel systems for fuel cell applications are used in transportation and industrial vehicles, for stationary and portable power generation, and in hydrogen refueling products for the infrastructure to support fuel cell vehicles. Our packaged fuel systems comprise the storage, monitoring, control, and injection of gaseous fuels to improve efficiency, enhance power output, and reduce pollutant emissions from internal combustion engines and fuel cell systems.

We supply our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 18,000 fuel systems for alternative fuel vehicles, primarily to General Motors Corporation and its affiliates (“General Motors”), which in turn has sold substantially all of these vehicles to its customers. We also provide our gaseous fuel systems and hydrogen refueling products for fuel cell applications to major OEMs through funded research and development contracts and on a prototype basis. These fuel cell and hydrogen refueling products are not currently manufactured in high volumes and will require additional product development over the next five years for commercialization; however, we believe that a commercial market will begin to develop for these products over the next five years. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen refueling products using our systems on a commercial basis.

Our revenues and cash flows are dependent on the advancement of OEM fuel cell technologies, our OEM customers’ internal plans, the technology required of our storage systems to meet evolving OEM specifications and spending levels, and timing for pre-production development programs and commercial production. Our business depends on the industry-wide growth of the hydrogen and alternative fuel markets, which in turn is dependent on regulations, laws, hydrogen availability and refueling infrastructure, technology advancements, government advocacy, and consumer adoption of fuel cell and alternative fuel technologies on a commercial scale. In evaluating financial condition and operating results, we assess these industry-wide factors and the potential impact on our business.

Our industry is also dependent on a limited number of third party suppliers of materials and components for our products, particularly high-strength fiber. Any quality or supply issue with these materials and components can negatively impact our business. During the first half of fiscal 2005, we experienced shortages of high-strength fiber from our primary supplier due to industry-wide demand and short-term capacity issues. This shortage of fiber negatively impacted the timing of certain contract activities during the first nine months of fiscal 2005. Although the short-term capacity issues were resolved, we could experience supply shortages or the discontinuance of certain fiber products in the future. These supply issues could negatively impact our ability to develop and manufacture fuel storage systems for our customers.

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

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

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We classify our business operations into four reporting segments: the Fuel Cell Systems segment, the Alternative Fuels segment, Advanced Research & Product Development, and Corporate.

The Fuel Cell Systems segment generates revenue through the sale of compressed hydrogen storage, fuel delivery, and electronic control systems to OEMs, and the installation of our products into OEM fuel cell vehicles and hydrogen refueling systems. The Fuel Cell Systems segment also generates contract revenue by providing engineering design and support to OEMs so that our fuel storage, fuel delivery, and electronic control systems integrate and operate with certain of their fuel cell applications.

The Alternative Fuels segment generates revenue through the sale of compressed natural gas (“CNG”), propane (“LPG”), and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. The Alternative Fuels segment also generates contract revenue by providing engineering design and support to OEMs so that our fuel storage, fuel delivery, and electronic control systems integrate and operate with certain of their alternative fuel vehicles. The chief operating decision maker allocates resources and tracks performance by each of the four reporting segments.

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

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

We recognize revenue for product sales when goods are shipped in accordance with our shipping terms and collectability is reasonably assured. Contract revenue is recognized based on the percentage of completion method.

Customers representing over 10% of total revenues are as follows:

General Motors Relationship. Our strategic alliance with General Motors became effective upon our spin-off from IMPCO. We believe that our strategic alliance with General Motors will advance and commercialize, on a global basis, the integration of our gaseous storage and handling systems into fuel cell systems used in the transportation markets. Under the alliance, Quantum and General Motors may co-develop technologies that are designed to accelerate the commercialization of fuel cell applications. Additionally, General Motors will endorse Quantum as a recommended provider of hydrogen storage, hydrogen handling, and associated electronic controls.

Under the alliance, we have committed to spend $4.0 million annually for specific research and development projects directed by General Motors to speed the commercialization of our fuel cell related products. While this commitment was waived by General Motors for calendar years 2002 and 2003, we cannot assure you that this commitment will be waived in the future. We have agreed upon a Directed Research and Development Statement of Work (the “SOW”) with General Motors that covers the period from May 15, 2004 though May 14, 2005. The SOW outlines specific tasks for the advancement of compressed fuel storage technologies enabling improved performance. Total spending under the SOW is expected to be approximately $2.9 million and is primarily funded under the Advanced Research & Product Development segment. Each party will retain the ownership of its existing technology and will jointly own technology that is created under the alliance. We have the opportunity to use jointly created technologies in certain aspects of our business but will be required to share revenue with General Motors on fuel cell system-related products that are sold to General Motors or third parties.

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

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

Separation from IMPCO. On July 23, 2002, IMPCO completed the distribution and spin-off of Quantum by distributing to IMPCO stockholders one share of Quantum common stock for every share of IMPCO common stock held on the record date, which was July 5, 2002. Prior to the distribution, we entered into several agreements with IMPCO with respect to, among other things, intellectual property, interim services, and a number of ongoing commercial relationships. The pricing terms for goods and services covered by the commercial agreements reflected negotiated prices. These agreements expire thru July 22, 2007.

Critical Accounting Policies and Estimates

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

Management considers an accounting estimate to be critical if:

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

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Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Cost.” This Statement amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (scrap). SFAS No. 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005. As such, we plan to adopt these provisions for our annual reporting period beginning May 1, 2006. We are currently evaluating the impact that SFAS No. 151 will have on our financial statements.

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In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R requires the expensing of unvested stock options in the first interim or annual reporting period that begins after June 15, 2005. As such, we plan to adopt these provisions for our second quarter beginning August 1, 2005. Currently, we account for stock options using the intrinsic value method of reporting prescribed by Accounting Principles Board Opinion (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and provide footnote disclosure of the compensation expense associated with stock options. We are currently analyzing which method will be the most appropriate to estimate fair value of stock-based compensation upon adoption of SFAS 123R. We anticipate that fair value estimates will be consistent with pro forma disclosures reported in note 8 to the condensed financial statements, although actual compensation expense will be higher as a result of 1,530,000 additional options granted on March 3, 2005.

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Results of Operations

Three and nine months ended January 31, 2004 and 2005

Net revenues and operating income (loss) for our reportable business segments were as follows: