Hello,

Year in Review
The holiday season marks a time of celebrating and spreading good cheer. As 2006 comes to a close, we’d like to look back on the year and celebrate all that the team at QuantumSphere, Inc has accomplished. What a busy and momentous year it has been!

We started off the year with the invaluable addition of Patrick Deane, our Chief Financial Officer and Chief Operations Officer, as well as other key science and operations professionals. In the spring of this year, we demonstrated our portable direct methanol fuel cell device utilizing low-cost QSI-Nano® catalysts. We were also honored with a visit from Secretary of State, Bruce McPherson, who toured our site and discussed using nano metals and alloys for various applications in batteries, fuel cells and hydrogen generation. Summer was a very exciting time for us in energy research results, as we received a positive third-party validation from a global battery manufacturer on our high-performance Zn-air battery cathodes. In addition, we exceeded the Department of Energy’s efficiency target for clean hydrogen generation from water with our electrolysis device.

QSI concluded the summer with an announcement about the successful preparation of a key alloy used in thin-film solar cells. The year was equally as productive in patent application filings; the team at QSI was pleased to file a key patent application leveraging QSI-Nano® Catalyst for the large primary battery market, a fuel cell patent application for portable electronics, a hydrogen generation patent application, as well as a materials patent application for solar cells and two additional process patent applications for forming and collecting nanomaterials. In November, we were very excited to announce that the QuantumSphere Inc. Research Grant was awarded to Dr. Zhanhu Guo, a postdoctoral research associate from Prof. H. Thomas Hahn’s MCL-Multifunctional Composites Lab group in the Mechanical and Aerospace Engineering and Materials Science and Engineering Departments at the UCLA Henry Samueli School of Engineering and Applied Science. Dr. Guo and his team will work to validate the use of QSI’s magnetic nanoparticles for composites used in GMR sensor applications, a multi-billion dollar market.

Another highlight of the year was the opportunity I had to meet with U.S. Senator John Thune from South Dakota. Recently, Jack Hu, Chairman of the U.S. Senate Advisory Committee hosted an intimate gathering for local business leaders and elected officials. The event gave me the opportunity to discuss important technology and energy issues with Senator Thune.

I would like to take this opportunity to thank our wonderful employees for their continued dedication and hard work. Thank you also to our customers, partners and stockholders! We value the opportunity to work with you and look forward to serving you in 2007!

Wishing you and your family a joyous, restful and blessed holiday season!

Kevin D. Maloney
Chief Executive Officer