SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004MARCH 31, 2005

OR

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 0-27527

PLUG POWER INC.

(Exact name of registrant as specified in its charter)

968 ALBANY-SHAKER ROAD, LATHAM, NEW YORK 12110

(Address of registrant’s principal executive office)

(518) 782-7700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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  ¨

The number of shares of common stock, par value of $.01 per share, outstanding as of November 4, 2004April 30, 2005 was 73,250,863.73,461,442.

PLUG POWER INC.

INDEX to FORM 10-Q

Plug Power Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of the condensed consolidated financial statements.

Plug Power Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

Plug Power Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

Plug Power Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations

Description of Business

Plug Power Inc. and subsidiaries (Company) was originally formed as a joint venture between Edison Development Corporation (EDC) and Mechanical Technology Incorporated (MTI) in the State of Delaware on June 27, 1997 and succeeded by merger to all of the assets, liabilities and equity of Plug Power, L.L.C. in November 1999.

The Company is a development stage enterprise involved in the design, development and manufacture of on-site energy systems for energy consumers worldwide. The Company’s architecture-based technology platform includesfocused on its proprietary proton exchange membrane (PEM) fuel cell and fuel processing technologies,technology platforms, from which multiple products are expected to be offered.being offered or are under development. The Company is currently developing: (1)offering for commercial sale its GenCore^® product, a back-up power productsproduct for telecommunications, broadband, utility and industrial uninterruptible power supply (UPS) applications. The Company is also developing additional products, including a continuous power product, with optional combined heat and power capability for remote small commercial and remote residential applications; (2)and an on-site hydrogen generation product for use in a variety of industrial gas applications; (3) combined heat and power products for remote residential and small commercial applications; and (4) battery-replacement modules for material handling equipment.applications.

Liquidity

The Company’s cash requirements depend on numerous factors, including but not limited to,completion of our product development activities, ability to commercialize itsour on-site energy systems,products, market acceptance of itsour systems and other factors. The Company expects to continue to devote substantial capital resources to continue its development programs directed at commercializing on-site energy systemsproducts for worldwide use, hiring and to hire and traintraining our production staff, developdeveloping and expandexpanding our manufacturing capacity, and continuecontinuing expansion of our production and our research and development activities. The Company will pursue the expansion of its operations through internal growth and strategic alliancesacquisitions and expectsexpect that such activities will be funded from existing cash and cash equivalents marketable securities and theto a lesser extent, issuance of additional equity or debt securities or otheradditional borrowings subject to market and other conditions. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect its ability to pursue its strategy and could negatively affect its operations in future periods. The Company anticipates incurring additional losses over at least the next several years.

At September 30, 2004,March 31, 2005, the Company had unrestricted cash, cash equivalents and marketable securities in the amount of $75.3$56.3 million and working capital of $73.2$54.2 million. Management believes that the Company’s currently available cash, cash equivalents and marketable securities will provide sufficient capital to fund operations for at least the next twelve months.

2. Basis of Presentation

Principles of Consolidation:The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Interim Financial Statements: The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly, in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows for all periods presented, have been made. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2003.2004.

The information presented in the accompanying condensed consolidated balance sheet as of December 31, 20032004 has been derived from the Company’s December 31, 20032004 audited consolidated financial statements. All other information has been derived from the Company’s unaudited consolidated financial statements for the periods as of and ending September 30, 2004March 31, 2005 and 2003.2004.

Cash Equivalents and Restricted Cash:Cash equivalents consist of money market accounts, overnight repurchase agreements and certificates of deposit with an initial term of less than three months. For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

At September 30, 2004,March 31, 2005, the Company had restricted cash in the amount of $4.7$4.3 million that is required to be placed in escrow to collateralize debt related to the purchase of real estate. The escrowed amounts are recorded under the captions, “Restricted cash” in the accompanying condensed consolidated balance sheets.

Marketable Securities:Marketable securities include investments in corporate debt securities and US Treasury obligations which are carried at fair value and are considered available for sale. At September 30, 2004,March 31, 2005, the difference between the cost and the fair value of these securities result in an unrealized loss in the amount of $351,000,$428,000, which is reflected as a component of stockholders’ equity under the caption, “Accumulated other comprehensive loss”. At September 30, 2004,March 31, 2005, the Company held marketable securities with maturities up to thirtytwenty six months.

Inventory:Inventory is stated at the lower of average cost or market and generally consists of raw materials.

Goodwill and Other Intangible Assets: The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, as of January 1, 2002. Pursuant to SFAS No. 142, goodwillGoodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142.142 “Goodwill and Other Intangible Assets”. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”.

Goodwill represents the excess of costs over fair value of net assets acquired pursuant to the March 25, 2003 merger transaction with H Power Corp. (H Power). Amortized intangible assets, including purchased technology and other intangible assets, are carried at cost less accumulated amortization. The Company amortizes these intangible assets on a straight-line basis over their estimated useful lives. The range of estimated useful lives on the Company’s identifiable intangible assets is two to ten years.

Impairment of Long-Lived Assets: Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Product and Service Revenue: The Company applies the guidance within SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104) in the evaluation of its contracts to determine when to properly recognize revenue. Under SAB 104 revenue is recognized when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured. The Company defers recognition of product and service revenue at the time of delivery and recognizes revenue as the continued service, maintenance and other support obligations expire (see Critical Accounting Policies and Estimates - Revenue Recognition). The costs associated with the product, service and other obligations are expensed as they are incurred.

The Company’s initial sales of GenSys^™ and GenCore^™ 5T are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract terms require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within contractual arrangements are not accounted for separately based on the Company’s limited commercial experience and available evidence of fair value. The Company’s contractual arrangements under its initial commercial sales are with a limited number of customers and the arrangements are separately negotiated and not combined. As a result, the Company defers recognition of product and service revenue and recognizes revenue on a straight-line basis over the stated contractual terms, as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months. At March 31, 2005 and December 31, 2004, the Company had deferred product and service revenue in the amount of $4.6 million and $5.5 million, respectively.

As the Company gains commercial experience, including field experience relative to service and warranty based on the sales of initial products, the fair values for the multiple elements within future contracts may become determinable and the Company may, in future periods, recognize revenue upon delivery of the product or may continue to defer recognition, based on application of appropriate guidance within EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, or changes in the manner contractual agreements are structured, including agreements with distribution partners.

Research and Development Contract Revenue: Research and development contract revenue primarily relates to cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. The Company generally shares in the cost of these programs with cost sharing percentages between 20% and 60%. Revenue from “time and material” contracts is recognized on the basis of hours utilized, plus other reimbursable contract costs incurred during the period. At September 30,March 31, 2005 and December 31, 2004, the Company had deferred contract revenue of $719,000.$620,000 and $200,000, respectively.

Income Taxes:Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We did not report a benefit for federal and state income taxes in the consolidated financial statements as the deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward will not be realized.

Stock-Based Compensation: The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25”, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each period:

On June 20, 2003, the Company issued 607,804 shares of restricted stock and cancelled 1,810,048 options to purchase common stock in connection with the Company’s offer to eligible employees to exchange options to purchase shares of common stock with an exercise price of $8.53 or greater per share for shares of restricted stock on a three for one basis. The shares of restricted stock received in this exchange will vest in three equal installments effective 21 months, 24 months and 27 months from the date of the exchange. During the three and nine month periodsperiod ended September 30, 2004,March 31, 2005, the Company recorded employee compensation expense of $402,000 and $1.2 million, respectively,$124,000 relating to the issuance of the restricted stock awards.awards, net of forfeitures. This amount represents recognition of compensation expense on a straight-line basis over the vesting periods of the restricted stock.

Use of Estimates:The unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Impact of Recently Issued Accounting StandardsStandards:: In MarchDecember 2004, the EITF reached a consensus onFASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the FASB ratified EITF Issue No. 03-16, “Accountingfair value method, and eliminates the ability to account for Investments in Limited Liability Companies” (EITF 03-16). The EITF concluded that if investors in a limited liability company have specific ownership accounts, they should followthese instruments under the guidanceintrinsic value method prescribed in Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” and EITF Topic No. D-46, “Accounting for Limited Partnership Investments.” Otherwise, investors should follow the significant influence model prescribed in Accounting Principles Boardby APB Opinion No. 18, “The Equity Method25, and allowed under the original provisions of AccountingSFAS No. 123. SFAS No. 123R requires the use of an option pricing model for Investments in Common Stock.” EITF 03-16 wasestimating fair value, which is amortized to expense over the service periods. On April 14, 2005, the Securities and Exchange Commission (SEC) delayed the effective date of SFAS No. 123R from the first annual or interim fiscal period beginning after June 15, 2005, to the first quarter of the first fiscal year beginning after June 15, 2005. If the Company had applied the provisions of SFAS No. 123R to the financial statements for the Company during the third quarter ofperiod ending December 31, 2004, and did not have a material effect on the Company.

Reclassifications: Certain prior period amountsnet loss would have been reclassified to conformincreased by approximately $7.5 million. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the 2004 presentation.original issuance of SFAS No. 123 or in the year of adoption. We are currently evaluating these transition methods.

3. Loss Per Share

Loss per share for the Company is calculated as follows:

No options or warrants outstanding were included in the calculation of diluted loss per share because their impact would have been anti-dilutive. These dilutive potential common shares at September 30,March 31, 2005 and 2004 and 2003 are summarized as follows:

4. Investments in Affiliates

GE Fuel Cell Systems, LLC

In February 1999, the Company entered into an agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, distribute, install and service certain of its PEM fuel cell systems under 35 kW designed for use in residential, commercial and industrial stationary power applications on a global basis, with the exception of the states of Illinois, Indiana, Michigan and Ohio, in which DTE Energy Technologies, Inc. (“DTE”), has exclusive distribution rights. GE MicroGen, Inc. is a wholly owned subsidiary of General Electric Company that operates within the GE Energy (formerly known as GE Power Systems) business.Energy.

In connection with the original formation of GEFCS, wethe Company issued 2,250,000 shares of ourits common stock to GE MicroGen, Inc. in exchange for a 25% interest in GEFCS. WeAs of the date of issuance of such shares, the Company capitalized $11.3 million, the fair value of the shares issued, under the caption “Investment in affiliates” in ourthe accompanying consolidated financial statements. We also issuedIn accordance with the terms of the agreement, General Electric Company will provide capital in the form of a warrantloan not to GE MicroGen, Inc.exceed $8.0 million, to purchase 3,000,000 additional sharesfund the operations of common stock at a price of $12.50 per share. GEFCS exercised this option immediately prior to our initial public offering for a total exercise price of $37.5 million in cash.GEFCS.

In August 2001, wethe Company amended ourits agreements with GE Microgen, Inc. and GEFCS to expand GEFCS’ exclusive worldwide distribution rights to include all of ourits stationary PEM fuel cell systems. In addition, wethe Company increased ourits ownership interest in GEFCS from 25% to 40% and extended the term of the agreement to December 31, 2014.. In return, wethe Company granted GE Power Systems Equities, Inc. an option to purchase 725,000 shares of ourits common stock at any time prior to August 21, 2006 at an exercise price of $15.00 per share. The Company also replaced the product specifications, prices and delivery schedule in their distribution agreement with a high-level, multi-generation product plan, with subsequent modifications being subject to mutual agreement, and extended the term of the agreement to December 31, 2014. In connection with these transactions, the amendment, weCompany capitalized $5$5.0 million, the fair value, calculated using the Black-Scholes pricing model, of the option to purchase 725,000 shares of Plug Power common stock, under the caption “Investment in affiliates” in our condensedthe accompanying consolidated financial statements.statements, and is amortizing this amount over the remaining term of the original distribution agreement.

The Company accounts for its interest in GEFCS on the equity method of accounting and adjusts its investment by its proportionate share of income or losses under the caption “Equity in losses of affiliates” in the accompanying condensed consolidated statements of operations. GEFCS had an operating and net loss of approximately $3,000$6,000 for the three months ended September 30, 2004 and an operating and net loss of approximately $6,000 for the nine months ended September 30, 2004.March 31, 2005. For the three months ended September 30, 2004,March 31, 2005, equity in losses of affiliates, related to GEFCS, was approximately $451,000$450,000 including amortization of the related intangible asset of $448,000. ForAccumulated amortization at March 31, 2005 was $10.9 million.

In October 2003, the nine months ended September 30, 2004, equity in losses of affiliates, relatedCompany further amended the distribution agreement to provide for the ability to sell directly or negotiate nonexclusive distribution rights to third parties for its GenCore backup power product line and its GenSite hydrogen generation product line. In exchange the Company agreed to pay a commission, based on sales price, to GEFCS was approximately $1.4 million including amortization of the related intangible asset of $1.3 million.at a rate and schedule prescribed in our amended agreement. The distribution agreement expires on December 31, 2014.

Under a separate agreement with the General Electric Company, for ourits product development effort, we havethe Company has agreed to source technical support services, including engineering, testing, manufacturing and quality control services. Under this the initial

agreement, the Company haswas committed to purchase a minimum of $12.0 million of such services over a five-year period, which began September 30, 1999. In 2004During 2005, the Company and General Electric Company extended this period through SeptemberDecember 2007. Through September 30, 2004,March 31, 2005, the Company had purchased approximately $9.6$10.0 million of such services.

Additionally, General Electric Company has agreed to act as the agent in procuring certain equipment, parts and components and is providing training services to our employees regarding procurement activities pursuant to this agreement.

5. Acquisition of H Power Corp.

On March 25, 2003, the Company consummated a merger transaction with H Power, a company also involved in the design, development, and manufacture of PEM fuel cells and fuel cell systems, pursuant to which the Company acquired all of the outstanding shares of H Power in a stock-for-stock exchange. In connection with the transaction, H Power stockholders received 8,950,113 shares of Company’s common stock. In the aggregate, the Company issued 9,063,080 shares of its common stock in connection with the transaction. Immediately following the transaction H Power became a wholly owned subsidiary of the Company.

Effective March 25, 2003, the Company and H Power are treated as a single company for financial reporting purposes and the Company has recorded the fair value of H Power’s net assets on its consolidated financial statements. The historical financial statements of the Company will continue to be the historical financial statements of the combined company for periods prior to the merger. The fair value of the shares issued as a result of the transaction is estimated at approximately $46.3 million. The Company also incurred direct transaction costs of $4.1 million in connection with the transaction. As part of the acquisition, the Company acquired cash, cash equivalents and marketable securities of H Power of approximately $29.6 million, after payment of certain integration costs and expenses associated with the consummation of the merger of approximately $7.1 million, which were accounted for as additional purchase price. The Company has recorded approximately $10.4 million of goodwill, which is not deductible for tax purposes, related to the transaction. The Company has included H Power in its consolidated financial position and results of operations since the date of acquisition.

Approximately $3.0 million of the purchase price represents the estimated fair value of acquired in-process research and development projects. As we were not continuing the related development projects, this amount was immediately expensed in the consolidated statement of operations as of the date of acquisition. This write-off is included in in-process research and development expenses on the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2003.

6.5. Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets as of September 30, 2004March 31, 2005 and December 31, 20032004 were as follows:

Amortization expense for acquired intangible assets during the three and nine months ending September 30, 2004March 31, 2005 was $1.1 million and $3.4 million, respectively.million. Estimated amortization expense for the remainder of 20042005 and the four succeeding years is as follows:

7.6. Stockholders’ Equity

Changes in stockholders’ equity for the ninethree months ended September 30, 2004March 31, 2005 are as follows:

Common stock issued during the ninethree months ended September 30, 2004March 31, 2005 consisted of 249,226144,576 shares related to stock based compensation, 94,96031,799 shares related to stock option purchases and 31,631a recovery of 71,073 forfeited unvested shares related to the employee stock purchase plan.of restricted stock.

8.7. Commitments and Contingencies

Shareholder Class Action Lawsuit:Lawsuit: As previously disclosed, the Company and certain of its officers and directors were defendants in September 2000, a shareholder class action complaint waslawsuit filed in the federal district court for the Eastern District of New York alleging that the Company and various of its officers and directors violated certain federal securities laws by failing to disclose certain information concerning the Company’s products and future prospects. The action was brought on behalf of a class of purchasers of our stock who purchased the stock between February 14, 2000 and August 2, 2000. Subsequently, fourteen additional complaints with similar allegations and class periods were filed. By order dated October 30, 2000, the court consolidated the complaints into one action, entitled Plug Power Inc. Securities Litigation, CV-00-5553 (ERK) CV-00-5553(ERK)(RML). By order dated January 25, 2001,On December 29, 2004, the Court appointed lead plaintiffs and lead plaintiffs’ counsel. Subsequently, the plaintiffs served a consolidated amended complaint. The consolidated amended complaint extends the class period to begin on October 29, 1999 and alleges claims under the Securities Act and Exchange Act, and Rule 10b-5 promulgated under the Exchange Act. Subsequently, plaintiffs withdrew their claims under the Securities Act. Plaintiffs allege that the defendants made misleading statementsentered into a Stipulation and omissions regarding the stateAgreement of development of our technology in a registration statement issued in connection with our initial public offering (IPO) and in subsequent press releases. We served our motionSettlement to dismiss thesettle all remaining claims in May 2001. By order dated January 21, 2003, the Court dismissed all claims relatinglitigation, subject to pre-IPO press releases,final approval by the IPO prospectus and all but three post-IPO press releases.Court. The Court also denied$5 million cash settlement requires no payment by the motion to dismiss the claims againstCompany or the individual defendants at this time.and will be fully funded by directors and officers insurance. On April 29, 2005, the Court entered an Order and Final Judgment approving the settlement and dismissing the complaint with prejudice.

In May 2004, the Company reached an agreement in principle to settle the litigation. Pursuant to the settlement, the Company’s primary insurance carrier will fund the settlement. The settlement is subject to negotiation of a final agreement by the parties and approval by the court. The settlement is not anticipated to have any material impact on the Company’s financial condition.

9.8. Supplemental Disclosures of Cash Flows Information

The following represents required supplemental disclosures of cash flows information and non-cash financing and investing activities which occurred during the ninethree months ended September 30, 2004March 31, 2005 and 2003:2004:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and notes thereto included within this report, and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 20032004 on March 11, 2004.15, 2005. In addition to historical information, this Form 10-Q and following discussion contain statements that are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements contain projections of our future results of operations or of our financial position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned not to rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to: our ability to develop commercially viable on-site energy products; the cost and timing of developing our on-site energy products; market acceptance of our on-site energy products; our reliance on our relationship with certain affiliates of General Electric (GEFCS); our ability to perform on our multi-generation product plan in a manner satisfactory to GEFCS; our ability to manufacture on-site energy products on a large-scale commercial basis; competitive factors, such as price competition and competition from other traditional and alternative energy companies; the cost and availability of components and parts for our on-site energy products; the ability to raise and provide the necessary capital to develop, manufacture and market our on-site energy products; our ability to establish relationships with third parties with respect to product development, manufacturing, distribution and servicing and the supply of key product components; our ability to protect our intellectual property; our ability to lower the cost of our on-site energy products and demonstrate their reliability; the cost of complying with current and future governmental regulations; the impact of deregulation and restructuring of the electric utility industry on demand for our on-site energy products; fluctuations in the trading price and volume of our common stock and other risks and uncertainties discussed, but are not limited to, those set forth under the caption “Factors Affecting Future Results” in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2003,2004, filed with the Securities and Exchange Commission on March 11, 2004.15, 2005. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Form 10-Q.

Overview

We design and develop on-site energy systems, based on proton exchange membrane fuel cell technology, for energy consumers worldwide. Our architecture-based technology platform, which includes proprietary proton exchange membrane (PEM) fuel cell and fuel processing technologies, from which we expect to offer multiple products.products are being offered or are under development. We are currently developing: (1) backupoffering for commercial sale our GenCore^® product, a back-up power productsproduct for telecommunications, broadband, utility and industrial uninterruptible power supply (UPS) applications. We are also developing additional products, including a continuous power product, with optional combined heat and power capability for remote small commercial and remote residential applications; (2)and an on-site hydrogen generation product for use in a variety of industrial gas applications; (3) combined heat and power products for remote residential and small commercial applications; and (4) battery-replacement modules for material handling equipment.applications.

We are a development stage enterprise in the beginning stages of field testing and marketing our initial commercial products to a limited number of customers, including telecom, utilities, government entities and our distribution partners. Our initial product has been a limited edition GenSys^™ fuel cell system (System or Unit) fueled by natural gas, which is processed or reformed into hydrogen fuel, and is intended to offer complementary, quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. Subsequent enhancements to our Systems are expected to expand the market opportunity for fuel cells by lowering the installed cost, decreasing operating and maintenance costs, increasing efficiency, improving reliability, and adding features such as grid independence and co-generation.

Our initial commercial product, the GenCore^™ 5T (see Product Development and Commercialization), is designed to provide direct-current (DC) backup power for wirelinetelecommunications, broadband, utility and wireless applications in the telecom industry.industrial uninterruptible power supply (UPS) applications.. The GenCore^™ 5T is fueled by hydrogen and does not require a fuel processor. Subsequent derivations of the GenCore^® platform are expected to enable products for applications in the broadband and industrial uninterruptible power supply (UPS) industries.

Our strategy for product sales, distribution and marketing relies on forming relationships with distributors and customers and entering into development and demonstration programs with electric utilities, government agencies and other energy providers. As such, we have formed distribution, marketing and technology development relationships with companies such as General Electric Company (GE), Honda, Vaillant, Tyco, Pemeas Gmbh (Pemeas), Engelhard Corporation and DTE Energy (see Strategic Relationships and Development Agreements). We are also engaging directly with customers as the market for our products is developing. Many of our initial sales of GenSys^™ andour GenCore^™ 5T product are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract terms require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. As a result, we defer recognition of product and service revenue and recognize revenue on a straight line basis over the stated contractual terms, as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months (see Critical Accounting Policies and Estimates - Revenue Recognition).

As we gain commercial experience, including field experience relative to service and warranty based on the sales of our initial products, the fair values for the multiple elements within our future contracts may become determinable and we may, in future periods, recognize revenue upon delivery of the Unit or we may continue to defer recognition, based on application of appropriate guidance within EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, or change in the manner we structure contractual agreements, including our agreements with distribution partners.

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our fuel cell systems, market acceptance of our systems and other factors. We expect to pursue the expansion of our operations through internal growth and strategic acquisitions. As of September 30, 2004,March 31, 2005, we had unrestricted cash and cash equivalents and marketable securities totaling $75.3$56.3 million and working capital of $73.2$54.2 million. Additionally, we have restricted cash in the amount of $4.7$4.3 million, which was escrowed to collateralize debt associated with the purchase of our facilities in 1999.

During the ninethree months ended September 30, 2004,March 31, 2005, cash used by operating activities was $25.8$10.2 million consisting primarily of a net loss of $34.9$12.5 million offset, in part, by non-cash expenses in the amount of $10.3$2.9 million, including $3.1 million$847,000 for amortization and depreciation, $3.3$1.0 million for stock based compensation, $2.1 million$688,000 for amortization of intangible assets and $1.4 million$450,000 for equity losses in affiliates. Cash used inprovided by investing activities for the ninethree months ended September 30, 2004March 31, 2005 was $26.2$17.0 million consisting of $25.0$17.6 million invested inprovided by marketable securities and $1.2 millionoffset by $576,000 used to purchase property plant and equipment. Cash provided by financing activities was $644,000$182,000 consisting primarily of net proceeds from issuance of common stock for stock options exercised during the ninethree months ended September 30, 2004.March 31, 2005.

We have financed our operations through September 30, 2004March 31, 2005 primarily from the sale of equity, which has provided cash in the amount of $342.6$349.5 million. Since inception, net cash used in operating activities has been $254.3$272.5 million and cash used in investing activities has been $50.9$44.4 million, including our purchase of property, plant and equipment of $31.3$32.3 million, our investments in marketable securities in the amount of $38.3$30.8 million offset, in part, by net proceeds from acquisition of $29.5 million.

Product Development and Commercialization

Our approach toWe currently have one commercial product development is focused on an architecture-based platform, with modular, scalable and extensible designs. Our architected technology platform includes proprietary proton exchange membrane (PEM) fuel cell and fuel processing technology, fromline, which we expectare continuing to offer multiple products including (1) backup power products for telecommunications, broadbandenhance and industrial UPS applications; (2) on-site hydrogen generation for a variety of industrial gas applications; (3) combined heat and power products for remote residential and small commercial applications; and (4) battery-replacement modules for material handling equipment.broaden:

GenCore^® –Backup—Back-up Power -Thefor Telecommunication, Broadband, Utility and UPS Applications—We currently offer the GenCore platformproduct line, which is focused on providing backup, direct-current (DC) backup power products in a power range of 2-12 kilowatts for applications in the telecom, broadband, utility and industrial UPS applications in the range of 2-12 kilowatts.market applications. Our GenCore products are fueled by hydrogen and do not require a fuel processor. In Decemberthe fourth quarter of 2003, we started makingbegan initial shipments of ourthe GenCore 5T product.product, and have shipped 128 units through March 31, 2005. See “Strategic Relationships and Development Agreements” for additional information regarding product development and commercialization.

Additionally, we continue to advance the development of our other technology platforms:

GenSys^™—Remote Continuous Power for Light Commercial and Residential Applications—We plan to continue to develop GenSys into a platform that is expected to support a number of products, including systems fueled by liquefied petroleum gas (LPG) for remote applications and, eventually, grid-connected light commercial and residential applications fueled by LPG or natural gas.

In connection with the development of our GenSys platform, we are developing combined heat and power (CHP) fuel cell systems for light commercial and residential applications that provide supplemental heat as electricity is produced. The GenSys development effort also includes a joint development program with Vaillant GmbH of Germany, under which we are developing a product that combines our fuel cell system with Vaillant’s gas heating technology to provide heat, electricity and hot water for the European light commercial and residential markets.

GenSite^TM™ –—On-Site Hydrogen Generation—We expect to combinehave combined our proprietary fuel processor technology with available commercial components for gas compression, purification and storage to further develop GenSite, an on-site hydrogen gas generator. This product is expected to target certain applications now served by packaged hydrogen gas (cylinders or tube trailers) or electrolyzers.

GenSys^TM –Remote Continuous Power for Light Commercial We presently have a prototype system in our research and Residential - We planproduct development facilities in Apeldoorn, Holland, and another system at our Latham, NY headquarters. In 2005, we expect to continue to develop GenSys into a fully architected platform that will supportinstall and operate a number of products, including liquefied petroleum gas fueledGenSite systems, for remote commercial and remote residential applications, and eventually grid-connected light commercial and residential applications. In July 2003,in application, at customer locations. During 2004, we deliveredshipped our first fuel cellGenSite system fueled by liquefied petroleum gas,and it was installed and operational during the GenSys 5P. The GenSys5P is being marketed to rural electric cooperatives, propane dealers and federal and state government agencies that require the remote fuel capability provided by LPG.quarter ended March 31, 2005.

GenDrive^TM –Battery Replacement for Material Handling -The GenCore platform is expected to provide the basis for our development of the GenDrive product, a hydrogen-fueled battery-replacement module for material handling equipment. GenDrive is expected to bring value to large distribution centers by freeing expensive floor space from the re-charging infrastructure currently required to support batteries and by reducing the frequency of recharging/refueling. We expect GenDrive to maintain a higher state of charge in the equipment during operation than the batteries that are used today, allowing for greater productivity.

Home Energy Station –Station—We are also currently developing technology in support of the automotive fuel cell market. In collaborationmarket under an agreement with Honda R&D Co.Co Ltd. of Japan (“Honda”)(Honda), a subsidiary of Honda Motor Co., Ltd., under which we are developing a home

refueling system that is expected to provide heat, hot water and electricity to the home, while also providing hydrogen to fuel a fuel cell vehicle. The companies completed the first phase of the agreement in October 2003 with the successful demonstration of a prototype Home Energy Station at Honda R&D Americas’ facility in Torrance, California. The work under the second phase of the project started in March 2004 and is focused on developing a next-generation prototype of the Home Energy Station. As in the first phase, Honda R&D of Japan is funding Plug Power’s work under this new agreement.

Strategic Relationships and Development Agreements

Since our inception, we have formed strategic relationships with suppliers of key components, developed distributor and customer relationships, and entered into development and demonstration programs with electric utilities, government agencies and other energy providers. We continue to maintain key relationships as part of our “extended enterprise” strategy. These relationships include distribution, marketing, and technology partnerships with companies such as GE, Honda, Tyco, Vaillant, Pemeas Gmbh (Pemeas), Engelhard and DTE Energy and strategic relationships with supply chain partners, including 3M, Dana, Toyo, Entegris, Parker and Arvin Meritor. Some of these relationships are described in greater detail below.

GE Entities: In February 1999, the Company entered into an agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, distribute, install and service certain of its PEM fuel cell systems under 35 kW designed for use in residential, commercial and industrial stationary power applications on a global basis, with the exception of the states of Illinois, Indiana, Michigan and Ohio, in which DTE Energy Technologies, Inc., has exclusive distribution rights. GE MicroGen, Inc. is a wholly owned subsidiary of General Electric Company that operates within the GE Energy (formerly known as GE Power Systems) business.

In connection with the original formation of GEFCS, we issued 2,250,000 shares of our common stock to GE MicroGen, Inc. in exchange for a 25% interest in GEFCS. We capitalized $11.3 million, the fair value of the shares issued, under the caption “Investment in affiliates” in our consolidated financial statements. We also issued a warrant to GE MicroGen, Inc. to purchase 3,000,000 additional shares of common stock at a price of $12.50 per share. GEFCS exercised this option immediately prior to our initial public offering for a total exercise price of $37.5 million in cash.

In August 2001, we amended our agreements with GE Microgen, Inc. and GEFCS to expand GEFCS’ exclusive worldwide distribution rights to include all of our stationary PEM fuel cell systems. In addition, we increased our ownership interest in GEFCS from 25% to 40% and extended the term of the agreement to December 31, 2014. In return, we granted GE Power Systems Equities, Inc. an option to purchase 725,000 shares of our common stock at any time prior to August 21, 2006 at an exercise price of $15.00 per share. In connection with the amendment, we capitalized $5 million, the fair value of the option to purchase 725,000 shares of Plug Power common stock, under the caption “Investment in affiliates” in our condensed consolidated financial statements.

The Company accounts for its interest in GEFCS on the equity method of accounting and adjusts its investment by its proportionate share of income or losses under the caption “Equity in losses of affiliates” in the accompanying condensed consolidated statements of operations. GEFCS had an operating and net loss of approximately $3,000 for the three months ending September 30, 2004 and operating and net loss of approximately $6,000 for the nine months ended September 30, 2004. For the three months ended September 30, 2004, equity in losses of affiliates, related to GEFCS, was approximately $451,000 including amortization of the related intangible asset of $448,000. For the nine months ended September 30, 2004, equity in losses of affiliates, related to GEFCS, was approximately $1.4 million including amortization of the related intangible asset of $1.3 million.

Under a separate agreement with the General Electric Company, for our product development effort, we have agreed to source technical support services, including engineering, testing, manufacturing and quality control services. Under the initial agreement, the Company was committed to purchase a minimum of $12.0 million of such services over a five year period, which began September 30, 1999. In 2004 the Company and General Electric Company extended this period through September 2007. Through September 30, 2004, the Company had purchased approximately $9.6 million of such services. General Electric Company has agreed to act as the agent in procuring certain equipment, parts and components and is providing training services to our employees regarding procurement activities pursuant to this agreement.

Honda: We have an agreement with Honda to exclusively and jointly developdeveloping and testtesting a fuel cell system that provides electricity and heat to a home or business, while also providing hydrogen fuel for a fuel cell vehicle (the “Home Energy Station”). In October 2003, we successfully demonstrated a prototype Home Energy Station at Honda R&D Americas’ facility in Torrance, California. In March 2004, we amended oursigned an agreement with Honda to provide for the second phase of anour expected multi-phase product development effort. The work under the second phase of the project is focused on developing a next-generation prototype of the Home Energy Station. As in the first phase, Honda R&D of Japan is funding Plug Power’s work under this new agreement. In September 2004, under the second phase of our work with Honda, we successfully demonstrated a second-generation prototype of the Home Energy Station at our Latham NY headquarters. This system is refueling a prototype Honda FCX fuel cell vehicle that is undergoing winter testing in the Albany, New York region, as well as two FCX vehicles that Honda has leased to New York State. In 2005 we are continuing our collaboration with Honda and in February, 2005 we signed an agreement with Honda for the third phase of this multi-phase Home Energy Station product development effort.

GenDrive^™—Battery Replacement for Material Handling—The GenCore platform is expected to provide the basis for our development of the GenDrive product, a hydrogen-fueled battery-replacement module for material handling equipment. We continue to explore the potential for partnerships with end users of this product to develop the GenDrive further.

Strategic Relationships and Development Agreements

Since our inception, we have formed strategic relationships with suppliers of key components, developed distributor and customer relationships and have entered into development and demonstration programs with electric utilities, government agencies and other energy providers. Relationships have been established for sales and marketing related activity, as well as technology development. These relationships include distribution, marketing and technology arrangements with companies such as General Electric Company (GE), Honda, Vaillant, Tyco, Pemeas Gmbh (Pemeas), Engelhard Corporation and DTE Energy, and relationships with supply chain partners, including 3M, Dana, Toyo, Entegris, Parker and Arvin Meritor. Some of these relationships are described in greater detail below.

GE Entities: In February 1999, we entered into an agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, sell, install and service our stationary PEM fuel cell systems on a global basis, with the exception of the states of Illinois, Indiana, Michigan and Ohio, in which DTE Energy Technologies, Inc. has exclusive distribution rights. GE MicroGen, Inc. is a wholly owned subsidiary of GE that operates within the GE Energy (formerly known as GE Power Systems) business. Under the terms of our distribution agreement with GEFCS, we serve as GEFCS’ exclusive supplier of PEM fuel cell systems and related components meeting the specifications set forth in the distribution agreement. We have a 40 percent ownership interest in GEFCS.

In August 2001, we amended our agreements with GE MicroGen, Inc. and GEFCS to expand GEFCS’ exclusive worldwide distribution rights to include all of our stationary PEM fuel cell systems. Under the amended agreements, we can sell systems directly to governmental and quasi-governmental entities and, under certain circumstances, to other customers.

In October 2003, we further amended our distribution agreement to provide for the ability to sell directly or negotiate nonexclusive distribution rights to third parties for our GenCore backup power product line and our GenSite hydrogen generation product line. In exchange we have agreed to pay a commission, based on sales price, to GEFCS at a rate and schedule prescribed in our amended agreement. The distribution agreement expires on December 31, 2014.

As a result of the October 2003 amendment to our distribution agreement with GEFCS, we have formed our own marketing and sales force to channel the GenCore and GenSite products to the market. In addition to direct sales to customers, we actively seek distribution partners within target markets for these particular products.

General Electric: In addition to the distribution agreement described above, we have entered into a separate agreement with GE relating to product development and we have agreed to source technical support services from GE, including engineering, testing, manufacturing and quality control services. Under the initial agreement, the Company is committed to purchase a minimum of $12.0 million of such services through September 2004. During 2005, the Company and GE extended this period through December 2007. Through March 31, 2005, we had purchased approximately $10.0 million of such services. Additionally, GE agreed to act as our agent in procuring certain equipment, parts and components and is providing training services to our employees regarding procurement activities pursuant to this agreement.

Honda: As described above, we have an agreement with Honda to exclusively and jointly develop and test the Home Energy Station, a fuel cell system that provides electricity and heat to a home or business, while also providing hydrogen fuel for a fuel cell vehicle.

Tyco: We haveIn September 2004, we completed an agreement with Tyco Electronics Power Systems, Inc., (Tyco) to market, promote and sell Plug Power’sour GenCore^®5T fuel cell systems for telecommunication backup applications through its direct sales force, under both the Tyco Electronics and Plug Power brands. The distributionThis agreement between the companies formalizes a working relationship that has been actively addressing technology, marketing, reliability and certification for more than a year, and is complemented by the June 2004 nationwide service and installation agreement for GenCore between the Company and Tyco Electronics Installation Services Inc.

Vaillant: We have a development agreement with Vaillant GmbH (Vaillant), to develop a combination furnace, hot water heater andfuel cell heating appliance that combines our fuel cell system that is expectedwith Vaillant’s gas heating technology to provide both heat, electricity and electricityhot water for the home.European light commercial and residential markets. Under the agreement, we will sell fuel cell subsystems directly and exclusively to Vaillant and Vaillant will distribute fuel cell heating appliancesFuel Cell Heating Appliances throughout Europe on a non-exclusive basis.In exchange for the right to sell fuel cell subsystems directly and exclusively to Vaillant, we have agreed to pay GE MicroGen, Inc. a commission, based on a prescribed percentage of sales of fuel cell subsystems (asas defined in the agreement).agreement.

Pemeas: We have a joint development agreement with Pemeas (effective April 1, 2004, the fuel cell activity of Celanese AG and former Hoechst AG was formed intowere combined to form a new company, Pemeas GmbH), to develop, on an exclusive basis, a high temperature membrane electrode unit for stationary fuel cell systems with net electrical output of 750 watts up to 25 kilowatts. Additionally, we have the option to work with Pemeas on a non-exclusive basis to develop a high-temperature membrane electrode unit for stationary fuel cell systems with net electrical output of less than 750 watts and greater than 25 kilowatts. Under the agreement, the Company and Pemeas will each fund their own development efforts.

Engelhard: We have a joint development agreement and a supply agreement with Engelhard Corporation for development and supply of advanced catalysts to increase the overall performance and efficiency of our fuel processor. Over the course of the joint development agreement we have contributed $10.0 million to fund Engelhard’s development efforts and in turn Engelhard has purchased $10.0 million of our common stock. As of September 30, 2004 all funding obligations related to development efforts havehad been met and the Company and Engelhard will each fundhave been funding their own development efforts. Additionally, a supply agreement with Engelhard specifies the rights and obligations for Engelhard to supply products to us until 2013.

DTE Energy: We have an exclusivea distribution agreement with DTE Energy Technologies, Inc. forunder which DTE can exclusively market, sell, install and service our stationary PEM fuel cell systems in the states of Michigan, Ohio, Illinois, and Indiana. Under an amendment to the agreement in February 2004, we can sell directly or negotiate nonexclusive distribution rights to third parties for our GenCore backup power product line, and our GenSite hydrogen generation product line. Starting in the fourth quarter of 2004 for GenCore and in the fourth quarter of 2005 for GenSite,In exchange we have agreed to pay a 5% commission, to DTE Energy Technologies, Inc., based on sales price, of units shipped to the above noted states. The Company has entered into discussions with DTE Energy to defer the start of the GenCore commission period into 2005.GEFCS at a rate and schedule prescribed in our amended agreement. The distribution agreement expires on December 31, 2014.

Results of Operations

Comparison of the Three Months Ended September 30, 2004March 31, 2005 and September 30, 2003.March 31, 2004.

Product and service revenue. Product and service revenue was $1.3$1.1 million for the three months ended September 30, 2004March 31, 2005 compared to $2.0$1.4 million for the three months ended September 30, 2003.March 31, 2004. We defer recognition of product and service revenue at the time of delivery and recognize revenue as the continued service, maintenance and other support obligations expire (see Critical Accounting Policies and Estimates - Revenue Recognition). The costs associated with the product, service and other obligations are expensed as they are incurred.

Our initial sales of GenSys^™ and GenCore^™ 5T are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. As a result, we defer recognition of product and service revenue and recognize revenue on a straight-line basis as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months.

During the three months ended September 30,March 31, 2005, we recognized product and service revenue of $1.1 million, $1.0 million of which was deferred at December 31, 2004, wecompared to $1.4 million during the same quarter last year, $1.3 million of which was deferred at December 31, 2003. We delivered a total of 3916 fuel cell systems.systems during the quarter ended March 31, 2005. The revenue associated with 2410 of these systems is related to product and service arrangements and has been deferred while 156 fuel cell systems were delivered under a government contactcontract and the associated revenue is included in research and development contract revenue. For the three months ended September 30, 2004,March 31, 2005, we deferred revenue in the amount of $1.4 million$140,000 for the 2410 systems delivered under product and service arrangements, compared to $1.6 million$700,000 for the 4124 fuel cell systems delivered during the same period in 2003. During the quarter ended September 30, 2004, we recognized product and service revenue of $1.3 million, of which $893,000 was deferred at December 31, 2003, compared to $2.0 million during the same quarter last year, $1.1 million of which was deferred at December 31, 2002.2004.

At September 30, 2004,March 31, 2005, we had total deferred product and service revenue in the amount of $6.5$4.6 million of which we expect to recognize approximately $3.2$3.3 million through the remainder of 2004.2005.

Research and development contract revenue.Research and development contract revenue increased to $3.3$2.2 million for the three months ended September 30, 2004March 31, 2005 from $1.5$1.9 million during the same period last year. The increase is due to the addition of development agreements with the U.S. Department of Defense and increased activity under U.S. Department of Energy and New York State Energy Research and Development Authority and Honda R&D Co., Ltd. of Japan, research and development contracts. Research and development contract revenue primarily relates to cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. We generally share in the cost of these programs with cost sharing percentages between 20% and 60%. Revenue from “time and material” contracts is recognized on the basis of hours utilized, plus other reimbursable contract costs incurred during the period. We expect to continue certain research and development contract work that is directly related to our current product development efforts.

Cost of product and service revenue. Cost of product and service revenue decreased to $1.2 million$708,000 for three months ended September 30, 2004March 31, 2005 from $2.0 million$895,000 for three months ended September 30, 2003.March 31, 2004. Cost of product and service revenue includes the direct material cost incurred in the manufacture of the products we sell, as well as the labor and material costs incurred for product maintenance, replacement parts and service under our contractual obligations. These costs consist primarily of production materials and fees paid to outside suppliers for subcontracted components and services.

Cost of research and development contract revenue. Cost of research and development contract revenue increased to $4.3$2.9 million for three months ended September 30, 2004March 31, 2005 from $1.6$2.6 million for three months ended September 30, 2003.March 31, 2004. The increase in these costs related to the additional development agreements described above under research and development contract revenue.Cost of research and development contract revenue includes costs associated with research and development contracts including: compensation and benefits for engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies used and other directly allocable general overhead costs allocated to specific research and development contracts.

Noncash research and development expense. Noncash research and development expense for the three months ended September 30, 2004, increasedMarch 31, 2005, decreased to $664,000$372,000 from $501,000$474,000 during the same period last year. Noncash research and development expense represents the fair value of stock grants to employees, consultants and others in exchange for services provided. The increasedecrease is primarily the result of stock based compensationthe recovery of amortization associated with the amortizationforfeited shares of restricted stock issued in June 2003 under our employee stock option exchange program.stock.

Other research and development expense. Other research and development expense was $8.0expenses were $9.4 million for the three months ended September 30, 2004March 31, 2005 compared to $9.7$9.3 million for the three months ended September 30, 2003. The decline of research and development expense is primarily the result of an increase in resources allocated to research and development programs reflected in cost of revenues for research and development above under U.S. Department of Energy, New York State Energy Research and Development Authority and Honda R&D Co., Ltd. of Japan, research and development contracts.March 31, 2004. Research and development expense includes: materials to build development and prototype units, compensation and benefits for the engineering and related staff, expenses for contract engineers, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies consumed, facility related costs such as computer and network services and other general overhead costs. Our approach to the design of our next generation fuel cell system uses advanced modeling and system simulation techniques, which result in lower research and development costs because we build fewer systems for internal test and evaluation.

For the quarter ended September 30, 2004,March 31, 2005, other research and development expense also includes amortization in the amount of $688,000 related to the portion of the H Power purchase price which has been capitalized and recorded on our balance sheet under the caption “Intangible assets”. During the same period last year, other research and development expense included amortization of prepaid development costs in the amount of $337,000$358,000 under our joint development program with Engelhard and amortization in the amount of $688,000 related to the portion of the H Power purchase price which had been capitalized and recorded on our balance sheet under the caption “Intangible assets”.

Noncash general and administrative expense. Noncash general and administrative expenses for the three months ended September 30, 2004 increasedMarch 31, 2005 decreased to $304,000$136,000 from $185,000$252,000 for the three months ended September 30, 2003.March 31, 2004. Noncash general and administrative expense represents the fair value of stock grants to employees, consultants and others in exchange for services provided. The increasedecrease is primarily the result of stock based compensationthe recovery of amortization associated with the amortizationforfeited shares of restricted stock issued in June 2003 under our employee stock option exchange program.stock.

Other general and administrative expense. Other general and administrative expense increased to $2.0 million for three months ended March 31, 2005 from $1.7 million for three months ended September 30, 2004 from $1.5 million for three months ended September 30, 2003.March 31, 2004. Other general and administrative expense includes compensation, benefits and related costs in support of our general corporate functions including general management, finance and accounting, human resources, marketing, information technology and legal services.

Interest income. Interest income consisting of interest earned on our cash, cash equivalents and marketable securities increaseddecreased to $262,000$270,000 for the three months ended September 30, 2004,March 31, 2005, from $145,000$367,000 for the same period in 2003.2004. The increasedecrease was due to an increase inthe result of lower cash balances offset by slightly higher yields on our investment portfolio for funds received as a result of our public offering of equity in November 2003.portfolio.

Interest expense. Interest expense was $28,000$29,000 for the three months ended September 30, 2004,March 31, 2005, compared to $15,000$16,000 for the same period last year. Interest expense consists of interest on our long-term obligation related to the purchase of real estate and interest paid on capital lease obligations.

Equity in losses of affiliates. Equity in losses of affiliates decreased to $451,000$450,000 for the three months ended September 30, 2004March 31, 2005 from $477,000$466,000 during the same period last year. Equity in losses of affiliates, which we account for under the equity method of accounting, is our proportionate share of loss of GE Fuel Cell Systems in the amount of $3,000$2,000 and the amortization of our original investments in the amount of $448,000.

Income taxes. We did not report a benefit for federal and state income taxes in the consolidated financial statements as the deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward will not be realized.

Comparison of the Nine Months Ended September 30, 2004 and September 30, 2003.

Product and service revenue. Product and service revenue was $4.2 million for the nine months ended September 30, 2004 compared to $6.2 million for the nine months ended September 30, 2003. We defer recognition of product and service revenue at the time of delivery and recognize revenue as the continued service, maintenance and other support obligations expire (see Critical Accounting Policies and Estimates - Revenue Recognition). The costs associated with the product, service and other obligations are expensed as they are incurred.

During the nine months ended September 30, 2004, we delivered 118 fuel cell systems. The revenue associated with 92 of these systems is related to product and service arrangements and has been deferred while 26 fuel cell systems were delivered under a government contract and the associated revenue is included in research and development contract revenue. The costs associated with the 92 fuel cell systems delivered to customers were included in cost of product and service revenue while the costs associated with the 26 fuel cell systems delivered under a government contract have been included in cost of research and development contract revenue.

For the nine months ended September 30, 2004, we deferred revenue in the amount of $4.8 million for the 92 systems delivered under product and service arrangements, compared to $4.4 million for the 82 fuel cell systems delivered during the same period in 2003. During the nine months ended September 30, 2004, we recognized product and service revenue of $4.2 million, of which $3.4 million was deferred at December 31, 2003, compared to $6.2 million during the same period last year, $5.8 million of which was deferred at December 31, 2002.

At September 30, 2004, we had total deferred revenue in the amount of $6.5 million of which we expect to recognize approximately $3.2 million through the remainder of 2004.

Research and development contract revenue.Research and development contract revenue increased to $7.4 million for the nine months ended September 30, 2004 from $3.4 million during the same period last year. The increase is due to the addition of development agreements with the U.S. Department of Defense and increased activity under U.S. Department of Energy, New York State Energy Research and Development Authority and Honda R&D Co., Ltd. of Japan, research and development contracts. Research and development contract revenue primarily relates to cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. We generally share in the cost of these programs with cost sharing percentages between 20% and 60%. Revenue from “time and material” contracts is recognized on the basis of hours utilized, plus other reimbursable contract costs incurred during the period. We expect to continue certain research and development contract work that is directly related to our current product development efforts.

Cost of product and service revenue. Cost of product and service revenue decreased to $3.9 million for nine months ended September 30, 2004 from $4.6 million for nine months ended September 30, 2003. Cost of product and service revenue includes the direct material cost incurred in the manufacture of the products we sell, as well as the labor and material costs incurred for product maintenance, replacement parts and service under our contractual obligations. These costs consist primarily of production materials and fees paid to outside suppliers for subcontracted components and services.

Cost of research and development contract revenue. Cost of research and development contract revenue increased to $9.9 million for the nine months ended September 30, 2004 from $4.1 million for the nine months ended September 30, 2003. The increase in these costs relates primarily to the additional development agreements described above under research and development contract revenue.Cost of research and development contract revenue includes costs associated with research and development contracts including: compensation and benefits for engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies used and other directly allocable general overhead costs allocated to specific research and development contracts.

In-process research and development expense. In-process research and development expense of $3.0 million for the nine months ended September 30, 2003 represents the write-off of in-process research and development expense related to the acquisition of intellectual property and certain other assets acquired as a result of our merger with H Power. The amount attributable to in-process research and development was determined using an income approach which reflects the present value of future avoided costs that would otherwise have been spent to acquire the exclusive rights to this technology. The net avoided cost is discounted using a 20% discount rate, which is believed to be consistent with the risk associated with this early stage technology. This amount was further adjusted to reflect the technology’s state of completion in order to reflect the fair value of the in-process research and development attributable to the efforts of the seller up to the date of the transaction.

Noncash research and development expense. Noncash research and development expense for the nine months ended September 30, 2004, increased to $1.6 million from $1.4 million during the same period last year. Noncash research and development expense represents the fair value of stock grants to employees, consultants and others in exchange for services provided. The increase is primarily the result of stock based compensation associated with the amortization of restricted stock issued in June 2003 under our employee stock option exchange program.

Other research and development expense. Other research and development expense was $24.6 million for the nine months ended September 30, 2004 compared to $29.3 million for the nine months ended September 30, 2003. The decline of research and development expense is primarily the result of an increase in resources allocated to research and development programs reflected in cost of revenues for research and development above under U.S. Department of Energy, New York State Energy Research and Development Authority and Honda R&D Co., Ltd. of Japan, research and development contracts. Research and development expense includes: materials to build development and prototype units, compensation and benefits for the engineering and related staff, expenses for contract engineers, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies consumed, facility related costs such as computer and network services and other general overhead costs. Our approach to the design of our next generation fuel cell system uses advanced modeling and system simulation techniques, which result in lower research and development costs because we build fewer systems for internal test and evaluation.

For the nine months ended September 30, 2004, other research and development expense also includes amortization of prepaid development costs in the amount of $708,000 under our joint development program with Engelhard, recorded on our balance sheet under the caption “Prepaid development costs” and amortization in the amount of $2.1 million related to the portion of the H Power purchase price which has been capitalized and recorded on our balance sheet under the caption “Intangible assets”. During the same period last year, other research and development expense included amortization of prepaid development costs in the amount of $1.1 million under our joint development program with Engelhard, amortization in the amount of $515,000 related to our purchase of certain fuel processing from Gastec and $1.4 million related to the portion of the H Power purchase price that has been capitalized. Gastec was fully expensed as of March 31, 2003.

Noncash general and administrative expense. Noncash general and administrative expenses for the nine months ended September 30, 2004 increased to $1.0 million from $356,000 for the nine months ended September 30, 2003. Noncash general and administrative expense represents the fair value of stock grants to employees, consultants and others in exchange for services provided. The increase is primarily the result of stock based compensation associated with the amortization of restricted stock issued in June 2003 under our employee stock option exchange program.

Other general and administrative expense. Other general and administrative expense was $5.2 million for the nine months ended September 30, 2004 compared to $4.7 million for the same period last year. Other general and administrative expense includes compensation, benefits and related costs in support of our general corporate functions including general management, finance and accounting, human resources, marketing, information technology and legal services.

Interest income. Interest income consisting of interest earned on our cash, cash equivalents and marketable securities increased to $1.1 million for the nine months ended September 30, 2004, from $538,000 for the same period in 2003. The increase was due to an increase in our investment portfolio for funds received as a result of our March 2003 acquisition of H Power and our public offering of equity in November 2003.

Interest expense. Interest expense was $54,000 for the nine months ended September 30, 2004, compared to $48,000 for the same period last year. Interest expense consists of interest on our long-term obligation related to the purchase of real estate and interest paid on capital lease obligations.

Equity in losses of affiliates. Equity in losses of affiliates was $1.4 million for the nine months ended September 30, 2004 and 2003. Equity in losses of affiliates, which we account for under the equity method of accounting, is our proportionate share of the losses of GE Fuel Cell Systems of $6,000 and amortization of our original investments in the amount of $1.4 million.

Income taxes. We did not report a benefit for federal and state income taxes in the consolidated financial statements as the deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward will not be realized.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles and related disclosure requires management to make estimates and assumptions that affect:

Specifically, we must use estimates in determining the economic useful lives of assets, including identifiable intangibles, and various other recorded or disclosed amounts. Therefore, our financial statements and related disclosure are necessarily affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from estimates. To the extent that actual outcomes differ from estimates, or additional facts and circumstances cause management to revise estimates, our financial position as reflected in its financial statements will be affected. Any effects on business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

We believe that the following are our most critical accounting policies affected by the estimates and assumptions the Company must make in the preparation of its financial statements and related disclosure:

Revenue recognition: We are a development stage enterprise in the beginning stages of performing field testing and marketing our initial commercial products to a limited number of customers, including telecom, utilities, government entities and our distribution partners. This initial product is a limited edition fuel cell system (System or Unit) that is intended to offer complementary, quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. Subsequent enhancements to our Systems are expected to expand the market opportunity for fuel cells by lowering the installed cost, decreasing operating and maintenance costs, increasing efficiency, improving reliability, and adding features such as grid independence and co-generation and uninterruptible power supply (UPS)UPS applications.

We apply the guidance within Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104) to our initial sales contracts to determine when to properly recognize revenue. We defer recognition of product and service revenue at the time of delivery and recognize revenue as the continued service, maintenance and other support obligations expire. The costs associated with the product, service and other obligations are expensed as they are incurred.

Our initial sales of GenSys^™ and GenCore^™ 5T are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract terms require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. As a result, we defer recognition of product and service revenue and recognize revenue on a straight-line basis over the stated contractual terms, as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months.

As we gain commercial experience, including field experience relative to service and warranty based on the sales of our initial products, the fair values for the multiple elements within our future contracts may become determinable and we may, in future periods, recognize revenue upon delivery of the product or we may continue to defer recognition, based on application of appropriate guidance within EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, or changes in the manner we structure contractual agreements, including our agreements with distribution partners.

Valuation of long-lived assets: We assess the impairment of identifiable intangible, long-lived assets and goodwill, if any, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following:

When we determine that the carrying value of intangible, long-lived assets and goodwill, if any, may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would measure any impairment based upon the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, as appropriate. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Accounting for income taxes: As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of the future tax benefit of the net operating loss carryforwardcarry forward that has resulted from our cumulative net operating lossesloss since inception. These differences result in a net deferred tax asset. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $178.8 million as of December 31, 2004, due to uncertainties related to our ability to utilize the net deferred tax assets, primarily consisting of net operating losses and credits which may be carried forward, before they expire. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. At September 30, 2004,March 31, 2005, our net deferred tax assets have been offset in full by a valuation allowance. As a result, the net provision for income taxes is zero for the three and nine months ended September 30, 2004.March 31, 2005.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. On April 14, 2005, the Securities and Exchange Commission (SEC) delayed the effective date of SFAS No. 123R from the first annual or interim fiscal period beginning after June 15, 2005, to the first quarter of the first fiscal year beginning after June 15, 2005. If the Company had applied the provisions of SFAS No. 123R to the financial statements for the period ending December 31, 2004, net loss would have been increased by approximately $7.5 million. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123 or in the year of adoption. We are currently evaluating these transition methods.

Liquidity and Capital Resources

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our on-site energy products, market acceptance of our systems and other factors. We expect to devote substantial capital resources to continue our development programs directed at commercializing our on-site energy products for worldwide use, hiring and training our production staff, developing and expand our manufacturing capacity, continue expanding our production and our research and development activities. We expect to pursue the expansion of our operations through internal growth and strategic acquisitions and expect that such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods. We anticipate incurring substantial additional losses over at least the next several years and believe that our current cash, cash equivalents and marketable securities balances will provide sufficient capital to fund operations for at least the next twelve months.

Several key indicators of liquidity are summarized in the following table:

In May 2004,and will be fully funded by directors and officers insurance. On April 29, 2005, the Company reachedCourt entered an agreement in principle to settle the litigation. Pursuant toOrder and Final Judgment approving the settlement and dismissing the Company’s primary insurance carrier will fund the settlement. The settlement is subject to negotiation of a final agreement by the parties and approval by the court. The settlement is not anticipated to have any material impact on the Company’s financial condition.complaint with prejudice.

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the ninethree months ended September 30, 2004,March 31, 2005, we issued 98,02634,890 shares of our common stock in connection with matching contributions under our 401(k) Savings & Retirement Plan. The issuance of these shares is exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended.

ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K

A) Exhibits.

B) Reports on Form 8-K.

None

Signatures

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

2423