SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005MARCH 31, 2006

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 a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). Yes

Large Accelerated Filer  ¨    Accelerated Filer  x    NoNon-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act).    ¨  YesxNo

The number of shares of common stock, par value of $.01 per share, outstanding as of November 7, 2005May 1, 2006 was 85,761,32386,019,775

PLUG POWER INC.

INDEX to FORM 10-Q

Plug Power Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets

(Unaudited)

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 in 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’s initial sales of GenSys^®™ and GenCore^®™ 5T are contract specificcontract-specific arrangements containing multiple obligations, thatwhich 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 September 30, 2005March 31, 2006 and December 31, 2004,2005, the Company had deferred product and service revenue in the amount of $3.0$2.5 million and $5.5$2.9 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,”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

“time and material” contracts is recognized on the basis of hours utilized, plus other reimbursable contract costs incurred during the period. At September 30, 2005March 31, 2006 and December 31, 2004,2005 the Company had deferred contract revenue of $408,000$736,000 and $200,000,$216,000, 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-BasedStock Based Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). Under SFAS 123R, the Company is required to recognize, as expense, the estimated fair value of all share-based payments to employees. For the three months ended March 31, 2006, the Company recorded expense of approximately $858,000 in connection with its share-based payment awards, including incremental expense as a result of SFAS 123R of approximately $515,000.

The Company appliesadopted SFAS 123R under the intrinsic value-basedmodified prospective method. Under this method, the Company recognized compensation cost for all share-based payments to employees based on the grant date estimate of accounting prescribed byfair value for those awards, beginning on January 1, 2006. Prior period financial information has not been restated.

For periods prior to the adoption of SFAS 123R, the Company had elected to follow Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees,” (APB 25) 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 accountInterpretations in accounting for its fixed planshare-based payment awards. Under APB 25, since the exercise price of the Company’s employee stock options. Under this method, compensation expense is recorded onoptions equaled the date of grant only if the current market price of the underlying stock exceededon the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accountingdate of the grant and, disclosure requirements using a fair value-based methodin the case of accounting for stock-based employeethe Company’s stock purchase plans, since the plans were non-compensatory, no 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. expense was recorded.

The following table illustrates the effect on net loss and loss per share as if the fair-value-based methodCompany had been applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” to all outstanding and unvested awards in each period:its stock-based employee compensation for the three months ended March 31, 2005.

		Three Months Ended March 31, 2005
Net loss, as reported		$	(12,535,153	)
Add: Stock-based employee compensation expense included in reported net loss			507,818
Deduct: Total stock-based employee compensation expense determined under fair value based method			(1,459,230	)
Pro forma net loss		$	(13,486,565	)
Loss per share:
Basic and diluted-as reported		$	(0.17	)
Basic and diluted-proforma		$	(0.18	)

On June 20, 2003,

Share Based Compensation Plans

Employee Stock Purchase Plan

1999 Employee Stock Purchase Plan

In 1999, the Company issued 607,804 sharesadopted the 1999 Employee Stock Purchase Plan (the “Plan”) which provides for the issuance of restricted stock and cancelled 1,810,048 optionsup to purchase common stock in connection with the Company’s offer to eligible employees to exchange options to purchasea total of 1,000,000 shares of common stock to participating employees. Eligible employees may contribute between 1% and 10% of their base pay to the Plan. At the end of a designated purchase period, which occurs every six months on June 30 and December 31, employees purchase shares of the Company’s common stock with contributions accumulated via payroll deductions, at an amount equal to 85% of the lower of the fair market value of the common stock on the first day or the last day of the applicable six-month offering period.

The Company measures the fair value of issuances under the employee stock purchase plan using the Black-Scholes option pricing model at the end of each reporting period. The compensation cost for the Plan consists of the discount (15% of the grant date stock price) and the fair value of the option feature. For the three-month period ended March 31, 2006, the Company recorded compensation cost of approximately $57,000 associated with the Plan. At March 31, 2006, based on employee withholdings and the Company’s common stock price at that date, approximately 20,000 shares would have been eligible for issuance if March 31, 2006 had been a designated purchase date. As a result of the employee stock purchase on December 31, 2005, the Company issued 41,524 shares of its common stock. No shares were issued under the Plan during the three months ended March 31, 2006.

Stock Option Plans

Effective July 1, 1997, the Company established a stock option plan to provide employees, consultants, and members of the Board of Directors the ability to acquire an ownership interest in the Company (“1997 Stock Option Plan”). Options for employees issued under this plan generally vested 20% per year and expire ten years after issuance. Options granted to members of the Board generally vested 50% upon grant and 25% per year thereafter. Options granted to consultants generally vested one-third on the expiration of the consultant’s initial contract term, with an exercise priceadditional one-third vesting on each of $8.53 or greater per sharethe next two anniversaries thereafter. At March 31, 2006, there were a total of 866,764 options outstanding and vested under the 1997 Stock Option Plan. Although no further options will be granted under the 1997 Stock Option Plan, the vested options will be exercisable for shares of restricted stock on a three for one basis.common stock.

At March 31, 2006 there were 5,280,012 options outstanding, and approximately 3,535,850 million options available to be issued under the 1999 Stock Option and Incentive Plan (“1999 Stock Option Plan”). The number of shares of restrictedcommon stock receivedavailable for issuance under the 1999 Stock Option Plan will increase by the amount of any forfeitures under the 1999 Stock Option Plan and under the 1997 Stock Option Plan. The number of shares of common stock available for future issuance under the 1999 Stock Option Plan will further increase on January 1 and July 1 of each year by an amount equal to 16.4% of any net increase in the total number of shares of stock outstanding. The 1999 Stock Option Plan permits the Company to: grant incentive stock options; grant non-qualified stock options; grant stock appreciation rights; issue or sell common stock with vesting or other restrictions, or without restrictions; grant rights to receive common stock in the future with or without vesting; grant common stock upon the attainment of specified performance goals; and grant dividend rights in respect of common stock. Options for employees issued under this exchange vestedplan generally vest in equal annual installments over periods of three equal installments effective 21 months, 24 monthsor four years and 27 months from the dateexpire ten years after issuance. Options granted to members of the exchange. DuringBoard generally vest in full one year after issuance. Options granted to consultants generally vest one-third on the expiration of the consultant’s initial contract term, with an additional one-third vesting on each of the next two anniversaries thereafter. To date, options granted under the 1999 Stock Option Plan have vesting provisions ranging from immediate vesting to five years in duration and expire ten years after issuance. These grants may be made to officers, employees, non-employee directors, consultants, advisors and other key persons of the Company.

Compensation cost associated with employee stock options represented approximately $.5 million of the total share-based payment expense recorded for the three month periodmonths ended September 30, 2005,March 31, 2006. The stock options were valued using a Black-Scholes method of valuation, and the Companyresulting fair value is recorded employeeas compensation expense of approximately $66,000 relating to the issuance of the restricted stock awards. This amount represents recognition of compensation expensecost on a straight-line basis over the option vesting periodsperiod. The assumptions made for purposes of estimating fair value under the Black-Scholes model for 667,450 and 973,600 options granted during the three months ended March 31, 2006 and 2005, respectively were as follows:

The Company’s estimate of an expected option term was calculated in accordance with the SAB 107 simplified method for calculating the expected term assumption. The estimated stock price volatility was derived based upon a blend of implied volatility and the Company’s actual historic stock prices over the past six years, which represents the Company’s best estimate of expected volatility. The specific stock option valuation assumptions used for awards granted prior to January 1, 2006 are as disclosed in the Company’s prior annual reports on Form 10-K, as filed with the SEC.

A summary of stock option activity for the three months ended March 31, 2006 is as follows:

The weighted average grant date fair value of options granted during the three months ended March 31, 2006 and 2005 was $3.30 and $2.92, respectively. The total intrinsic value of options exercised and cash received by the Company from option exercises during the three months ended March 31, 2006 was approximately $400 and $3,600, respectively. As of March 31, 2006, there was approximately $3.8 million of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over a weighted average period of 2.25 years. The total fair value of stock options that vested during the three months ended March 31, 2006 and 2005 was approximately $.5 million and $1.5 million, respectively.

A summary of restricted stock activity for the three months ended March 31, 2006 is as follows:

The restricted stock awards vest in equal installments over a period of three years. The restricted stock awards were valued based on the closing price of the Company’s common stock on the date of grant, and compensation cost is recorded on a straight-line basis over the share vesting period. The Company recorded expense of approximately $83,000 associated with its restricted stock.

stock awards in the three months ended March 31, 2006. As of March 31, 2006, there was approximately $1.4 million of unrecognized compensation cost related to restricted stock awards that will be recognized as expense over a weighted average period of 3 years.

Use of Estimates:The unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principlesU.S. generally accepted in the United States of America,accounting principles, 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.

RecentImpact of Recently Issued Accounting Pronouncements:Standards:In December 2004,February 2006, the FASB issued SFAS No. 123R, “Share-Based Payment.155,“Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS 155 amends SFAS No. 123R requires employee stock options133,“Accounting for Derivative Instruments and rightsHedging Activities,” and SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement also resolves issues addressed in Statement No. 133 Implementation Issue No. D1,“Application of Statement 133 to purchase shares under stock participation plans to be accounted for under theBeneficial Interests in Securitized Financial Assets.” SFAS 155 permits fair value method,remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and eliminatesclarifies which interest-only strips and principal-only strips are not subject to 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. The requirements of SFAS No. 123R are133. SFAS 140 is amended to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued during fiscal periodsyears beginning after DecemberSeptember 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 only to interim periods in the year of adoption.2006. The Company is currently evaluating these transition methods.

does not expect this statement to have a material impact on its consolidated financial statements.

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, 2006 and 2005 and 2004 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 GE Energy.

In connection with the formation of GEFCS, the Company issued 2,250,000 shares of its common stock to GE MicroGen, Inc. in exchange for a 25% interest in GEFCS. As 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 the accompanying consolidated financial statements. In accordance with the terms of the agreement, General Electric Company will provide capital in the form of a loan not to exceed $8.0 million, to fund the operations of GEFCS.

In August 2001, the Company amended its agreements with GE Microgen, Inc. and GEFCS to expand GEFCS’ exclusive worldwide distribution rights to include all of its stationary PEM fuel cell systems. In addition, the Company increased its ownership interest in GEFCS from 25% to 40%. In return, the Company granted GE Power Systems Equities, Inc. an option to purchase 725,000 shares of its 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 Company capitalized $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 the accompanying consolidated financial statements, and is amortizing this amount over the remaining term of the original distribution agreement.

The Company accountspreviously accounted for its interest in GEFCS on the equity method of accounting and adjustsadjusted its investment by its proportionate share of income or losses under the caption “Equity in losses of affiliates” in the accompanying consolidated statements of operations. During the fourth quarter of fiscal 2005 the Company recorded an other than temporary impairment of its investment in GEFCS in accordance with APB 18,The Equity Method of Accounting for Investments in Common Stock. The charge was recorded to fully write off our investment primarily as a result of a shift in the

Company’s business strategy away from residential fuel cells, for which GEFCS was well suited as a distribution partner, to backup power generation, for which GEFCS is not a natural partner. Accordingly, as of and for the quarter ended March 31, 2006 there is no activity with regard to investments in affiliates. For the three monthsquarter ended September 30,March 31, 2005, equity in losses of affiliates related to GEFCS was approximately $448,000, consisting almost entirely of amortization of the related intangible asset. Accumulated amortization at September 30, 2005 was $11.8$0.5 million.

The Company’s distribution agreement with GE Fuel Cell Systems (GEFCS) has been amended on a number of occasions, most recently in April 2005. The amendments to the distribution agreement provide for the ability to sell directly or negotiate nonexclusive distribution rights to third parties for the GenCore^® back-up power product line, the GenSite^™ hydrogen generation product line and the GenSys^® prime power product line (for telecommunication and broadband applications). In exchange, starting in the fourth quarter of 2005 the Company has agreed to pay a 5% commission for GenCore^®, and starting in the fourth quarter of 2005 the Company has agreed to pay a 5% commission

for GenSite^™, in each case based on sales price, to GEFCS. We have also agreed to pay a 5% commission for GenSys^® beginning in the fourth quarter of 2006. The distribution agreement expires on December 31, 2014.

Under a separate agreement with the General Electric Company, for its product development effort, the Company has 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. During 2005, the Company and General Electric Company extended this period through December 2007. Through September 30, 2005, the Company had purchased approximately $10.2 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 the Company’s employees regarding procurement activities.

5. Goodwill and Other Intangible Assets

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

Amortization expense for acquired intangible assets during the nine months ended September 30, 2005 was $2.0 million. Estimated amortization expense for the remainder of 2005 and the succeeding years is as follows:

6. Stockholders’ Equity

Changes in stockholders’ equity for the ninethree months ended September 30, 2005March 31, 2006 are as follows:

		Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss				Deficit Accumulated During the Development Stage				Total Stockholders’ Equity				Comprehensive Loss
December 31, 2005		$	858,353		$	531,435,616		$	(257,120	)		$	(407,081,958	)		$	124,954,891
Net loss													(12,125,919	)			(12,125,919	)		$	(12,125,919	)
Change in unrealized loss on marketable securities									146,368								146,368				146,368
Total comprehensive loss																				$	(11,979,551	)
Stock based compensation			1,668			1,516,421											1,518,089
Stock option exercises			7			3,584											3,591
March 31, 2006		$	860,028		$	532,955,621		$	(110,752	)		$	(419,207,877	)		$	114,497,020

Common stock issued during the three months ended September 30, 2005March 31, 2006 consisted of 82,527166,743 shares related to stock based compensation, and 20,100666 shares related to stock option exercises.

Additionally, in August 2005, the Company completed a public offering of 12.0 million shares of common stock. The Company received net proceeds of $70.6 million after payment of expenses and placement fees relating to the issuance and distribution of the securities.

purchases.

7. Commitments and Contingencies

Shareholder Class Action Lawsuit: As previously disclosed, the Company and certain of its officers and directors were defendants in a shareholder class action lawsuit filed in the federal district court for the Eastern District of New York entitled Plug Power Inc. Securities Litigation, CV-00-5553(ERK)(RML). On December 29, 2004, the plaintiffs and the defendants entered into a Stipulation and Agreement of Settlement to settle all remaining claims in the litigation, subject to final approval by the Court. The $5 million cash settlement requires no payment by the Company or the individual defendants 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.

8.6. Supplemental Disclosures of Cash Flows Information

The following represents required supplemental disclosures of cash flows information and non-cashnoncash financing and investing activities which occurred during the ninethree months ended September 30,March 31, 2006 and 2005:

7. Subsequent Events

On April 10, 2006 Plug Power entered into a Stock Purchase Agreement with Smart Hydrogen Inc. (“Buyer” or “Smart Hydrogen”) pursuant to which the Company agreed to sell 395,000 shares of Class B Capital Stock of the Company, which are convertible into 39,500,000 shares of common stock of the Company, to the Buyer for an aggregate purchase price of $217,250,000. Each share of Class B Capital Stock is convertible into 100 shares of common stock of the Company and the purchase price per share of common stock under the Stock Purchase Agreement, on an as-converted basis, is $5.50. Smart Hydrogen has also agreed to purchase 1,825,000 shares of common stock of the Company from DTE Energy Foundation contemporaneously with the closing of its purchase of Class B Capital Stock from the Company. In the event the purchase from DTE Energy Foundation is not consummated, the Company will have the option to sell an additional 18,250 shares of Class B Capital Stock, convertible into 1,825,000 shares of common stock, to the Buyer at an as-converted purchase price of $5.50 per share for an aggregate purchase price of $10,037,500. Following the closing of these transactions, Smart Hydrogen is expected to own approximately 35% of the Company’s outstanding common stock on an as-converted basis, taking into account the 2,714,700 shares of common stock of the Company that the Buyer purchased from GE Power Systems Equities, Inc. in December 2005 and 2004:currently owns. This investment is expected to provide Plug Power with the opportunity to accelerate and expand its business strategy by strengthening its sales, marketing, research and development efforts while providing the flexibility to engage global business opportunities and expand its presence in important markets.

These transactions are expected to close in the summer of 2006, subject to approval by the Company’s shareholders, regulatory approvals, including Hart-Scott-Rodino antitrust clearance and clearance by the Committee on Foreign Investment in the United States, and other customary closing conditions.

ITEM–2

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, 20042005 on March 15, 2005.14, 2006. 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: the ability to satisfy the conditions to the consummation of the investment by Smart Hydrogen, the timing and content of the approvals necessary to consummate the investment by Smart Hydrogen, the risk that possible strategic benefits of the investment by Smart Hydrogen do not materialize, 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, 2004,2005, filed with the Securities and Exchange Commission on March 15, 2005.14, 2006. 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 commercial and residential energy consumers worldwide. We are focused on a platform-based systems architecture, whichOur architecture-based technology platform includes proprietary proton exchange membrane (PEM) fuel cell and fuel processing technologies, from which wemultiple products are offeringbeing offered or developing multiple products.are under development. We are currently offering for commercial sale our GenCore^® product, for commercial sale. Our GenCore^® product is a direct-current (DC) back-upbackup power product for telecommunications, broadband, utility and industrial uninterruptible power supply (UPS) applications. We are also developing additional products, for continuous-runincluding a continuous power applications,product, with optional combined heat and power capability for remote small commercial and remote residential 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 commercial product, the GenCore^™ 5T (see Product Development and Commercialization), is designed to provide direct-current (DC) backup power for telecommunications, broadband, utility and industrial uninterruptible power supply applications. The GenCore^™ 5T is fueled by hydrogen and does not require a fuel processor.

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 develops.is developing. Many of our initial sales of our GenCore^™ 5T product have been contract specificare 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 linestraight-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—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 product or we mayUnit, continue to defer recognition, based on application of appropriate guidance within EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,”Deliverables”, or changes inchange the manner in which 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, 2005,March 31, 2006, we had unrestricted cash and cash equivalents and marketable securities totaling $106.6$86.3 million and working capital of $105.7$85.5 million. Additionally, we have restricted cash in the amount of $4.3$4.0 million, which was escrowed to collateralize debt associated with the purchase of our facilities in 1999.

Recent Developments

DuringInvestment Transaction

On April 10, 2006 Plug Power entered into a Stock Purchase Agreement with Smart Hydrogen Inc. (“Buyer” or “Smart Hydrogen”) pursuant to which the nine months ended September 30, 2005, cash used by operating activities was $30.1 million consisting primarilyCompany agreed to sell 395,000 shares of a net lossClass B Capital Stock of $35.3 million offset, in part, by non-cash expenses in the amount of $7.1 million, including $2.6 million for amortization and depreciation, $2.5 million for stock based compensation, $688,000 for amortization of intangible assets and $1.3 million for equity losses in affiliates. Cash used in investing activities for the nine months ended September 30, 2005 was $8.4 million consisting of $6.8 million in net purchases of marketable securities and $1.6 million used to purchase property plant and equipment. Cash provided by financing activities was $71.3 million consisting primarily of net proceeds from the issuanceCompany, which are convertible into 39,500,000 shares of common stock of the Company, to the Buyer for an aggregate purchase price of $217,250,000. Each share of Class B Capital Stock is convertible into 100 shares of common stock of the Company and the purchase price per share of common stock under the Stock Purchase Agreement, on an as-converted basis, is $5.50. Smart Hydrogen has also agreed to purchase 1,825,000 shares of common stock of the Company from DTE Energy Foundation contemporaneously with the closing of its purchase of Class B Capital Stock from the Company. In the event the purchase from DTE Energy Foundation is not consummated, the Company will have the option to sell an additional 18,250 shares of Class B Capital Stock, convertible into 1,825,000 shares of common stock, to the Buyer at an as-converted purchase price of $5.50 per share for an aggregate purchase price of $10,037,500. Following the closing of these transactions, Smart Hydrogen is expected to own approximately 35% of the Company’s secondary offeringoutstanding common stock on an as-converted basis, taking into account the 2,714,700 shares of $70.6 million.common stock of the Company that the Buyer purchased from GE Power Systems Equities, Inc. in December 2005 and currently owns. This investment is expected to provide Plug Power with the opportunity to accelerate and expand its business strategy by strengthening its sales, marketing, research and development efforts while providing the flexibility to engage global business opportunities and expand its presence in important markets.

We have financed our operations through September 30, 2005 primarily fromThese transactions are expected to close in summer 2006, subject to approval by the sale of equity, which has provided cashCompany’s shareholders, regulatory approvals, including Hart-Scott-Rodino antitrust clearance and clearance by the Committee on Foreign Investment in the amountUnited States, and other customary closing conditions.

Restructuring of $420.6 million. Since inception, net cash usedGE Relationship

On March 24, 2006, the Company, GE MicroGen, Inc. (“GE MicroGen”) a wholly-owned subsidiary of General Electric Company (“GE”), and GE restructured their service and equity relationships by terminating the joint venture, GE Fuel Cell Systems (“GEFCS”), and the associated distributor and other agreements, and entering into a new development collaboration agreement. Under the new agreement, the Company and GE (through its Global Research unit) have agreed to collaborate on programs including but not limited to development of tools, materials and components that can be applied to various types of fuel cell products. The specific programs to be undertaken under the agreement, and the detailed terms and conditions thereof, remain subject to agreement by both parties. It is anticipated that such programs could also include continued

collaboration on sales and marketing opportunities for the Company’s products between the Company and GE. Under the terms of the new development collaboration agreement, the Company is obligated to purchase $1 million of services from GE in operating activities hasconnection with this collaboration prior to December 31, 2008. The development collaboration agreement is scheduled to terminate on the earlier of December 31, 2014 or sooner subject to completion of a certain level of program activity.

The Company and GE agreed that GEFCS was not an effective entity for marketing the Company’s products. Accordingly, the exclusive product distribution and service rights that had been $292.5 milliongranted by the Company to GEFCS will now revert back to the Company and, cash used in investing activities has been $69.8 million, including our purchase of property, plant and equipment of $33.3 million and our investments in marketable securities in the amountcase of $55.1 million offset,certain products, the Company will no longer be required to pay commissions to GE on third-party sales. The Company may now freely sell its products to the partners and customers it determines are most effective in part, by net proceeds from acquisitionexecuting its business plan, with no further obligations to GE.

Director Resignation

On March 24, 2006, Richard R. Stewart resigned as a Director of $29.5 million.the Company as a result of the policies of his employer, General Electric Company. Mr. Stewart had no disagreements with the Company on any matter relating to the Company’s operations, policies or procedures.

Product Development and Commercialization

We are focused on a fuel cell technology platform from which we believe we can offer multiple products. We currently have one commercial product line, GenCore^®, which we are continuingcontinue to enhance and broaden:

GenCore^®— OurBackup Power for Telecommunication, Broadband, Utility and UPS Applications—We currently offer the GenCore^® product line which is focused on providing back-up, DCdirect-current backup power products in a power range of 1-12 kilowatts for applications in the telecom, broadband, utility and industrial UPS market applications. Our GenCore^® products are fueled by hydrogen and do not require a fuel processor. In the fourth quarter of 2003, the Company

we began initial shipments of the GenCore^® 5T product and hashave shipped 182246 units through September 30, 2005. The Company recently announced several ordersMarch 31, 2006. See “Distribution, Marketing and Strategic Relationships” for a total of 116 GenCore^® back-up fuel cell systems from Tycoadditional information regarding product development and the sale of 12 GenCore^®commercialization. systems to the Florida Department of Environmental Protection, marking the first commercial purchase of a GenCore^® product by a state agency.

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

GenSys^®—Remote Continuous Power for Light Commercial and Residential Applications—We are developingbegan field-testing of the next generation GenSys^®, our continuous run product, in the third quarter of 2005. 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, both grid-independent and 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^®See “Distribution, Marketing and Strategic Relationships” for additional information regarding product development effort also includes a joint development program with Vaillant, 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. We recently received a contract extension from the Department of Defense and have installed 10 GenSys^®commercialization. systems at Robbins Air Force base where they will be tested for reliability and suitability for use on military bases.

GenSite^™—We have 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. We are presently operating prototype systems installed in our Latham, NY and Apeldoorn, Netherlands facilities where they are supplementing the hydrogen used in our daily operations and providing engineering and operational information. We are also participating in a NYSERDA program with Honda and Air Products to utilize our GenSite in a fuel cell vehicle refueling demonstration.

While we continue to be interested in onsite hydrogen generation, the Company’s resources are currently focused on other product lines that have the potential for earlier market traction. We will continue to evaluate how the Company can profitably participate in this market.

Home Energy Station—We are also currentlyhave been developing technology in support of the automotive fuel cell market under an agreementa series of agreements with Honda R&D Co Ltd. of Japan (Honda), a subsidiary of Honda Motor Co., Ltd., under which we arehave exclusively and jointly developingdeveloped and testing atested three phases of prototype fuel cell systemsystems that providesprovide 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 athe first prototype Home Energy Station at Honda R&D Americas’ facility in Torrance, California. In March 2004, we signed an agreement with Honda for the second phase of our expected multi-phase product development effort. As in the first phase, Honda is funding work under this 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 isIn September 2005, Plug Power and Honda installed our third-generation Home Energy Station in Torrance, California. Honda now utilizes the systems in both New York and California for refueling a prototype Honda FCX fuel cell vehicle that is undergoing winter testingvehicles in their test programs. Across each generation of the Albany, New York region,Home Energy Station, we have significantly reduced its size and weight, as well as two FCX vehicles that Honda has leased to the State of New York. We are continuing our collaboration with Hondaimproved its performance. See “Distribution, Marketing and in February 2005 we signed an agreement with HondaStrategic Relationships” for the third phase of this multi-phase Home Energy Stationadditional information regarding product development effort.

and commercialization.

GenDrive^™Distribution, Marketing and Strategic Relationships—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 partnerships

In connection with end users of this product to develop the GenDrive^™ further.

Strategic Relationships and Development Agreements

Since our inception,building an extended enterprise, we have formed strategic relationships with suppliers of key components, developed distributorwell-established companies through distribution, marketing, supply and customer relationshipstechnology and entered intoproduct development and demonstration programs with electric utilities, government agencies and other energy providers. Relationships have been established forarrangements. Our sales and marketing related activity, as well as technology development. Thesestrategy is to build a network of leading distributors and sub-distributor networks who have established relationships includeand that can distribute and service our products in specific geographic or market segments. We have distribution marketingagreements in place with four domestic distributors, including Tyco Electronics Power Systems, Inc., (Tyco) our largest North American distribution partner, and technology arrangements13 international distributors, including IST Holdings Ltd. (IST), our distribution partner in South Africa with whom we recently jointly received a $3 million customer buy-down grant from the International Finance Corporation to install 400 fuel cell systems over the next three years.

We have also partnered, in the past, with companies such as General Electric Company (GE),Vaillant, Pemeas and Engelhard and have recently entered into an additional agreement with Honda Vaillant, Tyco, Pemeas Gmbh (Pemeas), Engelhard Corporationin connection with research and DTE Energy,development of key components of our fuel cell systems and future products we expect to offer. We have also established strong supply-chain relationships with supply chain partners includinglike 3M Dana, Toyo,Company (3M), Parker Hannifin Corporation (Parker Hannifin), T. Rad, Entegris, Parker and Arvin Meritor.

Some of these relationships are described in greater detail below.

GEGeneral Electric Company (GE) Entities: In February 1999 we entered into an agreement with GE MicroGen Inc. to form GE Fuel Cell Systems, LLC (GEFCS),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 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 and related arrangements with GEFCS, we serveserved 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% ownership interest in GEFCS.

Our distribution agreement, with GEFCS has been amended on a number of occasions, most recently in April 2005. These amendments include an increase to the Company’s ownership interest in GEFCS from 25% to 40%. In return, the Company grantedand GE Power Systems Equities, Inc. an option to purchase 725,000 shares ofagreed that its common stock at any time prior to August 21, 2006 at an exercise price of $15.00 per share. We have also amended our distribution agreement to provide for the ability toGE Energy business would not sell directly or negotiate nonexclusive distribution rights to third parties for our GenCore^® back-up power product line, our GenSite^™ hydrogen generation product linesuch PEM fuel cell systems and our GenSys^® prime power product line (for telecommunication and broadband applications). In exchange, startingrelated components in the fourth quarter of 2005 we have agreed to pay a 5% commission for GenCore^®, and startingterritory in the fourth quarter of 2005

we have agreed to pay a 5% commission of GenSite^™, in each case based on sales price, to GEFCS. We have also agreed to pay a 5% commission for GenSys^® beginning in the fourth quarter of 2006. Thewhich GEFCS had exclusive distribution agreement expires on December 31, 2014.rights.

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 committedwe were required to purchase a minimum of $12.0 million of such services throughby September 2004. 2007.

During 2005 the Company, GE MicroGen and GE extended this periodbegan discussions to restructure the service and equity relationships by terminating the Service Agreements and Equity Agreements described above. These discussions were finalized during the first quarter of fiscal 2006, and the Company and GE (acting through December 2007. Through September 30, 2005, we had purchased approximately $10.2its Global Research unit) have entered into a new development collaboration agreement under which the Company and GE have agreed to collaborate on programs including, but not limited to, development of tools, materials and components that can be applied to various types of fuel cell products. The specific programs to be undertaken under the agreement, and the detailed terms and conditions thereof, remain subject to agreement by both parties. It is anticipated that such programs could also include continued collaboration on sales and marketing opportunities for the Company’s products between the Company and GE. Under the terms of the new development collaboration agreement, the Company is obligated to purchase $1 million of such services. Additionally,services from GE agreedin connection with this collaboration prior to act as our agent in procuringDecember 31, 2008. The development collaboration agreement is scheduled to terminate on the earlier of December 31, 2014 or the date of completion of a certain equipment, parts and components and is providing training services to our employees regarding procurement activities pursuant to this agreement.

level of program activity.

Honda: As described above, we have an agreement with Honda to exclusively and jointly develop and test the Home Energy Station. We are currently entering Phase IIIIn 2006, we signed a contract with Honda funding our joint development of the fourth generation system as well as a third generation home energy station prototype. In addition, we have signed a newseparate agreement with Honda to collaborate onfunding joint research and development activities forof technology that may be utilized in future products.systems.

Tyco: In September 2004, we completed an agreement with Tyco Electronics Power Systems, Inc., (Tyco) to market, promote and sell our GenCore^®5T fuel cell systems for telecommunication backup applications through its direct sales force under both the Tyco Electronics and Plug Power brands. This agreement 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 fuel cell heating appliance 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. Under the agreement, we will sell fuel cell subsystems directly and exclusively to Vaillant, and Vaillant will distribute Fuel 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 as defined in the agreement.

Pemeas: We have a joint development agreement with Pemeas (effective April 1, 2004, the fuel cell activity of Celanese AG and the former Hoechst AG were combined to form a new company, Pemeas GmbH), to develop, on an exclusive basis, a high temperaturehigh-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 had been met and the Company and Engelhard have 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 a distribution agreement with DTE Energy Technologies, Inc. under 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™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.

Results of Operations

Comparison of the Three Months Ended September 30, 2005March 31, 2006 and September 30, 2004.March 31, 2005.

Product and service revenue. Product and service revenue was $1.3 million for

During the three month periodsmonths ended September 30, 2005 and 2004, respectively. We defer recognition ofMarch 31, 2006, we recognized product and service revenue of $857,000, $714,000 of which was deferred at December 31, 2005, compared to $1.1 million during the timesame quarter last year, $1.0 million of delivery and recognizewhich was deferred at December 31, 2004. We delivered a total of 17 fuel cell systems during the quarter ended March 31, 2006. The revenue as the continued service, maintenance and other support obligations expire (see Critical Accounting Policies and Estimates—Revenue Recognition). The costs associated with these systems is related to product and service arrangements and is deferred as described in further detail below. For the three months ended March 31, 2006, we deferred revenue in the amount of $344,000 for the 17 systems delivered under product and service arrangements, compared to $140,000 for the 10 fuel cell systems delivered during the same period in 2005.

At March 31, 2006, we had total deferred product and other obligations are expensed as they are incurred.service revenue in the amount of $2.5 million of which we expect to recognize approximately $1.8 million during the remainder of 2006.

Our initial sales of the GenCore^®product and services are contract specificcontract-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 areis 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 forover periods of twelve to twenty-seven months.

During the three months ended September 30, 2005, we recognized product and service revenue of $1.3 million, $1.0 million of which was deferred at December 31, 2004, compared to $1.3 million during the same quarter last year, $893,000 of which was deferred at December 31, 2003. We delivered a total of 39 fuel cell systems during the quarter ended September 30, 2005. The revenue associated with 28 of these systems is related to product and service arrangements and has been deferred while 11 fuel cell system was delivered under a government contract and the associated revenue is included in research and development contract revenue. For the three months ended September 30, 2005, we deferred revenue in the amount of $467,000 for the 28 systems delivered under product and service arrangements, compared to $1.4 million for the 24 fuel cell systems delivered during the same period in 2004.

At September 30, 2005, we had total deferred product and service revenue in the amount of $3.0 million of which we expect to recognize approximately $851,000 during the remainder of 2005.

Research and development contract revenue.Research and development contract revenue was $2.6decreased to $1.4 million for the three months ended September 30, 2005, comparedMarch 31, 2006 from $2.2 million during the same period last year. The decrease is the result of prior spending levels dropping off for material purchases and subcontractor activity as the U.S. Department of Energy (DOE) programs wind down and decreased activity under our contract with National Institute of Standards and Technology (NIST). We expect to $3.3 million for the three months ended September 30, 2004.continue certain research and development contract work that is directly related to our current product development efforts. 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 decreasedincreased to $796,000$1.2 million for the three months ended September 30, 2005March 31, 2006 from $1.2 million$708,000 for the three months ended September 30, 2004. The decrease was driven primarily by a change in product mix to the lower cost GenCore^® units sold in 2005 versus the higher cost GenSys^™ units sold in the prior year.March 31, 2005. 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 decreased to $3.4$2.5 million for the three months ended September 30, 2005March 31, 2006 from $4.3$2.9 million for the three months ended September 30, 2004.March 31, 2005 as a result of decreased work under existing agreements as described above as well as a shift to higher cost share contracts. 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, 2005, decreasedMarch 31, 2006, increased to $387,000$663,000 from $664,000 for$372,000 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 decreaseincrease is primarily the result of stock based compensation associated with the amortizationCompany’s adoption of restricted stock issuedSFAS 123R during the first quarter of fiscal 2006 (see Note 2 in June 2003 under our employee stock option exchange program offset by the recovery of amortization associated with forfeited shares from terminated employees.

Notes to Condensed Consolidated Financial Statements).

Other research and development expense. Other research and development expenses were $9.1$8.3 million for the three months ended September 30, 2005March 31, 2006 compared to $7.9$9.4 million for the three months ended September 30, 2004. The increase was driven primarily by the write-off of approximately $720,000 of inventory pertaining to our GenSite prototype product. The decision to write-off this inventory is the result of the Company’s decision to focus its resources on other product lines that have the potential for earlier market traction. ResearchMarch 31, 2005. Other 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 includedincludes 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”. This intangible asset became fully amortized during the first quarter of fiscal 2005, and, thus,so there is no relatedcorresponding amortization expense forduring the three monthsquarter ended September 30, 2005.

March 31, 2006.

Noncash general and administrative expense. Noncash general and administrative expenses for the three months ended September 30, 2005 decreasedMarch 31, 2006 increased to $275,000$195,000 from $304,000$136,000 for the three months ended September 30, 2004.March 31, 2005. Noncash general and administrative expense represents the fair value of stock grants to employees, consultants and others in exchange for services provided. The decreaseincrease is primarily the result of stock based compensation associated with the amortizationCompany’s adoption of restricted stock issuedSFAS 123R during the first quarter of fiscal 2006 (see Note 2 in June 2003 under our employee stock option exchange program offset by the recovery of amortization associated with forfeited shares from terminated employees.Notes to Condensed Consolidated Financial Statements).

Other general and administrative expense. Other general and administrative expense increased to $2.2 million for the three months ended March 31, 2006 from $2.0 million for the three months ended September 30, 2005 from $1.7 million for the three months ended September 30, 2004.March 31, 2005. 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 $669,000$823,000 for the three months ended September 30, 2005March 31, 2006, from $262,000$270,000 for the same period in 2004.2005. The increase was primarily the result of higher cash balances as a result of the Company’s August 2005 secondary offering.and slightly higher yields on our investment portfolio.