For the fiscal year ended December 31, 2004

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

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

The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant on June 30, 2004 was $391.7 million.

As of February 3, 2005, 72,808,072 shares of the Registrant’s Common Stock were issued and outstanding.

Portions of the definitive proxy statement relating to the Registrant’s Annual Meeting of stockholders to be held on May 19, 2005 are incorporated by reference into Part III of this report to the extent described therein.

Plug Power Inc. together with its subsidiaries (Company or Plug Power) is a development stage enterprise involved in the design, development and manufacture of on-site energy systems for energy consumers worldwide. The Company is organized in the State of Delaware and was originally formed as a joint venture between Edison Development Corporation and Mechanical Technology Incorporated in the State of Delaware on June 27, 1997 and succeeded by merger to all the assets, liabilities and equity of Plug Power L.L.C. on November 3, 1999.

The Company is focused on an architecture-based technology platform, which includes proprietary proton exchange membrane (PEM) fuel cell and fuel processing technologies, from which multiple products are being offered or are under development. The Company is currently offering for commercial sale its GenCore^® product, a back-up power product 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; and an on-site hydrogen generation product for use in a variety of industrial gas applications.

Fuel cell technology has existed since the 19th century, and PEM fuel cells were first developed in the 1950s. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electric power without combustion. Hydrogen is derived from hydrocarbon fuels such as natural gas, propane, methanol or gasoline and can also be obtained from the electrolysis of water, stored hydrogen or a hydrogen pipeline. A single PEM fuel cell consists principally of two electrodes (the anode and the cathode) separated by a polymer electrolyte membrane. Each of the electrodes is coated on one side with a platinum-based catalyst. Hydrogen fuel is fed into the anode and air enters through the cathode. Promoted by the platinum catalyst, the hydrogen molecule splits into two protons and two electrons. The electrons are conducted around the membrane, creating an electric current; the protons from the hydrogen molecule are transported through the polymer electrolyte membrane and combine at the cathode with the electrons and oxygen from the air to form water and produce heat. To obtain the desired level of electric power, individual fuel cells are combined into a fuel cell stack. Increasing the number of fuel cells in a stack increases the voltage, while increasing the surface area of each fuel cell increases the current.

In addition to a fuel cell stack, a complete PEM fuel cell power system generally includes supporting subsystems, such as fuel, air supply, cooling and control systems, and may also require a power inverter or power conditioner to convert the direct current (DC) produced by the fuel cell stack into alternating current (AC). If the PEM fuel cell system does not use hydrogen directly as its fuel, then a fuel processor is also required in order to extract hydrogen from hydrocarbon fuels.

We currently have one commercial product line, which we are continuing to enhance and broaden:

GenCore^®—Back-up Power for Telecommunication, Broadband, Utility and UPS Applications—We currently offer the GenCore product 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 market applications. Our GenCore products are fueled by hydrogen and do not require a fuel processor. In the fourth quarter of 2003, we began initial shipments of the GenCore 5T product, and have shipped 112 units through December 31, 2004. See “Other Distribution, Marketing and Strategic Relationships” 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^™—On-Site Hydrogen Generation—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 presently have a prototype system in our research and product development facilities in Apeldoorn, Holland, and another system at our Latham, NY headquarters. In 2005, we expect to install and operate a number of GenSite systems, in application, at customer locations. During 2004, we shipped our first GenSite system and expect that it will be installed and operational by March 2005.

Home Energy Station—We are also currently developing technology in support of the automotive fuel cell market under an agreement with Honda R&D Co Ltd. of Japan (Honda), a subsidiary of Honda Motor Co., Ltd., under which we are exclusively and jointly developing and testing 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 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 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. At December 31, 2004, we were substantially complete with the second phase and we expect to continue our collaboration with Honda in 2005 with a third phase of Home Energy Station development.

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.

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 2004, the Company and GE extended this period through September 2006. Through December 31, 2004, we had purchased approximately $9.9 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: 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 former Hoechst AG were 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 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 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.

We believe that neither we nor our competitors can achieve a significant proprietary position on the basic technologies currently used in PEM fuel cell systems. However, we believe the design and integration of our system and system components, as well as some of the low-cost manufacturing processes that we have developed, is intellectual property that can be protected.

During 2004, we increased our technology portfolio by adding 22 new U.S. patents. At December 31, 2004, we had 124 U.S. patents, 9 foreign patents, and 156 patents pending worldwide. Additionally, patents were filed with Honda relating to development work for the Home Energy Station. These patents cover, among other things: fuel cell components that reduce manufacturing part count; fuel cell system designs that lend themselves to mass manufacturing; improvements to fuel cell system efficiency reliability and longer system life; and control strategies, such as added safety protections and operation under extreme conditions. In general, our employees agree that all inventions (whether patented or not) made or conceived while an employee of Plug Power, which are related to or result from work or research that Plug Power performs, will remain the sole and exclusive property of Plug Power.

There are a number of companies located in the United States, Canada and abroad that are developing PEM fuel cell technology. Additionally, a number of major automotive companies have in-house PEM fuel cell development efforts.

We also compete with companies that are developing other types of fuel cells. There are four types of fuel cells other than PEM fuel cells that are generally considered to have possible commercial applications: phosphoric acid fuel cells, molten carbonate fuel cells, solid oxide fuel cells and alkaline fuel cells. Each of these fuel cells differs in the component materials, as well as in its overall operating temperature. While all fuel cell types may have potential environmental and efficiency advantages over traditional power sources, we believe that PEM fuel cells can be manufactured less expensively and are more efficient and more practical in small-scale stationary applications. Further, most automotive companies have selected PEM technology for fuel-cell-powered automobiles, which we expect will help establish a stronger industry around PEM technology and may result in a lower cost as compared to the other fuel cell technologies. (See “Factors Affecting Future Results” for a discussion of the risks associated with achieving these objectives).

Our systems also compete with other distributed generation technologies, including microturbines and reciprocating engines, which are available at prices competitive with existing forms of power generation. We believe that our fuel cell systems will have a competitive advantage over these distributed generation technologies in that they can be more easily scaled to a range of applications and are expected to be more efficient in following the load profile of customers. Our systems will also compete with solar- and wind-powered systems and with certain types of battery technologies.

We do not believe that we will be subject to existing federal and state regulatory commissions governing traditional electric utilities and other regulated entities. Our product and its installation is, however, subject to oversight and regulation at the state and local level in accordance with state and local statutes and ordinances relating to, among others, building codes, public safety, electrical and gas pipeline connections, hydrogen siting and related matters. The level of regulation may depend, in part, upon whether a system is placed outside or inside a home or business. For example, the 2002 National Electric Code (NEC) is a model code adopted by the National Fire Protection Association that governs the electrical wiring of most homes, businesses and other buildings. The NEC has been adopted by local jurisdictions throughout the United States and is enforced by local officials, such as building and electrical inspectors. Article 692 of the NEC governs the installation of fuel cell systems. Accordingly, all our systems installed in a jurisdiction that has adopted the 2002 NEC must be installed in accordance with Article 692. In addition, product safety standards have been established covering the overall fuel cell system (CSA FC-1 formerly ANSI Z21.83) and the power conversion electronics (UL 1741). Our product has been certified by CSA International to be in compliance with the safety requirements of CSA FC-1, and our power conditioning system, an inverter, has been listed to UL1741 by Underwriter’s Laboratories. Other than these requirements, at this time, we do not know what additional requirements, if any, each jurisdiction will impose on our product or its installation. We also do not know the extent to which any new regulations may impact our ability to distribute, install and service our product. Once our product reaches the commercialization stage and we begin distributing our systems to our early target markets, the federal, state or local government entities or competitors may seek to impose regulations.

As of December 31, 2004, we had a total staff of 330, including 325 full-time employees, of which 215 were engineers, scientists, and other degreed professionals. We continuously monitor our workforce in an effort to identify specific areas of need, job redundancies, or inefficiencies based on our stage of development.

We maintain a website with an Internet address of www.plugpower.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own internet access charges, we make available free of charge, through our website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission.

This Annual Report on Form 10-K contains 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, our product development expectations and 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, those factors described below. Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of the 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 Annual Report on Form 10-K.

We may never complete the research and development of commercially viable on-site energy products.

We are a development stage company. We do not know when or whether we will successfully complete research and development of commercially viable on-site energy products. If we are unable to develop commercially viable on-site energy products, we will not be able to generate sufficient revenue to become profitable. The commercialization of our products depends on our ability to reduce the costs of our components and subsystems and we cannot assure you that we will be able to sufficiently reduce these costs. In addition, the commercialization of our products requires improvement of their overall reliability, efficiency and safety and we cannot assure you that we will be able to develop, acquire or license the technology necessary to achieve such improvement. Although we have sold a limited number of our initial products, we must complete substantial additional research and development before we will be able to manufacture a commercially viable product in commercial quantities. In addition, while we are conducting tests to predict the overall life of our products, we may not have run our products over their projected useful life prior to large-scale commercialization. As a result, we cannot be sure that our products will last as long as predicted, resulting in possible warranty claims and commercial failures.

We have incurred losses and anticipate continued losses for at least the next several years.

As of December 31, 2004, we had an accumulated deficit of $355.3 million. We have not achieved profitability in any quarter since our formation and expect to continue to incur net losses until we can produce sufficient revenue to cover our costs, which is not expected to occur for at least the next several years. We anticipate that we will continue to incur losses until we can produce and sell our products on a large-scale and cost-effective basis. However, we cannot predict when we will operate profitably, if ever. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

We have only been in business for a short time, and your basis for evaluating us is limited.

We were formed in June 1997 to further the research and development of stationary fuel cell systems. While we delivered our initial product in the third quarter of 2001, we do not expect to be profitable for at least the next several years. Accordingly, there is only a limited basis upon which you can evaluate our business and prospects. Before investing in our securities, you should consider the challenges, expenses and difficulties that we will face as a development stage company seeking to develop and manufacture new products.

A viable market for our products may never develop or may take longer to develop than we anticipate.

Our on-site energy products represent emerging markets, and we do not know the extent to which our targeted distributors and resellers will want to purchase these products and whether end-users will want to use them. If a viable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our products and may be unable to achieve profitability. The development of a viable market for our products may be impacted by many factors which are out of our control, including:

We have no experience manufacturing our products on a large-scale commercial basis and may be unable to do so.

To date, we have focused primarily on research, development and low volume manufacturing and have no experience manufacturing our products on a large-scale commercial basis. In 2000, we completed construction of our 50,000 square foot manufacturing facility, and have continued to develop our manufacturing capabilities and processes. We do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture our products in commercial quantities while meeting the quality, price, engineering, design and production standards required to successfully market our products. Our failure to develop such manufacturing processes and capabilities could have a material adverse effect on our business, financial condition, results of operations and prospects. Even if we are successful in developing our manufacturing capabilities and processes, we do not know whether we will do so in time to meet our product commercialization schedule or to satisfy the requirements of our distributors or customers.

We have not fully developed and produced certain products that we have agreed to sell to GE Fuel Cell Systems.

Our distribution agreement with GE Fuel Cell Systems has been amended on five occasions. In October 2003, we 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, starting in the fourth quarter of 2004 for GenCore and in the fourth quarter of 2005 for GenSite, we have agreed to pay a 5% commission, based on sales price, to GEFCS. The distribution agreement expires on December 31, 2014.

We have not developed certain products that meet all specifications required by the multi-generation product plan. There can be no assurance that we will complete development of products meeting specifications required by GE Fuel Cell Systems and deliver them on schedule. Pursuant to the distribution agreement, GE Fuel Cell Systems has the right to provide notice to us if, in its good faith judgment, we have materially deviated from the multi-generation product plan. Should GE Fuel Cell Systems provide such notice, and we cannot mutually agree to a modification to the multi-generation product plan, then GE Fuel Cell Systems has the right to terminate the distribution agreement for cause, subject to our rights to cure. In addition, GE Fuel Cell Systems has the right to terminate the distribution agreement for cause if we fail to provide GE Fuel Cell Systems with products that, in GE Fuel Cell Systems’ reasonable judgment, are materially competitive with alternative proton exchange membrane fuel cell-powered generator sets, subject to our rights to cure.

GE Energy, the division of General Electric Company which controls GE Fuel Cell Systems through GE MicroGen, Inc., has agreed not to sell or distribute proton exchange membrane fuel cell systems and related components manufactured by parties other than us through any entity other than GE Fuel Cell Systems. GE Energy is not, however, prohibited from developing non-proton exchange membrane fuel cell systems and other distributed energy systems and products that would compete directly or indirectly against our proton exchange membrane fuel cell systems or other products we may manufacture. GE Energy is not required to provide us with any information concerning the developments of such products, or plans or intentions to manufacture such products by GE Energy. The development of different energy product solutions by GE Energy could harm the marketability of our technology by providing potential customers with an alternative to our products.

Delays in our product development would have a material impact on our commercialization schedule.

If we experience delays in meeting our development goals or if our products exhibit technical defects or if we are unable to meet cost or performance goals, including power output, useful life and reliability, our commercialization schedule will be delayed. In this event, potential purchasers of our products may choose alternative technologies and any delays could allow potential competitors to gain market advantages. We cannot assure you that we will successfully meet our commercialization schedule in the future.

We may need to secure additional funding to complete our product development and commercialization plans and we may be unable to raise additional capital.

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our products and market acceptance of our products. We expect to devote substantial capital resources to continue development programs, establish a manufacturing infrastructure and develop manufacturing processes. We may need to raise additional funds to achieve commercialization of our products. However, we do not know whether we will be able to secure additional funding, or funding on acceptable terms, to pursue our commercialization plans. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders will be reduced. If adequate funds are not available to satisfy either short-term or long-term capital requirements, we may be required to limit operations in a manner inconsistent with our development and commercialization plans, which could affect operations in future periods.

We may be unable to establish relationships with third parties for certain aspects of product development, manufacturing, distribution and servicing and the supply of key components for our products.

We will need to enter into additional strategic relationships in order to complete our current product development and commercialization plans. In particular, we may require one or more partners to assist us in developing commercially viable fuel cell systems that produce in the range of 25 to 100 kW of electric power. We will also require partners to assist in the distribution, servicing and supply of components for our anticipated back-up power and on-site hydrogen generation products, both of which are in development. If we are unable to identify or enter into satisfactory agreements with potential partners, including those relating to the distribution of and service and support for our anticipated back-up power and on-site hydrogen generation products, we may not be able to complete our product development and commercialization plans on schedule or at all. We may also need to scale back these plans in the absence of needed partners, which would adversely affect our future prospects. In addition, any arrangement with a strategic partner may require us to issue a material amount of equity securities to the partner, provide the partner with representation on our board of directors and/or commit significant financial resources to fund our product development efforts in exchange for their assistance or the contribution to us of intellectual property. Any such issuance of equity securities would reduce the percentage ownership of our then current stockholders. While we have entered into relationships with suppliers of some key components for our products, we do not know when or whether we will secure supply relationships for all required components and subsystems for our products, or whether such relationships will be on terms that will allow us to achieve our objectives. Our business, prospects, results of operations and financial condition could be harmed if we fail to secure relationships with entities which can develop or supply the required components for our products and provide the required distribution and servicing support. Additionally, the agreements governing our current relationships allow for termination by our partners under certain circumstances.

We will rely on our partners to develop and provide components for our products.

A supplier’s failure to develop and supply components in a timely manner or at all, or to develop or supply components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could harm our ability to manufacture our products. In addition, to the extent that our supply partners use technology or manufacturing processes that are proprietary, we may be unable to obtain comparable components from alternative sources.

The markets for on-site energy products are intensely competitive. There are a number of companies located in the United States, Canada and abroad that are developing proton exchange membrane and other fuel cell technologies and energy products that compete with our products. Some of our competitors in the fuel cell sector are much larger than we are and may have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of commercially viable fuel cell products more quickly and effectively than we can.

In addition, there are many companies engaged in all areas of traditional and alternative energy generation in the United States, Canada and abroad, including, among others, major electric, oil, chemical, natural gas, batteries, generators and specialized electronics firms, as well as universities, research institutions and foreign government-sponsored companies. These firms are engaged in forms of power generation such as solar and wind power, reciprocating engines and microturbines, as well as traditional grid-supplied electric power. Many of these entities have substantially greater financial, research and development, manufacturing and marketing resources than we do.

If we are unable to develop products that are competitive with competing technologies in terms of price, reliability and longevity, consumers will be unlikely to buy our products. The price of our products depends largely on material and manufacturing costs. We cannot guarantee that we will be able to lower these costs to the level where we will be able to produce a competitive product or that any product produced using lower cost materials and manufacturing processes will not suffer from a reduction in performance, reliability and longevity.

Failure of our field tests could negatively impact demand for our products.

We are currently field-testing a number of our products and we plan to conduct additional field tests in the future. We may encounter problems and delays during these field tests for a number of reasons, including the failure of our technology or the technology of third parties, as well as our failure to maintain and service our products properly. Many of these potential problems and delays are beyond our control. Any problem or perceived problem with our field tests could materially harm our reputation and impair market acceptance of, and demand for, our products.

Further regulatory changes and electric utility industry restructuring may affect demand for our products.

The market for electric power generation products is heavily influenced by federal and state governmental regulations and policies concerning the electric utility industry. A change in the current regulatory policies could deter further investment in the research and development of alternative energy sources, including fuel cells, and could result in a significant reduction in the demand for our products. We cannot predict how deregulation or restructuring of the industry will affect the market for our products.

Our business may become subject to future government regulation, which may impact our ability to market our products.

Our products will be subject to federal, local, and foreign laws and regulations, including, for example, state and local ordinances relating to building codes, public safety, electrical and gas pipeline connections and related matters. Further, as products are introduced into the market commercially, governments may impose new regulations. We do not know the extent to which any such regulations may impact our ability to distribute, install and service our products. Any regulation of our products, whether at the federal, state, local or foreign level, including any regulations relating to installation and servicing of our products, may increase our costs and the price of our products.

Utility companies could place barriers on our entry into the marketplace where customers depend on traditional grid supplied energy.

Utility companies often charge fees to industrial companies for disconnecting from the grid, for using less electricity or for having the capacity to use power from the grid for back-up purposes, and may charge similar fees to residential customers in the future. The imposition of such fees could increase the cost to grid-connected customers of using our products and could make our products less desirable, thereby harming our revenue and profitability.

Alternatives to our technology or improvements to traditional energy technologies could make our products less attractive or render them obsolete.

Our products are among a number of alternative energy products being developed. A significant amount of public and private funding is currently directed toward development of a number of types of distributed generation technology, including microturbines, solar power, wind power and other types of fuel cell technologies. Improvements are also being made to the existing electric transmission system. Technological advances in alternative energy products, improvements in the electric power grid or other fuel cell technologies may make our products less attractive or render them obsolete.

The hydrocarbon fuels and other raw materials on which our products rely may not be readily available or available on a cost-effective basis.

Certain of our products depend largely on the availability of natural gas and liquid propane. If these fuels are not readily available, or if their prices are such that energy produced by our products costs more than energy provided by other sources, our products could be less attractive to potential users.

In addition, platinum is a key material in our proton exchange membrane fuel cells. Platinum is a scarce natural resource and we are dependent upon a sufficient supply of this commodity. Any shortages could adversely affect our ability to produce commercially viable fuel cell systems and significantly raise our cost of producing our fuel cell systems.

Our products use flammable fuels that are inherently dangerous substances.

Our fuel cell systems use hydrogen, natural gas and liquid propane in catalytic reactions, which produce less heat than a typical gas furnace. While our products do not use these fuels in a combustion process, hydrogen, natural gas and liquid propane are flammable fuels that could leak in a home or office and combust if ignited by another source. Further, while we are not aware of any accidents involving our products, any such accidents involving our products or other products using similar flammable fuels could materially suppress demand for, or heighten regulatory scrutiny of, our products.

Product liability or defects could negatively impact our results of operations.

Any liability for damages resulting from malfunctions or design defects could be substantial and could materially adversely affect our business, financial condition, results of operations and prospects. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of our products resulting in a decline in demand for our products and could divert the attention of our management, which may materially and adversely affect our business, financial condition, results of operations and prospects.

Future acquisitions may disrupt our business, distract our management and reduce the percentage ownership of our stockholders.

As part of our business strategy we may engage in acquisitions that we believe will provide us with complementary technologies, products, channels, expertise and/or other valuable assets. However, we may not be able to identify suitable acquisition candidates. If we do identify suitable candidates, we may not be able to acquire them on commercially acceptable terms or at all. If we acquire another company, we may not be able to successfully integrate the acquired business into our existing business in a timely and non-disruptive manner. We may have to devote a significant amount of time and management and financial resources to do so. Even with this investment of management and financial resources, an acquisition may not produce the desired revenues, earnings or business synergies. In addition, an acquisition may reduce the percentage ownership of our then current stockholders. If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital and management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected. In addition, from an accounting perspective, acquisitions can involve non-recurring charges and amortization of significant amounts of intangible assets that could adversely affect our results of operations.

We may not be able to protect important intellectual property and we could incur substantial costs defending against claims that our products infringe on the proprietary rights of others.

Proton exchange membrane fuel cell technology was first developed in the 1950s, and fuel-processing technology has been practiced on a large scale in the petrochemical industry for decades. Accordingly, we do not believe that we can establish a significant proprietary position in the fundamental component technologies in these areas. However, our ability to compete effectively will depend, in part, on our ability to protect our proprietary system-level technologies, systems designs and manufacturing processes. We rely on patents, trademarks, and other policies and procedures related to confidentiality to protect our intellectual property. However, some of our intellectual property is not covered by any patent or patent application. Moreover, we do not know whether any of our pending patent applications will issue or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Even if all of our patent applications are issued and are sufficiently broad, our patents may be challenged or invalidated. We could incur substantial costs in prosecuting or defending patent infringement suits or otherwise protecting our intellectual property rights. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so. Moreover, patent applications filed in foreign countries may be subject to laws, rules and procedures that are substantially different from those of the United States, and any resulting foreign patents may be difficult and expensive to enforce. In addition, we do not know whether the U.S. Patent & Trademark Office will grant federal registrations based on our pending trademark applications. Even if federal registrations are granted to us, our trademark rights may be challenged. It is also possible that our competitors or others will adopt trademarks similar to ours, thus impeding our ability to build brand identity and possibly leading to customer confusion. We could incur substantial costs in prosecuting or defending trademark infringement suits.

Further, our competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing third party patents, we could be required to pay substantial royalties and/or damages, and we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our products, and could necessitate the expenditure of significant resources to develop or acquire non-infringing intellectual property.

Asserting, defending and maintaining our intellectual property rights could be difficult and costly and failure to do so may diminish our ability to compete effectively and may harm our operating results. We may need to pursue lawsuits or legal action in the future to enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others. If third parties prepare and file applications for trademarks used or registered by us, we may oppose those applications and be required to participate in proceedings to determine priority of rights to the trademark. Similarly, competitors may have filed applications for patents, may have received patents and may obtain additional patents and proprietary rights relating to products or technology that block or compete with ours. We may have to participate in interference proceedings to determine the priority of invention and the right to a patent for the technology. Litigation and interference proceedings, even if they are successful, are expensive to pursue and time consuming, and we could use a substantial amount of our financial resources in either case.

We rely, in part, on contractual provisions to protect our trade secrets and proprietary knowledge.

Confidentiality agreements to which we are party may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors. Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any competitive advantages we may have.

We continue to undergo rapid change in the scope and breadth of our operations as we advance the development of our products. Such rapid change is likely to place a significant strain on our senior management team and other resources. We will be required to make significant investments in our engineering, logistics, financial and management information systems and to motivate and effectively manage our employees. Our business, prospects, results of operations and financial condition could be harmed if we encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by such a rapid change.

We face risks associated with our plans to market, distribute and service our products internationally.

We intend to market, distribute and service our products internationally. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. Our success in international markets will depend, in part, on our ability and that of our partners to secure relationships with foreign sub-distributors, and our ability to manufacture products that meet foreign regulatory and commercial requirements. Additionally, our planned international operations are subject to other inherent risks, including potential difficulties in enforcing contractual obligations and intellectual property rights in foreign countries and fluctuations in currency exchange rates.

Our government contracts could restrict our ability to effectively commercialize our technology.

Some of our technology has been developed under government funding by the United States and by other countries. The United States government has a non-exclusive, royalty-free, irrevocable worldwide license to practice or have practiced any of our technology developed under contracts funded by the government. In some cases, government agencies in the United States can require us to obtain or produce components for our systems from sources located in the United States rather than foreign countries. Our contracts with government agencies are also subject to the risk of termination at the convenience of the contracting agency, potential disclosure of our confidential information to third parties and the exercise of “march-in” rights by the government. March-in rights refer to the right of the United States government or government agency to license to others any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology. The implementation of restrictions on our sourcing of components or the exercise of march-in rights could harm our business, prospects, results of operations and financial condition. In addition, under the Freedom of Information Act, any documents that we have submitted to the government or to a contractor under a government funding arrangement are subject to public disclosure that could compromise our intellectual property rights unless such documents are exempted as trade secrets or as confidential information and treated accordingly by such government agencies.

Our future plans could be harmed if we are unable to attract or retain key personnel.

We have attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers and manufacturing and marketing professionals. Our future success will depend, in part, on our ability to attract and retain qualified management and technical personnel. We do not know whether we will be successful in hiring or retaining qualified personnel. Our inability to hire qualified personnel on a timely basis, or the departure of key employees, could materially and adversely affect our development and commercialization plans and, therefore, our business, prospects, results of operations and financial condition.

GE MicroGen and DTE Energy have representatives on our board of directors.

Under our agreement with GE MicroGen we are required to use our best efforts to cause one individual nominated by GE Energy, an operating business of General Electric Company, to be elected to our board of directors for as long as our distribution agreement with GE Fuel Cell Systems remains in effect. Currently, Richard R. Stewart serves on our board of directors as GE Energy’s nominee. In addition, a current employee of DTE Energy, Anthony F. Earley, Jr., and a former employee of DTE Energy, Larry G. Garberding, currently serve on our board of directors. Both GE Fuel Cell Systems and DTE Energy have entered into distribution agreements with us.

In September 2000, a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that we and various of our officers and directors violated certain federal securities laws by failing to disclose certain information concerning our 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)(RML). By order dated January 25, 2001, 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 the 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 statements and omissions regarding the state 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 motion to dismiss the claims in May 2001. By order dated January 21, 2003, the Court dismissed all claims relating to pre-IPO press releases, the IPO prospectus and all but three post-IPO press releases. The Court ruled that the three remaining press releases raised questions of fact that could not be resolved on a motion to dismiss. The Court also denied the motion to dismiss the claims against the individual defendants at this time.

On December 29, 2004, the plaintiffs and the defendants entered into a Stipulation and Agreement of Settlement, which is subject to final approval by the Court. The settlement does not call for payment by the defendants and would be covered by directors and officers insurance. The Stipulation and Agreement of Settlement was submitted to the Court on January 5, 2005. On January 19, 2005, the Court entered an order certifying the class for the purposes of settlement pursuant to Federal Rule of Civil Procedure 23, setting forth procedures for notice to the plaintiff class, and scheduling a settlement fairness hearing for April 29, 2005. Pursuant to the Court’s January 19, 2005 order, members of the plaintiff class who wish to be excluded from the class must mail a request to be excluded no later than April 11, 2005.

As noted, the settlement is still subject to final approval by the Court, and certain plaintiffs may submit requests for exclusion from the settlement. We continue to believe that the allegations in the consolidated amended complaint are without merit and intend, if the settlement is not approved by the Court, to vigorously defend against the claims. If the plaintiffs were to prevail, such an outcome could have a material adverse effect on our business, financial condition, results of operations and prospects. However, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions.

Provisions in our charter documents and Delaware law may prevent or delay an acquisition of us, which could decrease the value of our securities.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include those that:

In addition, in certain circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

The market price of our common stock has historically experienced and may continue to experience significant volatility. Since our initial public offering in October 1999, the market price of our common stock has fluctuated from a high of $156.50 per share in the first quarter of 2000 to a low of $3.39 per share in the fourth quarter of 2002. Our progress in developing and commercializing our products, our quarterly operating results, announcements of new products by us or our competitors, our perceived prospects, changes in securities analysts’ recommendations or earnings estimates, changes in general conditions in the economy or the financial markets, adverse events related to our strategic relationships, significant sales of our common stock by existing stockholders including one or

more of our strategic partners and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market, and in particular the market for technology-related stocks, has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock. In addition, we may be subject to additional securities class action litigation as a result of volatility in the price of our common stock, which could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition.

Our failure to comply with Nasdaq’s listing standards could result in the delisting of our common stock by Nasdaq from the Nasdaq National Market and severely limit the ability to sell our common stock.

Our common stock is currently traded on the Nasdaq National Market. Under Nasdaq’s listing maintenance standards, if the closing bid price of our common stock is under $1.00 per share for 30 consecutive trading days, Nasdaq will notify us that we may be delisted from the Nasdaq National Market. If the closing bid price of our common stock does not thereafter regain compliance for a minimum of 10 consecutive trading days during the 90 days following notification by Nasdaq, Nasdaq may delist our common stock from trading on the Nasdaq National Market. There can be no assurance that our common stock will remain eligible for trading on the Nasdaq National Market. In addition, if our common stock is delisted, our stockholders would not be able to sell our common stock on the Nasdaq National Market, and their ability to sell any of our common stock would be severely, if not completely, limited.

Our principal executive offices are located in Latham, New York. At our 36-acre campus, we own a 56,000 square foot research and development center, a 32,000 square foot office building and a 50,000 square foot manufacturing facility and believe that these facilities are sufficient to accommodate our anticipated production volumes for at least the next two years.

Shareholder Class Action Lawsuit: As previously disclosed, in September 2000 a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that we and various of our officers and directors violated certain federal securities laws by failing to disclose certain information concerning our products and future prospects.

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

Market Information. Our common stock is traded on the Nasdaq National Market under the symbol “PLUG.” As of March 1, 2005, there were approximately 2,600 record holders of our common stock. However, management believes that a significant number of shares are held by brokers under a “nominee name” and that the number of beneficial shareholders of our common stock exceeds 80,000. The following table sets forth high and low last reported sale prices for our common stock as reported by the Nasdaq National Market for the periods indicated:

Dividend Policy. We have never declared or paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend upon capital requirements and limitations imposed by our credit agreements, if any, and such other factors as our board of directors may consider.

The following tables set forth selected financial data and other operating information of the Company. The selected statement of operations and balance sheet data for 2004, 2003, 2002, 2001 and 2000 as set forth below are derived from the audited financial statements of the Company. The information is only a summary and you should read it in conjunction with the Company’s audited financial statements and related notes and other financial information included herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

The following discussion should be read in conjunction with our accompanying Financial Statements and Notes thereto included within this Annual Report on Form 10-K. In addition to historical information, this Annual Report on Form 10-K and the 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 under Item I—Business under the caption “Factors Affecting Future Results.” Readers should not place undue reliance on our forward-looking statements. 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 Annual Report on Form 10-K.

We are focused on our proprietary proton exchange membrane (PEM) fuel cell and fuel processing technology platforms, from which multiple products are being offered or are under development. We are currently offering for commercial sale our GenCore^® product, a back-up power product 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; and an on-site hydrogen generation product for use in a variety of industrial gas applications.

We are in the 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. Our 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 fuel cell systems are expected to expand the market opportunity for fuel cells by lowering the installation cost, and decreasing operating and maintenance costs, increasing efficiency, improving reliability, and adding features such as grid independence and co-generation and uninterruptible power supply (UPS) applications.

Our initial commercial sales are for the delivery of limited edition fuel cell systems and are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support, which are limited to a defined operating period, as well as certain cancellation privileges that expire ratably over the stated contractual term. Contract terms on our initial commercial sales 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. Under these initial commercial sales, we defer recognition of product and service revenue, as a result of the cancellation privileges, and recognize revenue on a straight line basis as the cancellation privileges expire ratably over the stated contractual term, which are for periods of twelve to twenty-seven months (See Critical Accounting Policies and Estimates, Revenue Recognition).

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our systems, market acceptance of our systems and other factors. We expect to pursue the expansion of our operations through internal growth and strategic acquisitions.

We have financed our operations through December 31, 2004 primarily from the sale of equity, which has provided cash in the amount of $349.3 million. During the year ended December 31, 2004, we used $33.9 million in cash in operating activities, used $36.7 million in cash for investing activities and received $840,000 from financing activities. Cash used by operating activities consisted primarily of a net loss of $46.7 million offset, in part, by non-cash items of $4.2 million in amortization and depreciation, $4.1 million in stock based compensation, $2.8 million amortization of intangible assets and $1.8 million in equity losses in affiliates. Cash used in investing activities of $36.7 million consisted of $35.0 million from marketable securities and $1.6 million for the purchase of property plant and equipment. Cash provided by financing activities of $840,000 consisted primarily of $911,000 of proceeds from issuance of common stock issued for stock options exercises and under the employee stock purchase plan.

Product and service revenue. Product and service revenue decreased to $5.3 million for the year ended December 31, 2004, from $7.5 million for the year ended December 31, 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. 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 is 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. Substantially all product and service revenue recognized in 2003 relates to the GenSys product line. In the fourth quarter of 2003, we started making the initial shipments of our GenCore product which is focused on providing backup, direct-current (DC) power products for telecom, broadband and industrial uninterruptible power supply (UPS) applications.

During the year ended December 31, 2004, we delivered 150 fuel cell systems and recognized product and service revenue against these current year deliveries in the amount of $1.4 million combined with the recognition of $3.9 million of revenue originally deferred at December 31, 2003. This compares to 145 fuel cell systems delivered for the year ended December 31, 2003, during which we recognized $2.1 million of product and service revenue against 2002 deliveries combined with the recognition of $5.4 million of revenue originally deferred at December 31, 2002.

During 2004 and 2003, we invoiced $5.7 million and $6.8 million, respectively, for the delivery of fuel cell systems and recognized revenue of $5.3 million and $4.7 million in 2004 and 2003, respectively. The difference between the amounts invoiced and the recognized revenue in 2004 and 2003 represents a component of deferred revenue at December 31, 2004 and 2003. During 2005, we expect to recognize substantially all of the deferred revenue as of December 31, 2004.

Research and development contract revenue. Research and development contract revenue increased to $10.8 million for the year ended December 31, 2004 from $5.0 million for the year ended December 31, 2003. The increase is due to the addition of development agreements with the U.S. Department of Defense (DOD) and increased activity under U.S. Department of Energy (DOE), National Institute of Standards and Technology (NIST), New York State Energy Research and Development Authority (NYSERDA) and Honda R&D Co., Ltd. of Japan research and development contracts. We expect to 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.

Cost of product and service revenue. Cost of product and service revenue decreased to $5.4 million for the year ended December 31, 2004 from $7.2 million for the year ended December 31, 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. This decrease is primarily related to the decrease in the cost of production materials for the units shipped, offset, in part by an increase in the service costs as a result of the increase in operational field units.

Cost of research and development contract revenue. Cost of research and development contract revenue increased to $13.5 million for the year ended December 31, 2004 from $7.0 million for the year ended December 31, 2003. 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, and materials and supplies and other directly allocable general overhead costs allocated to specific research and development contracts. The increase in these costs relates primarily to the additional activity under the development agreements described above under research and development contract revenue.

Noncash research and development expense. Noncash research and development expense increased to $2.6 million for the year ended December 31, 2004 from $1.8 million for the year ended December 31, 2003. 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 decreased to $32.6 million for the year ended December 31, 2004 from $38.3 million for the year ended December 31, 2003. The decline in 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 under DOE, NYSERDA and Honda R&D Co., Ltd. of Japan research and development contracts (as discussed above). 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.

Other research and development expense also includes amortization in the amount of $3.5 million and $4.4 million for the years ended December 31, 2004 and 2003, respectively. For the year ended December 31, 2004, amortization expense 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 $2.8 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”. For the year ended December 31, 2003, other research and development expense included amortization of prepaid development costs in the amount of $1.8 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 $2.1 million related to the portion of the H Power purchase price that has been capitalized.

Amortization of capitalized technology acquired as a result of our merger with H Power, is recorded on our balance sheet under the caption “Intangible assets”. At December 31, 2004, the carrying value of intangible assets acquired from H Power was $688,000, and the joint development program with Engelhard was fully amortized.

Noncash general and administrative expense. Noncash general and administrative expense increased to $1.4 million for the year ended December 31, 2004 from $896,000 for the year ended December 31, 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 expenses increased to $7.0 million for the year ended December 31, 2004 from $6.3 million for the year ended December 31, 2003. 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. The increase in other general and administrative expenses is the result of our increase in our sales and marketing expenses for the year ending December 31, 2004, in support of commercialization of our products. Based on our current level of operations, no significant increase in other general and administrative expenses is anticipated in 2005.

Interest income. Interest income, consisting of interest earned on our cash, cash equivalents and marketable securities, increased to $1.5 million for the year ended December 31, 2004, from $833,000 for the year ended December 31, 2003. The increase was primarily due to an increase in our investment portfolio for funds received as a result of our March 2003 acquisition of H Power and our common stock offering in November 2003.

Interest expense. Interest expense consists of interest on a long-term obligation related to our facilities and interest paid on capital lease obligations. Interest expense was $61,000 for the year ended December 31, 2004, compared to $62,000 for the year ended December 31, 2003. The debt accrues interest at a variable rate of interest that was approximately 2.37% and 1.30% at December 31, 2004 and 2003, respectively.

Equity in losses of affiliates. Equity in losses of affiliates decreased to $1.8 million for the year ended December 31, 2004 from $1.9 million during the year ended December 31, 2003. Equity in losses of affiliates, which we account for under the equity method of accounting, is our proportionate share of the losses of GEFCS in the amount of $12,000 and amortization of intangible assets in the amount of $1.8 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 carry forward may not be realized.

Product and service revenue. Product and service revenue decreased to $7.5 million for the year ended December 31, 2003, from $9.4 million for the year ended December 31, 2002. Our initial commercial sales for the delivery of limited edition fuel cell systems are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support, which are limited to a defined operating period that does not extend beyond the stated contractual term, as well as certain cancellation privileges that expire ratably over the stated contractual term. Under these

initial commercial sales, we defer recognition of product and service revenue, as a result of the cancellation privileges, and recognize revenue on a straight-line basis as the cancellation privileges expire ratably over the stated contractual term, which are for periods of six to twelve months. Substantially all product and service revenue recognized to date relates to the GenSys product line. In the fourth quarter of 2003, we started making the initial shipments of our GenCore product, which is focused on providing backup, DC power products for telecom, broadband and industrial UPS applications.

During the year ended December 31, 2003, we delivered 145 fuel cell systems and recognized product and service revenue against these current year deliveries in the amount of $2.1 million combined with the recognition of $5.4 million of revenue originally deferred at December 31, 2002. This compares to 121 fuel cell systems delivered for the year ended December 31, 2002, during which we recognized $3.9 million of product and service revenue against 2002 deliveries combined with the recognition of $5.5 million of revenue originally deferred at December 31, 2001.

During 2003 and 2002, we invoiced $6.8 million and $9.4 million, respectively, for the delivery of fuel cell systems and recognized revenue of $4.7 million and $5.5 million in 2003 and 2002, respectively. The difference between the amounts invoiced and the recognized revenue in 2003 and 2002 represents a component of deferred revenue at December 31, 2003 and 2002. During 2004, we recognized substantially all of the deferred revenue as of December 31, 2003.

Research and development contract revenue. Research and development contract revenue increased to $5.0 million for the year ended December 31, 2003, from $2.4 million for the year ended December 31, 2002. The increase is due to the addition of development agreements with the DOE, NYSERDA and NIST in 2003 and the continuation of commercial agreements including Honda R&D Co., Ltd. of Japan that began in the fourth quarter of 2002. 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.

Cost of product and service revenue. Cost of product and service revenue decreased to $7.2 million for the year ended December 31, 2003 from $7.6 million for the year ended December 31, 2002. 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. This decrease is primarily related to the decrease in the service costs of units in the field and a decrease in the cost of production materials for the units shipped.

Cost of research and development contract revenue. Cost of research and development contract revenue increased to $7.0 million for the year ended December 31, 2003 from $3.7 million for the year ended December 31, 2002. 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. The increase in these costs relates primarily to the additional development agreements described above under research and development contract revenue.

In-process research and development expense. In-process research and development expense of $3.0 million for the year ended December 31, 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 the 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 increased to $1.8 million for the year ended December 31, 2003 from $1.0 million for the year ended December 31, 2002. Noncash research and development expense represents the fair value of stock grants to consultants and others in exchange for services provided. The increase is directly related to the amount of services provided.

Other research and development expense. Other research and development expense decreased to $38.3 million for the year ended December 31, 2003 from $39.3 million for the year ended December 31, 2002. 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. The decrease is primarily the result of our approach to the design of our next generation fuel cell system using advanced modeling and system simulation techniques which result in lower research and development costs because we build fewer systems for internal test and evaluation.

Other research and development expense also includes amortization in the amount of $4.4 million and $1.6 million for the years ended December 31, 2003 and 2002, respectively, for prepaid development costs under our joint development program with Engelhard, recorded on our balance sheet under the caption “Prepaid development costs” and amortization of capitalized technology from our purchase of certain Gastec fuel processing technology and certain other capitalized technology acquired as a result of our merger with H Power, both of which are recorded on our balance sheet under the caption “Intangible assets”. At December 31, 2003 the carrying value of intangible assets acquired from H Power was $3.4 million, and the carrying value of prepaid development costs was $700,000. The intangible assets acquired from Gastec have been fully amortized as of December 31, 2003.

Noncash general and administrative expense. Noncash general and administrative expense increased to $896,000 for the year ended December 31, 2003 from $482,000 for the year ended December 31, 2002. Noncash general and administrative expense represents the fair value of stock grants and vested stock options to employees, consultants and others in exchange for services provided.

Other general and administrative expense. Other general and administrative expenses decreased to $6.3 million for the year ended December 31, 2003 from $6.5 million for the year ended December 31, 2002. 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. The decrease in other general and administrative expenses is the result of our continuing effort for more efficient spending in support of operations across the entire organization.

Interest income. Interest income, consisting of interest earned on our cash, cash equivalents and marketable securities, decreased to $833,000 for the year ended December 31, 2003, from $1.7 million for the same period in 2002. The decrease was due to lower principal balances as well as a lower yield on our investment portfolio during a period of generally declining interest rates offset, in part, by 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 consists of interest on a long-term obligation related to our facilities and interest paid on capital lease obligations. Interest expense was $62,000 for the year ended December 31, 2003, compared to $97,000 for the year ended December 31, 2002. The debt accrues interest at a variable rate of interest that was approximately 1.30% and 1.55% at December 31, 2003 and 2002, respectively.

Equity in losses of affiliates. Equity in losses of affiliates decreased to $1.9 million for the year ended December 31, 2003 from $2.0 million 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 the losses of GEFCS in the amount of $108,000 and amortization of intangible assets in the amount of $1.8 million.

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, management must use estimates in determining the economic useful lives of assets, including identifiable intangibles, and various other recorded or disclosed amounts. Therefore, the Company’s financial statements and related disclosure are necessarily affected by these estimates. Management evaluates 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, the Company’s 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.

Management believes that the following are the Company’s 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 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 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 and intangible assets and goodwill: 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. Based on the review during the year ended December 31, 2004, we do not believe an impairment charge is required.

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 net operating loss carry forward that has resulted from our cumulative net operating loss 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 December 31, 2004, 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 year ended December 31, 2004.

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151 “Inventory Costs, an amendment of ARB No. 43”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are currently evaluating the statements to determine the effect on our financial statements.

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. The requirements of SFAS No. 123R are effective for fiscal periods 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 $7.6 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. We are currently evaluating these transition methods.

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 expanding our manufacturing capacity, and continuing expansion of 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 and to a lesser extent, 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 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.

We have financed our operations through December 31, 2004 primarily from the sale of equity, which has provided cash in the amount of $349.3 million. As of December 31, 2004, we had unrestricted cash, cash equivalents and marketable securities totaling $66.9 million and working capital of $64.1 million. As a result of our purchase of real estate from Mechanical Technology Incorporated, we have escrowed an additional $4.3 million in cash to collateralize the $4.3 million of mortgage debt assumed on the purchase. Since inception, net cash used in operating activities has been $262.4 million and cash used in investing activities has been $61.4 million.

During the year ended December 31, 2004, the Company used $33.9 million in cash for operating activities, used $36.7 million in cash for investing activities and received $840,000 from financing activities. Net cash used in operating activities consisted primarily of a net loss of $46.7 million offset, in part, by non-cash items of $4.2 million in amortization and depreciation, $4.1 million in stock based compensation, $2.8 million amortization of intangible assets and $1.8 million in equity losses in affiliates. Cash used in investing activities consisted of $35.0 million from marketable securities and $1.6 million for the purchase of property, plant and equipment. Cash provided by financing activities of $840,000 consisted primarily of $911,000 received from proceeds on issuance of common stock issued for stock options exercises and under the employee stock purchase plan.

Other significant transactions impacting our liquidity and capital resources are as follows:

On March 25, 2003, we consummated a merger transaction with H Power pursuant to which we acquired H Power in a stock-for-stock exchange valued at approximately $46.3 million. In connection with the transaction, H Power stockholders received 0.8305 shares of our common stock for each share of H Power common stock held immediately prior to the transaction. Immediately following the transaction H Power became a wholly owned subsidiary of the Company. As part of the acquisition, we acquired intellectual property and certain other assets including cash, cash equivalents and marketable securities of H Power worth approximately $29.6 million, after payment of $7.1 million of certain costs and expenses associated with the consummation of the merger which were accounted for as additional purchase price.

In November 1999, we completed an initial public offering of 6,782,900 shares of common stock, which includes additional shares purchased pursuant to exercise of the underwriters’ over allotment option. We received proceeds of $93.0 million, which was net of $8.7 million of expenses and underwriting discounts relating to the issuance and distribution of the securities.

In July 2001, we completed a follow-on public offering of 4,575,000 shares of common stock, which includes additional shares purchased pursuant to exercise of the underwriters’ over allotment option. We received proceeds of $51.6 million, which was net of $3.3 million of expenses and underwriting discounts relating to the issuance and distribution of the securities.

In November 2003, the Company completed a public offering of 11,700,000 shares of common stock. We received proceeds of $55.0 million, net of $3.5 million of expenses and placement fees relating to the issuance and distribution of the securities.

In July 2001, simultaneous with the closing of the follow-on public offering, we closed a private equity financing of 416,666 shares of common stock to GE Power Systems Equities, Inc., an indirect wholly owned subsidiary of General Electric Company, and 416,666 shares of common stock to Edison Development Corporation, an indirect wholly owned subsidiary of DTE Energy Company, raising an additional $9.6 million in net proceeds.

We were formed in June 1997 as a joint venture between Mechanical Technology Incorporated and Edison Development Corporation, an indirect wholly owned subsidiary of DTE Energy Company. At formation, Mechanical Technology Incorporated contributed assets related to its fuel cell program, including intellectual property, 22 employees, equipment and the right to receive government contracts for research and development of PEM fuel cell systems, if awarded. Edison Development Corporation contributed or committed to contribute $9.0 million in cash, expertise in distributed power generation and marketplace presence to distribute and sell stationary fuel cell systems.

In January 1999, we entered into an agreement with Mechanical Technology Incorporated and Edison Development Corporation pursuant to which we had the right to require Edison Development Corporation and Mechanical Technology Incorporated to make capital contributions of $22.5 million each, an aggregate of $45.0 million, through December 31, 2000. In September 1999, we made a capital call of $4.0 million, and Mechanical Technology Incorporated and Edison Development Corporation each contributed $2.0 million in cash in exchange for 266,667 shares of common stock. Both Mechanical Technology Incorporated and Edison Development Corporation contributed the remaining $41.0 million immediately prior to our initial public offering in exchange for an aggregate of 5,466,666 shares of common stock.

In June 1999, we entered into a real estate purchase agreement with Mechanical Technology Incorporated to acquire approximately 36 acres of land, two commercial buildings and a residential building located in Latham, New York. This property is the location of our current facilities, including a newly constructed production facility. As part of the real estate transaction we

assumed a $6.2 million letter of credit issued by KeyBank National Association for the express purpose of servicing $6.2 million of debt related to Industrial Development Revenue Bonds issued by the Town of Colonie Industrial Development Agency. As consideration for the purchase, we issued 704,315 shares of common stock to Mechanical Technology Incorporated, valued at $6.67 per share. In connection with this transaction we wrote off deferred rent expense, in the amount of $1.9 million, related to a 10-year facilities lease on one of the purchased buildings, at a favorable lease rate.

Also in June 1999, Edison Development Corporation purchased 704,315 shares of common stock for $4.7 million in cash under provisions of our original formation documents that allowed Edison Development Corporation and Mechanical Technology Incorporated to maintain equal ownership percentages in us. Mechanical Technology Incorporated has made aggregate cash contributions of $27.0 million plus noncash contributions of $14.2 million, while Edison Development Corporation has made aggregate cash contributions of $46.2 million, including $5.0 million in connection with the closing of a private placement of 416,666 shares of our common stock in July, 2001. Mechanical Technology Incorporated and Edison Development Corporation have not made any additional cash or noncash contributions since October 1999 and July 2001, respectively.

In February 1999, we entered into a joint venture agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, sell, install and service certain of our 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 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 consolidated financial statements.

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. During 2004, the Company and General Electric Company extended this period through September 2006. Through December 31, 2004, the Company had purchased approximately $9.9 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.

In 2000 we were awarded and received $1.0 million under a grant from the State of New York. The grant is for the express purpose of promoting employment. Terms of the grant require us to meet certain employment criteria, as defined, over a five year period. For the year ended December 31, 2004, we were in compliance with the terms and conditions of the grant. The term of the grant ended on December 31, 2004.

In 2003 we finalized contracts with the U.S. Department of Energy (DOE), National Institute of Standards and Technology (NIST) and the New York State Energy Research and Development Authority (NYSERDA), under which we expect to receive approximately $15.0 million in net funding during the 30-month, cost-share programs ending in 2006.

In 2004 we were awarded a $1.8 million contract by the U.S. Department of Defense under the Common Core Power Production Program. This one-year program will help develop application and integration platforms for a variety of stationary and light mobility applications for the U.S. military. The program is being funded by the U.S. Air Force, Advanced Power Transformation Office, and managed by the U.S. Army Corps of Engineers, Engineer Research and Development Center.

The following is a summary of our contractual obligations as of December 31, 2004.

Other obligations include future payments under our agreement with General Electric Company to source technical support services for our product development effort as described in Note 3 of the Notes to Consolidated Financial Statements.

We invest our excess cash in government, government backed and interest-bearing investment-grade securities that we generally hold for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

The Company’s Consolidated Financial Statements included in this Report beginning at page F-1 are incorporated in this Item 8 by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein at page F-3.

Incorporated herein by reference is the information appearing under the captions “Information about our Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the Security and Exchange Commission.

Incorporated herein by reference is the information appearing under the captions “Executive Officers” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the Security and Exchange Commission.

We have adopted a Code of Business Conduct and Ethics that applies to all officers, directors, employees and consultants of the Company. The Code of Business Conduct and Ethics is intended to comply with Item 406 of Regulation S-K of the Securities Exchange Act of 1934 and with applicable rules of The NASDAQ Stock Market, Inc. Our Code of Business Conduct and Ethics is posted on our Internet website under the “Investor” page. Our Internet website address is www.plugpower.com. To the extent required or permitted by the rules of the SEC and Nasdaq, we will disclose amendments and waivers relating to our Code of Business Conduct and Ethics in the same place as our website.

Incorporated herein by reference is the information appearing under the caption “Executive Compensation” in the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the Security and Exchange Commission.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated herein by reference is the information appearing under the caption “Principal and Management Stockholders” in the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.

The following table gives information about the shares of Common Stock that may be issued upon the exercise of options under the Plug Power, L.L.C. Second Amendment and Restatement of the Membership Option Plan (1997 Plan), the Company’s 1999 Stock Option and Incentive Plan, as amended (1999 Stock Option Plan) and the Company’s 1999 Employee Stock Purchase Plan, as of December 31, 2004.

Incorporated herein by reference is the information appearing under the caption “Certain Relationships and Related Transactions” in the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.

Incorporated herein by reference is the information appearing under the caption “Independent Auditors Fees” in the Company’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.

The financial statements and notes are listed in the Index to Consolidated Financial Statements on page F-1 of this Report.

Consolidated financial statement schedules not filed herein have been omitted as they are not applicable or the required information or equivalent information has been included in the consolidated financial statements or the notes thereto.

Exhibits are as set forth in the “List of Exhibits” which immediately precedes the Index to Consolidated Financial Statements on page F-1 of this Report.

Exhibits are as set forth in the “List of Exhibits” which immediately precedes the Index to the Consolidated Financial Statements on page F-1 of this report.

Pursuant to the requirements of Section 13 or 15(d) 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.


PLUG POWER INC.

By:		/s/ ROGER B. SAILLANT
		Roger B. Saillant, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Certain exhibits indicated below are incorporated by reference to documents of Plug Power on file with the Commission. Exhibits nos. 10.5, 10.7, 10.8, 10.14, 10.15, 10.28, 10.29 and 10.31 represent the management contracts and compensation plans and arrangements required to be filed as exhibits to this Annual Report on Form 10-K.

We have audited the accompanying consolidated balance sheets of Plug Power Inc. and subsidiaries (a development stage enterprise) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2004 and for the period June 27, 1997 (inception) to December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The cumulative consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the period June 27, 1997 (inception) to December 31, 2004 include amounts for the period from June 27, 1997 to December 31, 1997 and for each of the years in the three-year period ending December 31, 2000, which were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the period June 27, 1997 through December 31, 2000, is based solely on the report of other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Plug Power Inc. and subsidiaries (a development stage enterprise) as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 and for the period June 27, 1997 (inception) to December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Plug Power Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Plug Power Inc. and subsidiaries (a development stage enterprise) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Plug Power Inc. and subsidiaries (a development stage enterprise) maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Also, in our opinion, Plug Power Inc. and subsidiaries (a development stage enterprise) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Plug Power, Inc. and subsidiaries as of December 31, 2004 and 2003, and related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2004 and for the period June 27, 1997 (inception) to December 31, 2004, and our report dated March 4, 2005 expressed a unqualified opinion on those consolidated financial statements.

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

For the years ended December 31, 2004, 2003 and 2002 and Cumulative Amounts from Inception

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

For the years ended December 31, 2004, 2003 and 2002 and cumulative amounts from inception

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

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 focused on its proprietary proton exchange membrane (PEM) fuel cell and fuel processing technology platforms, from which multiple products are being offered or are under development. The Company is currently offering for commercial sale its GenCore^® product, a back-up power product 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; and an on-site hydrogen generation product for use in a variety of industrial gas applications.

The Company’s 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. The Company expects to continue to devote substantial capital resources to continue its development programs directed at commercializing on-site energy products for worldwide use, hiring and training our production staff, developing and expanding our manufacturing capacity, and continuing expansion of our production and our research and development activities. The Company will pursue the expansion of its operations through internal growth and strategic acquisitions and expect that such activities will be funded from existing cash and cash equivalents and to a lesser extent, 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 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 and believe that its current cash, cash equivalents and marketable securities balances will provide sufficient capital to fund operations for at least the next twelve months.

On March 25, 2003, the Company consummated a merger transaction with H Power Corp. (H Power) pursuant to which it acquired H Power in a stock-for-stock exchange valued at approximately $46.3 million. The Company acquired certain intellectual property and other assets including approximately $29.6 million in net cash, cash equivalents and marketable securities.

At December 31, 2004, the Company had unrestricted cash, cash equivalents and marketable securities in the amount of $66.8 million and working capital of $64.1 million. Management believes that the Company’s current available cash, cash equivalents and marketable securities will provide sufficient capital to fund operations for at least the next twelve months.

The consolidated financial statements include the financial statements of Plug Power Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to the 2004 presentation.

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 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 December 31, 2004 and 2003, the Company has restricted cash of $4.3 million and $4.7 million, respectively, 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 consolidated balance sheets.

Marketable securities include investments in equity and debt obligations, which are carried at fair value. These investments are considered available for sale, and the difference between the cost and the fair value of these securities is reflected in other comprehensive income (loss) and as a component of stockholders’ equity. At December 31, 2004, the Company recorded unrealized losses of $482,000. There was no significant difference between cost and fair value of these investments at December 31, 2003 or 2002.

The amortized cost and estimated fair value of the Company’s available-for-sale investment securities as of December 31, 2004 were as follows:

The following are estimated fair value of, and the gross unrealized losses of the Company’s available-for-sale debt securities as of December 31, 2004:

The following represents contractual maturities of investments in available for sale debt securities at December 31, 2004:

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

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, goodwill 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. 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 H Power net assets acquired. 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.

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 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 December 31, 2004 and 2003, the Company had deferred product and service revenue in the amount of $5.3 million and $4.9 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”, or changes in the manner contractual agreements are structured, including agreements with distribution partners.

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 December 31, 2004 the Company had deferred research and development contract revenue in the amount of $200,000. At December 31 2003, the Company had no deferred research and development contract revenue.

Property, plant and equipment are originally recorded at cost. Machinery and equipment under capital leases are originally recorded at the present value of minimum lease payments. Maintenance and repairs are expensed as costs are incurred.

Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Machinery and equipment under capital leases are amortized straight line over the shorter of the lease term or estimated useful life of the asset.

The Company provides for depreciation and amortization of buildings, building improvements and machinery and equipment over the following estimated useful lives:

The Company’s investment in GE Fuel Cell Systems LLC is accounted for under the equity method. The Company would recognize a loss when there is a other than a temporary decline in value in the investment.

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.

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. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

Costs incurred in the research and development of the Company’s fuel cell systems are expensed as incurred.

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:

Basic earnings per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company (such as stock options and warrants).

The following table provides calculations of basic and diluted earnings per share:

The 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.

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect of the statement on the consolidated financial statements.

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. The requirements of SFAS No. 123R are effective for fiscal periods 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 only to interim periods in the year of adoption. The Company is currently evaluating these transition methods.

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.

In connection with the original 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 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 consolidated statements of operations. GEFCS had an operating and net loss of $30,000 for the year ended December 31, 2004. For the years ended December 31, 2004, 2003 and 2002, equity in losses of affiliates, related to GEFCS, was $1.8 million, $1.9 million and $1.9 million including amortization of $1.8 million, $1.8 million and $1.8 million, respectively. Accumulated amortization at December 31, 2004 and 2003 was $10.5 million and $8.7 million, respectively.

In October 2003, the Company 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 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 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 2004, the Company and General Electric Company extended this period through September 2006. At December 31, 2004 and 2003, approximately $262,000 and $335,000, respectively, was payable to General Electric Company under this arrangement. Through December 31, 2004, the Company had purchased approximately $9.9 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.

Property, plant and equipment at December 31, 2004 and 2003 consists of the following:

Depreciation expense was $4.0 million, $3.9 million and $5.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.

No changes in the carrying amount of Goodwill occurred during the year ended December 31, 2004. For the year ended December 31, 2003, the change in the carrying amount of goodwill was $10.0 million related to acquisition of H Power Corp.

The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets as of December 31, 2004 and December 31, 2003 were as follows:

Amortization expense for acquired intangible assets during the years ended December 31, 2004, 2003 and 2002 was $4.5 million, $4.4 million, and $4.7 million, respectively. Estimated amortization expense for 2005 and the four succeeding years is as follows:

In connection with the Company’s purchase of real estate in July, 1999, the Company assumed a $6.2 million letter of credit issued by KeyBank National Association for the express purpose of servicing $6.2 million of debt related to Industrial Development Revenue Bonds issued by the Town of Colonie Industrial Development Agency in favor of the acquired property. The debt matures in 2013 and accrues interest at a variable rate of interest which was approximately 2.37% at December 31, 2004. Simultaneous with the assumption, the Company was required to escrow $6.2 million to collateralize the debt. This debt also contains a subjective acceleration clause based on adverse financial conditions. The bank has provided the Company with a waiver through January 1, 2006 for any adverse changes in financial condition occurring prior to December 31, 2004.

The outstanding balance of the debt as of December 31, 2004 was $4.3 million and the amount of the corresponding escrow requirement as of December 31, 2004 was $4.3 million and is recorded under the balance sheet captions, “Restricted cash.” Principal payments due on long-term debt are: 2005, $365,000; 2006, $385,000; 2007, $410,000; 2008, $435,000; 2009, $460,000 and thereafter, $2.2 million.

There was no current income tax expense for the years ended December 31, 2004, 2003 and 2002. The Company was a Limited Liability Company (LLC) until its merger into Plug Power Inc. effective November 3, 1999. From inception through November 3, 1999, the Company was treated as a partnership for federal and state income tax purposes and accordingly the Company’s income taxes or credits resulting from earnings or losses were payable by, or accrued to its members. Therefore, no provision for income taxes has been made prior to November 3, 1999.

Effective November 3, 1999, the Company is taxed as a corporation for Federal and State income tax purposes and the effect of deferred taxes recognized as a result of the change in tax status of the Company have been included in operations. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates.

The significant components of deferred income tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002 are as follows:

The Company’s effective income tax rate differed from the Federal statutory rate as follows:

The deferred tax assets and liabilities as of December 31, 2004 and 2003 consist of the following tax effects relating to temporary differences and carryforwards:

The Company has recorded a valuation allowance, as a result of uncertainties related to the realization of its net deferred tax asset, at December 31, 2004 and 2003 of approximately $178.8 million and $162.0 million, respectively. The increase of approximately $16.8 million during 2004 relates primarily to $17.3 million net operating losses incurred in 2004. The valuation allowance increased approximately $54.5 million in 2003 primarily due to the acquisition of $35.7 million of deferred tax assets and the net operating losses incurred during that year. The $35.7 million includes deferred tax assets acquired as part of the H Power transaction, which may be subject to limitations under Section 382 of the Internal Revenue Code. The deferred tax assets have been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforwards may not be realized. Included in the valuation allowance as of December 31, 2004 and 2003 are $14.9 million and $14.8 million, respectively, of deferred tax assets resulting from the exercise of employee stock options, which upon subsequent realization of the tax benefits, will be allocated directly to paid-in capital.

Under Section 382 of the Internal Revenue Code, the use of loss carryforwards may be limited if a change in ownership of a company occurs. The H Power transaction constituted a change of ownership for the related H Power tax attributes under IRC Section 382 and will result in limitation to the utilization of H Power’s net operating loss carryforwards of $81.6 million.

At December 31, 2004, the Company has unused Federal and State net operating loss carryforwards of approximately $394.8 million, of which $81.6 million was generated from the operations of H Power during the period May 31, 1989, through the date of the H Power acquisition and $313.2 million was generated by the Company during the period October 1, 1999 through December 31, 2004. The net operating loss carryforwards if unused will expire at various dates from 2004 through 2023. In 2004, net operating loss carryforwards of $297,000 acquired as part of the H Power transaction expired.

The Company has one class of common stock, par value $.01 per share. Each share of the Company’s common stock is entitled to one vote on all matters submitted to stockholders. As of December 31, 2004 there were 73,350,878 shares of common stock issued and outstanding.

Through December 31, 2004, the Company’s stockholders in the aggregate have contributed $349.3 million in cash, including $93.0 million in net proceeds from the Company’s initial public offering, $51.6 million in net proceeds from the Company’s follow-on public offering, $55.0 million in net proceeds from the Company’s second follow-on offering and $35.4 million in other contributions, consisting of in-process research and development, real estate, other in-kind contributions and equity interests in affiliates.

In November 2003, the Company completed a public offering of 11.7 million shares of common stock. The Company received net proceeds of $55.0 million, after payment of $3.5 million of expenses and placement fees relating to the issuance and distribution of the securities. During 2003, the Company also issued approximately 9.0 million shares of common stock with a fair value of approximately $5.10 per share in connection with its acquisition of H Power.

The following represents a summary of the issuances of shares of common stock since inception.

The Company has authorized 5.0 million shares of preferred stock, par value $.01 per share. Our certificate of incorporation provides that shares of preferred stock may be issued from time to time in one or more series. Our Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, qualifications, limitations and restrictions thereof, applicable to the shares of each series. As of December 31, 2004, there was no preferred stock outstanding.

In 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the “Plan”) under which employees will be eligible to purchase shares of the Company’s common stock at a discount through periodic payroll deductions. The Plan is intended to meet the requirements of Section 423 of the Internal Revenue Code. Purchases occur at the end of six month offering periods at a purchase price equal to 85% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the offering period, whichever is lower. Participants may elect to have from 1% to 10% of their pay withheld for purchase of common stock at the end of the offering period, up to a maximum of $12,500 within any offering period. The Company has reserved 1,000,000 shares of common stock for issuance under the Plan. The Company issued 71,709, 90,380 and 78,208 shares of stock under the Plan during 2004, 2003, and 2002, respectively.

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 additional one-third vesting on each anniversary thereafter. At December 31, 2004, there were a total of 910,336 options granted, outstanding, and vested under this plan. Although no further options will be granted under this plan, the options previously granted will continue to vest in accordance with this plan and vested options will be exercisable for shares of common stock.

At December 31, 2004 there were 3,801,728 options granted and outstanding, and an additional 3,622,681 options available to be issued under the 1999 Stock Option and Incentive Plan (“1999 Stock Option Plan”). The number of shares of common stock available for issuance under the 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 under the 1999 Stock Option Plan will further increase 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 plan generally vest annually over periods of three or four years and expire ten years after issuance. Options granted to members of the Board generally vest one year after issuance. Options granted to consultants generally vested one-third on the expiration of the consultant’s initial contract term, with an additional one-third vesting on each anniversary 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.

The following table summarizes information about the stock options outstanding under the Option Plans at December 31, 2004:

At December 31, 2004, 3,622,681 shares of common stock were reserved for issuance under future stock option exercises.

The per share weighted average fair value of the options granted during 2004, 2003 and 2002 was $8.16, $5.85 and $6.25, respectively, using the Black-Scholes pricing model with the assumptions outlined below.

The dividend yield was assumed to be zero for all periods. The risk free interest rate ranged from 2.8% to 3.9% in 2004, 2.3% to 3.4% in 2003 and 2.9% to 7.4% in 2002. An expected life of 5 years was assumed for each year. Expected volatility of 57% in 2004, 69% in 2003 and 84% in 2002 was used in determining fair value under the Black-Scholes pricing model.

On June 20, 2003, the Company issued 607,804 shares of restricted common 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 common stock on a three for one basis. The shares of restricted common stock received in this exchange vest in three equal installments effective 21 months, 24 months and 27 months from the date of the exchange and are excluded from the weighted average number of common shares for the calculation of basic and diluted earnings per share until vested. During the years ended December 31, 2004 and 2003, the Company recorded employee compensation expense of $1.8 million and $937,000, respectively, relating to the issuance of the restricted stock awards. This amount represents recognition of compensation expense on a straight-line basis over the vesting periods of the restricted stock.

The Company offers a 401(k) Savings & Retirement Plan to eligible employees meeting certain age and service requirements. This plan permits participants to contribute up to 15% of their salary, up to the maximum allowable by the Internal Revenue Service regulations. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participants are vested in the Company’s matching contribution based on the years of service completed. Participants are fully vested upon completion of three years of service. During 2002, the Company began funding its matching contribution in common stock. Accordingly, the Company has issued 139,190, 158,522 and 90,423 shares of common stock to the Plug Power Inc. 401(k) Savings & Retirement Plan during 2004, 2003 and 2002, respectively.

The Company’s expense for this plan, including the issuance of shares, was $950,000, $867,000 and $773,000 for years ended December 31, 2004, 2003 and 2002, respectively.

The Company has an exclusive distribution agreement with DTE Energy Technologies, Inc. (an affiliate of EDC and DTE Energy Corporation) for the states of Michigan, Ohio, Illinois, and Indiana. Under the agreement the Company can sell directly or negotiate nonexclusive distribution rights to third parties for the GenCore backup power product line, and the GenSite hydrogen generation product line. Starting in the fourth quarter of 2004 for GenCore and in the fourth quarter of 2005 for GenSite, the Company has agreed to pay a 5% commission to DTE Energy Technologies, Inc., based on sales price of units shipped to the above noted states. The distribution agreement expires on December 31, 2014.

As of December 31, 2004, the Company had a receivable from DTE Energy Technologies, Inc. in the amount of $51,000. There was no amounts due from or due to DTE Technologies, Inc. at December 31, 2003.

The following disclosure of the estimated fair value of financial instruments is made in accordance with the provision of SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”. Although the estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, the estimates presented are not necessarily indicative of the amounts that the Company could realize in current market exchanges.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents, restricted cash, accounts receivables, accounts payables, and accrued expenses: The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short maturities of these instruments.

Long-term debt: The fair value of the Company’s long-term debt in the consolidated balance sheets approximates the carrying value at December 31, 2004 and 2003. The debt accrues interest at a variable rate of interest which was approximately 2.37% and 1.30% at December 31, 2004 and 2003, respectively.

The following represents required supplemental disclosures of cash flows information and noncash financing and investing activities which occurred during the years ended December 31, 2004, 2003 and 2002:

As previously disclosed in September 2000, a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that the Company and various of our officers and directors violated certain federal securities laws by failing to disclose certain information concerning our 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)(RML). By order dated January 25, 2001, 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 the 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 statements and omissions regarding the state of development of our technology in a registration statement issued in connection with our initial public offering (IPO) and in subsequent press releases. The Company served our motion to dismiss the claims in May 2001. By order dated January 21, 2003, the Court dismissed all claims relating to pre-IPO press releases, the IPO prospectus and all but three post-IPO press releases. The Court ruled that the three remaining press releases raised questions of fact that could not be resolved on a motion to dismiss. The Court also denied the motion to dismiss the claims against the individual defendants at this time.

On December 29, 2004, the plaintiffs and the defendants entered into a Stipulation and Agreement of Settlement, which is subject to final approval by the Court. The settlement does not call for any payment by the defendants and would be covered by directors and officers insurance. The Stipulation and Agreement of Settlement was submitted to the Court on January 5, 2005. On January 19, 2005, the Court entered an order certifying the class for the purposes of settlement pursuant to Federal Rule of Civil Procedure 23, setting forth procedures for notice to the plaintiff class, and scheduling a settlement fairness hearing for April 29, 2005. Pursuant to the Court’s January 19, 2005 order, members of the plaintiff class who wish to be excluded from the class must mail a request to be excluded no later than April 11, 2005.

The Company continues to believe that the allegations in the consolidated amended complaint are without merit and intend to vigorously defend against the claims. If the plaintiffs were to prevail, such an outcome could have a material adverse effect on our business, financial condition, results of operations and prospects. However, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions. As noted, the settlement is still subject to final approval by the Court, and certain plaintiffs may submit requests for exclusion from the settlement.

Vaillant: In March 2000, the Company finalized a development agreement with Vaillant GmbH (Vaillant), to develop a combination furnace, hot water heater and fuel cell system that will provide both heat and electricity for the home. Under that agreement, Vaillant will obtain fuel cell subsystems from GEFCS and then will produce the fuel cell heating appliances for its customers in Germany, Austria, Switzerland and the Netherlands, and for GEFCS customers throughout Europe.

In March 2002, the Company amended its agreements with Vaillant to expand their distribution territory, on a non-exclusive basis, to include all of Europe. Also under the amended agreements, the Company 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, The Company 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: In April 2000, the Company entered into a joint development agreement with Pemeas (effective April 1, 2004, the fuel cell activity of Celanese AG and former Hoechst AG were 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, the Company will 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: In September 2000, the Company finalized 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 the Company’s fuel processor. Over the course of the joint development agreement the Company has contributed $10.0 million to fund Engelhard’s development efforts, and Engelhard in turn has acquired $10.0 million of the Company’s common stock. At December 31, 2004, the $10.0 million has been fully expensed. The supply agreement with Engelhard also specifies the rights and obligations for Engelhard to supply products to the Company over the next 10 years.

Honda: In October 2002, the Company signed a definitive agreement with Honda R&D Co., Ltd. of Japan, a subsidiary of Honda Motor Co., Ltd., to exclusively and jointly develop and test an initial prototype of a Home Energy Station for fuel cell automobiles. Under the terms of this agreement, the Company’s associated research and development efforts will be funded through total installments of $3.0 million. As part of the program, the Company expects to integrate one of its GenSys^™5C stationary fuel cell systems with additional components necessary for the home refueling concept. A Home Energy Station is a fuel cell product that is expected to provide heat, hot water, and electricity to a home, while also providing hydrogen fuel for a fuel cell vehicle. The device will be fueled by natural gas, and is expected to be environmentally friendly due to its high and low emissions. The exclusive agreement covers the first phase of what is expected to be a multi-phase development project. In October 2003, the Company successfully demonstrated a prototype Home Energy Station at Honda R&D Americas’ facility in Torrance, California. Through December 31, 2003, the Company has invoiced and received $3.0 million under this agreement and recognized research and development contract revenue and associated cost of revenue in the amount of $3.0 million.

In March 2004, the Company amended the agreement with Honda to provide for the second phase of product development effort. In September 2004, under the second phase of the work with Honda, the Company successfully demonstrated a second-generation prototype of the Home Energy Station at its Latham N.Y. headquarters. As in the first phase, Honda R&D of Japan is funding Plug Power’s work under this new agreement. Through December 31, 2004, the Company has invoiced and received $4.0 million under this agreement and recognized research and development contract revenue and associated cost of revenue in the amount of $3.8 million.

In 2004, the Company leased certain equipment under capital lease transactions with an original cost of $129,900, which had a net book value at December 31, 2004 of $90,000. The Company had no capital leases at December 31, 2003. The Company also has several noncancelable operating leases, primarily for warehouse facilities and office space that expire over the next five years. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) during 2004, 2003, and 2002 was $283,000, $188,000 and $496,000, respectively.

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 2004 are:

At December 31, 2004 the future minimum lease payments due on capital lease obligations are $62,000 in 2005.

Concentrations of credit risk with respect to receivables exist due to the limited number of select customers that the Company has initial commercial sales arrangements. To mitigate credit risk, the Company applies standard credit approvals and performs appropriate evaluation of a prospective customer’s financial condition. At December 31, 2004, five customers comprise approximately 62.1% of the total accounts receivable balance, with each customer individually representing 15.9%, 14.9%, 13.9%, 8.9% and 8.5% of total accounts receivable, respectively. For the year ended December 31, 2004, product and service revenue recognized on sales arrangements with five customers represented approximately 63.1% of total product and service revenue, with each customer individually representing 18.8%, 17.5%, 13.5%, 7.0% and 6.3% of recognized product and service revenue, respectively.

The Company has cash deposits in excess of federally insured limits. The amount of such deposits is approximately $9.3 million at December 31, 2004.

The Company is party to employment agreements with certain executives which provide for compensation and certain other benefits. The agreements also provide for severance payments under certain circumstances.

16. Unaudited Quarterly Financial Data (in thousands, except per share data)


	Sales prices
	High		Low
2003
1st Quarter	$	6.34	$	4.04
2nd Quarter	$	6.18	$	4.50
3rd Quarter	$	6.58	$	3.85
4th Quarter	$	7.50	$	4.88
2004
1st Quarter	$	10.65	$	6.75
2nd Quarter	$	10.24	$	6.85
3rd Quarter	$	7.55	$	4.62
4th Quarter	$	7.27	$	5.45


	Years Ended December 31,
	2004			2003			2002			2001			2000
	(in thousands, except per share data)
Statement Of Operations:
Product and service revenue	$	5,306		$	7,517		$	9,427		$	2,574		$	—
Research and development contract revenue		10,835			4,985			2,391			3,168			8,378

Total revenue		16,141			12,502			11,818			5,742			8,378
Cost of product and service revenues		5,368			7,150			7,602			5,080			—
Cost of research and development contract revenues		13,474			7,010			3,739			6,211			13,055
In-process research and development		—			3,000			—			—			4,984
Research and development expense		35,203			40,070			40,289			60,600			65,905
General and administrative expense		8,423			7,183			6,956			7,492			16,167
Other expense (income), net		412			1,128			450			(529	)		(5,491	)

Net loss	$	(46,739	)	$	(53,039	)	$	(47,218	)	$	(73,112	)	$	(86,242	)

Loss per share, basic and diluted	$	(0.64	)	$	(0.88	)	$	(0.93	)	$	(1.56	)	$	(1.99	)

Weighted average number of common shares outstanding		73,126			60,146			50,645			46,840			43,308

Balance Sheet Data: (at end of the period)
Unrestricted cash, cash equivalents and marketable securities	$	66,849		$	102,004		$	55,848		$	92,682		$	86,733
Total assets		117,997			160,589			108,683			151,374			150,829
Current portion of long-term obligations		427			545			530			530			577
Long-term obligations		4,996			5,306			5,727			6,172			6,707
Stockholders’ equity		102,113			144,286			92,697			135,003			134,131
Working capital		64,073			99,286			56,876			90,366			83,352


	Years ended December 31,
	2004		2003		2002
Unrestricted cash, cash equivalents and marketable securities	$	66,849,000	$	102,004,000	$	55,848,000
Working capital		64,073,000		99,285,000		56,876,000
Net loss		46,739,000		53,039,000		47,218,000
Net cash used in operating activities		33,896,000		38,017,000		36,894,000
Purchase of property, plant and equipment		1,617,000		627,000		1,268,000


	Years ended December 31,
	2004		2003		2002
Unrestricted cash, cash equivalents and marketable securities	$	66,849,000	$	102,004,000	$	55,848,000
Working capital		64,073,000		99,285,000		56,876,000
Net loss		46,739,000		53,039,000		47,218,000
Net cash used in operating activities		33,896,000		38,017,000		36,894,000
Purchase of property, plant and equipment		1,617,000		627,000		1,268,000


	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Long-term debt	$	4,363,000	$	365,000	$	795,000	$	895,000	$	2,308,000
Capital lease obligations		62,000		62,000		—		—		—
Operating leases		3,009,000		866,000		1,017,000		768,000		358,000

Total	$	7,434,000	$	1,293,000	$	1,812,000	$	1,663,000	$	2,666,000


Plan Category	Number of shares to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted average exercise price of outstanding options, warrants and rights (b)		Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a))(c)
Equity compensation plans approved by security holders	4,712,064	(1)	$	11.48	4,276,355	(2)
Equity compensation plans not approved by security holders (3)	—			—	—

Total	4,712,064	(1)	$	11.48	4,276,355	(2)


Signature	Title	Date
/s/ ROGER B. SAILLANT Roger B. Saillant	President, Chief Executive Officer and Director (Principal Executive Officer)	March 15, 2005

/s/ DAVID A. NEUMANN David Neumann	Chief Financial Officer (Principal Financial Officer and Accounting Officer)	March 15, 2005

/s/ ANTHONY F. EARLEY, JR. Anthony F. Earley, Jr.	Director	March 15, 2005

/s/ LARRY G. GARBERDING Larry G. Garberding	Director	March 15, 2005

/s/ J. DOUGLAS GRANT J. Douglas Grant	Director	March 15, 2005

/s/ MAUREEN O. HELMER Maureen O. Helmer	Director	March 15, 2005

/s/ DOUGLAS T. HICKEY Douglas T. Hickey	Director	March 15, 2005

/s/ GEORGE C. MCNAMEE George C. McNamee	Director	March 15, 2005

/s/ RICHARD R. STEWART Richard R. Stewart	Director	March 15, 2005

/s/ JOHN M. SHALIKASHVILI John M. Shalikashvili	Director	March 15, 2005

/s/ GARY K. WILLIS Gary K. Willis	Director	March 15, 2005


Exhibit No. and Description
3.1		Amended and Restated Certificate of Incorporation of Plug Power.(2)

3.2		Amended and Restated By-laws of Plug Power.(2)

3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Plug Power(3)

4.1		Specimen certificate for shares of common stock, $.01 par value, of Plug Power.(1)

10.1		Trademark and Trade Name Agreement, dated as of February 2, 1999, between General Electric Company and GE Fuel Cell Systems, LLC.(1)

10.2		Trademark Agreement, dated as of February 2, 1999, between Plug Power, LLC, and GE Fuel Cell Systems, LLC.(1)

10.3		Assignment and Assumption Agreement, dated as of July 1, 1999, between the Town of Colonie Industrial Development Agency, Mechanical Technology Incorporated, Plug Power, LLC, KeyBank, N.A., and First Albany Corporation.(1)

10.4		Replacement Reimbursement Agreement, dated as of July 1, 1999, between Plug Power, LLC and KeyBank, N.A.(1)

10.5		1997 Membership Option Plan and amendment thereto dated September 27, 1999.(1)

10.6		Trust Indenture, dated as of December 1, 1998, between the Town of Colonie Industrial Development Agency and Manufacturers and Traders Trust Company, as trustee.(1)

10.7		1999 Stock Option and Incentive Plan.(1)

10.8		Employee Stock Purchase Plan.(1)

10.9		Agreement, dated as of August 27, 1999, by Plug Power, LLC, Plug Power Inc., GE On-Site Power, Inc., GE Power Systems Business of General Electric Company, and GE Fuel Cell Systems, L.L.C.(1)

10.10		Registration Rights Agreement to be entered into by the Registrant and the stockholders of the Registrant.(2)

10.11		Registration Rights Agreement to be entered into by Plug Power, L.L.C. and GE On-Site Power, Inc.(2)

10.12		Amendment No. 1 to Distributor Agreement dated February 2, 1999, between GE Fuel Cell Systems L.L.C. and Plug Power Inc.(3)

10.13		Amendment to Distributor Agreement dated February 2, 1999, made as of July 31, 2000, between GE Fuel Cell Systems L.L.C. and Plug Power Inc.(3)

10.14		Agreement, dated as of December 15, 2000, between Plug Power Inc. and Roger Saillant.(3)

10.15		Amendment dated September 19, 2000 to agreement, dated as of August 6, 1999, between Plug Power Inc. and Gregory A. Silvestri.(3)

10.16		Joint Development Agreement, dated as of June 2, 2000, between Plug Power Inc. and Engelhard Corporation(3)

10.17		Amended and Restated Limited Liability Company Agreement of GE Fuel Cell Systems, L.L.C. dated August 21, 2001, between GE MicroGen, Inc. and Plug Power Inc.(4)

10.18		Side Letter, dated August 21, 2001, to Amended and Restated Limited Liability Company Agreement of GE Fuel Cell Systems, L.L.C. between GE MicroGen, Inc. and Plug Power Inc.(4)

10.19		First Amendment, dated July 25, 2001, to Registration Rights Agreement entered into by Plug Power, L.L.C. and GE On-Site Power, Inc.(4)

10.20		Amended and Restated Distribution Agreement, dated as of August 21, 2001, between GE Fuel Cell Systems, LLC and Plug Power, LLC(4)

10.21		Investment Agreement dated July 25, 2001, by and between Plug Power Inc. and GE Power Systems Equities Inc.(4)

10.22		Option to Purchase Common Stock of Plug Power Inc. by GE Power Systems Equities, Inc., dated August 21, 2001(4)

10.23		Services Agreement, dated March 17, 2000, between Plug Power Inc. and General Electric Company (4)

10.24		Amendment, dated September 18, 2000, to the Services Agreement between Plug Power Inc. and General Electric Company(4)


Exhibit No. and Description
10.25		Amendment, dated December 31, 2000, to the Services Agreement between Plug Power Inc. and General Electric Company(4)

10.26		Amendment, dated March 31, 2001, to the Services Agreement between Plug Power Inc. and General Electric Company(4)

10.27		Amendment No. 1, dated February 27, 2002, to Services Agreement, between Plug Power Inc. and GE Microgen (f/k/a GE On-Site Power)(4)

10.28		Agreement, dated as of August 29, 2002, between Plug Power Inc. and Mark Sperry.(5)

10.29		Agreement, dated as of August 29, 2002, between Plug Power Inc. and John Elter. (5)

10.30		Amendment, dated July 2, 2003, to the Distributor Agreement between GE Fuel Cell Systems, LLC and Plug Power, LLC(6)

10.31		Agreement dated as of January 20, 2004, between Plug Power Inc. and David A Neumann.(6)

10.32		Stock Option Agreement—1999 Stock Option and Incentive Plan.(7)

23.1		Consent of KPMG LLP(7)

31.1 and 31.2		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(7)

32.1 and 32.2		Certifications pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(7)


		Page
Reports of Independent Registered Public Accounting Firm		F-2

Consolidated balance sheets as of December 31, 2004 and 2003		F-4

Consolidated statements of operations for the years ended December 31, 2004, 2003 and 2002 and cumulative amounts from inception		F-5

Consolidated statements of cash flows for the years ended December 31, 2004, 2003 and 2002 and cumulative amounts from inception		F-6

Consolidated statements of stockholders’ equity and comprehensive loss for the years ended December 31, 2004, 2003 and 2002		F-7

Notes to consolidated financial statements		F-8


	December 31, 2004			December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	18,976,767		$	88,685,255
Restricted cash		365,000			345,000
Marketable securities		47,872,662			13,318,850
Accounts receivable		2,989,481			3,307,627
Inventory		3,527,140			2,663,741
Prepaid development costs		—			708,481
Prepaid expenses and other current assets		1,230,713			1,253,510

Total current assets		74,961,763			110,282,464
Restricted cash		3,965,274			4,330,274
Property, plant and equipment, net		21,829,254			24,122,266
Intangible asset		687,500			3,437,500
Investment in affiliate		5,785,358			7,588,891
Goodwill		10,388,980			10,388,980
Other assets		379,361			438,396

Total assets	$	117,997,490		$	160,588,771

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,339,143		$	1,975,370
Accrued expenses		2,447,316			3,491,583
Deferred revenue		5,675,227			5,184,932
Current portion of capital lease obligation and long-term debt		427,238			345,000

Total current liabilities		10,888,924			10,996,885
Long-term debt		3,998,391			4,365,955
Other liabilities		997,349			939,810

Total liabilities		15,884,664			16,302,650

Stockholders’ equity:
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value per share; 245,000,000 shares authorized; 73,350,878 shares issued and outstanding at December 31, 2004 and 72,850,709 shares issued and outstanding at December 31, 2003		733,509			728,506
Additional paid-in capital		457,880,663			454,399,857
Unamortized value of restricted stock		(680,459	)		(2,242,573	)
Accumulated other comprehensive loss		(482,391	)		—
Deficit accumulated during the development stage		(355,338,496	)		(308,599,669	)

Total stockholders’ equity		102,112,826			144,286,121

Total liabilities and stockholders’ equity	$	117,997,490		$	160,588,771


	December 31, 2004			December 31, 2003			December 31, 2002			Cumulative Amounts from Inception
Product and service revenue	$	5,305,648		$	7,517,060		$	9,426,803		$	24,822,945
Research and development contract revenue		10,835,655			4,985,157			2,391,374			48,493,391

Total revenue		16,141,303			12,502,217			11,818,177			73,316,336
Cost of product and service revenue		5,367,897			7,150,192			7,601,819			25,199,796
Cost of research and development contract revenue		13,474,090			7,009,752			3,738,838			69,077,245
In-process research and development		—			3,000,000			—			12,026,640
Research and development expense:
Noncash stock-based compensation		2,591,156			1,752,276			1,003,616			7,232,075
Other research and development		32,611,633			38,317,462			39,285,548			261,273,613
General and administrative expense:
Noncash stock-based compensation		1,398,377			896,018			481,927			14,874,399
Other general and administrative		7,025,063			6,286,894			6,473,957			44,659,615

Operating loss		(46,326,913	)		(51,910,377	)		(46,767,528	)		(361,027,047	)
Interest income		1,452,593			833,014			1,655,075			19,512,660
Interest expense		(60,974	)		(61,568	)		(96,635	)		(1,031,717	)

Loss before equity in losses of affiliates		(44,935,294	)		(51,138,931	)		(45,209,088	)		(342,546,104	)
Equity in losses of affiliates		(1,803,533	)		(1,899,871	)		(2,009,238	)		(12,792,392	)

Net loss	$	(46,738,827	)	$	(53,038,802	)	$	(47,218,326	)	$	(355,338,496	)

Loss per share:
Basic and diluted	$	(0.64	)	$	(0.88	)	$	(0.93	)

Weighted average number of common shares outstanding		73,125,957			60,145,940			50,644,950


	Common stock					Additional Paid-in Capital		Unamortized Value of Restricted Stock			Accumulated Other Comprehensive Loss			Deficit Accumulated During the Development Stage			Total Stockholders’ Equity
	Shares			Amount		Additional Paid-in Capital		Unamortized Value of Restricted Stock			Accumulated Other Comprehensive Loss						Total Stockholders’ Equity
December 31, 2001		50,322,928		$	503,229	$	342,842,203	$	—		$	—		$	(208,342,541	)	$	135,002,891
Stock issued for development agreement		243,383			2,434		1,997,566											2,000,000
Stock based compensation		213,987			2,140		1,805,453											1,807,593
Stock option exercises		138,567			1,386		707,545											708,931
Stock issued under employee stock purchase plan		78,208			782		394,897											395,679
Net loss															(47,218,326	)		(47,218,326	)

December 31, 2002		50,997,073			509,971		347,747,664		—			—			(255,560,867	)		92,696,768
Public offering, net		11,700,000			117,000		54,850,204											54,967,204
Stock issued in acquisition of H Power		9,063,080			90,631		46,169,945											46,260,576
Stock based compensation		356,839			3,567		2,026,020											2,029,587
Issuance of restricted stock		608,304			6,083		3,173,700		(3,179,783	)								—
Amortization of restricted stock									937,210									937,210
Stock option exercises		35,033			350		84,623											84,973
Stock issued under employee stock purchase plan		90,380			904		347,701											348,605
Net loss															(53,038,802	)		(53,038,802	)

December 31, 2003		72,850,709			728,506		454,399,857		(2,242,573	)		—			(308,599,669	)		144,286,121
Stock based compensation		290,200			2,904		2,353,582											2,356,486
Issuance of restricted stock		42,300			422		218,180		(218,602	)								—
Amortization of restricted stock									1,780,716									1,780,716
Stock option exercises		95,960			960		500,348											501,308
Stock issued under employee stock purchase plan		71,709			717		408,696											409,413
Net loss															(46,738,827	)		(46,738,827	)
Change in unrealized loss on marketable securities												(482,391	)					(482,391	)

December 31, 2004		73,350,878		$	733,509	$	457,880,663	$	(680,459	)	$	(482,391	)	$	(355,338,496	)	$	102,112,826


Comprehensive loss for the year ended December 31, 2004 is as follows:

Net loss	$	(46,738,827	)
Comprehensive loss		(482,391	)

Total comprehensive loss	$	(47,221,218	)


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Debt Securities	$	37,555,053	$	—	$	482,391	$	37,072,662
Equity Securities		10,800,000		—		—		10,800,000

Total	$	48,355,053	$	—	$	482,391	$	47,872,662


	Less than 12 months				More than 12 months
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Debt Securities	$	29,330,621	$	439,104	$	2,192,040	$	43,287


	Amortized Cost		Estimated Fair Value
Due in
2005	$	20,326,445	$	20,056,436
2006-2009		16,228,608		16,016,226
2010-2014		—		—
2015 and later		1,000,000		1,000,000


Buildings		20 years
Building improvements		5–20 years
Machinery and equipment		3–15 years


	Year Ended December 31,
	2004			2003			2002
Net loss, as reported	$	(46,738,827	)	$	(53,038,802	)	$	(47,218,326	)
Add: Stock-based employee compensation expense included in reported net loss		3,989,533			2,648,294			1,485,543
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards		(11,619,788	)		(12,140,641	)		(23,660,210	)

Proforma net loss	$	(54,369,082	)	$	(62,531,149	)	$	(69,392,993	)

Loss per share:
Basic and diluted—as reported	$	(0.64	)	$	(0.88	)	$	(0.93	)

Basic and diluted—pro forma	$	(0.74	)	$	(1.04	)	$	(1.37	)


	December 31, 2004			December 31, 2003
Land	$	90,000		$	90,000
Buildings		14,557,080			14,557,080
Building improvements		7,450,936			6,809,585
Machinery and equipment		22,293,614			21,188,540

		44,391,630			42,645,205
Less accumulated depreciation and amortization		(22,562,376	)		(18,522,939	)

Property, plant, and equipment, net	$	21,829,254		$	24,122,266


		December 31, 2004				December 31, 2003
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Distribution Agreement	10 years	$	16,250,000	$	10,464,642	$	16,250,000	$	8,661,109
Purchased Technology—H Power	2 years		5,500,000		4,812,500		5,500,000		2,062,500

Total		$	21,750,000	$	15,277,142	$	21,750,000	$	10,723,609


		Estimated Amortization Expense
2005		2,479,100
2006		1,791,600
2007		1,791,600
2008		410,558
2009		—


	2004		2003
Accrued payroll and compensation related costs	$	681,056	$	1,174,562
Accrual for closure of H Power facilities		451,620		470,024
Other accrued liabilities		1,314,640		1,846,997

	$	2,447,316	$	3,491,583


	No. of Common Shares	Cash Contribution		Noncash Contribution			Total Capital Contribution
1997
DTE Energy Company	4,750,000	$	4,750,000	$	—		$	4,750,000
Mechanical Technology Incorporated	4,750,000		—		4,750,000	(a)		4,750,000

	9,500,000		4,750,000		4,750,000			9,500,000

1998
DTE Energy Company	4,950,000		7,750,000		—			7,750,000
Mechanical Technology Incorporated	2,700,000		3,000,000		550,000	(a)		5,500,000
Stock based compensation and other noncash transactions	—		—		212,000	(c)		(1,738,000	)

	7,650,000		10,750,000		762,000			11,512,000

1999
Edison Development Corporation	4,004,315		28,697,782		—			28,697,782
Mechanical Technology Incorporated	6,254,315		24,000,000		8,897,782	(a)		32,897,782
General Electric Company	5,250,000		37,500,000		11,250,000	(b)		48,750,000
Other private investors	3,549,850		25,045,000		—			25,045,000
Initial public offering-net	6,782,900		92,971,878		—			92,971,878
Stock option exercises	24,128		41,907		—			41,907
Stock based compensation and other noncash transactions	—		—		978,800	(c)		978,800

	25,865,508		208,256,567		21,126,582			229,383,149

2000
Stock option exercises	632,378		3,793,028		—			3,793,028
Stock issued under employee stock purchase plan	32,717		408,452		—			408,452
Stock issued for development agreement	104,869		—		5,000,000	(d)		5,000,000
Stock issued for equity in affiliate	7,000		—		827,750	(e)		827,750
Stock based compensation and other noncash transactions	3,041		—		8,936,779	(c)		8,936,779

	780,005		4,201,480		14,764,529			18,966,009

2001
Edison Development Corporation	416,666		4,800,000		—			4,800,000
General Electric Company	416,666		4,800,000		—			4,800,000
Public offering-net	4,575,000		51,588,551		—			51,588,551
Stock option exercises	760,531		2,051,954		—			2,051,954
Stock issued under employee stock purchase plan	73,132		730,592		—			730,592
Stock issued for development agreement	96,336		—		3,000,000	(d)		3,000,000
Stock option issued to affiliate	—		—		5,000,000	(f)		5,000,000
Stock based compensation and other noncash transactions	189,084		—		2,013,177	(c)		2,013,177

	6,527,415		63,971,097		10,013,177			73,984,274

2002
Stock option exercises	138,567		708,931		—			708,931
Stock issued under employee stock purchase plan	78,208		395,679		—			395,679
Stock issued for development agreement	243,383		—		2,000,000	(d)		2,000,000
Stock based compensation and other noncash transactions	213,987		—		1,807,593	(c)		1,807,593

	674,145		1,104,610		3,807,593			4,912,203

2003
Public offering, net	11,700,000		54,967,204		—			54,967,204
Stock option exercises	35,033		84,973		—			84,973
Stock issued under employee stock purchase plan	90,380		348,605		—			348,605
Stock issued in acquisition of H Power	9,063,080		—		46,260,576	(g)		46,260,576
Stock based compensation	965,143		—		2,966,797	(c)		2,966,797

	21,853,636		55,400,782		49,227,373			104,628,155

2004
Stock option exercises	95,960		501,308		—			501,308
Stock issued under employee stock purchase plan	71,709		409,413		—			409,413
Stock based compensation	332,500		—		4,137,202	(c)		4,137,202

	500,169		910,721		4,137,202			5,047,923

Total as of December 31, 2004	73,350,878	$	349,345,257	$	106,804,413		$	457,933,713


	Options Outstanding				Options Exercisable
Exercise Price range	Shares	Average Remaining Life	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$ 0.00 – 1.00	462,867	2.6	$	1.00	462,867	$	1.00
1.01 – 5.00	181,694	5.1		4.80	165,569		4.81
5.01 – 10.00	2,467,983	7.9		7.32	1,823,772		7.38
10.01 – 15.00	1,168,080	5.7		11.83	976,705		11.95
15.01 – 20.00	131,900	6.0		18.17	131,774		18.17
20.01 – 25.00	87,000	6.4		24.46	86,937		24.47
25.01 – 50.00	92,500	5.5		43.80	92,500		43.80
50.01 – 75.00	23,200	5.4		65.08	23,200		65.08
75.01 – 100.00	79,240	5.4		94.29	79,240		94.29
100.01 – 140.00	17,600	5.2		106.75	17,600		106.75

	4,712,064	6.5		11.17	3,860,164		11.87


Option Activity	Number of Shares Subject to Option		Weighted Average Exercise Price per Share
January 1, 2002	6,008,932		23.36
Granted at fair value	206,298		9.08
Forfeited or terminated	(253,720	)	37.46
Exercised	(164,346	)	4.31

December 31, 2002	5,797,164		21.83
Granted at fair value	1,245,245		6.12
Options exchanged for restricted stock	(1,810,048	)	39.48
Forfeited or terminated	(366,161	)	23.92
Exercised	(35,033	)	2.41

December 31, 2003	4,831,167		12.46
Granted at fair value	337,500		8.03
Forfeited or terminated	(360,643	)	23.22
Exercised	(95,960	)	5.22

December 31, 2004	4,712,064		11.17


Year ending December 31	Operating leases
2005	$	866,000
2006		619,000
2007		398,000
2008		384,000
2009		384,000
Thereafter		358,000

Total minimum lease payments	$	3,009,000


	Quarters Ended
	March 31, 2004			June 30, 2004			September 30, 2004			December 31, 2004
Product and service revenue	$	1,351		$	1,508		$	1,335		$	1,112
Contract revenue		1,935			2,177			3,293			3,430
Net loss		(11,952	)		(11,299	)		(11,684	)		(11,804	)
Loss per share:
Basic and diluted		(0.17	)		(0.15	)		(0.16	)		(0.16	)


	Quarters Ended
	March 31, 2003			June 30, 2003			September 30, 2003			December 31, 2003
Product and service revenue	$	2,033		$	2,146		$	1,988		$	1,350
Contract revenue		919			957			1,477			1,632
Net loss		(13,767	)		(12,827	)		(12,405	)		(14,040	)
Loss per share:
Basic and diluted		(0.27	)		(0.21	)		(0.20	)		(0.21	)