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UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549~~

~~FORM~~SECURITIES ~~10-Q~~ AND EXCHANGE COMMISSION

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Washington, D.C. 20549

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34463

~~A123~~B456 Systems, Inc. ~~(Exact name of registrant as specified in its charter)~~

Delaware (State or other jurisdiction of incorporation or organization)		04-3583876 (I.R.S. Employer Identification No.)
A123 Systems, Inc.
200 West Street
Waltham, Massachusetts		02451
(Address of principal executive offices)		(Zip Code)

(Exact name of registrant as specified in its charter)

617-778-5700 (Registrant's telephone number, including area code)

Delaware (State or other jurisdiction of incorporation or organization)		04-3583876 (I.R.S. Employer Identification No.)

B456 Systems, Inc.
200 West Street
Waltham, Massachusetts		02451
(Address of principal executive offices)		(Zip Code)

617-778-5700

(Registrant’s telephone number, including area code)

A123 Systems, Inc.

200 West Street

Waltham, MA 02451

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "“large accelerated filer,"” "“accelerated filer"” and "“smaller reporting company"” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ýo Accelerated filer ox Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) ~~Smaller reporting company o~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý x

As of ~~August 6~~October 1, 2012, there were ~~170~~305,~~557~~699,~~467~~542 shares of the registrant'’s Common Stock, par value $.001 per share, outstanding.

Table of Contents

B456 ~~A123~~ Systems, Inc. ~~Quarterly Report on Form 10-Q For the Quarterly Period Ended June 30, 2012 INDEX~~

		PAGE NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Comprehensive Loss			5
Condensed Consolidated Statements of Stockholders' Equity			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Condensed Consolidated Financial Statements			8
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations			33
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk			56
ITEM 4: Controls and Procedures			56
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings			57
ITEM 1A: Risk Factors			59
ITEM 2: Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities			94
ITEM 6: Exhibits			95
Signatures			96
Exhibit Index			97
EX-31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act
EX-31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act
EX-32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act
EX-32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act
EX-101.INS—XBRL Instance Document
EX-101.SCH—XBRL Taxonomy Extension Schema Document
EX-101.CAL—XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.LAB—XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE—XBRL Taxonomy Extension Presentation Linkbase Document
EX-101.DEF—XTRL Taxonomy Extension Definition

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2012

INDEX

	PAGE NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements	3
Condensed Consolidated Balance Sheets (Unaudited)	3
Condensed Consolidated Statements of Operations (Unaudited)	4
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)	5
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	6
Condensed Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Condensed Consolidated Financial Statements (Unaudited)	8
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk	47
ITEM 4: Controls and Procedures	47
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings	48
ITEM 1A: Risk Factors	49
ITEM 2: Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities	50
ITEM 6: Exhibits	50
Signatures	51
Exhibit Index	52
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
EX-31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
EX-32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act by Chief Executive Officer
EX-32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act by Chief Financial Officer
EX-101.INS—XBRL Instance Document
EX-101.SCH—XBRL Taxonomy Extension Schema Document
EX-101.CAL—XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.LAB—XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE—XBRL Taxonomy Extension Presentation Linkbase Document
EX-101.DEF—XBRL Taxonomy Extension Definition

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

B456 ~~A123~~ Systems, Inc. ~~Condensed Consolidated Balance Sheets (in thousands, except share and per share data)~~

	December 31, 2011			June 30, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	186,893		$	47,670
Restricted cash and cash equivalents		668			40,758
Accounts receivable, net		47,200			25,998
Inventory		103,394			96,304
Deferred cost		6,256			6,515
Prepaid expenses and other current assets		8,011			11,134
Total current assets		352,422			228,379
Property, plant and equipment, net		145,203			138,620
Goodwill		9,581			9,581
Long-term grants receivable		101,054			101,554
Deposits and other assets		5,745			8,669
Investments		11,897			8,162
Total assets	$	625,902		$	494,965
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit lines	$	38,094		$	—
Current portion of long-term debt		2,069			38,490
Current portion of capital lease obligations		1,740			1,537
Accounts payable		27,220			23,422
Accrued expenses		31,910			73,470
Other current liabilities		8,329			5,705
Deferred revenue		9,577			15,073
Deferred rent		181			181
Total current liabilities		119,120			157,878
Long-term debt, net of current portion		142,755			146,715
Capital lease obligations, net of current portion		17,336			16,598
Deferred revenue, net of current portion		35,303			34,499
Deferred rent, net of current portion		1,203			1,112
Warrant derivative liability		—			18,650
Other long-term liabilities		13,820			12,548
Total liabilities		329,537			388,000
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.001 par value—5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2011 and June 30, 2012		—			—
Common stock, $0.001 par value—250,000,00 and 650,000,000 shares authorized; 134,342,974 and 147,141,066 shares issued and outstanding at December 31, 2011 and June 30, 2012, respectively		134			147
Additional paid-in capital		946,506			965,021
Accumulated deficit		(648,958	)		(856,886	)
Accumulated other comprehensive loss		(1,317	)		(1,317	)
Total stockholders' equity		296,365			106,965
Total liabilities and stockholders' equity	$	625,902		$	494,965

Condensed Consolidated Balance Sheets (Unaudited)

~~See~~(in ~~notes~~thousands, toexcept ~~condensed~~share ~~consolidated~~and ~~financial~~per ~~statements.~~share data)

	December 31, 2011			September 30, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	186,893		$	31,349
Restricted cash and cash equivalents	668			2,289
Accounts receivable, net	47,200			22,460
Inventory	103,394			98,970
Deferred cost	6,256			9,434
Prepaid expenses and other current assets	8,011			11,085
Total current assets	352,422			175,587
Property, plant and equipment, net	145,203			134,055
Goodwill	9,581			—
Long-term grants receivable	101,054			101,804
Deposits and other assets	5,745			7,586
Investments	11,897			2,000
Total assets	$	625,902		$	421,032
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit lines	$	38,094		$	—
Current portion of long-term debt	2,069			4,505
Current portion of capital lease obligations	1,740			1,485
Accounts payable	27,220			20,829
Accrued expenses	31,910			65,085
Other current liabilities	8,329			7,998
Deferred revenue	9,577			14,377
Deferred rent	181			181
Total current liabilities	119,120			114,460
Long-term debt, net of current portion	142,755			144,311
Capital lease obligations, net of current portion	17,336			16,254
Deferred revenue, net of current portion	35,303			35,768
Deferred rent, net of current portion	1,203			1,067
Warrant and derivative liabilities	—			15,769
Other long-term liabilities	13,820			13,482
Total liabilities	329,537			341,111
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value—5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2011 and September 30, 2012	—			—
Common stock, $0.001 par value—250,000,000 shares authorized; 134,342,974 and 305,699,542 shares issued and outstanding at December 31, 2011 and September 30, 2012, respectively	134			306
Additional paid-in capital	946,506			1,020,354
Accumulated deficit	(648,958		)	(939,422		)
Accumulated other comprehensive loss	(1,317		)	(1,317		)
Total stockholders’ equity	296,365			79,921
Total liabilities and stockholders’ equity	$	625,902		$	421,032

~~Table~~See ofnotes ~~Contents~~to unaudited condensed consolidated financial statements.

~~A123 Systems, Inc. Condensed Consolidated Statements of Operations (in thousands, except per share data)~~ 3

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2012			2011			2012
Revenue:
Product	$	29,564		$	11,487		$	45,022		$	18,787
Services		6,789			5,498			9,428			9,087
Total revenue		36,353			16,985			54,450			27,874
Cost of revenue:
Product		48,818			42,908			79,914			139,972
Services		5,066			3,247			7,544			7,890
Total cost of revenue		53,884			46,155			87,458			147,862
Gross loss		(17,531	)		(29,170	)		(33,008	)		(119,988	)
Operating expenses:
Research, development and engineering		17,434			21,383			37,793			44,964
Sales and marketing		5,070			4,185			9,152			8,605
General and administrative		9,399			11,415			18,510			23,279
Production start-up		3,497			—			8,118			—
Total operating expenses		35,400			36,983			73,573			76,848
Operating loss		(52,931	)		(66,153	)		(106,581	)		(196,836	)
Other income (expense):
Interest expense, net		(2,105	)		(4,761	)		(2,746	)		(6,952	)
Gain (loss) on foreign exchange		77			(146	)		79			(46	)
Gain (loss) on change in fair value of derivative liabilities		—			(8,374	)		—			181
Impairment of long-term investment		—			(2,930	)		—			(2,930	)
Other (expense) income, net		(353	)		(338	)		673			(795	)
Total other expense, net		(2,381	)		(16,549	)		(1,994	)		(10,542	)
Loss from operations, before tax		(55,312	)		(82,702	)		(108,575	)		(207,378	)
Provision for income taxes		78			188			488			550
Net loss		(55,390	)		(82,890	)		(109,063	)		(207,928	)
Less: net loss attributable to the noncontrolling interest		—			—			27			—
Net loss attributable to A123 Systems, Inc.	$	(55,390	)	$	(82,890	)	$	(109,036	)	$	(207,928	)
Net loss per share attributable to A123 Systems, Inc.—basic and diluted:	$	(0.44	)	$	(0.56	)	$	(0.95	)	$	(1.43	)
Weighted average number of common shares outstanding—basic and diluted		124,513			146,989			115,066			145,205

Table of Contents

~~See~~B456 ~~notes to condensed consolidated financial statements~~Systems, Inc.

4Condensed Consolidated Statements of Operations (Unaudited)

~~Table~~(in ofthousands, ~~Contents~~except per share data)

A123 Systems, Inc. Condensed Consolidated Statements of Comprehensive Loss (in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2012			2011			2012
Revenue:
Products	$	59,603		$	21,377		$	104,625		$	40,164
Services	4,716			4,083			14,144			13,170
Total revenue	64,319			25,460			118,769			53,334
Cost of revenue:
Products	78,014			43,189			157,928			183,161
Services	5,878			9,738			13,422			17,628
Total cost of revenue	83,892			52,927			171,350			200,789
Gross loss	(19,573		)	(27,467		)	(52,581		)	(147,455		)
Operating expenses:
Research, development and engineering	19,181			18,612			56,974			63,576
Sales and marketing	4,515			3,753			13,667			12,358
General and administrative	16,289			14,392			34,799			37,671
Production start-up	1,097			—			9,215			—
Goodwill impairment loss	—			9,581			—			9,581
Total operating expenses	41,082			46,338			114,655			123,186
Operating loss	(60,655		)	(73,805		)	(167,236		)	(270,641		)
Other income (expense):
Interest expense, net	(2,227		)	(15,585		)	(4,973		)	(22,537		)
Gain (loss) on foreign exchange	(98		)	419			(19		)	373
Gain on change in fair value of warrant derivative liability	—			25,248			—			25,429
Impairment of long-term investment	—			(5,943		)	—			(8,873		)
Loss on debt and warrant issuance and conversion	—			(12,544		)	—			(12,544		)
Other (expense) income, net	(143		)	(220		)	530			(1,015		)
Total other expense, net	(2,468		)	(8,625		)	(4,462		)	(19,167		)
Loss from operations, before tax	(63,123		)	(82,430		)	(171,698		)	(289,808		)
Provision for income taxes	594			106			1,082			656
Net loss	(63,717		)	(82,536		)	(172,780		)	(290,464		)
Less: loss attributable to the noncontrolling interest	—			—			27			—
Net loss attributable to B456 Systems, Inc.	$	(63,717	)	$	(82,536	)	$	(172,753	)	$	(290,464	)
Net loss per share attributable to B456 Systems, Inc.—basic and diluted:	$	(0.51	)	$	(0.40	)	$	(1.45	)	$	(1.76	)
Weighted average number of common shares outstanding—basic and diluted	126,049			204,667			118,767			165,283

	Three Months Ended June 30						Six Months Ended June 30
	2011			2012			2011			2012
Net loss	$	(55,390	)	$	(82,890	)	$	(109,063	)	$	(207,928	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments		18			—			(383	)		—
Comprehensive loss		(55,372	)		(82,890	)		(109,446	)		(207,928	)
Less: loss attributable to the noncontrolling interest		—			—			(27	)		—
Comprehensive loss attributable to A123 Systems, Inc.	$	(55,372	)	$	(82,890	)	$	(109,419	)	$	(207,928	)

See notes to unaudited condensed consolidated financial statements.

Table of Contents

~~A123~~B456 Systems, Inc.

Condensed Consolidated Statements of ~~Stockholders'~~Comprehensive ~~Equity~~ Loss (Unaudited)

(in thousands~~, except per share data~~)

	Common Stock, $0.001 Par Value
	Three Months Ended September 30						Nine Months Ended September 30
													Accumulated Other Comprehensive Loss
	2011			2012			2011			2012
							Additional Paid-in Capital			Accumulated Deficit						Total Stockholders' Equity			Noncontrolling Interest
Net loss	$	(63,717	)	$	(82,536	)	$	(172,780	)	$	(290,464	)
	Shares			Amount
Other comprehensive loss, net of tax:
BALANCE—January 1, 2011		105,194		$	105		$	790,256		$	(391,228	)	$	(935	)	$	398,198		$	334
Foreign currency translation adjustments	—			—			(383		)	—
Stock-based compensation		—			—			6,721			—			—			6,721			—
Comprehensive loss	(63,717		)	(82,536		)	(173,163		)	(290,464		)
Exercise of stock options		602			1			1,976			—			—			1,977			—
Less: loss attributable to the noncontrolling interest	—			—			27			—
Vesting of restricted stock units		45			—			—			—			—			—			—
Comprehensive loss attributable to B456 Systems, Inc.	$	(63,717	)	$	(82,536	)	$	(173,136	)	$	(290,464	)
Issuance of common stock		20,184			20			115,167			—			—			115,187
Purchase of subsidiary shares by noncontrolling interest holder		—			—			—			—			—			—			600
Deconsolidation of subsidiary		—			—			—			—			—			—			(907	)
Net loss		—			—			—			(109,036	)		—			(109,036	)		(27	)
Other comprehensive loss		—			—			—			—			(383	)		(383	)		—
BALANCE—June 30, 2011		126,025		$	126		$	914,120		$	(500,264	)	$	(1,318	)	$	412,664		$	—
BALANCE—January 1, 2012		134,343		$	134		$	946,506		$	(648,958	)	$	(1,317	)	$	296,365		$	—
Stock-based compensation		—			—			7,052			—			—			7,052			—
Exercise of stock options		11			—			12			—			—			12			—
Vesting of restricted stock units		287			—			—			—			—			—			—
Issuance of common stock		12,500			13			11,451			—			—			11,464			—
Net loss		—			—			—			(207,928	)		—			(207,928	)		—
Other comprehensive loss		—			—			—			—			—			—			—
BALANCE—June 30, 2012		147,141		$	147		$	965,021		$	(856,886	)	$	(1,317	)	$	106,965		$	—

See notes to unaudited condensed consolidated financial statements.

Table of Contents

B456 ~~A123~~ Systems, Inc. ~~Condensed Consolidated Statements of Cash Flows (in thousands)~~

	Six Months Ended June 30,
	2011			2012
Cash flows from operating activities:
Net loss	$	(109,063	)		(207,928	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		10,697			14,059
Noncash rent		(102	)		(90	)
Noncash loss on equity investments		625			806
Impairment of long-lived and intangible assets		2,645			3,316
Impairment of long-term investment		—			2,930
Gain on change in fair value of derivative liabilities		—			(181	)
Gain on asset transfer and subsequent deconsolidation of variable interest entity (VIE)		(1,255	)		—
Loss on disposal of property and equipment		28			—
Amortization of debt issuance costs and noncash interest expense		1,178			3,759
Stock-based compensation		6,721			7,052
Changes in operating assets and liabilities, excluding the effect of deconsolidation of VIE:
Accounts receivable		(10,217	)		27,708
Inventory		(36,227	)		7,090
Deferred cost		(1,285	)		(258	)
Prepaid expenses and other assets		(5,663	)		(3,027	)
Accounts payable		23,179			(4,767	)
Accrued expenses		3,429			45,411
Deferred revenue		(363	)		(1,814	)
Other liabilities		2,306			(5,395	)
Net cash used in operating activities		(113,367	)		(111,329	)
Cash flows from investing activities:
Increase in restricted cash		(565	)		(40,090	)
Purchases of and deposits on property, plant and equipment		(86,279	)		(15,553	)
Proceeds from government grant		26,138			2,150
Purchase of investments		(1,891	)		—
Net cash used in investing activities		(62,597	)		(53,493	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net of offering costs		115,285			23,502
Net proceeds from convertible debt offering and issuance costs		—			46,889
Proceeds from government grant		900			—
Proceeds from exercise of stock options		1,977			12
Proceeds from issuance of debt, net of offering costs		139,068			—
Principal payments on revolving credit line		—			(38,094	)
Principal payments on long term debt		(2,591	)		(4,943	)
Payments on capital lease obligations		(1,225	)		(1,767	)
Contributions from noncontrolling interest		600			—
Net cash provided by financing activities		254,014			25,599
Effect of foreign exchange rates on cash and cash equivalents		(17	)		—
Net decrease in cash and cash equivalents		78,033			(139,223	)
Cash and cash equivalents at beginning of period		216,841			186,893
Cash and cash equivalents at end of period	$	294,874		$	47,670
Supplemental cash flow information—cash paid for interest	$	351		$	2,863
Noncash investing and financing activities:
Increase in accounts payable and accrued expenses for property, plant and equipment	$	27,329		$	6,563

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

~~See~~(in ~~notes~~thousands, toexcept ~~condensed~~per ~~consolidated~~share ~~financial statements.~~data)

									Accumulated
	Common Stock,			Additional					Other			Total
	$0.001 Par Value			Paid-in		Accumulated			Comprehensive			Stockholders’			Noncontrolling
	Shares	Amount		Capital		Deficit			Loss			Equity			Interest
BALANCE—January 1, 2011	105,194	$	105	$	790,256	$	(391,228	)	$	(935	)	$	398,198		$	334
Stock-based compensation	—	—		10,411		—			—			10,411			—
Exercise of stock options	638	1		2,001		—			—			2,002			—
Vesting of restricted stock units	58	—		—		—			—			—			—
Issuance of common stock	20,184	20		115,167		—			—			115,187			—
Deconsolidation variable interest entity (VIE)	—	—		—		—			—			—			(307		)
Net loss	—	—		—		(172,753		)	—			(172,753		)	(27		)
Other comprehensive loss	—	—		—		—			(383		)	(383		)	—
BALANCE—September 30, 2011	126,074	$	126	$	917,835	$	(563,981	)	$	(1,318	)	$	352,662		$	—

BALANCE—January 1, 2012	134,343	$	134	$	946,506	$	(648,958	)	$	(1,317	)	$	296,365		$	—
Stock-based compensation	—	—		10,348		—			—			10,348			—
Exercise of stock options	11	—		12		—			—			12			—
Vesting of restricted stock units	364	1		—		—			—			1			—
Issuance of common stock	26,855	27		15,572		—			—			15,599			—
Issuance of common stock from conversion of notes payable	144,126	144		47,916		—			—			48,060			—
Net loss	—	—		—		(290,464		)	—			(290,464		)	—
BALANCE—September 30, 2012	305,699	$	306	$	1,020,354	$	(939,422	)	$	(1,317	)	$	79,921		$	—

~~Table~~See ofnotes ~~Contents~~to unaudited condensed consolidated financial statements.

~~A123 Systems, Inc. Notes to Condensed Consolidated Financial Statements~~ 6

Table ~~1. Nature~~ of ~~the Business, Basis of Presentation, and Significant Accounting Policies~~ Contents

~~A123~~B456 Systems, Inc. (the "Company") was incorporated in Delaware on October 19, 2001 and has its corporate offices in Waltham, Massachusetts. The Company designs, develops, manufactures and sells advanced rechargeable lithium-ion batteries and battery systems and provides research and development services to government agencies and commercial customers.

~~Management~~Condensed ~~Plan~~Consolidated ~~Note—The~~Statements ~~Company has incurred significant net losses and negative operating cash flows since inception. At June 30, 2012, the Company had an accumulated deficit~~ of ~~$856.9~~Cash ~~million,~~Flows including a $207.9 million net loss incurred for the six months ended June 30, 2012. The Company had $47.7 million in cash and cash equivalents at June 30, 2012, down from $186.9 million at December 31, 2011. (Unaudited)

~~On March 26,~~(in 2012, the Company launched a field campaign to replace battery modules and packs that may contain defective prismatic cells produced at its Livonia, Michigan manufacturing facility. The cost of this field campaign is estimated at $51.6 million. In addition, the Company recorded an inventory charge of approximately $15.2 million related to inventory produced at its Michigan facilities that may be defective. As a result of this field campaign and the charge for existing prismatic cell inventory, the Company has begun to rebuild its inventory and manage its backlog for existing customer orders while simultaneously replacing the defective customer modules and packs. As a result of this field campaign, the Company expects to continue to incur significant net losses and negative operating cash flows over the next several quarters. thousands)

On May 11, 2012, the Company amended its revolving credit facility with its lead bank. This amendment eliminated the borrowing facility and provided for up to $15.0 million as security for letters of credit. All outstanding letters of credit are required to be cash collateralized at 105% of their face amount. At June 30, 2012, the Company had $10.8 million of restricted cash to collateralize primarily the outstanding letters of credit.

	Nine Months Ended September 30,
	2011			2012
Cash flows from operating activities:
Net loss	$	(172,780	)	$	(290,464	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	18,230			21,424
Noncash rent	(150		)	(136		)
Noncash loss on equity investments	768			1,025
Impairment of long-lived and intangible asset	2,645			13,352
Impairment of long term investment	—			8,873
Gain on change in fair value of warrant derivative liability	—			(25,429		)
Loss on debt and warrant issuance and conversion	—			12,544
Gain on asset transfer and subsequent deconsolidation of variable interest entity (VIE)	(1,255		)	—
Loss on disposal of property and equipment	28			—
Amortization of debt issuance costs and noncash interest expense	1,892			15,791
Stock-based compensation	10,411			10,348
Changes in operating assets and liabilities, excluding the effect of deconsolidation of VIE:
Accounts receivable	(33,392		)	22,857
Inventory	(52,047		)	4,424
Deferred cost	(12,422		)	(3,178		)
Prepaid expenses and other assets	(2,839		)	(6,413		)
Accounts payable	26,718			(4,367		)
Accrued expenses	14,294			36,985
Deferred revenue	(2,046		)	7,149
Other liabilities	3,967			(1,401		)
Net cash used in operating activities	(197,978		)	(176,616		)
Cash flows from investing activities:
Decrease (increase) in restricted cash	10,536			(1,621		)
Purchases of and deposits on property, plant and equipment	(113,729		)	(24,305		)
Proceeds from government grant	32,022			4,459
Purchase of investments	(3,288		)	—
Net cash used in investing activities	(74,459		)	(21,467		)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net of offering costs	115,187			32,793
Proceeds from government grant	900			1,000
Proceeds from exercise of stock options	2,002			12
Proceeds from issuance of debt, net of offering costs	138,824			58,989
Proceeds from revolving credit lines	38,094			—
Payments on settlement of warrants	—			(2,164		)
Principal payments on revolving credit line	(8,000		)	(38,094		)
Principal payments on long term debt	(4,028		)	(7,817		)
Payments on capital lease obligations	(2,148		)	(2,180		)
Contributions from noncontrolling interest	600			—
Net cash provided by financing activities	281,431			42,539
Effect of foreign exchange rates on cash and cash equivalents	(17		)	—
Net decrease in cash and cash equivalents	8,977			(155,544		)
Cash and cash equivalents at beginning of period	216,841			186,893
Cash and cash equivalents at end of period	$	225,818		$	31,349
Supplemental cash flow information—cash paid for interest	$	531		$	2,863
Noncash investing and financing activities:
Purchase of equipment under capital leases	$	153		$	—
Increase in accounts payable and accrued expenses for property, plant and equipment	$	26,996		$	3,613
Deferred financing costs included in accounts payable and accrued expenses for property, plant and equipment	$	342		$	—
Fulfillment of government grants with advance proceeds	$	1,046		$	757

~~At June 30,~~See ~~2012,~~notes the Company had $47.7 million of cash and cash equivalents. Additionally, $30.0 million of cash was released from restricted cash on July 6, 2012 as discussed below. The Company's credit facility and the 2013 Senior Notes (discussed below) contain a covenant requiring the Company to ~~maintain~~unaudited ancondensed ~~unrestricted~~consolidated ~~cash~~financial ~~balance of at least $40~~statements.0 million. During the six months ended June 30, 2012, the Company used on average $18.0 million to $25.0 million per month in net operating and investing cash flows. Based on the Company's historical use of cash, the Company expects its cash balance to fall below this required minimum by the end of August 2012.

The above circumstances, along with the Company's history and near term forecast of incurring significant net losses and negative operating cash flows, raise substantial doubt regarding its ability to continue as a going concern. The Company is considering a broad set of strategic alternatives to improve its liquidity, including measures to reduce costs and improve efficiency, accessing additional sources of capital through existing and potentially new arrangements, and other strategic options. See Note 10(b) Subsequent Events—Memorandum of Understanding from Wanxiang Group Corporation. In connection with this proposed transaction, the Company is currently in discussions with the holders of the 2013 Senior Notes and the Company's lead bank that holds the revolving credit facility to modify the respective agreements to reduce the minimum unrestricted cash balance from $40.0 million to a lower amount. Although management's intent is to improve the Company's operating efficiencies, to obtain additional financing (as discussed in Note 10(b) Subsequent Events) and to modify the terms and covenants in its 2013 Senior Notes and its revolving credit facility, there is no assurance that it will 7

8Table of Contents

~~Table~~B456 ~~of Contents~~Systems, Inc.

~~A123~~Notes ~~Systems, Inc.~~to Condensed Consolidated Financial Statements

1. ~~Notes~~Nature toof ~~Condensed~~the ~~Consolidated~~Business, ~~Financial~~Basis ~~Statements~~of ~~(Continued)~~Presentation, and Significant Accounting Policies

B456 1Systems, Inc. ~~Nature~~(the “Company”) was incorporated in Delaware on October 19, 2001 under the name A123 Systems, Inc. (“A123”) and has its corporate offices in Waltham, Massachusetts. Prior to the Sale (as defined below), the Company designed, developed, manufactured and sold advanced rechargeable lithium-ion batteries and battery systems and provided research and development services to government agencies and commercial customers. On March 22, 2013, the Company filed a Certificate of Amendment to the ~~Business~~Company’s Restated Certificate of Incorporation, ~~Basis~~as amended (the “Amendment”) to change its name from A123 Systems, Inc. to B456 Systems, Inc. The change of ~~Presentation~~corporate name was effected to satisfy one of the Company’s obligations under the Asset Purchase Agreement dated December 11, 2012 by and ~~Significant~~among ~~Accounting~~the ~~Policies~~Company, certain of its subsidiaries and Wanxiang America Corporation (~~Continued~~“Wanxiang”), a subsidiary of Wanxiang Group Corporation (discussed below).

~~be able~~The toCompany ~~obtain~~has ~~such~~incurred ~~financing~~significant onnet ~~favorable~~losses ~~terms,~~and ifnegative atoperating ~~all,~~cash orflows tosince ~~modify~~inception. ~~the~~At ~~covenants~~September 30, or2012, tothe ~~successfully~~Company ~~further~~had ~~reduce~~an ~~costs~~accumulated indeficit ~~such~~of $939.4 million, including a ~~way~~$290.5 ~~that~~million ~~would~~net ~~continue~~loss toincurred ~~allow~~for the nine months ended September 30, 2012. The Company tohad ~~operate its~~$31.3 ~~business~~million in cash and cash equivalents at September 30, 2012, down from $186.9 million at December 31, 2011.

Chapter 11 Bankruptcy Filing—On ~~May~~ October 2416, 2012, the Company ~~sold~~and toall ~~accredited~~of ~~investors~~its ofdomestic ~~$50.0 million~~subsidiaries ~~aggregate~~filed ~~principal~~voluntary ~~amount~~petitions offor ~~6.00%~~relief ~~senior~~under ~~convertible~~Chapter ~~notes~~11, (of Title 11 of the ~~"2013~~United ~~Senior~~States ~~Notes")~~Code, ~~and warrants~~in tothe ~~purchase~~United ~~shares~~States ofBankruptcy ~~common~~Court ~~stock~~for (the ~~"May~~District ~~2012~~of ~~Warrants"),~~Delaware. ~~equal~~The toCompany’s ~~30%~~intent ofunder the ~~number~~Chapter of11 ~~shares~~filing ~~underlying~~was ~~the~~to, ~~2013~~among ~~Senior~~other ~~Notes~~things, ~~assuming~~obtain ~~conversion~~access atto ~~the~~new ~~initial~~financing ~~conversion~~and ~~price.~~facilitate Asone ~~of June 30,~~or ~~2012~~more transactions, ~~$30.0 million~~including the sale of ~~proceeds~~certain ~~subject~~of toits aautomotive ~~control~~business ~~account~~assets. ~~agreement~~The ~~was~~Company ~~recorded~~continued asoperating ~~restricted~~its ~~cash.~~businesses ~~Such~~in ~~proceeds~~the ~~were~~ordinary ~~released~~course ~~from~~as ~~restricted~~it ~~cash~~attempted onto ~~July 6,~~complete ~~2012, upon~~the ~~satisfaction~~sale of the ~~conditions~~automotive ofassets ~~the~~and ~~agreements~~continued ~~with~~to ~~the~~actively ~~holders~~pursue ofstrategic ~~the~~alternatives ~~2013~~for ~~Senior~~their ~~Notes~~other businesses. ~~Pursuant~~The toCompany also obtained the ~~agreements~~necessary ~~with~~relief from the ~~holders~~Bankruptcy Court to pay the claims of ~~such~~certain ~~notes~~critical, priority and ~~its~~ ~~credit~~foreign ~~facility~~vendors ~~provider,~~and the ~~Company~~vast ~~must~~majority ~~maintain~~of aits ~~minimum~~employees’ ~~cash~~claims ~~balance~~in offull ~~$40.0 million~~and ~~(See~~on ~~below~~time ~~for~~in ~~more~~accordance ~~details).~~with its existing business terms.

On ~~July~~ October 1016, 2012, the Company ~~sold~~and its subsidiaries entered into an ~~aggregate~~asset ofpurchase 7agreement (the “JCI Asset Purchase Agreement”) with Johnson Controls,~~692~~ Inc. (“JCI”). Pursuant to the JCI Asset Purchase Agreement,~~308~~ JCI ~~shares~~agreed ofto acquire the Company'’s ~~common~~automotive ~~stock~~business assets and ~~warrants~~certain toliabilities, ~~purchase~~including ~~additional~~all ~~shares~~ of ~~such~~its ~~common~~automotive ~~stock~~technology, (certain products and customer contracts, its facilities in Livonia and Romulus, Michigan and the ~~"July~~Company’s ~~2012 Warrants")~~equity interest in Shanghai Advanced Traction Battery Systems Co. Ltd., the Company’s joint venture with SAIC Motor Co., Ltd., for an ~~exercise~~aggregate purchase price of $116.0 million.~~001~~ ~~per~~Additionally, ~~share~~pursuant to ~~certain~~the ~~existing~~JCI ~~institutional~~Asset ~~investors.~~Purchase ~~The~~Agreement, the Company ~~agreed~~granted JCI the option to ~~sell~~acquire ~~the~~its ~~common~~cathode ~~shares~~powder atmanufacturing anfacilities ~~initial~~in ~~negotiated~~China for an additional purchase price of $19.~~30,~~0 million. The JCI Asset Purchase Agreement was subject to ~~adjustment~~proposed bidding procedures and receipt of higher and better bid(s) at auction (the “Auction”). The JCI Asset Purchase Agreement called for the Company to pay a break-up fee in certain circumstances, including the Bankruptcy Court approving a higher bid at or as ~~described~~a ~~below~~result of the Auction. The Asset Purchase Agreement also provided for the reimbursement of specified expenses of JCI incurred by JCI in connection with the Asset Purchase Agreement. In conjunction with the Asset Purchase Agreement and the Chapter 11 Filing, the Company received a commitment from JCI for $72.5 million in debtor in possession financing (the “JCI DIP Loan Agreement”) to support the Company’s continued operations during the pendency of the bankruptcy case. On the date the agreement was executed, the Company received $15.5 million in financing from JCI.

~~Pursuant to~~On ~~the~~November 5, ~~July~~ 2012 ~~Warrants~~, the Company ~~issued~~and toWanxiang ~~the~~entered ~~institutional~~into ~~investors~~an ~~6,662,852~~agreement ~~additional~~regarding ~~shares~~debtor ~~of common stock~~ in ~~two~~possession ~~separate~~financing ~~issuances~~(the on“Wanxiang ~~July 12,~~DIP ~~2012~~Loan ~~and July 30,~~Agreement”) ~~2012~~pursuant ~~due~~ to ~~the~~which ~~decrease~~Wanxiang inprovided the ~~volume~~Company ~~weighted~~with ~~average stock price compared to the initial purchase price of~~ $150.~~30.~~0 ~~The~~million ~~Company~~in ~~also~~financing ~~paid $2.2 million~~ to support the ~~institutional investors~~Company’s ~~due~~continued tooperations aduring ~~limitation on~~ the ~~number~~pendency of ~~shares~~the ~~that~~Company’s ~~could~~bankruptcy ~~be settled under the warrants~~case. ~~The~~As ~~net~~a ~~offering~~result ~~proceeds~~of to the ~~Company~~execution ~~from~~of the ~~issuance~~Wanxiang ofDIP ~~14,355,160~~Loan ~~shares of common stock~~Agreement, ~~after deducting~~ the ~~placement~~JCI ~~agent's~~DIP ~~fees~~Loan ~~and~~Agreement ~~other~~was ~~estimated~~terminated ~~offering expenses of approximately $1.0 million~~ and ~~the~~all ~~cash~~amounts ~~settlement~~borrowed offrom ~~$2.2 million~~JCI ~~on the warrants,~~ were ~~approximately $6~~repaid.~~8 million.~~

~~As noted~~On ~~above~~December 6, 7 and 8, 2012, the Company's ~~revolving~~conducted, ~~credit~~pursuant ~~facility~~to ~~and~~bid ~~the~~procedures ~~2013~~approved ~~Senior~~by ~~Notes~~the ~~agreements~~Bankruptcy ~~require~~Court, ~~the~~an ~~Company~~auction tounder ~~maintain~~Section 363 aof ~~minimum~~the ~~cash~~federal ~~balance~~Bankruptcy ofCode ~~$40.0 million.~~for Ifthe sale of the Company'’s ~~cash~~assets ~~balance~~(the ~~falls~~“Auction”), ~~below~~and ~~$40.0~~announced on December ~~million~~9, 2012 that it ~~would~~had bereached ~~considered~~agreement anon ~~event~~the terms of ~~default~~an ~~per~~asset ~~the~~purchase ~~covenants~~agreement with Wanxiang through which Wanxiang would acquire substantially all of the ~~revolving~~Company’s ~~credit~~assets ~~facility~~for $256.6 million and ~~the~~an ~~2013~~additional ~~Senior~~asset ~~Notes.~~purchase agreement with Navitas Systems LLC (“Navitas”) through which Navitas would acquire the

Upon an event of default under the revolving credit facility, the bank could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If the Company was unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure such indebtedness. As of June 30, 2012, the Company had $8~~.6 million of outstanding letters of credits and no borrowings.~~

~~An event~~Table of default under the 2013 Senior Notes would trigger redemption rights, pursuant to which a holder could require the Company to redeem all or any portion of such note by delivering an event of default redemption notice to the Company which would include the redemption price. The redemption price equals the greater of (i) the product of (A) the conversion amount to be redeemed, multiplied by (B) the redemption premium (125%) and (ii) the product of (A) the conversion rate in effect at such time as the holder delivers an event of default redemption notice with respect to the conversion amount to be redeemed, multiplied by (B) the greatest closing sale price of the shares of the Company's common stock during the period beginning on the date immediately preceding such Contents

9Company’s Ann Arbor Michigan-based government business, including all U.S. military contracts, for $2.25 million (together, the “Proposed Sales”).

~~Table~~On December 11, 2012, the Bankruptcy Court issued an order approving the Proposed Sales, and asset purchase agreements between the Company and Wanxiang (the “Wanxiang APA”) and between the Company and Navitas (the “Navitas APA” and together with the Wanxiang APA, the “Asset Purchase Agreements”) were executed. Under the Wanxiang APA, Wanxiang agreed to acquire the Company’s automotive, grid and commercial business assets, including technology, products, contracts and U.S. facilities in Michigan, Massachusetts and Missouri; its operations in China; and its equity interest in Shanghai Advanced Traction Battery Systems Co., A123’s joint venture with Shanghai Automotive. The sale was subject to certain closing conditions, including approval from the Committee on Foreign Investment in the United States. Under the Navitas APA, Navitas agreed to acquire the Company’s U.S. government business assets, including its technology, products, intellectual property and contracts, as well as the lease for the Company’s facility in Ann Arbor, Michigan. The sale was subject to certain closing conditions, including the completion of ~~Contents~~the transactions contemplated by the Wanxiang APA as well as Navitas and Wanxiang entering into certain agreements related to the provision of transition services or the license of intellectual property between the companies. As a result of Wanxiang being the successful bidder at the Auction, the JCI Asset Purchase Agreement was terminated, and on December 11, 2012, the Company paid JCI an aggregate of $5.5 million, representing a “Breakup Fee” fee of $2.5 million, as well as expenses of up to $3.0 million required to be reimbursed by the Company.

~~A123~~On ~~Systems,~~January ~~Inc~~29, 2013, the Proposed Sales were closed with Wanxiang and Navitas. The Company received $258.6 million of net proceeds in conjunction with this sale, of which $50.0 million was used to repay the funds received under the Wanxiang DIP financing agreement executed November 5, 2012.

On ~~Notes~~February 6, to2013, ~~Condensed~~the ~~Consolidated~~Company ~~Financial~~filed ~~Statements~~with the Bankruptcy Court a proposed Joint Plan of Liquidation (~~Continued~~the “Proposed Plan”) and related disclosure statement (the “Disclosure Statement”) for the resolution and satisfaction of all claims against and interests in the Company. The Proposed Plan provides for the liquidation of assets of the Estate (i.e., the remaining assets of the Company not purchased by Wanxiang or Navitas, the “Estate”), including the investigation and prosecution of Estate Causes of Action, by a Liquidation Trust to be formed pursuant to the Proposed Plan and a Liquidation Trust Agreement. The Liquidation Trust is to be managed by a Liquidation Trustee as well as by a Liquidation Trust Oversight Committee selected by the Official Creditors’ Committee. The Liquidation Trust shall be responsible for making distributions to holders of claims and, if applicable, interests, as well as all other administrative tasks necessary for ultimate resolution of the Chapter 11 cases, pursuant to the terms of the Proposed Plan and the Liquidation Trust Agreement.

On 1.May 20, ~~Nature~~2013 of the ~~Business,~~Proposed ~~Basis~~Liquidation ofPlan ~~Presentation,~~was ~~and~~approved ~~Significant~~by ~~Accounting~~the ~~Policies~~Bankruptcy ~~(Continued)~~Court to be effective in June/July 2013.

~~event~~ Basis of ~~default~~Presentation—The accompanying condensed consolidated financial statements and ~~ending~~the onrelated disclosures as of September 30, 2012 and for the ~~date~~three and nine months ended September 30, 2011 and 2012 are unaudited and have been prepared in accordance with accounting principles generally accepted in the ~~holder~~United ~~delivers~~States of America (“GAAP”) and the ~~event~~applicable rules and regulations of ~~default~~the ~~redemption~~Securities ~~notice~~and Exchange Commission (“SEC”) for interim financial information. ~~The~~Accordingly, ~~Company~~they ~~must~~do ~~deliver~~not include all of the ~~redemption~~information ~~price~~and tonotes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the ~~holder~~consolidated ~~within~~financial ~~five~~statements ~~business~~and ~~days~~notes ~~after receiving~~thereto contained in the ~~event~~Company’s ofAnnual ~~default~~Report ~~redemption~~on ~~notice~~Form 10-K filed with the SEC on March 12, 2012. The December 31, 2011 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP for complete financial statements.

The ~~accompanying~~ interim condensed consolidated financial statements have been prepared ~~assuming~~on the ~~Company~~same ~~will~~basis ~~continue~~as tothe ~~operate~~audited asconsolidated afinancial ~~going~~statements ~~concern~~and, ~~which~~in ~~contemplates~~ the ~~realization~~opinion of ~~assets~~ ~~and~~management, ~~settlement~~reflect ofall ~~liabilities~~adjustments inof ~~the~~a normal ~~course~~recurring ofnature ~~business~~considered ~~and~~necessary ~~do not include any adjustments~~ to ~~reflect~~present fairly the ~~possible~~Company’s ~~future~~financial ~~effects~~position onas ~~the~~of ~~recoverability~~September 30, 2012 and ~~classification~~results of ~~assets~~its or operations for the ~~amounts~~three and ~~classifications~~nine ofmonths ~~liabilities~~ended ~~that~~September 30, ~~may~~2011 ~~result~~and ~~from~~2012, ~~uncertainty~~and ~~related~~its tocash ~~its~~flows ~~ability~~for tothe ~~continue~~nine asmonths aended ~~going~~September 30, ~~concern.~~2011 and 2012.

~~Basis of Presentation—~~The ~~accompanying condensed consolidated~~ financial statements ~~and~~in ~~the~~this ~~related~~Quarterly ~~disclosures~~Report ason ~~of June~~Form ~~30,~~10-Q ~~2012 and for the three and six months ended June 30, 2011 and 2012 are unaudited and~~ have been prepared inon ~~accordance~~a ~~with~~going ~~accounting~~concern ~~principles~~basis ~~generally accepted in the United States of America ("GAAP")~~ and ~~the~~, ~~applicable~~as ~~rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial information. Accordingly~~such, ~~they~~ do not include ~~all~~any ofadjustments ~~the~~that ~~information~~might ~~and~~arise ~~notes~~from ~~required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with~~ the ~~consolidated~~outcome ~~financial~~of ~~statements and notes thereto contained in~~ the Company'’s ~~Annual~~bankruptcy ~~Report~~filings ondiscussed ~~Form 10-K filed with the SEC on March 12, 2012~~above. The December 31, 2011 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP for complete financial statements.

~~The interim~~Comprehensive ~~condensed~~Loss—In consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position as of June 302011, ~~2012~~the ~~and~~Financial ~~results~~Accounting ofStandards ~~its~~Board ~~operations for~~ (the ~~three~~“FASB”) ~~and~~issued ~~six months~~Accounting ~~ended~~Standards ~~June 30,~~Update 2011 ~~and 2012~~-05, ~~and~~Comprehensive ~~its~~Income ~~cash~~(Topic ~~flows~~220) ~~for~~as ~~the three and six months ended June 30~~amended, ~~2011~~requiring ~~and~~amendments ~~2012.~~to ~~The interim results for~~ the ~~three~~disclosure ~~and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected~~ for ~~the year ending December 31, 2012.~~

Revisions to Amounts Previously Presented—Certain prior period amounts have been reclassified to conform to the current period presentation. Deferred costs of $1.3 million for the six months ended June 30, 2011 related to costs of product shipments where title has passed to the customer but not all of the revenue recognition criteria have been met, have been reclassified from inventory to deferred costs in the condensed consolidated statement of cash flow. Additionally, customer deposits received from customers of $0.8 million for products that have not been shipped, have been reclassified from deferred revenue to other current liabilities in the condensed consolidated statement of cash flow. There was no impact to net cash used in operating activities for the three and six months ended June 30, 2011. 9

~~Comprehensive~~Table Income—In June 2011, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220) as amended, requiring amendments to the disclosure for presentation of comprehensive income. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011, requires presentation of total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive Contents

10presentation of comprehensive loss. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011, requires presentation of total comprehensive loss, the components of net loss and the components of other comprehensive loss either in a single continuous statement of comprehensive loss or in two separate but consecutive statements. In December 2011, the FASB issued an amendment to this guidance which indefinitely defers the requirement to present reclassification adjustments out of accumulated other comprehensive loss either in a single continuous statement of comprehensive loss by component in both the statement in which net loss is presented and the statement in which other comprehensive loss is presented. This guidance is effective for annual periods beginning after December 15, 2011. In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified out of Accumulative Other Comprehensive Income (ASU 2013-02), which replaces the presentation requirements for reclassifications out of accumulated other comprehensive loss in ASU 2011-05 and ASU 2011-12. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive loss by component and to present significant amounts reclassified out of accumulated other comprehensive loss by respective line items of net loss if the amount reclassified is required to be reclassified to net loss in its entirety. ASU 2013-02 is effective in periods beginning after December 15, 2012 and should be applied prospectively. The Company adopted the amended guidance to ASC 2011-065 requiring presentation of comprehensive loss in two consecutive financial statements for the nine months ended September 30, 2012. The implementation of this guidance did not have a material impact on the Company’s condensed consolidated results of operations or financial position. The adoption of ASU 2013-02 is not anticipated to have any impact on our financial position, results of operations or cash flows.

~~Table~~Principles of ~~Contents~~Consolidation—The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

~~A123~~Use ~~Systems~~of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, ~~Inc~~ liabilities, revenue, expense and related disclosures. The Company bases estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The Company’s actual results may differ from these estimates under different assumptions or conditions.

Government ~~Notes~~Grants—The Company recognizes government grants when there is reasonable assurance that the Company will comply with the conditions attached to ~~Condensed~~the ~~Consolidated~~grant ~~Financial~~arrangement ~~Statements~~and ~~(Continued)~~the grant will be received. The Company evaluates the conditions of each individual grant as of each reporting period to ensure that the Company has reached reasonable assurance of meeting the conditions of each grant arrangement and that it is expected that the grant will be received as a result of meeting the necessary conditions. For example, if a grant has conditions where the Company must create and maintain a certain number of jobs, the Company records the grant in the period that it has evaluated and determined that the necessary number of jobs has been created and, based on the Company’s forecasts, it is reasonably assured that the jobs will be maintained during the required employment period. Government grants are recognized in the condensed consolidated statements of operations on a systematic basis over the periods in which the Company recognizes the related costs for which the government grant is intended to compensate. Specifically, when government grants are related to reimbursements for cost of revenues or operating expenses, the government grants are recognized as a reduction of the related expense in the condensed consolidated statements of operations over the period that the Company is required to comply with the conditions of the grants. For government grants related to reimbursements of capital expenditures, the government grants are recognized as a reduction of the basis of the asset and recognized in the consolidated statements of operations over the estimated useful life of the depreciable asset as reduced depreciation expense. For the three and nine months ended September 30, 2011, the Company recorded $4.2 million and $10.3 million, respectively, as a reduction to depreciation expense related to reduced carrying value of property, plant and equipment due to government grants reimbursements. For the three and nine months ended September 30, 2012, the Company recorded $8.8 million and $26.5 million, respectively, as a reduction to depreciation expense related to reduced carrying value of property, plant and equipment due to government grants reimbursements.

The 1.Company ~~Nature~~records ofgovernment grant receivables in the ~~Business,~~condensed ~~Basis~~consolidated ofbalance ~~Presentation~~sheets in prepaid expenses and other current assets or long-term grant receivable, depending on when the amounts are expected to be received from the government agency. The Company does not discount long-term grant receivables. Proceeds received from government grants prior to expenditures being incurred are recorded as restricted cash and ~~Significant~~other ~~Accounting~~current ~~Policies~~liabilities ~~(Continued)~~or other long-term liabilities, depending on when the Company expects to use the proceeds.

~~income or~~The inCompany ~~two~~classifies ~~separate~~grant ~~but~~proceeds ~~consecutive~~received ~~statements.~~in Inadvance ~~December 2011, the FASB issued an amendment to this guidance which indefinitely defers the requirement to present reclassification adjustments out~~ of ~~accumulated~~spending ~~other~~for ~~comprehensive~~qualified ~~income~~expenditures ~~either~~as in a ~~single~~cash ~~continuous~~flow ~~statement~~from offinancing ~~comprehensive~~activities ~~income by component~~ in ~~both~~ the ~~statement~~condensed inconsolidated ~~which~~statements ~~net~~of ~~income~~cash ~~is presented and the statement in which other comprehensive income is presented. This guidance is effective for annual periods beginning after December 15~~flows, ~~2011.~~as ~~The Company adopted~~ the ~~amended~~proceeds ~~guidance~~are ~~requiring~~used ~~presentation of~~to ~~comprehensive~~assist ~~income~~ in ~~two~~funding ~~consecutive~~future ~~financial statements for the six months ended June 30, 2012~~expenditures. ~~The~~Grant ~~implementation~~proceeds ofreceived ~~this~~as ~~guidance~~reimbursements ~~did~~for ~~not~~capital ~~have~~expenditures apreviously ~~material~~incurred ~~impact~~are onclassified ~~the Company's condensed consolidated results of operations or financial position.~~ in

Principles of Consolidation—The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In February 2011, the Company entered into an agreement to transfer certain of its assets held by its wholly owned Korean subsidiary to its joint venture with a quasi governmental entity in the Peoples' Republic of China. The asset transfer and subsequent deconsolidation of the joint venture resulted in a $1.2 million gain recognized in other expense, net for the three and six months ended June 30, 2011. Prior to February 2011, the joint venture was consolidated as a variable-interest entity, but did not have a material impact on the Company's consolidated financial operations and did not represent a material portion of the Company's consolidated assets. 10

~~Use~~Table of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense and related disclosures. The Company bases estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The Company's actual results may differ from these estimates under different assumptions or conditions. Contents

~~Government~~cash ~~Grants—The~~flows ~~Company~~from ~~recognizes~~investing ~~government~~activities ~~grants when there is reasonable assurance that the Company will comply with the conditions attached to the grant arrangement~~ and ~~the~~ grant ~~will~~proceeds be received. ~~The Company evaluates the conditions of each individual grant~~ as of each reporting period to ensure that the Company has reached reasonable assurance of meeting the conditions of each grant arrangement and that it is expected that the grant will be received as a result of meeting the necessary conditions. For example, if a grant has conditions where the Company must create and maintain a certain number of jobs, the Company records the grant in the period that it has evaluated and determined that the necessary number of jobs has been created and, based on the Company's forecasts, it is reasonably assured that the jobs will be maintained during the required employment period. Government grants are recognized in the condensed consolidated statements of operations on a systematic basis over the periods in which the Company recognizes the related costs for which the government grant is intended to compensate. Specifically, when government grants are related to reimbursements for ~~cost of revenues or~~ operating expenses, the government grants are recognized as a reduction of the related expense in the condensed consolidated statements of operations over the period that the Company is required to comply with the conditions of the grants. For government grants related to reimbursements of capital expenditures, ~~the~~previously ~~government~~incurred ~~grants~~ are ~~recognized~~classified ~~as a reduction of the basis of the asset and recognized~~ in ~~the~~cash ~~consolidated~~flows ~~statements~~from ofoperating activities.

11Revenue Recognition—The Company earns revenue from the sale of products and delivery of services, including products and services sold under governmental contracts. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the price to the buyer is fixed or determinable, and collectability is reasonably assured. When collectability is not reasonably assured, the Company will record a receivable and defer the revenue and costs associated with the delivered product or services until cash is received from the customer.

~~Table~~If a sales arrangement contains multiple elements, the Company evaluates the agreement to determine if separate units of ~~Contents~~accounting exist within the arrangement. If separate units of accounting exist within the arrangement, the Company allocates revenue to each element based on the relative selling price of each of the elements.

~~A123~~Products ~~Systems, Inc.~~ Revenue

Products ~~Notes~~revenue is generally recognized upon transfer of title and risk of loss, which is typically upon shipment, unless an acceptance period exists. The Company’s customary shipping terms are FOB shipping point or free carrier. In instances where customer acceptance of a product is required, revenue is either recognized (i) upon shipment when the Company is able to ~~Condensed~~demonstrate ~~Consolidated~~that ~~Financial~~the ~~Statements~~customer specific objective criteria have been met or (~~Continued~~ii) upon the earlier of customer acceptance or expiration of the acceptance period. The Company’s customers may generally cancel orders at any time prior to product shipment.

The 1.Company ~~Nature~~provides warranties for its products and records the estimated costs as a cost of revenue in the ~~Business~~period the revenue is recorded. The Company’s standard warranty period extends one to five years from the date of delivery, ~~Basis~~depending on the type of ~~Presentation~~product purchased and its application. The warranties provide that the Company’s products will be free from defects in material and workmanship and will, under normal use, conform to the specifications for the product. The standard warranties further provide that the Company will repair the product or provide replacement parts at no charge to the customer. The Company’s warranty liability is based on the current field campaign and ~~Significant~~on ~~Accounting~~projected ~~Policies~~product ~~(Continued)~~failure rates and estimated costs of fulfilling warranty claims. Projections are based on the Company’s actual warranty experience and other known and expected factors. The Company monitors its warranty liability and adjusts the amounts as necessary. When the Company is unable to reasonably determine its obligation for warranty of new products, revenue from the sale of the products is deferred until expiration of the warranty period or until such time as the warranty obligation can be reasonably estimated.

~~operations over~~In ~~the~~instances ~~estimated~~where ~~useful~~the ~~life~~Company ofhas ~~the~~deferred ~~depreciable~~revenue ~~asset~~due asto ~~reduced~~not ~~depreciation~~meeting ~~expense.~~all ~~For~~of the ~~three~~revenue ~~and~~recognition ~~six~~criteria ~~months~~but ~~ended~~where ~~June 30,~~title ~~2011~~has passed to the customer, the Company ~~recorded~~also ~~$3.4 million and~~defers ~~$6.1 million,~~the ~~respectively,~~associated ascosts aof ~~reduction~~revenue tountil ~~depreciation~~such ~~expense~~time ~~related~~that it is able to ~~reduced~~recognize ~~carrying~~the ~~value~~revenue. ofDeferred ~~property,~~costs ~~plant~~of ~~and~~revenue ~~equipment~~are ~~due~~classified toin ~~government~~the ~~grants~~condensed ~~reimbursements.~~consolidated ~~For~~balance ~~the~~sheets ~~three and~~as ~~six~~deferred ~~months~~costs ~~ended~~under ~~June 30,~~current ~~2012,~~assets ~~the~~as ~~Company~~these ~~recorded~~are ~~$9.5 million,~~expected ~~and~~to ~~$17.7 million,~~be ~~respectively,~~recognized as acost ~~reduction~~of torevenue ~~depreciation~~in ~~expense~~the ~~related~~condensed toconsolidated ~~reduced~~statement ~~carrying~~of ~~value~~operations within one year. As of ~~property~~ December 31, ~~plant~~2011 and ~~equipment~~September 30, ~~due~~2012, tothe ~~government~~Company ~~grants~~had ~~reimbursements~~deferred cost of revenue of $6.3 million and $9.4 million, respectively.

~~The Company~~Services records government grant receivables in the condensed consolidated balance sheets in prepaid expenses and other current assets or long-term grant receivable, depending on when the amounts are expected to be received from the government agency. The Company does not discount long-term grant receivables. Proceeds received from government grants prior to expenditures being incurred are recorded as restricted cash and other current liabilities or other long-term liabilities, depending on when the Company expects to use the proceeds. Revenue

~~The Company~~Revenue ~~classifies~~from inservices is recognized as the ~~condensed~~services ~~consolidated~~are ~~statements~~performed consistent with the performance requirements of ~~cash~~the ~~flows~~contract ~~grant~~using ~~proceeds~~the ~~received~~proportional inperformance ~~advance~~method if the Company is able to reasonably estimate the contract cost and progress toward completion of ~~spending~~the ~~for~~contract. ~~qualified~~If ~~expenditures~~the asCompany adoes ~~cash~~not ~~flow~~have ~~from~~the ~~financing activities~~ability to reasonably estimate contract costs or progress toward completion of the contract, asthe Company defers the ~~proceeds~~related ~~are~~revenue ~~used~~and tocosts ~~assist~~and inrecognizes ~~funding~~the ~~future~~revenues ~~expenditures~~and costs based on the completed performance method. ~~Grant~~When ~~proceeds~~the ~~received~~completed performance method is used, the excess of accumulated costs over related billings, if any, are classified as ~~reimbursements~~an ~~for~~asset ~~capital~~and ~~expenditures~~the ~~previously~~excess ~~incurred~~of accumulated billings over related costs, if any, are classified inas ~~cash~~a ~~flows~~liability. ~~from investing~~The ~~activities~~Company ~~and~~classifies ~~grant~~the ~~proceeds~~portion ~~received~~of the related asset or liability as ~~reimbursements~~long-term ~~for~~if ~~operating~~such ~~expenditures~~asset ~~previously~~or ~~incurred~~liability ~~are~~is ~~classified~~expected into ~~cash~~be ~~flows~~recognized ~~from~~beyond ~~operating~~one ~~activities~~year.

~~Revenue~~Service ~~Recognition—The~~revenue ~~Company~~includes ~~earns~~ revenue derived from the ~~sale~~execution of ~~products~~contracts ~~and~~awarded ~~delivery~~by ofthe ~~services,~~U.S. ~~including~~Federal ~~products~~government, ~~and~~other ~~services~~government ~~sold~~agencies ~~under governmental~~and ~~contracts~~commercial customers. ~~Revenue~~The isCompany’s ~~recognized~~research ~~when~~and ~~all~~development ofarrangements with the ~~following~~federal ~~criteria~~government ~~are~~or ~~met:~~other ~~persuasive~~government ~~evidence~~agencies oftypically anrequire ~~arrangement~~the ~~exists,~~Company ~~delivery~~to ~~has~~provide ~~occurred~~pure orresearch, ~~services~~in ~~have~~which ~~been provided,~~ the ~~price to~~Company ~~the~~investigates ~~buyer~~design istechniques ~~fixed~~on ornew ~~determinable,~~battery ~~and~~technologies. ~~collectability~~The isCompany’s ~~reasonably~~arrangements ~~assured.~~with ~~When~~commercial ~~collectability~~customers isconsist ~~not~~of ~~reasonably~~arrangements ~~assured,~~where the Company ~~will~~is ~~record~~paid ato ~~receivable~~enhance ~~and~~or ~~defer~~modify ~~the~~an ~~revenue~~existing ~~and costs associated with the delivered~~ product or ~~services~~to ~~until~~develop ~~cash~~a isnew ~~received~~product ~~from~~to ~~the~~meet a customer.’s specifications.

If a sales arrangement contains multiple elements, the Company evaluates the agreement to determine if separate units of accounting exist within the arrangement. If separate units of accounting exist within the arrangement, the Company allocates revenue to each element based on the relative selling price of each of the elements. 11

Table ~~Product~~of ~~Revenue~~ Contents

~~Product~~Other revenue is generally recognized upon transfer of title and risk of loss, which is typically upon shipment, unless an acceptance period exists. The Company's customary shipping terms are FOB shipping point or free carrier. In instances where customer acceptance of a product is required, revenue is either recognized (i) upon shipment when the Company is able to demonstrate that the customer specific objective criteria have been met or (ii) upon the earlier of customer acceptance or expiration of the acceptance period. The Company's customers may generally cancel orders at any time prior to product shipment. Revenue

~~The Company~~Fees ~~provides~~to ~~warranties~~license ~~for~~the ~~its~~use ~~products~~of ~~and~~the ~~records~~Company’s ~~the~~proprietary ~~estimated~~and ~~costs~~licensed astechnologies aare ~~cost~~recognized ofonly ~~revenue~~after inboth the license period has commenced and the technology has been delivered to the customer. Royalty revenue is ~~recorded.~~recognized ~~The~~when ~~Company's~~it ~~standard~~becomes ~~warranty~~determinable ~~period extends~~and ~~one~~collectability tois ~~five~~reasonably ~~years~~assured; ~~from~~otherwise the ~~date~~Company recognizes revenue upon receipt of ~~delivery,~~payment. ~~depending~~To ondate, the ~~type~~Company ofhas ~~product~~not ~~purchased~~recognized ~~and~~any ~~its~~significant ~~application.~~royalty revenue.

12During the three and nine months ended September 30, 2011, the Company recognized $0.4 million and $0.6 million in license fee revenue. During the three and nine months ended September 30, 2012, the Company recognized $0.6 million and $1.7 million, respectively, in license fee revenue.

~~Table~~Deferred ~~of Contents~~Revenue

~~A123~~The ~~Systems~~Company records deferred revenue for product sales and services revenue in several different circumstances. These circumstances include when (i) the Company has delivered products or performed services but other revenue recognition criteria have not been satisfied, (ii) ~~Inc~~payments have been received in advance of products being delivered or services being performed and (iii) all other revenue recognition criteria have been met, but the Company is not able to reasonably estimate the warranty expense. Deferred revenue includes up-front fees associated with services arrangements. Deferred revenue expected to be recognized as revenue more than one year subsequent to the balance sheet date is classified as long-term deferred revenue. Deferred revenue will vary depending on the timing and amount of cash receipts from customers and can vary significantly depending on specific contractual terms.

Currently, ~~Notes~~the Company has two outstanding technology license agreements with its customers to ~~Condensed~~license ~~Consolidated~~certain ~~Financial~~of ~~Statements~~its technology in the field of consumer electronic devices (~~Continued~~excluding power tools and certain other consumer products) and in the field of manufacturing advance battery systems and modules in the transportation market. In connection with the license agreements, the licensees have paid up front, non-refundable license fees and will pay ongoing royalties based on a percentage of the licensees’ net sales of products that use or embody the licensed technology and know-how. The Company has commenced recognizing revenue on both of the upfront license fees over the longer of the license term or the expected customer relationship.

Deferred 1.revenue ~~Nature~~related ofto the ~~Business,~~license ~~Basis~~agreements ofwere ~~Presentation,~~$34.5 million and ~~Significant~~$33.1 ~~Accounting~~million ~~Policies~~as ~~(Continued)~~of December 31, 2011 and September 30, 2012, respectively.

~~The warranties~~Customer provide that the Company's products will be free from defects in material and workmanship and will, under normal use, conform to the specifications for the product. The standard warranties further provide that the Company will repair the product or provide replacement parts at no charge to the customer. The Company's warranty liability is based on the current field campaign and on projected product failure rates and estimated costs of fulfilling warranty claims. Projections are based on the Company's actual warranty experience and other known and expected factors. The Company monitors its warranty liability and adjusts the amounts as necessary. When the Company is unable to reasonably determine its obligation for warranty of new products, revenue from the sale of the products is deferred until expiration of the warranty period or until such time as the warranty obligation can be reasonably estimated. Deposits

~~In instances~~Customer ~~where~~deposits ~~the~~received ~~Company~~from ~~has~~customers ~~deferred~~related ~~revenue~~to ~~due~~products towhere ~~not~~title ~~meeting~~has ~~all~~not ofpassed ~~the~~are ~~revenue~~recorded ~~recognition~~in ~~criteria~~other ~~but~~liabilities. ~~where~~The ~~title~~Company ~~has~~classifies ~~passed~~as tolong-term the portion of customer, ~~the~~deposits ~~Company~~that ~~also~~are ~~defers~~expected ~~the associated~~to ~~costs~~be ofrecognized ~~revenue~~beyond ~~until~~one ~~such~~year. ~~time~~Upon ~~that~~transfer itof istitle ~~able~~and towhen ~~recognize~~all of the revenue. ~~Deferred~~recognition ~~costs~~criteria ofhave ~~revenue~~been ~~are~~met, ~~classified~~the inCompany recognizes the ~~condensed~~related ~~consolidated~~revenue. ~~balance~~If ~~sheets~~not asall ~~deferred~~of ~~costs~~the ~~under current~~revenue ~~assets~~recognition ascriteria ~~these~~have ~~are~~been ~~expected~~met, but title to bethe ~~recognized~~goods ashas ~~cost~~passed ofto ~~revenue~~the incustomer, the ~~condensed~~Company ~~consolidated~~records ~~statement~~the ofrelated ~~operations~~amount ~~within~~in ~~one~~deferred ~~year~~revenue. As of December 31, 2011 and ~~June~~September 30, 2012, the Company ~~had~~recorded ~~deferred~~customer ~~cost~~deposits of ~~revenue of~~ $6.39 million and $63.5 million in other current liabilities, respectively.

Fair ~~Services~~Value ~~Revenue~~ of Financial Instruments—Except for the convertible notes (the 2016 Notes as defined in Note 8 and the 2013 Senior Notes) outstanding, the carrying amount of all financial instruments approximate their fair values as of December 31, 2011 and September 30, 2012. The carrying amount of cash (Level 1) and restricted cash (Level 1) approximates fair value due to the short-term nature of these items. Cash equivalents, which include money market accounts, are carried at fair value. Management believes that the Company’s debt obligations (Level 2), except for the 2016 Notes outstanding as of December 31, 2011 and September 30, 2012, and the 2013 Senior Notes outstanding as of September 30, 2012, accrue interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair value. The Company’s outstanding 2016 Notes (Level 2) have an estimated fair value of $51.4 million and $140.7 million as of December 31, 2011 and September 30, 2012 based on available market data. As of December 31, 2011 and September 30, 2012, the 2016 Notes had a carrying value of $140.1 million and $140.7 million reflected in long-term debt in the Company’s condensed consolidated balance sheet, which reflects the face amount of $143.8 million, net of the unamortized discount. The Company’s outstanding 2013 Senior Notes (Level 2) have an estimated fair value of $4.5 million as of September 30, 2012 based on available market data. As of September 30, 2012, the 2013 Senior Notes had a carrying value of $4.5 million reflected in the current portion of long-term debt in the Company’s condensed consolidated balance sheet, which reflects the face amount of $4.2 million plus $0.3 million of debt discount.

Revenue from services is recognized as the services are performed consistent with the performance requirements of the contract using the proportional performance method if the Company is able to reasonably estimate the contract cost and progress toward completion of the contract. If the Company does not have the ability to reasonably estimate contract costs or progress toward completion of the contract, the Company defers the related revenue and costs and recognizes the revenues and costs based on the completed performance method. When the completed performance method is used, the excess of accumulated costs over related billings, if any, are classified as an asset and the excess of accumulated billings over related costs, if any, are classified as a liability. The Company classifies the portion of the related asset or liability as long-term if such asset or liability is expected to be recognized beyond one year. 12

~~Service revenue~~Table ~~includes revenue derived from the execution~~ of contracts awarded by the U.S. Federal government, other government agencies and commercial customers. The Company's research and development arrangements with the federal government or other government agencies typically require the Company to provide pure research, in which the Company investigates design techniques on new battery technologies. The Company's arrangements with commercial customers consist of arrangements where the Company is paid to enhance or modify an existing product or to develop a new product to meet a customer's specifications. Contents

Fair ~~Other~~value ~~Revenue~~ is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including the Company’s cash equivalents and warrant derivative liability.

~~Fees~~Items toMeasured ~~license~~at ~~the~~Fair ~~use~~Value ofon ~~the~~a ~~Company's~~Recurring ~~proprietary~~Basis—The ~~and~~following ~~licensed~~tables ~~technologies~~show ~~are~~assets ~~recognized~~measured ~~only~~at ~~after~~fair ~~both~~value ~~the~~on ~~license~~a ~~period~~recurring ~~has commenced~~basis and the ~~technology~~input ~~has~~categories ~~been~~associated ~~delivered~~with tothose ~~the~~assets ~~customer.~~(in Royalty revenue is recognized when it becomes determinable and collectability is reasonably assured; otherwise the Company recognizes revenue upon receipt of payment. To date, the Company has not recognized any significant royalty revenue. thousands):

			As of December 31, 2011
	Fair Value at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset:
Money market funds	$	160,944	$	160,944	$	—	$	—

			As of September 30, 2012
	Fair Value at September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	15,950	$	15,950	$	—	$	—
Embedded derivative asset(1)	$	44	$	—	$	—	$	44
Liabilities:
Warrant derivative liability	$	14,574	$	—	$	—	$	14,574
Embedded derivative liability	$	1,195	$	—	$	—	$	1,195

~~Table~~(1) Included ofin ~~Contents~~Other Current Assets.

~~A123~~Cash ~~Systems, Inc.~~and cash equivalents include investments in money market fund investments that are measured at fair value on a recurring basis based on quoted prices in active markets for identical assets.

The ~~Notes~~embedded derivative asset related to ~~Condensed~~the ~~Consolidated~~Hudson ~~Financial~~Bay ~~Statements~~embedded ~~(Continued)~~derivatives are carried at fair value and are classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.

The 1.Company’s ~~Nature~~warrant ofderivative liability represents the ~~Business~~liability for the January 2012 Warrants and May 2012 Warrants issued to institutional investors (Note 2), ~~Basis~~and the warrant issued to Wanxiang as part of ~~Presentation~~the bridge financing. The warrant derivative liability related to the January 2012 Warrants, the May 2012 Warrants and ~~Significant~~the ~~Accounting~~Wanxiang ~~Policies~~Warrants ~~(Continued)~~are carried at fair value and are classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs. The embedded derivative liability related to the Wanxiang embedded conversion and redemption features are carried at fair value and are classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.

~~During~~ The Company’s embedded derivative asset represents the ~~three~~redemption ~~and~~feature ~~six~~included ~~months~~in ~~ended~~the ~~June~~August ~~30,~~2012 ~~2011,~~Amendment of the ~~Company~~2013 ~~recognized~~Senior Notes. The value of the embedded derivative on the date of the amendment (August 8, 2010) was $1.5 million was determined using a lattice valuation model using the following assumptions: (i) the stock price on the date of measurement, (ii) expected term of 0.293 years, (iii) ~~million~~risk-free inrate ~~license~~of ~~fee~~0.17%, ~~revenue~~(iv) expected common stock volatility of 98.5% ~~During~~(v) bond ~~the~~yield ~~three~~rate of 30.0% and ~~six~~(iv) default ~~months~~recovery ~~ended~~rate ~~June~~of 35.0%. The value of the embedded derivative on September 30, 2012~~, the~~ ~~Company~~of ~~recognized~~less than $0.6 1 million ~~and~~was ~~$1.1~~determined using a lattice valuation model using the following assumptions (i) ~~million~~the stock price on the date of measurement, ~~respectively~~(ii) expected term of 0.09 years, in(iii) risk-free ~~license~~rate ~~fee~~of ~~revenue~~0.06%, (iv) expected common stock volatility of 134.0% (v) bond yield rate of 30.0% and (iv) default recovery rate of 40.0%.

The ~~Deferred~~initial ~~Revenue~~ fair value of the January 2012 Warrants at the date of issuance was determined to be $11.9 million using the Black- Scholes option pricing method applying the following assumptions: (i) risk-free rate of 0.31%, (ii) remaining term of 2.5 years, (iii) no dividend yield, (iv) volatility of 79%, (v) the exercise price of $2.71, and (vi) the stock price on the date

The Company records deferred revenue for product sales and services revenue in several different circumstances. These circumstances include when (i) the Company has delivered products or performed services but other revenue recognition criteria have not been satisfied, (ii) payments have been received in advance of products being delivered or services being performed and (iii) all other revenue recognition criteria have been met, but the Company is not able to reasonably estimate the warranty expense. Deferred revenue includes up-front fees associated with services arrangements. Deferred revenue expected to be recognized as revenue more than one year subsequent to the balance sheet date is classified as long-term deferred revenue. Deferred revenue will vary depending on the timing and amount of cash receipts from customers and can vary significantly depending on specific contractual terms. 13

~~Currently, the~~Table ~~Company has two outstanding technology license agreements with its customers to license certain~~ of its technology in the field of consumer electronic devices (excluding power tools and certain other consumer products) and in the field of manufacturing advance battery systems and modules in the transportation market. In connection with the license agreements, the licensees have paid up front, non-refundable license fees and will pay ongoing royalties based on a percentage of the licensees' net sales of products that use or embody the licensed technology and know-how. The Company has commenced recognizing revenue on both of the upfront license fees over the longer of the license term or the expected customer relationship. Contents

~~Deferred revenue~~of ~~related~~measurement. toAs of September 30, 2012, the ~~license~~fair ~~agreements~~value ~~were~~of the January 2012 Warrants was determined to be $340.5 8 million ~~and~~using ~~$33~~the Black-Scholes option pricing method applying the following assumptions: (i) risk-free rate of 0.422%, (ii) ~~million~~remaining asterm of ~~December~~1.83 31years, ~~2011~~(iii) no dividend yield, (iv) volatility of 106%, (v) the exercise price of $2.71, and ~~June~~(vi) the stock price on the date of measurement. A 10% change in volatility would impact the fair value of the warrant as of September 30, 2012 by $0.1 million. In the event of a change in control, ~~respectively~~these warrants require a cash payment based on contractually defined inputs. The probability of a change in control has been factored into the valuation of the liability.

The ~~Customer~~initial ~~Deposits~~ fair value of the May 2012 Warrants at the date of issuance was determined to be $7.7 million using the Black- Scholes option pricing method applying the following assumptions: (i) risk-free rate of 0.99%, (ii) remaining term of 5.5 years, (iii) no dividend yield, (iv) volatility of 77%, (v) the exercise price of $1.29, and (vi) the stock price on the date of measurement. As of September 30, 2012, the fair value of the May 2012 Warrant was determined to be $1.7 million using the Black- Scholes option pricing method applying the following assumptions: (i) risk-free rate of 0.62%, (ii) remaining term of 5.15 years, (iii) no dividend yield, (iv) volatility of 78%, (v) the exercise price of $0.42, and (vi) the stock price on the date of measurement. A 10% change in volatility would impact the fair value of the warrant as of September 30, 2012 by $0.2 million. In the event of a change in control, these warrants require a cash payment based on contractually defined inputs. The probability of a change in control has been factored into the valuation of the liability.

~~Customer~~The ~~deposits~~initial ~~received~~fair ~~from~~value ~~customers~~of ~~related~~the toJuly 2012 ~~products~~Warrants ~~where~~at ~~title~~the ~~has~~date ~~not~~of ~~passed~~issuance ~~are~~was ~~recorded~~determined into ~~other~~be ~~liabilities~~$4.9 ~~The~~million ~~Company classifies~~using asa ~~long~~Monte-~~term~~Carlo ~~the~~simulation ~~portion~~methodology ofapplying ~~customer~~the ~~deposits~~following ~~that~~assumptions: ~~are~~(i) risk ~~expected~~free torate beranging ~~recognized~~from ~~beyond~~0.06% ~~one~~to ~~year~~0.07% ~~Upon~~(ii) remaining ~~transfer~~term of ~~title~~2 ~~and~~days ~~when~~to ~~all~~22 ~~of the revenue recognition criteria have been met~~days, ~~the Company~~(iii) volatility ~~recognizes~~ranging ~~the~~from ~~related revenue~~98.5% Ifto ~~not~~136.4% ~~all of~~ (iv) the ~~revenue~~exercise ~~recognition~~price ~~criteria~~of ~~have been met~~$0.001, ~~but~~and ~~title to~~ (vi) the ~~goods~~stock ~~has~~price ~~passed~~on to the ~~customer,~~date ~~the~~of ~~Company records the related amount in deferred revenue~~measurement. AsThe ofwarrants ~~December 31,~~were ~~2011~~exercised ~~and~~during ~~June~~July ~~30,~~of 2012, ~~the~~resulting ~~Company~~in ~~recorded~~the ~~customer~~issuance ~~deposits~~ of $6~~.9 million~~,662,852 ~~and~~shares ~~$1.5 million~~of incommon ~~other current liabilities, respectively~~stock.

~~Production~~The ~~start-up—Production~~initial ~~start-up~~fair ~~expenses~~value ~~consist~~of the Wanxiang Warrants at the date of ~~manufacturing~~issuance ~~salaries~~was ~~and~~determined ~~personnel-related~~to ~~costs,~~be ~~site~~$14.1 million ~~selection~~using ~~costs, including~~the ~~legal~~Monte ~~and~~Carlo ~~regulatory~~simulation ~~costs,~~methodology ~~rent~~by ~~and~~applying the ~~cost~~following assumptions: (i) risk-free rate of ~~operating~~0.83%, a(ii) remaining ~~production~~term ~~line~~of ~~before~~5 years, it(iii) no ~~has~~dividend ~~been~~yield, ~~qualified~~(iv) volatility ~~for~~of ~~production~~86%, ~~including~~(v) the exercise price of $25M, and (vi) the ~~cost~~stock price on the date of ~~raw~~measurement. ~~materials~~As ~~run~~of ~~through~~September 30, 2012, the ~~production~~fair ~~line during~~value of the ~~qualification~~Wanxiang ~~phase~~Warrant was determined to be $12.1 ~~During~~million using the ~~three~~Monte ~~and~~Carlo ~~six~~simulation ~~months~~methodology ~~ended~~by ~~June~~applying the following assumptions: (i) ~~30,~~risk-free ~~2011,~~rate ~~the~~of ~~Company~~0.60%, ~~incurred~~(ii) remaining ~~production~~term ~~start-up~~of ~~expenses~~4.88 years, ~~related~~(iii) no todividend ~~its~~yield, ~~facility~~(iv) volatility inof ~~Romulus~~86%, ~~Michigan~~(v) the exercise price of $25M, and ~~related to~~(vi) the stock price on the ~~second~~date ~~production~~of ~~line~~measurement. inA ~~its~~10% ~~facility~~change in ~~Livonia,~~volatility ~~Michigan.~~would Byimpact the ~~end~~fair value of ~~2011~~the warrant as of September 30, ~~the~~2012 ~~Company~~by ~~had~~$0.2 ~~completed~~million. In the ~~qualification~~event of ~~the~~a ~~Livonia~~change ~~and~~in ~~Romulus~~control, ~~Michigan~~these ~~facilities~~warrants require a cash payment based on contractually defined inputs. The probability of a change in control has been factored into the valuation of the liability.

14The Company’s embedded derivative liability represents the liability for the embedded conversion and redemption features within the Wanxiang Notes that are not clearly and closely related to the debt and do not meet the criteria for equity classification. Accordingly, these embedded derivatives are measured at fair value separate from the debt obligation and recorded as a liability. The embedded derivative liability is classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs. The initial fair value of the embedded derivatives upon issuance was determined to be $1.1 million using the discounted cash flow model by applying the following assumptions: (i) risk-free rate ranging from 0.00% to 0.32%, (ii) bond yield of 30%, (iii) no dividend yield, (iv) interest rate of 10%, and (v) recovery rate of 71%. As of September 30, 2012, the fair value of the embedded derivatives upon issuance was determined to be $1.2 million using the discounted cash flow model applying the following assumptions: (i) risk-free rate ranging from 0.00% to 0.25%, (ii) bond yield of 35%, (iii) no dividend yield, (iv) interest rate of 10%, and (v) recovery rate of 71%, and (vi). The probability of a change in control and the probability of debt covenant triggers have been factored into the valuation of the embedded derivative liability.

~~Table~~The following table provides a roll forward of ~~Contents~~the fair value of these assets and liabilities, where fair value is determined by Level 3 inputs (in thousands):

~~A123~~Assets ~~Systems, Inc.~~Measured as Level 3 Inputs

Notes to Condensed Consolidated Financial Statements (Continued)

	Three Months Ended September 30, 2012
Balance at June 30, 2012	$	—
Embedded derivatives associated with the Hudson Bay Note	1,456
Change in fair value (loss)	(1,412		)
Balance at September 30, 2012	$	44

~~1. Nature of the Business, Basis of Presentation, and Significant Accounting Policies (Continued)~~ 14

~~There were~~Table ~~no production start-up expenses during the three and six months ended June 30, 2012 as all~~ of the Company's facilities completed its qualification by December 31, 2011. A portion of production start-up expenses incurred during the three and six months ended June 30, 2011 was offset by government grant funding. The following table presents production start-up expenditures included in the Company's condensed consolidated statements of operations (in thousands): Contents

	Three Months Ended June 30,					Six Months Ended June 30,
	Nine Months Ended September 30, 2012
	2011			2012		2011			2012
Balance at January 1, 2012	$	—
Production start-up expenditures
Embedded derivatives associated with the Hudson Bay Note	1,456
Aggregated production start-up expenditures	$	4,944		$	—	$	11,941		$	—
Change in fair value (loss)	(1,412		)
Production start-up reimbursements		(1,447	)		—		(3,823	)		—
Balance at September 30, 2012	$	44
Production start-up expenses	$	3,497		$	—	$	8,118		$	—

~~Fair~~Liabilities ~~Value~~Measured ~~of Financial Instruments—Except for the convertible notes (the 2016 Notes~~ as ~~defined~~Level in3 Note 8 and the 2013 Senior Notes) outstanding, the carrying amount of all financial instruments approximate their fair values as of December 31, 2011 and June 30, 2012. The carrying amount of cash (level 1) and cash equivalents, restricted cash (level 1) and cash equivalents approximates fair value due to the short-term nature of these items. Management believes that the Company's debt obligations (level 2), except for the 2016 Notes outstanding as of December 31, 2011 and June 30, 2012, and the 2013 Senior Notes outstanding as of June 30, 2012, accrue interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair value. The Company's outstanding 2016 Notes (level 2) have an estimated fair value of $51.4 million and $37.4 million as of December 31, 2011 and June 30, 2012 based on available market data. As of December 31, 2011 and June 30, 2012, the 2016 Notes had a carrying value of $140.1 million and $140.5 million reflected in long-term debt in the Company's condensed consolidated balance sheet, which reflects the face amount of $143.8 million, net of the unamortized discount. The Company's outstanding 2013 Senior Notes (level 2) have an estimated fair value of $61.5 million as of June 30, 2012 (includes the fair value of the embedded derivatives) based on available market data. As of June 30, 2012, the 2013 Senior Notes had a carrying value of $41.9 million (includes the amounts allocated to the derivative liabilities) reflected in the current portion of long-term debt and long-term debt in the Company's condensed consolidated balance sheet, which reflects the face amount of $47.1 million, net of the unamortized discount. Inputs

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (level 1) observable inputs such as quoted prices in active markets; (level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring

	Three Months Ended September 30, 2012
Balance at June 30, 2012	$	22,274
Warrants issued July 10, 2012	4,937
Wanxiang Warrants issued August 8, 2012	14,147
Embedded derivatives associated with the Wanxiang Warrants	1,072
Change in fair value (gain)	(26,661		)
Balance at September 30, 2012	$	15,769

	Nine Months Ended September 30, 2012
Balance at January 1, 2012	$	—
Warrants issued January 25, 2012	11,901
Warrants issued May 24, 2012	7,712
Warrants issued July 10, 2012	4,937
Wanxiang Warrants issued August 8, 2012	14,147
Embedded derivatives associated with the 2013 Senior Notes	2,841
Embedded derivatives associated with the Wanxiang Warrants	1,072
Change in fair value (gain)	(26,841		)
Balance at September 30, 2012	$	15,769

~~Table~~Items ofMeasured ~~Contents~~at Fair Value on a Non-Recurring Basis—The following tables show assets measured at fair value on a non-recurring basis and the input categories associated with those assets (in thousands):

A123 Systems, Inc.

			As of December 31, 2011
	Fair Value at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset:
Investment in Fisker	$	8,873	$	—	$	—	$	8,873
Goodwill	$	9,581	$	—	$	—	$	9,581

Notes to Condensed Consolidated Financial Statements (Continued)

As of September 30, 2012

Fair Value at
September 30,
2012

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:

Investment in Fisker

—

Goodwill

—

In 1January 2010, the Company entered into an agreement to purchase preferred stock of Fisker Automotive, Inc., ~~Nature~~a maker of plug-in hybrid electric vehicles in the ~~Business~~United States (“Fisker”). The Company invested (i) cash of $13.0 million; and (ii) shares of the Company’s common stock, ~~Basis~~which, when transferred to Fisker, had a fair market value of ~~Presentation~~$7.5 million. The Company historically accounted for its investment under the cost method. In December 2011, ~~and~~the ~~Significant~~Company ~~Accounting~~elected ~~Policies~~not ~~(Continued)~~to participate in Fisker’s subsequent stock financing. This election not to participate resulted in the conversion of the

~~basis, the Company measures certain financial assets and liabilities at fair value, including the Company's cash equivalents and warrant derivative liability.~~ 15

~~Items~~Table ~~Measured~~of ~~at Fair Value on a Recurring Basis—The following tables show assets measured at fair value on a recurring basis and the input categories associated with those assets (in thousands):~~ Contents

			As of December 31, 2011
	Fair Value at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset:
Money market funds	$	160,944	$	160,944	$	—	$	—

Company’s preferred shares of Fisker to common shares on a 2:1 ratio. As such, the Company performed an analysis and valuation of its investment in Fisker resulting in an adjusted investment value of $8.9 million as of December 31, 2011. As of September 30, 2012, the fair value of the investment in Fisker was determined to be less than $0.1 million using the option-pricing method applying the following assumptions: (i) risk-free rate of 0.23%, (ii) remaining term of 2.0 years, (iii) no dividend yield, (iv) volatility of 50%, and (v) the exercise price of $1.0. During the three months ended September 30, 2012, the Company updated its analysis and valuation of its investment in Fisker resulting in the recognition of an impairment charge of $6.0 million and $8.9 million for the three and nine months ended September 30, 2012, respectively.

			As of June 30, 2012
	Fair Value at June 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	65,947	$	65,947	$	—	$	—
Liabilities:
Warrant derivative liability	$	18,650	$	—	$	—	$	18,650
Embedded derivatives		3,624		—		—		3,624
	$	22,274	$	—	$	—	$	22,274

The Company conducted its annual goodwill test as of September 30, 2012. The Company assesses goodwill and other intangible assets and long-lived assets for impairment annually as of October 1, or when changes in circumstances indicate that the carrying value may not be recoverable, as required by U.S. generally accepted accounting principles. The goodwill impairment test involves a two-step process. The first step is a comparison of the Company’s fair value to its carrying value. If the Company’s fair value exceeds its carrying value, no further procedures are required. However, if the Company’s fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. In this step, the Company’s fair value is allocated to all of the assets and liabilities, including any unrecognized intangible assets, in an analysis to calculate the implied fair value of goodwill in the same manner as if Company was being acquired in a business acquisition. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference. Based on the following facts: (i) challenges in the Company’s industries and its declining sales during the three months ended September 30, 2012, (ii) limited demand for end products that are manufactured with equipment sold by the Company, (iii) the liquidity challenges faced, (iv) the deterioration of its customers financial condition, and (v) the sustained decline in its stock price and a significant decline in its financial outlook for the next few years, the Company determined that sufficient impairment indicators existed to require performance of an additional interim goodwill impairment analysis as of September 30, 2012 as opposed to waiting until October 1, 2012. The results of the first step of the impairment test indicated that goodwill was impaired as of September 30, 2012. As such, the Company calculated the enterprise value, using the Company’s debt balance of $178.5 million and calculated fair value of its equity of $80.8 million (calculated using the common stock outstanding and Company’s stock price), and determined that the implied fair value of goodwill was substantially lower than the carrying value of goodwill. As a result, the Company recorded a $9.6 million goodwill impairment charge on September 30, 2012.

~~Cash and~~The ~~cash~~following ~~equivalents~~table ~~include~~provides ~~investments~~a inroll ~~money~~forward ~~market~~of ~~fund~~the ~~investments~~fair ~~that~~value ~~are~~of ~~measured~~these atassets, where fair value onis adetermined ~~recurring~~by ~~basis~~Level 3 ~~based~~inputs ~~on quoted prices~~ (in ~~active markets for identical assets.~~ thousands):

~~The Company's~~Assets ~~warrant~~Measured derivative liability represents the liability for the January 2012 Warrants and May 2012 Warrants issued to institutional investors (Note 2). The warrant derivative liability is carried at fair value and is classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs. The warrant liability is calculated using the Black-Scholes option pricing method. The initial fair value of the January 2012 Warrants at the date of issuance was determined to be $11.9 million using the Black- Scholes option pricing method applying the following assumptions: (i) risk-free rate of 0.31%, (ii) remaining term of 2.5 years, (iii) no dividend yield, (iv) volatility of 79%, (v) the exercise price of $2.71, and (vi) the stock price on the date of measurement. As of June 30, 2012, the fair value of the January 2012 Warrants was determined to be $8.7 million using the Black-Scholes option pricing method applying the following assumptions: (i) risk-free rate of 0.34%, (ii) remaining term of 2.08 years, (iii) no dividend yield, (iv) volatility of 94%, (v) the exercise price of $2.71, and (vi) the stock price on the date of measurement. A 10% change in volatility would impact the fair value of the warrant as of June 30, 2012 by $0.8 million. In the event of a change in control, these warrants require a cash payment based on contractually defined inputs. The probability of a change in control has been factored into the valuation of the liability. Inputs

The initial fair value of the May 2012 Warrants at the date of issuance was determined to be $7.7 million using the Black- Scholes option pricing method applying the following assumptions:

	Three Months Ended September 30, 2012
Balance at June 30, 2012	$	15,533
Change in fair value (loss)	(15,533		)
Balance at September 30, 2012	$	—

	Nine Months Ended September 30, 2012
Balance at January 1, 2012	$	18,464
Change in fair value (loss)	(18,464		)
Balance at September 30, 2012	$	—

~~Table~~Net Loss Per Share—Basic net loss per share is computed by dividing net loss by the weighted-average number of ~~Contents~~common shares outstanding during the fiscal year. Diluted net loss per share is computed by dividing net loss by the weighted-average number of dilutive common shares outstanding during the fiscal year. Dilutive shares outstanding are calculated by adding to the weighted shares outstanding any potential (unissued) shares of common stock and warrants based on the treasury stock method.

~~A123~~The ~~Systems~~following potentially dilutive securities were excluded from the calculation of diluted net loss per share, ~~Inc.~~ as the effect would have been anti-dilutive (in thousands):

~~Notes to Condensed Consolidated Financial Statements (Continued)~~ 16

Table ~~1. Nature~~ of ~~the Business, Basis of Presentation, and Significant Accounting Policies (Continued)~~ Contents

(i) risk-free rate of 0.99%, (ii) remaining term of 5.5 years, (iii) no dividend yield, (iv) volatility of 77%, (v) the exercise price of $1.29, and (vi) the stock price on the date of measurement. As of June 30, 2012, the fair value of the May 2012 Warrant was determined to be $9.9 million using the Black-Scholes option pricing method applying the following assumptions: (i) risk-free rate of 0.80%, (ii) remaining term of 5.4 years, (iii) no dividend yield, (iv) volatility of 78%, (v) the exercise price of $1.29, and (vi) the stock price on the date of measurement. A 10% change in volatility would impact the fair value of the warrant as of June 30, 2012 by $0.6 million. In the event of a change in control, these warrants require a cash payment based on contractually defined inputs. The probability of a change in control has been factored into the valuation of the liability.

	September 30,
	2011	2012
2016 Notes upon conversion to common stock	19,965	19,965
2013 Senior Notes upon conversion to common stock(1)	—	39,938
Warrants to purchase common stock	45	25,257
Options to purchase common stock	11,219	11,687
Unvested restricted stock units	1,361	6,215
	32,590	103,062

(1) The ~~Company's~~ ~~embedded~~number ~~derivative~~of ~~liability~~potentially ~~represents~~dilutive ~~the~~shares ~~liability~~attributable ~~for~~to the ~~embedded derivative conversion and redemption features within the~~ 2013 Senior Notes ~~that~~was ~~are~~calculated ~~not~~based clearly and closely related to the debt and do not meet the criteria for equity classification. Accordingly, these embedded derivatives are measured at fair value separate from the debt obligation and recorded as a liability. While measured separately, the embedded derivatives and the debt obligation are carried on ~~a combined basis and reflected in~~ the ~~current~~principal ~~portion~~outstanding ~~of long-term debt in the Company's condensed consolidated balance sheet. The embedded derivative liability is classified~~ as ~~Level 3~~ ~~in the fair value hierarchy due to the use~~ of ~~significant unobservable inputs. The initial fair value of the embedded derivatives upon issuance was determined to be $2.8~~September ~~million using the binomial lattice valuation model applying the following assumptions: (i) risk-free rate of 0.22%, (ii) bond yield of~~ 30%, ~~(iii) no~~2012 ~~dividend yield, (iv) volatility of 100.8%, (v) recovery rate of 35%,~~ and ~~(vi)~~ the ~~stock~~initial conversion price ~~on the date~~ of ~~measurement. As of June 30, 2012, the fair value of the embedded derivatives upon issuance was determined to be~~ $31.~~6 million~~18 ~~using~~per ~~the binomial lattice valuation model applying the following assumptions: (i) risk-free rate of 0~~share.~~21%,~~ ~~(ii) bond~~The ~~yield~~conversion ~~of 30%, (iii) no dividend yield, (iv) volatility of 101.3%, (v) recovery rate of 35%, and (vi) the stock~~ price onis ~~the~~subject ~~date~~to ofchange ~~measurement.~~as ~~The~~outlined ~~probability of a change~~ in ~~control~~Note 2, ~~and~~Private ~~the probability of debt covenant triggers have been factored into the valuation of the embedded derivative liability~~Placement.

~~The following~~2. ~~table~~Private ~~provides a roll forward of the fair value of these liabilities, where fair value is determined by Level 3 inputs (in thousands):~~ Placements

	Three Months Ended June 30, 2012
Balance at April 1, 2012	$	3,346
Issuance of May 2012 Warrants		7,712
Embedded derivatives associated with the 2013 Senior Notes		2,842
Change in fair value		8,374
Balance at June 30, 2012	$	22,274

January Registered Direct Offering

17On January 25, 2012, the Company sold an aggregate of 12,500,000 units to an institutional investor at a price of $2.034 per unit, with each unit consisting of (i) one share of its common stock (“Common Stock”) and (ii) one warrant to purchase one share of Common Stock (“January 2012 Warrants”), in a registered direct offering for gross proceeds of approximately $25.4 million. The net proceeds to the Company from the sale of the units, after deducting the placement agent’s fees and other estimated offering expenses, was approximately $23.5 million. The January 2012 Warrants have an exercise price of $2.71 per share, and the January 2012 Warrants can be exercised beginning on July 26, 2012 and will expire on July 28, 2014. In the event of a fundamental change, as defined in the Warrants, the Purchasers are entitled to a fair value settlement for the lost option value determined on a Black-Scholes-based calculation with defined assumptions within the agreement. The January 2012 warrants have been accounted for as a liability. The fair value of the January 2012 warrants on the date of issuance was $11.9 million. See Note 1, Fair Value of Financial Instruments. The remaining net proceeds were allocated to common stock. In addition, at any time during both the ten trading days beginning on June 18, 2012 (the “First Option Period”) and the ten trading days beginning on July 23, 2012 (“the Second Option Period”), the Company had the right, subject to certain conditions (including the Company having an arithmetic average of the daily volume weighted average common stock price of greater than $1.00 during the 30 trading days prior to each additional sale option period), to require the investors to purchase in each such period up to an additional 6,250,000 shares of Common Stock, for an aggregate of up to 12,500,000 additional shares of Common Stock. The Company did not meet the required conditions during the First Option Period and therefore did not exercise the purchase right described above. On July 5, 2012, the Company and the institutional investor agreed to terminate the purchase right associated with the Second Option Period. Accordingly, the Company was not able to require the investor to purchase any additional shares.

~~Table~~Private ofSenior ~~Contents~~Convertible Notes and Warrants Offering

~~A123~~On ~~Systems,~~May ~~Inc~~24, 2012, the Company issued $50.0 million aggregate principal amount of senior convertible notes and warrants to purchase 12,711,864 shares of its common stock to institutional investors (the “2013 Senior Notes” and the “May 2012 Warrants”).

The 2013 Senior Notes toand ~~Condensed~~the ~~Consolidated~~May 2012 ~~Financial~~Warrants ~~Statements~~are ~~(Continued)~~detachable and legally separable. See Note 8 for a summary of the material terms on the 2013 Senior Notes.

On 1August 10, 2012, the Company entered into an amendment to the 2013 Senior Notes Agreement (the “2013 Senior Notes Amendment”), increasing the conversion price of a portion of the Notes at all times on or after August 21, 2012 from 85% of the market price thereof to 87% of the market price thereof. ~~Nature~~In consideration of the ~~Business~~foregoing, ~~Basis~~the Amendment changed the first date on which the holders of ~~Presentation~~the Notes may convert up to $30 million of the Notes into shares of common stock at a 15% discount to the market price thereof from August 10, ~~and~~2012 ~~Significant~~to ~~Accounting~~August 20, ~~Policies~~2012. ~~(Continued)~~Additionally, the Amendment changed the required unrestricted cash balance from $40.0 million to $20.0 million. As of September 30, 2012, the Company had $31.3 million of cash and cash equivalents.

	Six Months Ended June 30, 2012
Balance at January 1, 2012	$	—
Issuance of January 2012 Warrants		11,901
Issuance of May 2012 Warrants		7,712
Embedded derivatives associated with the 2013 Senior Notes		2,842
Change in fair value		(181	)
Balance at June 30, 2012	$	22,274

The May 2012 Warrants have an exercise price equal to $1.29 per share, and the May 2012 Warrants can be exercised beginning on November 26, 2012 and will expire on November 24, 2017. In the event of a fundamental change, as defined in the Warrants, the Purchasers are entitled to a fair value settlement for the lost option value determined on a Black-Scholes-based calculation with defined assumptions within the agreement. The May 2012 Warrants have customary anti-dilution adjustments as well as an exercise price reset provision upon the issuance of common stock at a per share price

Net Loss Per Share—Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the fiscal year. Diluted net loss per share is computed by dividing net loss by the weighted-average number of dilutive common shares outstanding during the fiscal year. Dilutive shares outstanding are calculated by adding to the weighted shares outstanding any potential (unissued) shares of common stock and warrants based on the treasury stock method. 17

~~The following~~Table ~~potentially dilutive securities were excluded from the calculation~~ of ~~diluted net loss per share, as the effect would have been anti-dilutive (in thousands):~~ Contents

	June 30,
	2011		2012
2016 Notes upon conversion to common stock		19,965		19,965
2013 Senior Notes upon conversion to common stock(1)		—		39,938
Warrants to purchase common stock		45		25,257
Options to purchase common stock		11,240		12,001
Unvested restricted stock units		1,316		6,482
		32,566		103,643

less than the exercise price currently in effect for the warrant. The May 2012 Warrants have been accounted for as a liability. The fair value of the May 2012 Warrants on the date of issuance was $7.7 million. See Note 1, Fair Value of Financial Instruments. On July 13, 2012, the purchase price of the May 2012 Warrants was adjusted from $1.29 to $0.74 due to a common stock issuance on July 12, 2012. On July 31, 2012, the purchase price of the May 2012 Warrants was further adjusted from $0.74 to $0.42 due to a common stock issuance on July 30, 2012.

~~(1)~~The ~~number~~ ofMay 2012 ~~potentially~~Warrants ~~dilutive~~may ~~shares~~not ~~attributable~~be toexercised ~~the~~if, ~~2013~~after ~~Senior~~giving ~~Notes~~effect ~~was~~to ~~calculated~~the ~~based~~exercise, on the ~~principal~~Purchasers, ~~outstanding~~together aswith oftheir ~~June 30~~affiliates, ~~2012 and~~would ~~the~~beneficially ~~initial~~own ~~conversion~~in ~~price~~excess of $14.1899% ~~per~~(the ~~share~~“Maximum Percentage”). The ~~conversion~~Maximum ~~price~~Percentage ismay ~~subject~~be raised to ~~change~~any asother ~~outlined~~percentage not in ~~Note~~excess of 9.99% at the option of the holder of the May 22012 Warrants, ~~Private~~upon ~~Placement.~~at least 61-days’ prior notice to the Company, or lowered to any other percentage, at the option of the Purchasers, at any time.

July Registered 2.Direct ~~Private Placements~~ Offering

On ~~January~~July 10, ~~Registered~~2012, ~~Direct~~the ~~Offering~~ Company sold an aggregate of 7,692,308 shares of the Company’s common stock and warrants to purchase additional shares of such common stock (the “July 2012 Warrants”) for an exercise price of $0.001 per share to certain existing institutional investors (the “Investors”). The Company agreed to sell the common shares at an initial negotiated purchase price of $1.30, subject to adjustment as described below.

OnPursuant ~~January 25,~~to the July 2012 Warrants, the Company issued ~~sold~~to anthe ~~aggregate~~Investors ofadditional ~~12,500,000~~shares ~~units~~of tocommon anstock ~~institutional~~such ~~investor~~that atthe aInvestors ~~price~~would ofreceive ~~$2.034~~the ~~per unit,~~aggregate ~~with~~number ~~each unit consisting~~ of ~~(i) one~~shares ~~share~~ of ~~its~~the Company’s common stock ~~("Common~~equal ~~Stock")~~to ~~and~~ (iii) ~~one~~$5.0 ~~warrant~~million todivided ~~purchase~~by ~~one~~82% ~~share~~ of ~~Common~~the ~~Stock~~Volume-weighted ~~("January~~average ~~2012~~price ~~Warrants"~~(“VWAP”), inof ~~a registered~~the ~~direct~~Company’s ~~offering~~common ~~for~~stock ~~gross~~over ~~proceeds~~a ofperiod ~~approximately~~covering ~~$25.4~~July ~~million.~~9, 10 ~~The~~and 11, ~~net~~2012 ~~proceeds~~or, toif ~~the~~lower, ~~Company~~82% ~~from~~of the ~~sale~~VWAP of the ~~units, after deducting the placement agent'~~Company’s ~~fees~~common ~~and~~stock ~~other estimated~~on ~~offering expenses~~July 11, ~~was~~2012 ~~approximately~~and (ii) $~~23.~~5 ~~million~~.0 ~~The~~million ~~January~~divided ~~2012~~by ~~Warrants~~82% ~~have~~of anthe ~~exercise~~VWAP ~~price~~ of ~~$2.71 per share, and~~ the ~~January~~Company’s ~~2012~~common ~~Warrants~~stock ~~can~~over bea ~~exercised~~period ~~beginning~~covering on July 2625, 26 ~~2012~~ and ~~will~~27, ~~expire~~2012 ~~on July 28~~or, ~~2014.~~if Inlower, ~~the~~82% ~~event~~ of ~~a fundamental change, as defined in~~ the ~~Warrants,~~VWAP ~~the~~of ~~Purchasers are entitled to a fair value settlement for~~ the ~~lost option~~Company’s ~~value~~common ~~determined~~stock on July 27, 2012.

18Pursuant to the July 2012 Warrants, the Company issued to the institutional investors 6,662,852 additional shares of common stock in two separate issuances on July 12, 2012 and July 30, 2012 due to the decrease in the volume weighted average stock price compared to the initial purchase price of $1.30. The Company also paid $2.2 million to the institutional investors due to a limitation on the number of shares that could be settled under the warrants. The net offering proceeds to the Company from the issuance of 14,355,160 shares of common stock, after deducting the placement agent’s fees and other estimated offering expenses of approximately $1.0 million and the cash settlement of $2.2 million on the warrants, were approximately $6.8 million.

~~Table~~Senior ofSecured ~~Contents~~Convertible Notes and Warrants

~~A123~~On ~~Systems,~~August ~~Inc~~16, 2012, the Company entered into the Securities Purchase Agreement (“Purchase Agreement”) with the Wanxiang Clean Energy USA Corp. (the “Purchaser”) pursuant to which the Purchaser agreed, subject to the satisfaction of certain conditions within 180 days after the date of first advance under the Bridge Loan Facility, to purchase $200 million in aggregate principal amount of the 8.00% Convertible Notes from the Company (the “8.00% Convertible Notes). The 8.00% Convertible Notes will mature on the fifth anniversary of their issue date. The Company’s obligations under the 8.00% Convertible Notes are expected to be unconditionally guaranteed by certain of its subsidiaries and secured by substantially all of the Company’s and its subsidiaries’ assets.

The holders of the 8.00% Convertible Notes can convert the principal and accrued interest at any time, subject to ~~Condensed~~limitations, ~~Consolidated~~into ~~Financial~~shares ~~Statements~~of ~~(Continued)~~common stock at a conversion price of equal to $0.60 per share, subject to reduction to $0.24 per share in the event that certain government grants or tax credits cease to be available to the Company and adjusted for stock splits, stock dividends and other similar events.

Under 2the Purchase Agreement, the Company also agreed to issue warrants (“Convertible Note Warrants”) to the Purchaser. ~~Private~~Each ~~Placements~~Convertible Note Warrant has an exercise price of $115.0 million (~~Continued~~subject to a 40% reduction in price in the event that certain government grants or tax credits cease to be available to the Company) and expires on the fifth anniversary of their issue date. The Convertible Note Warrants, when taken together with the shares of Common Stock issued under the Bridge Warrants, are exercisable for 80% of the outstanding Common Stock of the Company at the time of exercise.

~~a Black-Scholes-based~~As ~~calculation with defined assumptions within the agreement. The January 2012 warrants have been accounted for as a liability. The fair value~~ of ~~the January 2012 warrants on the date of issuance was $11.9~~September ~~million. See Note 1~~30, ~~Fair Value of Financial Instruments. The remaining net proceeds were allocated to common stock. In addition, at any time during both the ten trading days beginning on June 18,~~ 2012 ~~(the "First Option Period") and the ten trading days beginning on July 23~~, ~~2012 ("~~the ~~Second Option Period"), the~~ Company ~~had~~was the right, subject to certain conditions (including the Company having an arithmetic average of the daily volume weighted average common stock price of greater than $1.00 during the 30 trading days prior to each additional sale option period), to require the investors to purchase in ~~each~~compliance ~~such~~with ~~period up to an additional 6,250,000 shares of Common Stock, for an aggregate of up to 12,500,000 additional shares of Common Stock. The Company did not meet~~ the ~~required~~covenants ~~conditions during the First Option Period~~ and ~~therefore~~terms ~~did~~of ~~not exercise~~ the ~~purchase right described above~~agreements. On July 5, 2012, the Company and the institutional investor agreed to terminate the purchase right associated with the Second Option Period. Accordingly, the Company will not be able to require the investor to purchase any additional shares.

~~Private Senior Convertible Notes and Warrants Offering~~ 18

OnTable ~~May 24, 2012, the Company issued $50.0 million aggregate principal amount~~ of ~~senior convertible notes and warrants to purchase 12,711,864 shares of its common stock to institutional investors.~~ Contents

~~The 2013 Senior Notes and the May 2012 Warrants are detachable and legally separable~~3. ~~See~~Government ~~Note 8 for a summary of the material terms on the 2013 Senior Notes.~~ Grants

~~The May~~Center ~~2012~~of ~~Warrants~~Energy ~~have an exercise price equal to $1.29 per share,~~ and ~~the~~Excellence May 2012 Warrants can be exercised beginning on November 26, 2012 and will expire on November 24, 2017. In the event of a fundamental change, as defined in the Warrants, the Purchasers are entitled to a fair value settlement for the lost option value determined on a Black-Scholes-based calculation with defined assumptions within the agreement. The May 2012 Warrants have customary anti-dilution adjustments as well as an exercise price reset provision upon the issuance of common stock at a per share price less than the exercise price currently in effect for the warrant. The May 2012 Warrants have been accounted for as a liability. The fair value of the May 2012 Warrants on the date of issuance was $7.7 million. See Note 1, Fair Value of Financial Instruments. On July 13, 2012, the purchase price of the May 2012 Warrants was adjusted from $1.29 to $0.74 due to a common stock issuance on July 12, 2012. On July 31, 2012, the purchase price of the May 2012 Warrants was further adjusted from $0.74 to $0.42 due to a common stock issuance on July 30, 2012. See Note 10 for details on this common stock issuance subsequent to the June 30, 2012. Grant

~~The May~~In ~~2012~~February 2009, ~~Warrants~~the ~~may~~State ~~not~~of beMichigan ~~exercised~~awarded ~~if,~~the ~~after~~Company ~~giving~~a ~~effect~~$10.0 million toCenter ~~the~~of ~~exercise,~~Energy and Excellence grant. Under the ~~Purchasers~~agreement, ~~together~~the ~~with~~State ~~their~~of ~~affiliates,~~Michigan ~~would~~will ~~beneficially~~provide ~~own~~cost inreimbursement ~~excess~~for 100% of ~~4.99%~~qualified (expenditures based on the ~~"Maximum~~ ~~Percentage")~~achievement of certain milestones by March 2012. ~~The~~There ~~Maximum~~are ~~Percentage~~no ~~may~~substantive beconditions ~~raised~~attached to ~~any~~this ~~other~~award ~~percentage~~that ~~not~~would inrequire ~~excess~~repayment of 9amounts received if such conditions were not met.~~99%~~ atThe ~~the~~Company ~~option~~received $3.0 million of this grant in March 2009 and $6.0 million of this grant in July 2010, with additional payments to be made based on the ~~holder~~achievement of certain milestones in the ~~May~~facility development. Through September 30, 2012, ~~Warrants~~the Company has used $9.1 million of these funds, ~~upon~~of atwhich ~~least~~$7.9 ~~61-days' prior~~million ~~notice~~and $1.2 million was recorded as an offset to ~~the~~property, ~~Company~~plant and equipment and operating expenses, orrespectively. ~~lowered~~For tothe ~~any~~nine ~~other~~months ~~percentage~~ended September 30, at2011, $0.1 million was recorded as an offset to operating expenses in the ~~option~~condensed consolidated statements of operations. There was no offset to operating expenses recorded for the ~~Purchasers~~three months ended September 30, at2011. ~~any~~For ~~time~~the three and nine months ended September 30, 2012, $0.3 million and $0.8 million were recorded as an offset to operating expenses in the condensed consolidated statements of operations, respectively.

19As of September 30, 2012, $0.9 million of these funds were recorded in short term restricted cash and other current liabilities.

Michigan Economic ~~Table~~Growth ~~of Contents~~ Authority

~~A123~~In ~~Systems~~April 2009, the Michigan Economic Growth Authority offered the Company certain tax incentives, which can be used to offset the Michigan Business Tax owed in a tax year, carried forward for the number of years specified by the agreement, or be paid to the Company in cash at the time claimed to the extent the Company does not owe a tax. The terms and conditions of the High-Tech Credit were established in October ~~Inc~~2009 and the Cell Manufacturing Credit in November 2009.

High ~~Notes~~Tech Credit—The High-Tech Credit agreement provides the Company with a 15-year tax credit, based on qualified wages and benefits multiplied by the Michigan personal income tax rate beginning with payments made for the 2011 fiscal year. The tax credit has an estimated value of up to ~~Condensed~~$25.3 ~~Consolidated~~million, ~~Financial~~depending ~~Statements~~on ~~(Continued)~~ the number of jobs created in Michigan. The proceeds to be received by the Company will be based on the number of jobs created, qualified wages paid and tax rates in effect over the 15 year period. The tax credit is subject to a repayment provision in the event the Company relocates a substantial portion of the jobs outside the state of Michigan on or before December 31, 2026. As of December 31, 2011 and September 30, 2012, the Company recorded undiscounted long-term receivables of $1.0 million and $1.5 million, respectively, with an offsetting balance in other long-term liabilities in the condensed consolidated balance sheet as it is reasonably assured that the Company will comply with the conditions of the tax credit and will receive the proceeds. The balance will be recognized in the condensed consolidated statements of operations over the term that the Company is required to maintain the required number of jobs in Michigan.

Cell 3Manufacturing Credit—The Cell Manufacturing Credit agreement authorizes a tax credit or cash for the Company equal to 50% of capital investment expenses related to the construction of the Company’s integrated battery cell manufacturing facilities in Michigan, commencing with costs incurred from January 1, 2009, up to a maximum of $100.0 million ~~Government~~over ~~Grants~~ a four year period. The tax credit shall not exceed $25.0 million per year and can be submitted for reimbursement beginning in tax year 2012. The Company is required to create 300 jobs no later than December 31, 2016 for the tax credit to be non-refundable. The tax credit is subject to a repayment provision in the event the Company relocates 51% or more of the 300 jobs outside of the state of Michigan within three years after the last year the tax credit is received. Through September 30, 2012, the Company has incurred $200.0 million in qualified expenses related to the construction of the Livonia and Romulus facilities. When the Company has met the filing requirements for the tax year ending December 31, 2012, the Company expects to begin receiving its first annual installment of the $100.0 million in proceeds related to these expenses. As of December 31, 2011 and September 30, 2012, the Company has recorded undiscounted receivables of $100.0 million, as it is reasonably assured that the Company will comply with the conditions of the tax credit and will receive the proceeds. Upon recording the receivables, the Company reduced the basis in the fixed assets acquired in accordance with the tax credit and this will be recognized in the condensed consolidated statements of operations over their estimated useful lives of the depreciable asset as reduced depreciation expense.

~~Center of Energy and Excellence Grant~~ 19

InTable ~~February 2009, the State~~ of Michigan awarded the Company a $10.0 million Center of Energy and Excellence grant. Under the agreement, the State of Michigan will provide cost reimbursement for 100% of qualified expenditures based on the achievement of certain milestones by March 2012. There are no substantive conditions attached to this award that would require repayment of amounts received if such conditions were not met. The Company received $3.0 million of this grant in March 2009 and $6.0 million of this grant in July 2010, with additional payments to be made based on the achievement of certain milestones in the facility development. Through June 30, 2012, the Company has used $8.8 million of these funds, of which $7.9 million and $0.9 million was recorded as an offset to property, plant and equipment and operating expenses, respectively. For the six months ended June 30, 2011, $0.1 million was recorded as an offset to operating expenses in the condensed consolidated statements of operations, respectively. There was no offset to operating expenses recorded for the three months ended June 30, 2011. For the three and six months ended June 30, 2012, $0.2 million and $0.5 million were recorded as an offset to operating expenses in the condensed consolidated statements of operations, respectively. Contents

~~As of June 30, 2012, $0~~U.~~2 million of these funds were recorded in short term restricted cash, $1~~S.~~0 million~~ inDepartment ~~prepaid~~of ~~and~~Energy ~~other~~Battery ~~current assets, and $1.2 million in other current liabilities.~~ Initiative

In December 2009, the Company entered into an agreement establishing the terms and conditions of a $249.1 million grant awarded under the U.S. Department of Energy (“DOE”) Battery Initiative to support manufacturing expansion of new lithium-ion battery manufacturing facilities in Michigan. ~~Economic~~Under ~~Growth~~the ~~Authority~~ agreement, the DOE will provide cost reimbursement for 50% of qualified expenditures incurred from December 1, 2009 to November 30, 2012. The agreement also provides for reimbursement of pre-award costs incurred from June 1, 2009 to November 30, 2009. There are no substantive conditions attached to this award that would require repayment of amounts received if such conditions were not met. In April 2012, the term of the award was extended by two years through December 2, 2014. Through September 30, 2012, the Company has incurred $266.8 million in qualified expenses, of which 50%, or $133.4 million, are allowable costs for reimbursement, nearly all of which have been reimbursed. For the three months ended September 30, 2011 and September 30, 2012, the Company incurred allowable costs of $8.0 million and $3.1 million, of which $5.2 million was recorded as an offset to property, plant and equipment and $2.8 million recorded as an offset to operating expenses, for the three months ended September 30, 2011, and $2.7 million was recorded as an offset to property, plant and equipment and $0.4 was recorded as an offset to operating expenses, for the three months ended September 30, 2012. For the nine months ended September 30, 2011 and September 30, 2012, the Company incurred allowable costs of $35.9 million and $5.6 million, of which $26.7 million and $4.7 million was recorded as an offset to property, plant and equipment and $9.2 million and $0.9 million as an offset to operating expenses, respectively. As of December 31, 2011 and September 30, 2012, the Company recorded $0.8 million and $0.9 million, respectively, as receivables in prepaid expenses and other current assets in the condensed consolidated balance sheets.

In April 2009, the Michigan Economic Growth Authority offered the Company certain tax incentives, which can be used to offset the Michigan Business Tax owed in a tax year, carried forward for the number of years specified by the agreement, or be paid to the Company in cash at the time claimed to the extent the Company does not owe a tax4. ~~The terms and conditions of the High-Tech Credit were established in October 2009 and the Cell Manufacturing Credit in November 2009.~~ Inventory

~~High~~Inventory ~~Tech~~consists Credit—The High-Tech Credit agreement provides the Company with a 15-year tax credit, based on qualified wages and benefits multiplied by the Michigan personal income tax rate beginning with payments made for the 2011 fiscal year. The tax credit has an estimated value of ~~up to $25.3 million, depending on~~ the ~~number~~following ~~of jobs created~~ (in Michigan. The proceeds to be received by the Company will be based on the number of jobs created, qualified wages paid and tax rates in effect over the 15 year period. The tax credit is subject to a repayment provision in the event the Company relocates a substantial portion of the jobs outside the state of Michigan on or before December 31, 2026. As of December 31, 2011 and June 30, 2012, the Company recorded undiscounted long-term receivables of $1.0 million and $1.6 million, respectively, with an offsetting balance in other long-term liabilities in the condensed consolidated balance sheet as it is reasonably assured that the Company will comply with the conditions of the tax credit and will receive the proceeds. The balance will be recognized in the condensed consolidated statements of operations over the term that the Company is required to maintain the required number of jobs in Michigan. thousands):

Cell Manufacturing Credit—The Cell Manufacturing Credit agreement authorizes a tax credit or cash for the Company equal to 50% of capital investment expenses related to the construction of the Company's integrated battery cell manufacturing facilities in Michigan, commencing with costs incurred from January 1, 2009, up to a maximum of $100.0 million over a four year period. The tax credit shall not exceed $25.0 million per year and can be submitted for reimbursement beginning in tax year 2012.

	December 31, 2011		September 30, 2012
Raw materials	$	44,493	$	42,585
Work-in-process	53,924		49,240
Finished goods	4,977		7,145
	$	103,394	$	98,970

20The Company’s lower of cost or market provision as of December 31, 2011 and September 30, 2012 was $4.9 million and $2.1 million, respectively. The inventory on hand as of September 30, 2012 was written down by $2.1 million to reduce specific inventory items on hand with unit costs that exceed their net realizable value. The net realizable value of inventory is calculated by taking the estimated selling price of the inventory on hand based on customer contracts and forecasted sales and subtracting the remaining costs to complete and dispose of the inventory. As a result of the field campaign launched related to the defective prismatic cells produced at the Livonia, Michigan manufacturing facility, the Company wrote down $15.2 million in inventory that was impacted by the defective prismatic cells during the nine months ended September 30, 2012. See Note 7 for additional details.

~~Table~~5. ~~of Contents~~Investments

~~A123~~Equity-Method ~~Systems, Inc.~~ Investments

In ~~Notes~~December 2009, the Company entered into a joint venture agreement with SAIC Motor Co. Ltd. (“SAIC”), an automaker in China, to ~~Condensed~~assist ~~Consolidated~~the ~~Financial~~Company ~~Statements~~in growing its business and sales in China’s transportation industry and created Shanghai Advanced Traction Battery Systems, Co. Ltd. (~~Continued~~the “Joint Venture”). Under the terms of the joint venture agreement, the Company was required to invest $4.7 million into the Joint Venture over a period of approximately 15 months, in return for a 49% interest in the Joint Venture. The Company made the first capital contribution of $1.9 million to the Joint Venture in July 2010 and the second capital contribution of $1.4 million in January 2011. The Company made the final capital contribution of $1.4 million in July 2011. The Company is accounting for its investment under the equity method.

In 3.August 2010, ~~Government~~the ~~Grants~~Company entered into an agreement to transfer certain patents held by the Company to a privately-held company, 24M Technologies, Inc. (~~Continued~~“24M”), in return for a 12% ownership interest in 24M. The Company is accounting for its investment under the equity method as it has determined it has significant influence over the operating and

The Company is required to create 300 jobs no later than December 31, 2016 for the tax credit to be non-refundable. The tax credit is subject to a repayment provision in the event the Company relocates 51% or more of the 300 jobs outside of the state of Michigan within three years after the last year the tax credit is received. Through June 30, 2012, the Company has incurred $200.0 million in qualified expenses related to the construction of the Livonia and Romulus facilities. When the Company has met the filing requirements for the tax year ending December 31, 2012, the Company expects to begin receiving $100.0 million in proceeds related to these expenses. As of December 31, 2011 and June 30, 2012, the Company has recorded undiscounted receivables of $100.0 million, as it is reasonably assured that the Company will comply with the conditions of the tax credit and will receive the proceeds. Upon recording the receivables, the Company reduced the basis in the fixed assets acquired in accordance with the tax credit and this will be recognized in the condensed consolidated statements of operations over their estimated useful lives of the depreciable asset as reduced depreciation expense. 20

Table ~~U.S. Department~~ of ~~Energy Battery Initiative~~ Contents

Infinancial ~~December~~decisions ~~2009, the Company entered into an agreement establishing the terms and conditions~~ of ~~a $249.1 million grant awarded under~~ the ~~U.S.~~third ~~Department of Energy ("DOE") Battery Initiative to support manufacturing expansion of new lithium-ion battery manufacturing facilities in Michigan~~party. ~~Under the agreement, the DOE will provide cost reimbursement for 50% of qualified expenditures incurred from December 1, 2009 to November 30, 2012.~~ The agreement also provides for reimbursement of pre-award costs incurred from June 1, 2009 to November 30, 2009. There are no substantive conditions attached to this award that would require repayment of amounts received if such conditions were not met. In April 2012, the term of the award was extended by two years through December 2, 2014. Through June 30, 2012, the Company has ~~incurred~~recorded ~~$260.6 million~~the ininvestment ~~qualified~~on ~~expenses, of which 50%, or $130.3 million, are allowable costs for reimbursement, nearly all of which have been reimbursed. For~~ the ~~three~~condensed ~~months~~consolidated ~~ended~~balance ~~June 30,~~sheet ~~2011~~at ~~and June 30, 2012,~~ the ~~Company~~fair ~~incurred~~value ~~allowable costs~~ of $16.4 million and $0.9 million, of which $13.9 million and $0.6 million was recorded as an offset to property, plant and equipment and $2.5 million and $0.3 million was recorded as an offset to operating expenses, respectively. For the ~~six~~ ~~months~~ownership ~~ended~~interest ~~June 30,~~received ~~2011~~net ~~and June 30, 2012, the Company incurred allowable costs~~ of ~~$27.9 million~~accumulated ~~and~~losses ~~$2.5 million,~~recognized ofunder which $21.5 million and $2.0 million was recorded as an offset to property, plant and equipment and $6.4 million and $0.5 million as an offset to operating expenses, respectively. As of December 31, 2011 and June 30, 2012, the ~~Company~~equity ~~recorded $0~~method.~~8 million and $0.7 million, respectively, as receivables in prepaid expenses and other current assets in the condensed consolidated balance sheets.~~

For 4the three and nine months ended September 30, 2011 and for the three and nine months ended September 30, 2012, the Company recorded a loss of $0.1 million, ~~Inventory~~ $0.7 million, $0.2 million and $1.0 million, respectively, in the condensed consolidated statements of operations related to its share of losses in investments accounted for under the equity method.

~~Inventory~~6. ~~consists~~Commitments ofand ~~the following (in thousands):~~ Contingencies

	December 31, 2011		June 30, 2012
Raw materials	$	44,493	$	42,873
Work-in-process		53,924		44,133
Finished goods		4,977		9,298
	$	103,394	$	96,304

Litigation—On April 2, 2012, a class action complaint was filed in the United States District Court for the District of Massachusetts by Scott Heiss, purportedly acting individually and on behalf of other similarly situated persons, against the Company and its CEO, David Vieau, its CFO, David Prystash, and its former Interim CFO, John Granara. The complaint followed the Company’s disclosure in March 2012 of potentially defective prismatic cells used in battery packs and a replacement program for such cells. The complaint attempted to allege that certain of the Company’s disclosures were inaccurate because the potentially defective cells and their replacement were not disclosed earlier. The complaint asserted a claim under Section 10(b) of the Securities Exchange Act of 1934 against the Company and claims under Sections 10(b) and 20(a) of that statute against the individuals. It asserted a purported class period from February 28, 2011 through March 23, 2012.

21On April 12, 2012, a similar class action complaint was filed in the United States District Court for the District of Massachusetts by Terry Leon Fike, purportedly acting individually and on behalf of other similarly situated persons, against the same defendants. The complaint made similar allegations and also asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and a purported class period from February 28, 2011 through March 23, 2012.

~~Table~~On June 7, 2012, the Court consolidated the two cases and appointed a lead plaintiff and lead counsel for the asserted class. On August 31, 2012, plaintiffs filed a consolidated amended complaint. On October 1, 2012, the Company filed a motion to dismiss the consolidated amended complaint. On October 22, 2012, the Company notified the Court of ~~Contents~~the bankruptcy filing, and on October 23, 2012, the Company filed a Notice of Motion Filed in Bankruptcy Court to Stay Litigations as to Non-Debtor Defendants. In response, plaintiffs requested an extension of time for the filing of briefing related to the pending motion to dismiss as to the non-debtor defendants. The Court granted the extension. On January 25, 2013, plaintiffs filed an opposition to the motion to dismiss as to the non-debtor defendants. The Company filed a reply on February 8, 2013. On March 14, 2013, the Court granted the Company’s motion to dismiss but gave plaintiffs leave to file a second amended complaint with twenty-one days. Plaintiffs opted not to file an amended complaint but to dismiss the case instead. On April 4, 2013, the parties filed a Stipulation of Voluntarily Dismissal with Prejudice.

~~A123~~On ~~Systems~~May 14, 2012, a putative derivative action was filed in the U.S. District Court for the District of Massachusetts against the Board of Directors and certain others, as well as against the Company as a nominal defendant, captioned, Jane Ahmed v. David P. Vieau, David Prystash, John Granara, Desh Deshpande, Arthur L. Goldstein, Gary E. Haroian, Dr. ~~Inc~~Paul E. Jacobs, Mark M. Little, Jeff McCarthy and Dr. Bart Riley, 1:12-CV-10865-RGS. The complaint alleged that certain of the Company’s disclosures between February 28, 2011 and March 28, 2012 were materially misleading because they failed to disclose the prismatic cell manufacturing issues and that the individual defendants violated their fiduciary duties and other causes of action on behalf of the Company. The complaint alleged that demand on the Board to take such actions would be “futile” and should be excused. On June 6, 2012, the defendants moved to dismiss the complaint on the ground that demand on the board of directors was required under Delaware law and that plaintiff had not properly pled that demand in this case should be excused as futile. On June 20, 2012, plaintiff opposed that motion, and on June 25, defendants submitted a reply in further support of their motion to dismiss. On October 15, 2012, the Court held oral argument on the motion to dismiss and took the motion under advisement. On October 17, 2012, the Company notified the Court of the bankruptcy filing, and on October 23, 2012, the Company filed a Notice of Motion Filed in Bankruptcy Court to Stay Litigations as to Non-Debtor Defendants. On January 14, 2013, the Court ordered the case stayed pursuant to the order issued on November 8, 2012 by the U.S. Bankruptcy Court for the District of Delaware staying all derivative actions.

On ~~Notes~~May 15, 2012, the Company received a letter addressed to ~~Condensed~~its ~~Consolidated~~Board ~~Financial~~of ~~Statements~~Directors ~~(Continued)~~from an attorney representing an individual claiming to be a shareholder of the Company. The letter asserted that the Company’s disclosures between November 9, 2010 and March 28, 2012 were materially misleading as a result of the prismatic cell manufacturing issue disclosed in March of 2012 and further asserted that the Board breached its fiduciary duties during this time. The letter made a demand on the Board to investigate the alleged inaccurate statements and to consider potential legal action against those deemed responsible. The Board considered the issues raised in the letter and retained independent counsel to advise them. On

~~4. Inventory (Continued)~~ 21

~~The Company's~~Table ~~lower~~ of cost or market provision as of December 31, 2011 and June 30, 2012 was $4.9 million and $5.2 million, respectively. The inventory on hand as of June 30, 2012 was written down by $5.2 million to reduce specific inventory items on hand with unit costs that exceed their net realizable value. The net realizable value of inventory is calculated by taking the estimated selling price of the inventory on hand based on customer contracts and forecasted sales and subtracting the remaining costs to complete and dispose of the inventory. As a result of the field campaign launched related to the defective prismatic cells produced at the Livonia, Michigan manufacturing facility, the Company wrote down $15.2 million in inventory that was impacted by the defective prismatic cells during the six months ended June 30, 2012. See Note 1 for additional details. Contents

August 3, 5.2012 ~~Investments~~ the Board’s counsel responded to the letter on the Board’s behalf indicating that the Board considered the allegations in the demands based on an investigation on behalf of the Board conducted by outside directors with the assistance of counsel and determined that it would not be in the best interest of A123, or its stockholders to commence or maintain an action against any present or former officer or director of A123 concerning the matters alleged in the demand and refused the demands.

On ~~Cost~~May 21, 2012, a putative derivative action was filed in Superior Court for the Commonwealth of Massachusetts against the Board of Directors and certain others, as well as against the Company as a nominal defendant, captioned, Murray Sussman v. David P. Vieau, Gururaj Deshpande, Gilbert N. Riley, Jr., Jeffrey McCarthy, Gary E. Haroian, Arthur L. Goldstein, Paul E. Jacobs, Mark M. Little, David Prystash, John Granara, Case No. 12-~~Method~~917. ~~Investments~~ The complaint asserted substantially similar allegations and claims as the Ahmed complaint summarized above, including that demand on the Board of Directors should be excused as futile. On June 11, 2012, the defendants filed a motion asking the court to stay this litigation in favor of the Ahmed derivative case pending in the U.S. District Court for the District of Massachusetts, or, in the alternative, that the complaint should be dismissed on the ground that demand on the board of directors was required under Delaware law and that plaintiff had not properly pled that demand in this case should be excused as futile. On July 16, 2012, the plaintiff filed a memorandum of law in opposition to defendants’ motion to stay the litigation, or in the alternative, to dismiss this action. On July 27, 2012, the defendants filed a reply memorandum of law in further support of their motion to stay, or in the alternative, to dismiss the action. On September 20, 2012, the Court granted the motion to stay pending resolution of the Ahmed derivative action. On October 23, 2012, the Company notified the Court of the bankruptcy filing. On October 31, 2012, the Court ordered the case stayed due to the automatic stay provisions of the Bankruptcy Code.

InOn ~~January~~July 13, ~~2010~~2012, the Company ~~entered~~received ~~into~~a andemand ~~agreement~~letter addressed to ~~purchase~~its ~~preferred~~Board ~~stock~~ of ~~Fisker~~Directors ~~Automotive, Inc.,~~from aan ~~maker~~attorney ~~of plug-in~~representing ~~hybrid~~an ~~electric~~individual ~~vehicles~~claiming into ~~the~~be ~~United~~a ~~States~~shareholder ~~("Fisker")~~of the Company. The ~~Company~~letter ~~agreed~~alleges tothat ~~invest~~our ~~(i) cash~~disclosures ofbetween ~~$13.0~~March ~~million;~~11, 2011 and ~~(ii)~~March ~~shares~~12, 2012 were materially misleading as a result of the ~~Company's~~prismatic ~~common stock,~~cell ~~which,~~manufacturing ~~when~~issue ~~transferred~~disclosed toin ~~Fisker,~~March of ~~had~~2012 aand ~~fair~~asserted ~~market~~that ~~value~~the Board and certain current and/or former executive officers of $7the company breached their fiduciary duties.~~5 million.~~ The ~~Company~~letter ismade ~~accounting~~a ~~for~~demand ~~its~~on ~~investment~~the ~~under~~Board to investigate the ~~cost~~alleged ~~method.~~breach Inof ~~December~~fiduciary ~~2011,~~duties to the Company ~~elected~~and ~~not~~ to ~~participate~~consider inlegal ~~Fisker's~~action ~~subsequent~~against ~~stock~~those ~~financing~~responsible. ~~This~~The ~~election~~Board ~~not~~considered tothe ~~participate~~issues ~~resulted~~raised in the ~~conversion~~letter ofand ~~the~~had ~~Company's~~its ~~preferred~~independent ~~shares~~counsel ofadvise ~~Fisker~~them. On August 3, 2012, the Board’s counsel responded to ~~common~~the ~~shares~~letter on athe ~~2:1~~Board’s ~~ratio.~~behalf Asindicating ~~such,~~ that the ~~Company~~Board ~~performed~~considered the allegations in the demands based on an ~~analysis~~investigation on behalf of the Board conducted by outside directors with the assistance of counsel and ~~valuation~~determined that it would not be in the best interest of A123 or its ~~investment~~stockholders into ~~Fisker~~commence ~~resulting~~or inmaintain an ~~adjusted~~action ~~investment~~against ~~value~~any ofpresent ~~$8.9 million~~or asformer officer or director of ~~December 31,~~the ~~2011.~~Company concerning the matters alleged in the demand and refused the demands.

~~During the~~The ~~three~~Company ~~months~~intends ~~ended~~to ~~June 30,~~defend ~~2012~~any litigations vigorously, although the ~~Company~~consolidated ~~updated~~class ~~its~~action ~~analysis~~has already been dismissed with prejudice, and ~~valuation~~expects ofthat ~~its~~the ~~investment~~derivative inactions ~~Fisker~~will ~~resulting~~be indismissed with prejudice by the ~~recognition~~liquidation trustee of anthe ~~impairment~~estate ~~charge~~once the plan of ~~$2.9 million~~ ~~for~~liquidation has been confirmed by the ~~three~~Bankruptcy Court and ~~six~~becomes ~~months~~effective. Nonetheless, ~~ended~~aside ~~June 30~~from the class action, ~~2012.~~which ~~The~~is already dismissed, the Company's ~~investment~~is inunable ~~Fisker~~to atdetermine ~~June 30~~the outcome of the other matters with certainty and the effect, ~~2012~~if ~~had~~any, athey ~~carrying~~may ~~value~~have on its financial position or results of $6operations.~~0 million.~~ See Note 1 of our financial statements for a discussion of our Chapter 11 Bankruptcy filing and related proceedings.

Royalty ~~Equity~~Obligations—On October 31, 2011, the Company entered into a Patent Sublicense Agreement with LiFePO4+C Licensing AG as part of a settlement agreement with Hydro-~~Method~~Quebec ~~Investments~~ and the Board of Regents of the University of Texas System, on behalf of the University of Texas at Austin. As partial consideration for the license grants by LiFePO4+C Licensing AG, the Company will be required to pay royalties to LiFePO4+C Licensing AG on a quarterly basis commencing as of January 1, 2012, based on a percentage of the Company’s net sales of cells, electrode systems, and/or complex systems (plus such net sales attributed to any permitted sublicensees of the Company) during such quarterly period. The Company is required to pay royalties on a sliding scale, with a maximum possible royalty rate of 2% of net sales (based on a defined percentage of the Company’s product sales revenue) through the agreement’s term, and based on the fiscal year in which the royalties are calculated and the accrual of total royalty in that fiscal year. Such defined percentage may also be adjusted by mutual agreement if the Company’s standalone cell or electrode system revenues increase significantly in proportion to overall product revenues. During the three and nine months ended September 30, 2012, the Company incurred $0.1 million in royalty obligations related to this agreement.

Restructuring—In ~~December 2009~~February 2012, ~~the~~as ~~Company~~part ~~entered~~of ~~into~~the aCompany’s ~~joint~~continuing ~~venture~~efforts ~~agreement~~to ~~with~~reduce ~~SAIC Motor Co. Ltd. ("SAIC")~~expenses, anthe ~~automaker~~Company indecided ~~China,~~ to ~~assist~~close ~~the~~down ~~Company in growing~~ its ~~business~~ ~~and~~facility ~~sales~~ in ~~China's~~Korea ~~transportation~~while ~~industry~~relocating ~~and~~a ~~created~~portion ~~Shanghai~~of ~~Advanced~~its ~~Traction~~new ~~Battery~~product ~~Systems, Co.~~development ~~Ltd.~~and ~~(the~~advanced ~~"Joint~~manufacturing ~~Venture").~~engineering ~~Under~~teams ~~the~~to ~~terms~~other offacilities. ~~the~~The ~~joint venture agreement, the~~ Company’s ~~was~~need ~~required~~ to ~~invest~~align ~~$4.7 million~~its ~~into~~manufacturing ~~the~~capacity ~~Joint~~with ~~Venture~~near-term ~~over~~customer ademand ~~period~~and ofthe ~~approximately~~need ~~15 months,~~to inreduce ~~return~~operating ~~for~~expenses aare ~~49% interest in~~ the ~~Joint~~key ~~Venture.~~factors ~~The~~that ~~Company~~drove ~~made~~ the ~~first capital~~decision ~~contribution~~to ~~of $1~~restructure.~~9 million~~ toThe ~~the~~Company ~~Joint~~expects ~~Venture~~to incomplete ~~July 2010 and~~ the ~~second~~shutdown ~~capital~~of ~~contribution~~its ofKorean ~~$1.4 million~~facility in ~~January 2011. The Company made~~ the ~~final~~fourth ~~capital contribution~~quarter of $12012.~~4 million~~ inIn ~~July~~March 2012, ~~2011.~~the ~~The~~ Company ~~is accounting for its investment under the equity method.~~

In August 2010, the Company entered into an agreement to transfer certain patents held by the Company to a privately-held company, 24M Technologies, Inc. ("24M"), in return for a 12% ownership interest in 24M. The Company is accounting for its investment under the equity method as it has determined it has significant influence over the operating and financial decisions of the third party. The Company has recorded the investment on the condensed consolidated balance sheet at the fair value of the ownership interest received net of accumulated losses recognized under the equity method. 22

22Table of Contents

~~Table~~recorded $0.8 million as a reserve for discretionary termination benefits for the Company’s Korean employees, in addition to a $1.1 million severance benefits accrual from statutory requirements accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 712, Compensation—Nonretirement Postemployment Benefits. During the three and nine months ended September 30, 2012, the Company paid $0.6 million and $1.6 million, respectively in termination benefits resulting in a severance accrual of ~~Contents~~$0.4 million remaining as of September 30, 2012. Facility closure and other costs are accounted for in accordance with ASC Topic 420, Exit or Disposal Cost Obligations, and are recorded when the liability is incurred. During the three and nine months ended September 30, 2012, the Company incurred $0.0 million and $0.5 million, respectively, in relocation expenses attributable to the restructuring efforts, of which approximately $0.4 million and $0.5 million were paid during the three and nine months ended September 30, 2012. Additionally, during the nine months ended September 30, 2012, the Company recorded $3.3 million in asset impairment charges and lease remediation costs of $0.7 million related to the Korea facility shutdown. There were no asset impairment charges or lease remediation costs during the three months ended September 30, 2012.

~~A123~~Retention ~~Systems~~agreements—In February 2012, the Company entered into employment agreements with approximately 40 employees. The agreements provide for severance payments ranging from 6 ~~Inc~~months to 24 months of salary in connection with a change in control and subsequent termination of employment. Certain of the agreements also provide for the above benefits if the employees’ employment is terminated without cause prior to a change in control. Certain of the agreements also provide for acceleration of vesting of stock options and restricted stock units in the event of a change in control.

No ~~Notes~~payments tohave ~~Condensed~~been ~~Consolidated~~made ~~Financial~~under ~~Statements~~these agreements. Most of the participants, however, received payments for achieving certain financial targets under the Key Employee Incentive Plan (~~Continued~~“KEIP”) and Key Employee Retirement Plan (“KERP”) programs which were established in November 2012 by the Bankruptcy Court.

57. ~~Investments~~Product ~~(Continued)~~ Warranties

~~For~~ The Company provides for the ~~three~~estimated ~~and~~costs ~~six~~to ~~months~~fulfill ~~ended~~customer ~~June 30,~~warranty ~~2011~~obligations ~~and~~upon ~~for~~the recognition of the ~~three~~related ~~and~~revenue. ~~six~~While ~~months~~the ~~ended~~Company ~~June 30~~engages in extensive product quality programs and processes, ~~2012~~including actively monitoring and evaluating the quality of its component suppliers, the Company’s ~~recorded~~warranty aobligation ~~loss~~is ofaffected ~~$0.4 million~~by product failure rates, ~~$0.6 million,~~ ~~$0.3 million~~costs per failure, and $0supplier warranties on parts delivered to the Company.~~8 million,~~ ~~respectively,~~In indeveloping the ~~condensed~~warranty ~~consolidated~~estimates ~~statements~~for ofeach ~~operations~~product, ~~related~~the toCompany utilizes its ~~share~~failure ofrate ~~losses~~performance infor ~~investments~~battery ~~accounted~~systems ~~for~~based ~~under the~~on ~~equity~~actual ~~method.~~warranty experience and an assessment of customer-specific factors that could impact warranty costs.

On March 26, 2012, the Company launched a field campaign to replace battery modules and packs that may have contained defective prismatic cells produced at its Livonia, Michigan manufacturing facility. The cost of this field campaign was estimated at $51.6 million. ~~Commitments~~In addition, the Company recorded an inventory charge of approximately $15.2 million related to inventory produced at its Michigan facilities that may be defective. As a result of this field campaign and ~~Contingencies~~ the charge for existing prismatic cell inventory, the Company began to rebuild its inventory and manage its backlog for existing customer orders while simultaneously replacing the defective customer modules and packs, which increased net losses and negative operating cash flows.

~~Litigation—On~~Based ~~April 2,~~on ~~2012,~~the ahistory ~~complaint~~of ~~was~~warranty ~~filed~~claims, in the ~~United~~Company ~~States~~has ~~District~~been ~~Court~~able ~~for~~to identify the ~~District~~types of ~~Massachusetts~~failures bythat ~~Scott~~have ~~Heiss~~occurred, ~~purportedly~~ ~~acting~~when ~~individually~~in ~~and~~the onproduct’s ~~behalf~~life ofcycle ~~other~~they ~~similarly~~have ~~situated persons~~occurred, ~~against~~and the ~~Company~~frequency ~~and~~of its ~~CEO,~~occurrence. ~~David~~Should ~~Vieau,~~actual ~~its~~product ~~CFO,~~failure ~~David Prystash~~rates, ~~and~~costs ~~its~~per ~~former~~failure, ~~Interim~~or ~~CFO,~~supplier ~~John~~warranties ~~Granara.~~on ~~The complaint~~parts ~~followed~~differ from the Company'’s ~~disclosure~~estimates, inrevisions ~~March~~to ~~2012~~the ofestimated ~~potentially~~warranty ~~defective~~liability ~~prismatic~~would ~~cells~~be ~~used~~required. inDuring ~~battery~~the ~~packs~~nine ~~and~~months aended ~~replacement~~September 30, ~~program~~2012, ~~for~~the ~~such~~Company ~~cells~~recorded an additional charge of $51.6 million, ~~The~~of ~~complaint~~which ~~attempts~~$6.6 million torepresented ~~allege~~the ~~that certain~~write-off of deferred costs associated with deferred revenue, related to the Company'’s ~~disclosures~~launch ~~were~~of ~~inaccurate~~a ~~because~~field ~~the~~campaign ~~potentially~~to ~~defective~~replace ~~cells~~battery modules and ~~their~~packs ~~replacement~~that ~~were~~may ~~not~~have ~~disclosed~~contained ~~earlier.~~defective ~~The~~prismatic ~~complaint~~cells ~~asserts~~produced aat ~~claim~~its ~~under~~Livonia, ~~Section 10(b) of~~Michigan ~~the~~manufacturing ~~Securities~~facility. ~~Exchange~~There ~~Act~~were ofno ~~1934~~additional ~~against~~charges ~~the~~related ~~Company~~to ~~and~~the ~~claims~~field ~~under~~campaign ~~Sections 10(b)~~resulting ~~and~~from ~~20(a)~~the ofdefective ~~that~~prismatic ~~statute~~cells ~~against~~produced ~~the~~at ~~individuals.~~its ItLivonia, ~~asserts~~Michigan afacility ~~purported~~for ~~class~~the ~~period~~three ~~from February 28,~~months ~~2011~~ended ~~through March~~September 2330, 2012.

~~On April 12,~~Product ~~2012~~warranty activity, awhich ~~similar~~is ~~complaint~~recorded ~~was filed~~ in ~~the~~accrued ~~United~~expenses ~~States District Court for the District of Massachusetts by Terry Leon Fike, purportedly acting individually~~ and ~~on behalf of~~ other ~~similarly~~long-term ~~situated~~liabilities ~~persons,~~on ~~against~~ the ~~same~~condensed ~~defendants.~~consolidated ~~The~~balance ~~complaint~~sheets, ~~makes~~was ~~similar~~as ~~allegations~~follows ~~and also asserts claims under Sections 10~~(b)in ~~and 20(a~~thousands) of the Securities Exchange Act of 1934 and a purported class period from February 28, 2011 through March 23, 2012. On June 7, 2012, the Court consolidated the two cases and appointed a lead plaintiff and lead counsel for the asserted class. No substantive response has been required at this time. :

On May 14, 2012, a putative derivative action was filed in the U.S. District Court for the District of Massachusetts against the Board of Directors and certain others, as well as against the Company as a nominal defendant, captioned, Jane Ahmed v. David P. Vieau, David Prystash, John Granara, Desh Deshpande, Arthur L. Goldstein, Gary E. Haroian, Dr. Paul E. Jacobs, Mark M. Little, Jeff McCarthy and Dr. Bart Riley, 1:12-CV-10865-RGS. The complaint alleges that certain of the Company's disclosures between February 28, 2011 and March 28, 2012 were materially misleading because they failed to disclose the prismatic cell manufacturing issues and that the individual defendants violated their fiduciary duties and other causes of action on behalf of the company. The complaint alleges that demand on the board to take such actions would be "futile" and should be excused. On June 6, 2012, the defendants moved to dismiss the complaint on the ground that demand on the board of directors was required under Delaware law and that plaintiff had not properly pled that demand in this case should be excused as futile. On June 20, 2012, plaintiff opposed that motion, and on June 25, defendants submitted a reply in further support of their motion to dismiss. The motion to dismiss has not been decided at this time.

	September 30, 2012
Product warranty liability at January 1, 2012	$	17,527
Accruals for new warranties issued (warranty expense)	1,065
Accruals for preexisting warranties (warranty expense net of deferral)	48,362
Payments made (in cash or in kind)	(12,612		)
Product warranty liability at September 30, 2012	54,342
Less amounts classified as current	45,263
Long-term warranty liability	$	9,079

On May 15, 2012 the Company received a letter addressed to its Board of Directors from an attorney representing an individual claiming to be a shareholder of the Company. The letter asserts that the Company's disclosures between November 9, 2010 and March 28, 2012 were materially misleading as a result of the prismatic cell manufacturing issue disclosed in March of 2012, and asserts that the Board breached its fiduciary duties during this time. The letter makes a demand on the Board to investigate the alleged inaccurate statements and to consider potential legal action against those 23

23Table of Contents

~~Table~~8. ofFinancing ~~Contents~~Arrangements

~~A123~~Long-Term ~~Systems, Inc.~~Debt—Long-term debt consists of the following (in thousands):

Notes to Condensed Consolidated Financial Statements (Continued)

	December 31, 2011		September 30, 2012
Convertible notes (2016 Notes)	$	140,064	$	140,708
Convertible notes (2013 Senior Notes)	—		4,505
Term loan	2,069		—
Wanxiang note	—		788
Mass Clean Energy loan	2,691		2,815
Total	144,824		148,816
Less amounts classified as current	2,069		4,505
Long-term debt	$	142,755	$	144,311

2016 6Notes — In April 2011, the Company issued $143.8 million ~~Commitments~~in principal of convertible unsecured subordinated notes (the “2016 Notes”). The 2016 Notes bear interest at 3.75%, which is payable semi-annually in arrears on April 15 and ~~Contingencies~~October 15 each year, beginning on October 15, 2011, and mature on April 15, 2016. Holders may surrender their Convertible Notes, in integral multiples of $1,000 principal amount, for conversion any time prior to the close of business on the business day immediately preceding the maturity date. The initial conversion rate of 138.8889 shares of common stock per $1,000 aggregate principal amount of 2016 Notes, equivalent to a conversion price of approximately $7.20 per share of the Company’s common stock, is subject to adjustment in certain events. Upon conversion, the Company will deliver shares of common stock. If the Company undergoes a fundamental change (~~Continued~~as defined in the prospectus supplement relating to the 2016 Notes), the holders of the 2016 Notes have the option to require the Company to repurchase all or any portion of their 2016 Notes. The Company may not redeem the 2016 Notes prior to the maturity date.

~~deemed responsible.~~ The ~~Board~~Company ~~considered~~recorded ~~the~~a ~~issues~~debt ~~raised~~discount into reflect the ~~letter~~value of the underwriter’s discounts and ~~retained~~commissions. ~~independent~~The ~~counsel~~debt todiscount ~~advise~~is ~~them~~being amortized as interest expense over the term of the 2016 Notes. OnAs ~~August~~of September 330, 2012, the ~~Board's~~unamortized ~~counsel~~discount ~~responded~~was to$3.0 million and the ~~letter~~carrying onvalue of the ~~Board's~~ ~~behalf~~2016 ~~indicating~~Notes, ~~that~~net of the ~~Board~~unamortized ~~considered~~discount, ~~the~~was ~~allegations~~$140.7 inmillion. During the ~~demands~~three ~~based~~months onended anSeptember 30, ~~investigation~~2012, onthe ~~behalf~~Company ofrecognized ~~the~~interest ~~Board~~expense ~~conducted~~of by$1.6 ~~outside~~million ~~directors~~related ~~with~~to the ~~assistance~~2016 Notes, of ~~counsel~~which ~~and determined~~$1.4 ~~that~~million itand ~~would~~$0.2 ~~not~~million berelate into the ~~best~~contractual coupon interest accrual and the amortization of the ~~Company~~discount, orrespectively. ~~its~~During ~~stockholders~~the tonine ~~commence~~months orended ~~maintain~~September 30, an2012, ~~action~~the ~~against~~Company ~~any~~recognized ~~present~~interest orexpense ~~former~~of ~~officer~~$4.8 million orrelated ~~director~~to the 2016 Notes, of ~~the~~which ~~Company~~$4.1 million ~~concerning the~~and ~~matters~~$0.7 million ~~alleged~~relate into the ~~demand~~contractual coupon interest accrual and ~~refused~~the amortization of the ~~demands.~~discount, respectively.

2013 Senior Notes — On May 2124, 2012, athe ~~putative~~Company ~~derivative~~issued ~~action~~$50.0 million ~~was filed~~ in ~~Superior~~aggregate ~~Court~~principal ~~for the Commonwealth~~ of ~~Massachusetts~~senior ~~against~~notes (the ~~Board~~“2013 ofSenior ~~Directors~~Note”) and ~~certain~~warrants ~~others,~~to aspurchase ~~well~~shares ~~as against~~of ~~the~~common ~~Company~~stock as(the a“May 2012 ~~nominal defendant~~Warrants”), ~~captioned,~~equal ~~Murray~~to ~~Sussman~~30% v.of ~~David~~the P.number ~~Vieau,~~of ~~Gururaj~~shares ~~Deshpande,~~underlying ~~Gilbert~~the N.2013 ~~Riley,~~Senior ~~Jr.,~~Notes ~~Jeffrey~~assuming ~~McCarthy,~~conversion ~~Gary~~at E.the ~~Haroian,~~initial ~~Arthur~~conversion Lprice. ~~Goldstein,~~The ~~Paul~~2013 ~~E. Jacobs,~~Senior ~~Mark~~Notes M.are ~~Little~~convertible, ~~David~~at ~~Prystash,~~the ~~John~~purchasers’ ~~Granara~~option, ~~Case~~into ~~No. 12-917.~~shares ~~The~~of ~~complaint asserts substantially similar allegations and claims as~~ the ~~Ahmed~~Company’s ~~complaint~~common ~~summarized above~~stock, ~~including~~ ~~that~~initially ~~demand~~at ona ~~the~~fixed ~~board~~conversion price of ~~directors should be excused as futile~~$1.18 Onper ~~June 11~~share, ~~2012,~~subject ~~the~~to ~~defendants~~certain ~~filed~~adjustments. aThe ~~motion~~2013 ~~asking~~Senior ~~the~~Notes ~~court~~bear tointerest ~~stay~~at ~~this~~a ~~litigation~~rate ~~in favor~~ of ~~the derivative case pending in the U~~6.S.00% ~~District~~per ~~Court~~year, ~~for~~subject ~~the~~to ~~District~~certain ~~of Massachusetts~~adjustments, ~~or,~~and inmature ~~the~~on ~~alternative~~July 15, ~~that~~2013. ~~the~~The ~~complaint~~2013 ~~should~~Senior beNotes ~~dismissed~~are onpari ~~the~~passu ~~ground~~in ~~that~~right ~~demand on the board~~ of ~~directors~~payment ~~was required~~with ~~under~~all ~~Delaware~~existing ~~law~~ and ~~that~~future ~~plaintiff~~unsecured ~~had~~senior ~~not~~indebtedness ~~properly~~and ~~pled~~will ~~that~~be ~~demand~~senior in ~~this~~right ~~case~~of ~~should~~payment beto ~~excused~~any asfuture ~~futile~~subordinated indebtedness. OnThe ~~July~~May ~~16,~~ 2012, ~~the~~Warrants ~~plaintiff~~may ~~filed~~not abe ~~memorandum~~exercised ofif, ~~law~~after ~~in opposition~~giving toeffect ~~defendants' motion~~ to ~~stay~~ the ~~litigation~~exercise, ~~or in~~ the ~~alternative~~Purchasers, totogether ~~dismiss~~with ~~this~~their ~~action.~~affiliates, Onwould ~~July 27,~~beneficially ~~2012,~~own ~~the~~in ~~defendants~~excess ~~filed~~of a4.99% ~~reply~~(the ~~memorandum~~“Maximum ofPercentage”). ~~law~~The inMaximum ~~further~~Percentage ~~support~~may ~~of their~~be ~~motion~~raised to ~~stay,~~any orother percentage not in ~~the~~excess ~~alternative,~~of to9.99% ~~dismiss~~at the ~~action.~~option ~~The~~of ~~motion~~the toholder ~~stay~~of orthe ~~dismiss~~May 2012 ~~has~~Warrants, ~~not~~upon ~~been~~at ~~decided~~least at61-days’ ~~this~~prior ~~time.~~notice ~~The~~to ~~court~~the ~~has~~Company, ~~set~~or alowered ~~hearing~~to ~~date~~any ofother ~~September 11~~percentage, ~~2012~~at ~~on defendants'~~the ~~motion~~option toof ~~stay~~the orPurchasers, ~~dismiss.~~at any time.

On ~~July~~ August 1310, 2012, the Company ~~received~~entered ainto ~~demand~~the ~~letter~~Consent ~~addressed~~and toFirst ~~its~~Amendment ~~Board~~to ofSenior ~~Directors~~Convertible ~~from~~Note anwith ~~attorney~~the ~~representing~~required anholders ~~individual claiming to be a shareholder~~ of the ~~Company. The~~Notes ~~letter alleges that~~ (the ~~Company's~~“2013 ~~disclosures~~Senior ~~between~~Notes ~~March 11,~~Amendment”) ~~2011~~in ~~and~~order ~~March 12,~~to ~~2012~~amend ~~were~~certain ~~materially~~terms ~~misleading as a result~~ of the ~~prismatic~~Notes ~~cell manufacturing issue disclosed~~ in ~~March~~ ofconnection ~~2012~~with ~~and asserts that~~ the ~~Board~~proposed ~~and~~entry ~~certain~~into ~~current~~a ~~and/or~~series ~~former executive officers~~ of ~~the~~financing ~~Company~~transactions ~~breached~~with ~~their~~Wanxiang ~~fiduciary~~Group ~~duties.~~Corporation ~~The~~and ~~letter~~certain ~~makes a demand on the Board to investigate the alleged breach~~ of ~~fiduciary~~its ~~duties~~affiliates to (the ~~Company~~“Wanxiang ~~and to consider legal action against those responsible~~Financings”). The ~~Board~~2013 ~~considered~~Senior ~~the~~Notes ~~issues~~Amendment, ~~raised~~among inother ~~the letter and had its independent counsel advise them. On August 3~~things, ~~2012~~reduced the ~~Board's~~minimum ~~counsel~~unrestricted ~~responded~~cash tobalance, ~~the~~changed ~~letter on~~ the ~~Board's~~conversion ~~behalf~~price ~~indicating that the Board considered the allegations in the demands based on an investigation on behalf~~ of the ~~Board~~Notes, ~~conducted by outside directors with the assistance of counsel~~ and ~~determined~~provided ~~that~~additional itredemption ~~would~~options ~~not be in the best interest of the Company or its stockholders~~ to ~~commence or maintain an action against any present or former officer or director of~~ the ~~Company concerning the matters alleged in the demand and refused the demands.~~

The Company intends to defend the litigations vigorously. Currently, the Company is unable to determine the outcome of these matters and the effect, if any, they may have on its financial position or results of operations. The outcomes of these matters are inherently uncertain and may be affected by future events. Accordingly, there can be no assurance as to the ultimate effect of these matters. 24

~~Royalty~~Table ~~Obligations—On October 31, 2011, the Company entered into a Patent Sublicense Agreement with LiFePO4+C Licensing AG as part~~ of ~~a settlement agreement with Hydro-Quebec and the Board of Regents of the University of Texas System, on behalf of the University of Texas at Austin.~~ Contents

24Company.

~~Table~~The 2013 Senior Notes Amendment increased the conversion price of ~~Contents~~a portion of the Notes at all times on or after August 21, 2012 from 85% of the market price thereof to 87% of the market price thereof. In consideration of the foregoing, the Amendment changed the first date on which the holders of the Notes may convert up to $30 million of the Notes into shares of common stock at a 15% discount to the market price thereof from August 10, 2012 to August 20, 2012. Additionally, the Amendment changed the required unrestricted cash balance from $40.0 million to $20.0 million. Additionally, the 2013 Senior Notes Amendment removed the maximum $3.5 million conversion cap.

~~A123~~The ~~Systems~~2013 Senior Notes Amendment provides that at any time on or after the date the Company consummates the Wanxiang Financings, whereby the Company receives proceeds of at least $225.0 million, the Company shall have the right to redeem all, but not less than all, of the outstanding Notes, subject to a 10% redemption premium. This redemption feature is an embedded derivative that is not clearly and closely related to the Notes. Consequently, it was initially bifurcated from the Notes and separately recorded at its fair value as an asset with subsequent changes in fair value recorded through earnings. At September ~~Inc~~30, 2012, the fair value of the embedded redemption feature was $0.0 million. A change in fair value of the embedded redemption feature in the amount of $3.6 million is reflected in the Consolidated Statement of Operations during the quarter ended September 30, 2012. The Company recorded a debt premium to reflect the value of the redemption feature. The debt premium is being amortized as interest expense over the term of the 2013 Notes.

The ~~Notes~~Company is required to ~~Condensed~~repay ~~Consolidated~~the ~~Financial~~2013 ~~Statements~~Senior Notes in twenty-seven semi-monthly installments (~~Continued~~“Installment Dates”), commencing on June 15, 2012 and thereafter on the 1st and 15th of each month. The amortization payment on each Installment Date is 1/29th of the principal amount of the 2013 Senior Notes, subject to certain adjustments, provided that the amortization payment on the June 15, 2012, July 1, 2012 and July 15, 2012 Installment Dates will be 12/3 times the amortization payment on the other Installment Dates. The Company has the right to make the interest or amortization payments and redemption payments in shares of the Company’s common stock, subject to the satisfaction of certain conditions, or elect to pay in cash. Among these conditions:

· there 6.must ~~Commitments~~be ~~and~~an ~~Contingencies~~effective ~~(Continued)~~registration statement covering such shares of common stock issuable under the terms of the 2013 Senior Notes or such shares of common stock must be eligible for sale pursuant to Rule 144 under the Securities Act without the need for registration,

~~As partial consideration for~~ · the ~~license~~weighted ~~grants~~average byprice ~~LiFePO4+C Licensing AG, the Company will be required to pay royalties to LiFePO4+C Licensing AG on a quarterly basis commencing as~~ of ~~January 1,~~ ~~2012, based on a percentage of~~ the Company'’s ~~net~~common ~~sales~~stock ~~of cells, electrode systems, and/or complex systems (plus such net sales attributed to any permitted sublicensees of the Company) during such quarterly period. The Company is required to pay royalties~~ on aeach ~~sliding scale, with a maximum possible royalty rate~~ of ~~2% of net sales (based on a defined percentage of~~ the ~~Company's~~ ~~product~~prior ~~sales~~15 ~~revenue)~~trading ~~through~~days ~~the~~has ~~agreement's~~not ~~term,~~been ~~and~~below based on the fiscal year in which the royalties are calculated and the accrual of total royalty in that fiscal year. Such defined percentage may also be adjusted by mutual agreement if the Company's standalone cell or electrode system revenues increase significantly in proportion to overall product revenues. During the three and six months ended June 30, 2012, the Company incurred $0.~~1 million~~80; ~~in royalty obligations related to this agreement.~~ and

~~Restructuring—In February 2012, as part of~~ · the ~~Company's~~daily ~~continuing~~dollar ~~efforts~~trading tovolume ~~reduce expenses and strengthen its operations, the Company decided to close down its facility in Korea while relocating a portion~~ of ~~its new product development and advanced manufacturing engineering teams to other facilities. The Company's need to align its manufacturing capacity with near-term customer demand and~~ the ~~need to reduce operating expenses are the key factors that drove the decision to restructure. The~~ Company expects to complete the shutdown of its Korean facility in the second half of 2012. In March 2012, the Company recorded $0.8 million as a reserve for discretionary termination benefits for the Company'’s ~~Korean employees,~~common instock ~~addition to a $1.1 million severance benefits accrual from statutory requirements accounted~~ for ineach accordance with Accounting Standards Codification ("ASC") Topic 712, Compensation—Nonretirement Postemployment Benefits. During the three and six months ended June 30, 2012, the Company paid $1.0 million in termination benefits resulting in a severance accrual of ~~$0.9 million remaining as of June 30, 2012. Facility closure and other costs are accounted for in accordance with ASC Topic 420, Exit or Disposal Cost Obligations, and are recorded when~~ the ~~liability~~prior is15 ~~incurred.~~trading ~~During~~days ~~the~~was ~~three~~at ~~and~~least ~~six months ended June 30, 2012, the Company incurred~~ $~~0.5 million in relocation expenses attributable to the restructuring efforts~~750, ~~of which approximately $0~~000.1 million was paid during the three and six months ended June 30, 2012. Additionally, during the three and six months ended June 30, 2012, the Company recorded $3.3 million in asset impairment charges and lease remediation costs of $0.7 million related to the Korea facility shutdown.

~~Retention~~If ~~agreements—In February 2012,~~ the Company ~~entered~~is ~~into~~not ~~employment~~permitted ~~agreements~~to ~~with~~deliver ~~approximately~~shares 40of ~~employees.~~common ~~The~~stock ~~agreements~~with ~~provide~~respect ~~for severance~~to ~~payments~~an ~~ranging~~Installment ~~from~~Date ~~6 months~~due to ~~24 months~~a offailure ~~salary~~to insatisfy ~~connection~~any ~~with~~of athe ~~change~~conditions, init ~~control~~must ~~and~~pay ~~subsequent~~the ~~termination~~applicable ofportion ~~employment. Certain~~ of the ~~agreements~~principal ~~also~~and ~~provide for~~interest ~~the~~amounts ~~above~~in ~~benefits~~cash, ifunless the ~~employees'~~conditions ~~employment~~are iswaived ~~terminated~~by ~~without~~the ~~cause~~purchaser. ~~prior~~Whether tothe aCompany ~~change~~makes repayments in ~~control.~~cash ~~Certain~~or ofstock ~~the~~(if ~~agreements~~permitted) ~~also~~on ~~provide~~any ~~for~~Installment ~~acceleration~~Date ofwill ~~vesting~~depend ofprimarily ~~stock~~on ~~options~~the Company’s finances and ~~restricted~~ ~~stock~~its ~~units~~trading inprice at the ~~event~~time of athe ~~change~~applicable inInstallment ~~control~~Date.

If 7the Company makes a payment in shares of common stock, the principal amount of the 2013 Senior Notes being paid will be converted into shares of the Company’s common stock at a price per share equal to the lesser of the applicable conversion price and 82% of the Market Price of the Company’s common stock on the applicable interest date or amortization installment date. ~~Product~~“Market ~~Warranties~~ Price” means the arithmetic average of the volume weighted average price of the Company’s common stock on each of the five trading days immediately preceding the applicable date, but in no event greater than the volume weighted average price of the Company’s common stock on the trading date immediately preceding the applicable date.

The Company ~~provides~~agreed ~~for the estimated costs~~ to ~~fulfill~~deposit ~~customer~~$30.0 million ~~warranty obligations upon the recognition~~ of the ~~related~~proceeds ~~revenue.~~from ~~While~~ the ~~Company~~2013 ~~engages~~Senior inNotes ~~extensive~~into ~~product~~a ~~quality programs~~bank ~~and~~account ~~processes,~~subject ~~including~~to ~~actively~~an ~~monitoring~~account ~~and~~control ~~evaluating~~agreement. ~~the~~Release ~~quality~~ of ~~its~~these ~~component~~proceeds ~~suppliers,~~was ~~the~~conditioned Company's warranty obligation is affected by product failure rates, costs per failure, and supplier warranties on parts delivered to the Company. In developing the warranty estimates for each product, the Company utilizes its failure rate performance for battery systems based on actual warranty upon:

25· the Company obtaining, on or prior to June 30, 2012, shareholder approval of (a) the issuance of shares of the Company’s common stock in connection with the conversion, interest payments and amortization of the

~~Table of Contents~~25

~~A123~~Table ~~Systems, Inc.~~of Contents

2013 Senior Notes toand ~~Condensed~~(b) an ~~Consolidated~~increase ~~Financial~~in ~~Statements~~the authorized number of shares of Common Stock of the Company (~~Continued~~the “Shareholder Approval”); and

· the 7.effectiveness, ~~Product~~on ~~Warranties~~or prior to certain deadlines, of one or more registration statements covering the shares of common stock underlying the 2013 Senior Notes and the May 2012 Warrants (~~Continued)~~the “Registration Statement Effectiveness”).

~~experience and~~On anJune 29, ~~assessment of customer-specific factors that could impact warranty costs. Based on the history of warranty claims~~2012, the Company ~~has~~received ~~been able to identify~~ the ~~types~~Shareholder ~~of failures that have occurred, when in the product's life cycle they have occurred, and the frequency of its occurrence~~Approval. On ~~Should actual product failure rates~~July 6, ~~costs per failure~~2012, ~~or supplier warranties on parts differ from~~ the Company's ~~estimates,~~fulfilled ~~revisions to~~ the ~~estimated~~remaining ~~warranty~~conditions ~~liability~~for ~~would~~release beof, ~~required.~~and ~~During~~subsequently ~~the~~received ~~six months ended June 30, 2012,~~ the ~~Company recorded an additional charge of~~ $5130.60 million, of ~~which~~proceeds ~~$6.6 million~~under ~~represented~~ the ~~write-off~~account ofcontrol deferred costs associated with deferred revenue, related to the Company's launch of a field campaign to replace battery modules and packs that may contain defective prismatic cells produced at its Livonia, Michigan manufacturing facilityagreement. There were no additional charges related to the field campaign resulting from the defective prismatic cells produced at its Livonia, Michigan facility for the three months ended June 30, 2012. See Note 1 for additional details.

~~Product warranty~~The ~~activity~~Company measured the associated May 2012 Warrants and the 2013 Senior Note embedded derivatives at fair value separate from the debt obligation. The May 2012 Warrants are recorded as a separate liability. Accordingly, ~~which~~a isdiscount was recorded inon ~~accrued~~the ~~expenses~~2013 Senior Notes to reflect the value of the May 2012 Warrants and ~~other~~the ~~long-~~embedded derivatives. The debt discount is being amortized to interest expense using the effective interest method over the term ~~liabilities~~of onthe 2013 Senior Notes. As of September 30, 2012, the ~~condensed~~unamortized ~~consolidated~~discount ~~balance~~was ~~sheets~~$0.3 million and the carrying value of the 2013 Senior Notes, net of the unamortized discount, and the embedded derivatives was $4.2 million. The Company recorded deferred financing costs of $3.4 million that will be amortized as ~~follows~~interest ~~(in~~expense ~~thousands):~~using the effective interest method over the term of the 2013 Senior Notes. During the three months ended September 30, 2012, the Company recognized interest expense of $10.5 million related to the 2013 Senior Notes, of which $0.3 million, $7.4 million, and $2.8 million relates to the contractual coupon interest accrual, the amortization of the discount, and the amortization of the deferred financing costs. During the nine months ended September 30, 2012, the Company recognized interest expense of $13.2 million related to the 2013 Senior Notes, of which $0.7 million, $9.1 million, and $3.4 million relates to the contractual coupon interest accrual, the amortization of the discount, and the amortization of the deferred financing costs. The embedded derivatives are required to be marked to market each reporting period through earnings.

	June 30, 2012
Product warranty liability at January 1, 2012	$	17,527
Accruals for new warranties issued (warranty expense)		284
Accruals for preexisting warranties (warranty expense net of deferral)		49,347
Payments made (in cash or in kind)		(6,815	)
Product warranty liability at June 30, 2012		60,343
Less amounts classified as current		52,005
Long-term warranty liability	$	8,338

Revolving Credit Facilities — On September 30, 2011, the Company entered into a Credit Agreement, providing it with a revolving loan facility in an aggregate principal amount of up to the lesser of (i) $40.0 million or (ii) a Borrowing Base (as defined in the credit agreement) established at 80% of certain eligible accounts, 15% of certain eligible foreign accounts and 30% of certain eligible inventory, as more specifically described in the agreement. The agreement also provides a letter of credit sub-facility in an aggregate principal amount of up to $10.0 million and a swing-line loan sub-facility in an aggregate principal amount of up to $5.0 million. Any outstanding obligations under either the letter of credit sub-facility or swing-line sub-facility deduct from the availability under the $40.0 million revolving facility. The credit agreement additionally provides a discretionary incremental facility in an aggregate principal amount of not less than $10.0 million and up to $35.0 million. The funding of the incremental facility is discretionary on the part of the lenders and will depend on market conditions and other factors. The credit agreement permits the Company to enter into cash management and hedging agreements with the lenders.

On 8March 6, 2012, the Company entered into the First Amendment to its Revolving Credit Agreement. ~~Financing~~The ~~Arrangements~~ amendment extends the Revolving Termination Date of the agreement to June 1, 2013. On May 11, 2012, the Company entered into a subsequent amendment. This amendment eliminates the borrowing facility and provides for up to $15.0 million as security for letters of credit. All outstanding letters of credit are required to be cash collateralized at 105% of their face amount. On August 16, 2012, the Company terminated the Revolving Credit Agreement. In connection with such termination, the Company provided standby letters of credit in the aggregate amount of $10.0 million to cover potential amounts owed under letters of credit which were issued and remained outstanding as of August 16, 2012.

~~Long-Term~~The ~~Debt—Long-term~~outstanding ~~debt~~balance ~~consists~~at December 31, 2011 was $38.1 million. As of ~~the~~September 30, ~~following~~2012, ~~(in~~there ~~thousands):~~was no balance outstanding and there was no amount available for borrowing under the facility.

	December 31, 2011		June 30, 2012
Convertible notes (2016 Notes)	$	140,064	$	140,494
Convertible notes (2013 Senior Notes)		—		41,938
Term loan		2,069		—
Mass Clean Energy loan		2,691		2,773
Total		144,824		185,205
Less amounts classified as current		2,069		38,490
Long-term debt	$	142,755	$	146,715

Senior Secured Bridge Loan Facility and Warrants — On August 16, 2012, the Company entered into a Loan Agreement (the “Loan Agreement”) with Wanxiang America Corporation (the “Lender”) providing for a senior secured bridge loan facility in an amount of up to $75.0 million (the “Bridge Loan Facility”). Borrowings under the Bridge Loan Facility bear interest at an annual rate of 10% and mature in August 2014. The Loan Agreement contains certain affirmative covenants, including those pertaining to the delivery of financial statements, notices of default and certain other information, maintenance of business and insurance, collateral matters, retention of employees, and compliance with laws. The Loan Agreement also contains negative covenants, including a financial covenant specifying the amount of unrestricted cash the Company is

2013 Senior Notes—On May 24, 2012, the Company issued $50.0 million in aggregate principal of senior notes. The 2013 Senior Notes are convertible, at the Purchasers' option, into shares of the Company's common stock, initially at a fixed conversion price of $1.18 per share, subject to certain adjustments. The 2013 Senior Notes bear interest at a rate of 6.00% per year, subject to certain adjustments, and mature on July 15, 2013. The 2013 Senior Notes are pari passu in right of payment 26

26Table of Contents

~~Table~~required to maintain, ranging from $20.0 million to $40.0 million. As of ~~Contents~~September 30, 2012, the Company is required to maintain an unrestricted cash balance of $20.0 million. The Bridge Loan Facility is secured by substantially all of the Company’s assets.

~~A123~~The ~~Systems~~Bridge Loan Facility provides for an initial cash advance of $15.0 million, of which $2.5 million must be retained by Wanxiang in reserve until such time as the Company obtains the subordination to Wanxiang of a lien securing certain existing indebtedness with the Massachusetts Clean Entergy Technology Center (“MA-CEC”) or elects to pay such existing indebtedness in full, and a letter of credit facility resulting in approximately $10 million of additional liquidity for the Company (the “Initial Loan”). On August ~~Inc~~16, 2012, the Company received proceeds in the amount of $12.1 million for the issuance of the Initial Loan, equal to $15.0 million, less the $2.5 million associated with the MA-CEC lien and $0.4 million of costs reimbursable to Wanxiang for their costs associated with the lending process.

The ~~Notes~~Bridge Loan Facility also provides for two subsequent $25.0 million cash advances, subject to ~~Condensed~~the ~~Consolidated~~satisfaction ~~Financial~~of ~~Statements~~certain conditions, including (~~Continued~~i) receipt of a favorable determination from the Committee on Foreign Investment in the United States (“CFIUS”), (ii) receipt of Chinese government approvals on terms satisfactory to the Lender in its sole discretion, (iii) the accuracy of representations and warranties, (iv) the absence of any default, (v) the absence of a material diminishment of the Company’s research and development and engineering teams by reason of resignations or departures and (vi) certain other conditions. The Company’s obligations under the Bridge Loan Facility are unconditionally guaranteed by certain subsidiaries of the Company and secured by substantially all of the Company’s and such subsidiaries’ assets.

Subject to certain exceptions, if the Company or any of its subsidiaries procures debt or equity financing from a person which is not the Lender (or an affiliate thereof) (an “Alternative Financing”) and the Alternative Financing is procured within one year after the date of the Initial Loan, the Company has agreed to pay to the Lender as liquidated damages and compensation for the costs of being prepared to make funds available under the Bridge Loan Facility and in respect of the 8.00% Convertible Notes an amount equal to $13.75 million. The Company will not be obligated to pay the aforementioned fee if the Alternative Financing ~~Arrangements~~occurs after either (~~Continued~~i) the issuance of the 8.00% Convertible Notes, or (ii) the date that is the later of 180 days following the date of the Initial Loan and the date the purchase agreement relating to the 8.00% Convertible Notes shall have been terminated if as of such date Chinese regulatory approval has not been obtained.

~~with all~~If ~~existing~~the ~~and~~Company ~~future~~procures ~~unsecured~~Alternative ~~senior~~Financing ~~indebtedness~~or ~~and~~if ~~will~~certain befundamental ~~senior~~changes specified in ~~right~~the Loan Agreement occur (“Fundamental Change”), the Company has agreed to pay a prepayment fee (i) in the amount of ~~payment~~10% of the principal amount of outstanding loans made and face amount of the outstanding letter of credit issued under the Bridge Loan Facility if such event or changes occur prior to ~~any~~one ~~future~~year ~~subordinated~~after ~~indebtedness.~~the date of the Loan Agreement or (ii) in the amount of 8% of the principal amount of outstanding loans made and face amount of the outstanding letter of credit issued under the Bridge Loan Facility if such event or changes occur after one year after the date of the Loan Agreement.

The ~~Purchasers~~ ~~also~~Loan ~~have~~Agreement ~~the~~contains ~~right~~certain atevents ~~any~~of ~~time,~~default ~~and~~(subject ~~from~~to ~~time~~grace toperiods ~~time,~~in ~~after~~certain ~~August 15,~~cases) ~~2012~~including among others: nonpayment of principal, tointerest ~~elect~~or tofees; ~~convert~~breach upof tothe ~~$30.0 million~~financial, ~~aggregate~~affirmative ~~principal~~or ~~amount~~negative covenants; inaccuracy of ~~2013 Senior~~the ~~Notes~~representations ator awarranties; ~~price~~default ~~equal~~on toother ~~85%~~material indebtedness; bankruptcy or insolvency; material unsatisfied judgments; certain Employee Retirement Income Security Act (“ERISA”) violations; invalidity or unenforceability of the ~~closing~~Loan ~~price~~Agreement or other documents associated with the Loan Agreement; delisting of the Company'’s ~~common~~Common ~~stock~~Stock onfrom ~~the~~NASDAQ or suspension of trading ~~day~~for ~~immediately~~more ~~preceding~~than ~~the~~five ~~conversion~~consecutive ~~date;~~trading ~~provided,~~days ~~however,~~or ~~that~~more than 15 trading days during any 365-day period; and the ~~Purchasers~~loss ~~may~~of ~~not convert~~availability ~~more~~of ~~than~~certain ~~$3.5 million~~government ~~aggregate~~grants ~~principal~~and ~~amount~~tax credits. As of ~~the~~October ~~2013~~12, ~~Senior~~2012, ~~Notes~~a onconsent ~~any~~and ~~given~~waiver ~~trading~~agreement ~~date~~was received with respect to the October 12, 2012 interest payment. An ~~The~~event ~~2013~~of ~~Senior~~default ~~Notes~~will ~~may~~also ~~not~~occur beunder ~~converted~~the Loan Agreement if, within 120 days after ~~giving~~the ~~effect~~effective todate under the ~~conversion~~ Loan Agreement, the ~~Purchasers~~shareholders ~~together~~of ~~with~~the ~~their~~Company ~~affiliates~~have ~~would~~not ~~beneficially~~approved ~~own~~(i) a inproposal ~~excess~~to approve the issuance of 4shares of the Company’s Common Stock upon conversion of the 8.9900% Convertible Notes, upon exercise of the ~~outstanding~~Convertible ~~shares~~Note Warrants (as defined below) and/or upon exercise of the ~~Company's~~Bridge ~~common~~Warrants ~~stock.~~(as ~~This~~defined ~~maximum~~below), ~~percentage~~(ii) a ~~may~~proposal beto ~~raised~~authorize a change of control resulting from such issuance under NASDAQ Listing Rule 5635(b) and (iii) a proposal to ~~any~~ ~~other~~approve ~~percentage~~an ~~not~~amendment into ~~excess~~the Company’s certificate of ~~9.99%~~incorporation atto increase the ~~option~~number of ~~the~~authorized ~~Purchasers,~~shares ~~upon~~of atCommon ~~least~~Stock ~~61-days'~~in ~~prior~~an ~~notice~~amount sufficient to allow for the Company, orto ~~lowered~~reserve tofor ~~any~~issuance ~~other~~upon ~~percentage,~~conversion atof the ~~option~~8.00% Convertible Notes and exercise of the ~~Purchasers~~ atConvertible ~~any~~Note ~~time.~~Warrants and the Bridge Warrants (such approvals together, the “Shareholder Approval”).

~~The Company~~A ismandatory ~~required~~prepayment tomay ~~repay~~be ~~the~~triggered ~~2013~~upon ~~Senior~~an ~~Notes~~Alternative inFinancing ~~twenty-seven~~or ~~semi-monthly~~a ~~installments~~Fundamental ~~("Installment~~Change. Upon ~~Dates"),~~the ~~commencing~~occurrence onand ~~June 15~~continuation of an event of default, ~~2012~~Wanxiang ~~and~~may ~~thereafter~~terminate on the ~~1st~~ commitment and ~~15th of~~all ~~each~~outstanding ~~month~~principal and obligations will become due and payable immediately. ~~The~~These ~~amortization~~features, ~~payment~~together, onare ~~each~~a ~~Installment~~compound ~~Date~~embedded derivative that is ~~1/29th of~~not ~~the~~clearly ~~principal~~and ~~amount~~closely ofrelated to the ~~2013~~Initial ~~Senior~~Loan. ~~Notes~~Consequently, ~~subject~~it towas ~~certain adjustments,~~initially ~~provided~~bifurcated ~~that~~from the ~~amortization~~Bridge ~~payment~~Loan onFacility ~~the~~and ~~June 15,~~separately ~~2012,~~recorded ~~July 1,~~at ~~2012~~its ~~and~~fair ~~July 15,~~value ~~2012~~as ~~Installment~~a ~~Dates~~liability ~~will~~with besubsequent ~~12/3~~changes ~~times~~in ~~the~~fair ~~amortization payment~~value onrecorded ~~the~~through ~~other Installment Dates~~earnings. ~~The~~At ~~Company~~September 30, ~~has~~2012, the ~~right~~fair tovalue ~~make~~of the ~~interest~~embedded orredemption ~~amortization~~feature ~~payments~~was $1.2 million and ~~redemption~~is ~~payments~~included in ~~shares~~warrant ofand ~~the~~derivative ~~Company's~~liabilities ~~common~~on ~~stock, subject to~~ the ~~satisfaction~~ ofConsolidated ~~certain~~Balance ~~conditions,~~Sheet. A orchange ~~elect~~in tofair ~~pay~~value inof ~~cash.~~the ~~Among~~embedded ~~these~~redemption ~~conditions:~~

If the Company is not permitted to deliver shares of common stock with respect to an Installment Date due to a failure to satisfy any of the conditions, it must pay the applicable portion of the principal and interest amounts in cash, unless the conditions are waived by the purchaser. Whether the Company makes repayments in cash or stock (if permitted) on any Installment Date will depend primarily on the Company's finances and its trading price at the time of the applicable Installment Date. 27

~~If the~~Table ~~Company makes a payment in shares~~ of common stock, the principal amount of the 2013 Senior Notes being paid will be converted into shares of the Company's common stock at a price per share equal to the lesser of the applicable conversion price and 82% of the Market Price of the Company's common stock on the applicable interest date or amortization installment date. "Market Price" means the arithmetic average of the volume weighted average price of the Company's common stock on each of the five trading days immediately preceding the applicable date, but in no event greater than the volume weighted average price of the Company's common stock on the trading date immediately preceding the applicable date. Contents

27feature in the amount of $0.1 million is reflected as interest and other income (loss), in the Consolidated Statement of Operations during the quarter ended September 30, 2012.

~~Table~~Upon issuance of ~~Contents~~the Initial Loan and each subsequent loan made under the Bridge Loan Facility, the Company issued, and will issue, a warrant to the Lender (“Bridge Warrant”). Subject to the limitations on exercisability described below, (i) the Bridge Warrant issued upon the Initial Loan is exercisable into the number of shares equal to 24.9% of the Company’s shares of Common Stock on a fully diluted basis at the time of exercise, (ii) the Bridge Warrant issuable upon the first Subsequent Loan will be exercisable into the number of additional shares required to bring Wanxiang’s ownership to 39.9% of the Company’s shares of Common Stock on a fully diluted basis at the time of exercise and (iii) the Bridge Warrant issuable upon the second Subsequent Loan will be exercisable into the number of additional shares required to bring Wanxiang’s ownership to 49.5% of the Company’s shares of Common Stock on a fully diluted basis at the time of exercise.

~~A123~~Each ~~Systems~~Bridge Warrant will have an aggregate exercise price of $25.0 million (subject to a reduction to 40% of such aggregate price in the event that certain government grants or tax credits cease to be available to the Company). New issuances of Common Stock after the later of 180 days after the date of the Initial Loan or the termination of the purchase agreement for the 8.00% Convertible Notes generally are excluded from the calculation of Wanxiang’s fully diluted ownership. The Bridge Warrants may be exercised for cash or by offset of amounts payable under the Bridge Loan Facility and will expire on the fifth anniversary of their issue date. None of the Bridge Warrants will be exercisable until the earlier of (i) the time the Company’s shareholders vote on the proposed issuances of Common Stock pursuant to exercise of the Bridge Warrants and the Convertible Note Warrants (each as defined below) and the conversion of the 8.00% Convertible Notes and (ii) the termination of the Company’s obligation to seek the approval of its shareholders. After such vote or termination has occurred, the exercise of the Bridge Warrants will be subject to the further limitations set forth below. The exercise of the Bridge Warrants in an amount greater than 9.99% of the issued and outstanding Common Stock after giving effect to such issue will be conditioned on receipt of a favorable determination from CFIUS. Additionally, before the Shareholder Approval has been obtained, the Bridge Warrants may only be exercised to the extent such issuance would not require Shareholder Approval under NASDAQ rules ~~Inc~~and regulations. In addition, subject to exceptions set forth therein, the Bridge Warrants may not be exercised if such exercise would result in Wanxiang’s obtaining greater than 49.9% beneficial ownership of the issued and outstanding Common Stock until the later of (a) such time as all of the 6.00% Convertible Notes and related warrants have been converted, redeemed or otherwise are no longer outstanding and (b) such time as all of the Company’s 2016 Notes have been converted, redeemed or otherwise are no longer outstanding.

The ~~Notes~~Company measured the associated Bridge Warrants and the features embedded in the Bridge Loan Facility at fair value separate from the debt obligation. The Bridge Warrants are recorded as a separate liability. While measured separately, the embedded derivatives and the warrant obligation are carried on a combined basis and reflected in the warrant and derivative liabilities section in the Company’s condensed consolidated balance sheet. Accordingly, a discount was recorded on the Bridge Loan Facility to ~~Condensed~~reflect ~~Consolidated~~the ~~Financial~~value ~~Statements~~of ~~(Continued)~~the Bridge Warrants and the embedded derivatives. As the fair value of Bridge warrants and embedded derivatives at inception exceeded the proceeds received, the Company recorded the Initial Loan with a discount equal to 100% of the face value of the note. The excess fair value was recorded as a loss on the statement of operations. The initial loan will be accreted to its face value of $12.5 million using the interest method over the term of the Bridge Loan Facility. As of September 30, 2012, the carrying value of the borrowings under the Bridge Loan Facility, net of the unamortized discount, and the embedded derivatives was $0.8 million. The Company recorded deferred financing costs of $1.8 that will be amortized as interest expense using the effective interest method over the term of the Bridge Loan Facility. During the three and nine months ended September 30, 2012, the Company recognized interest expense of $2.8 related to the Bridge Loan Facility, of which $0.2, $0.8, and $1.8 relates to the contractual coupon interest accrual, the amortization of the discount, and the amortization of the deferred financing costs, respectively. The embedded derivatives are required to be marked to market each reporting period through earnings.

Senior Secured Convertible Notes and Warrants — On August 16, 2012, the Company entered into the Securities Purchase Agreement (“Purchase Agreement”) with the Wanxiang Clean Energy USA Corp. (the “Purchaser”) pursuant to which the Purchaser agreed, subject to the satisfaction of certain conditions within 180 days after the date of first advance under the Bridge Loan Facility, to purchase $200 million in aggregate principal amount of the 8.00% ~~Financing~~Convertible ~~Arrangements~~Notes from the Company (~~Continued~~the “8.00% Convertible Notes). The 8.00% Convertible Notes will mature on the fifth anniversary of their issue date. The Company’s obligations under the 8.00% Convertible Notes are expected to be unconditionally guaranteed by certain of its subsidiaries and secured by substantially all of the Company’s and its subsidiaries’ assets.

The ~~Company~~ ~~agreed~~holders toof ~~deposit~~the ~~$30~~8.~~0 million~~00% ofConvertible ~~the~~Notes ~~proceeds~~can ~~from~~convert the ~~2013~~principal ~~Senior~~and ~~Notes~~accrued interest at any time, subject to limitations, into shares of common stock at a ~~bank~~conversion ~~account~~price ~~subject~~of equal to an$0.60 ~~account~~per ~~control~~share, ~~agreement~~subject to reduction to $0.24 ~~Release~~per ofshare ~~these~~in ~~proceeds~~the ~~was conditioned~~event ~~upon:~~that certain government grants or tax credits cease to be available to the Company and adjusted for stock

On June 29, 2012, the Company received the Shareholder Approval. Subsequent to the June 30, 2012 quarter end, on July 6, 2012, the Company fulfilled the remaining conditions for release of, and subsequently received, the $30.0 million of proceeds under the account control agreement. 28

~~The Company~~Table measured the associated May 2012 Warrants and the 2013 Senior Note embedded derivatives at fair value separate from the debt obligation. The May 2012 Warrants are recorded as a separate liability. While measured separately, the embedded derivatives and the debt obligation are carried on a combined basis and reflected in the current portion of long-term debt and long-term debt in the Company's condensed consolidated balance sheet. Accordingly, a discount was recorded on the 2013 Senior Notes to reflect the value of the May 2012 Warrants and the embedded derivatives. The debt discount is being amortized to interest expense using the effective interest method over the term of the 2013 Senior Notes. As of June 30, 2012, the unamortized discount was $8.8 million and the carrying value of the 2013 Senior Notes, net of the unamortized discount, and the embedded derivatives was $41.9 million. The Company recorded deferred financing costs of $3.4 million that will be amortized as interest expense using the effective interest method over the term of the 2013 Senior Notes. During the three and six months ended June 30, 2012, the Company recognized interest expense of $2.6 million related to the 2013 Senior Notes, of which $0.3 million, $1.7 million, and $0.6 million relates to the contractual coupon interest accrual, the amortization of the discount, the amortization of the deferred financing costs, respectively. The embedded derivatives are required to be market to market each reporting period through earnings. Contents

~~2016 Notes—In April 2011~~splits, ~~the~~stock ~~Company~~dividends ~~issued $143.8 million in principal of convertible unsecured subordinated notes (the "2016 Notes"). The 2016 Notes bear interest at 3.75%, which is payable semi-annually in arrears on April 15~~ and ~~October 15~~other ~~each~~similar year, beginning on October 15, 2011, and mature on April 15, 2016. Holders may surrender their Convertible Notes, in integral multiples of $1,000 principal amount, for conversion any time prior to the close of business on the business day immediately preceding the maturity date. The initial conversion rate of 138.8889 shares of common stock per $1,000 aggregate principal amount of 2016 Notes, equivalent to a conversion price of approximately $7.20 per share of the Company's common stock, is subject to adjustment in certain events. Upon conversion, the Company will deliver shares of common stock. If the Company undergoes a fundamental change (as defined in the prospectus supplement relating to the 2016 Notes), the holders of the 2016 Notes have the option to require the Company to repurchase all or any portion of their 2016 Notes. The Company may not redeem the 2016 Notes prior to the maturity date.

28Under the Purchase Agreement, the Company also agreed to issue warrants (“Convertible Note Warrants”) to the Purchaser. Each Convertible Note Warrant has an exercise price of $115.0 million (subject to a 40% reduction in price in the event that certain government grants or tax credits cease to be available to the Company) and expires on the fifth anniversary of their issue date. The Convertible Note Warrants, when taken together with the shares of Common Stock issued under the Bridge Warrants, are exercisable for 80% of the outstanding Common Stock of the Company at the time of exercise.

~~Table~~As of ~~Contents~~September 30, 2012, the Company was in compliance with the covenants and terms of the agreements.

~~A123 Systems, Inc~~9. Related Party Transactions

Transactions ~~Notes~~with toHolders ~~Condensed~~of ~~Consolidated~~Common ~~Financial~~Stock—In ~~Statements~~November 2011, the Company entered into a technology license agreement, professional services agreement, a product supply agreement and a stock purchase agreement with IHI Corporation (~~Continued~~“IHI”), an industrial equipment manufacturer located in Japan. IHI agreed to make a $25.0 million equity investment in the Company’s common stock under a stock purchase agreement, which closed on November 18, 2011. In addition, the Company had exclusively licensed, for an initial term of 10 years, its advanced battery system technology and systems integration know-how to manufacture battery systems and modules for the transportation market in Japan for a one-time non-refundable license fee of $7.5 million, plus a professional services fee of $0.7 million to facility the transfer under the technology license agreement and to enhance IHI’s ability to practice the technology licensed. The $0.7 million due under the professional services agreement is broken down into semi-yearly installments of $0.2 million with the first payment received on June 30, 2012. The amounts due under the professional service agreement are added to deferred revenue once billed, and amortized during the duration of the license agreement. During the license term, the Company will also receive royalty payments based on a percentage of IHI’s net sales of products that use or embody the licensed technology and know-how, minus the cost of battery cells purchased by IHI from the Company for use with such products. The Company will be the exclusive supplier of lithium ion battery cells to IHI under a product supply agreement for the battery systems and modules that IHI produces. As of December 31, 2011 and September 30, 2012, the balance due from IHI of $1.6 million and $0.4 million, respectively, is included within accounts receivable, net on the condensed consolidated balance sheets. As of December 31, 2011 and September 30, 2012, the deferred revenue balance related to the technology license fee was $7.5 million and $7.1 million, respectively. During the three and nine months ended September 30, 2012, amortization of the license fee resulted in the recognition of $0.2 million and $0.6 million of revenue from IHI, respectively.

Transactions 8with Joint Venture Partner’s Affiliate—In December 2009, the Company entered into a joint venture with SAIC to assist the Company in growing business and sales in China’s transportation industry. ~~Financing~~The ~~Arrangements~~Company ~~(Continued)~~entered into two development agreements with SAIC. During the nine months ended September 30, 2011, the Company recorded revenue related to the development and supply agreements with SAIC of $0.4 million. There was no revenue recorded during the three months ended September 30, 2011.There was no revenue recorded during the three and nine months ended September 30, 2012. As of December 31, 2011 and September 30, 2012, the balance due from SAIC was $0.1 million and $27 thousand, respectively, which is included within accounts receivable, net on the condensed consolidated balance sheets. There was no deferred revenue recorded as of December 31, 2011 and $28 thousand as of September 30, 2012.

~~The~~ Transactions with Cost-Method Investment—In January 2010, the Company ~~recorded~~entered into a ~~debt~~supply ~~discount~~agreement towith ~~reflect~~Fisker. ~~the~~The ~~value~~Company ofalso ~~the~~holds ~~underwriter's~~common ~~discounts~~stock ~~and~~in ~~commissions~~Fisker. The ~~debt~~Company ~~discount~~recognizes isrevenue ~~being~~on ~~amortized~~product asshipments ~~interest~~to ~~expense~~Fisker, ~~over~~within the ~~term~~condensed ofconsolidated ~~the 2016~~statements ~~Notes. As~~ of ~~June 30~~operations, ~~2012,~~when ~~the~~all ~~unamortized~~revenue ~~discount~~recognition ~~was~~criteria $3are met.~~3 million~~ ~~and~~During the ~~carrying~~three ~~value~~and ofnine ~~the~~months ~~2016~~ended ~~Notes~~September 30, ~~net~~ of2011, the ~~unamortized~~Company ~~discount,~~recorded ~~was~~$24.7 million and $~~140~~40.57 million of revenue from Fisker, respectively. During the three and nine months ended ~~June~~September 30, 2012, the Company ~~recognized~~recorded ~~interest~~$0.0 ~~expense~~million ofand $10.62 million ~~related~~of torevenue ~~the~~from ~~2016 Notes,~~Fisker ofrespectively. ~~which~~At ~~$1.4~~December ~~million~~31, 2011 and ~~$0.2~~September ~~million~~30, ~~relate~~2012, to the ~~contractual~~Company ~~coupon~~has ~~interest~~deferred ~~accrual~~$4.4 million and ~~the~~$2.0 million, ~~amortization~~respectively, of ~~the~~service ~~discount,~~and ~~respectively.~~product ~~During~~revenue related to the ~~six~~development ~~months~~and ~~ended June 30,~~supply ~~2012,~~agreement. ~~the~~The ~~Company~~balance ~~recognized~~due ~~interest~~from ~~expense~~Fisker as of ~~$3.2~~December ~~million~~31, ~~related~~2011 toand ~~the~~September 30, ~~2016 Notes~~2012, of ~~which~~ $23.87 million and $01.4 9 million, ~~relate~~respectively, tois ~~the~~included ~~contractual~~within ~~coupon interest~~accounts ~~accrual~~receivable, ~~and~~net on the ~~amortization~~condensed ofconsolidated ~~the~~balance ~~discount, respectively~~sheets.

~~Revolving~~Transactions ~~Credit~~with ~~Facilities~~Equity-Method Investment—OnDuring ~~September~~March 302010, ~~2011,~~ the Company entered into a ~~Credit~~technology ~~Agreement,~~license ~~providing~~contract itto ~~with~~license acertain ~~revolving~~patents ~~loan~~and ~~facility~~technology ~~in an~~to ~~aggregate~~the ~~principal~~Company’s ~~amount~~Joint ofVenture upfor to the ~~lesser~~term of ~~(i) $40.0 million or (ii) a Borrowing Base (as defined in~~ the ~~credit~~Joint ~~agreement)~~Venture, ~~established~~which atextends ~~80%~~to ~~of certain eligible accounts~~April 28, ~~15%~~2030. ofIn ~~certain~~conjunction ~~eligible~~with ~~foreign~~the ~~accounts~~license ~~and 30% of certain eligible inventory~~agreement, asthe ~~more~~Joint ~~specifically~~Venture ~~described~~paid in the ~~agreement.~~Company ~~The~~the ~~agreement~~first ~~also~~payment ~~provides a letter~~ of ~~credit sub-facility~~the inlicense anfee ~~aggregate principal amount~~ of ~~up to~~ $101.0 million ~~and a swing-line loan sub-facility~~ in ~~an aggregate principal amount of up to $5.0~~July ~~million~~2010. ~~Any~~Revenue ~~outstanding~~on ~~obligations under either~~ the ~~letter~~license offee ~~credit~~will ~~sub-facility~~be oramortized ~~swing-line~~over ~~sub-facility deduct from~~ the ~~availability~~term ~~under~~of the ~~$40.0 million~~ ~~revolving facility~~license. ~~The~~Revenue ~~credit~~recognition ~~agreement~~on ~~additionally~~the ~~provides~~license afee ~~discretionary~~is ~~incremental~~expected ~~facility~~to incommence anupon ~~aggregate~~the ~~principal~~successful ~~amount~~completion of ~~not~~training ~~less~~provided ~~than $10.0 million and up~~ to ~~$35.0 million.~~employees ~~The funding~~ of the ~~incremental~~Joint ~~facility~~Venture. isAs ~~discretionary on the part~~ of ~~the~~December 31, ~~lenders~~2011 and ~~will~~September 30, ~~depend~~2012, onthe ~~market conditions and other factors~~$1.0 ~~The~~million ~~credit~~license ~~agreement~~fee ~~permits~~is ~~the Company~~recorded ~~to enter into cash management and hedging agreements with the lenders.~~

On March 6, 2012, the Company entered into the First Amendment to its Revolving Credit Agreement. The amendment extends the Revolving Termination Date of the agreement to June 1, 2013. On May 11, 2012, the Company entered into a subsequent amendment. This amendment eliminates the borrowing facility and provides for up to $15.0 million as security for letters of credit. All outstanding letters of credit are required to be cash collateralized at 105% of their face amount. At June 30, 2012, the Company had $10.8 million of restricted cash to collateralize primarily the outstanding letters of credit. One of the financial covenants in this revolving facility requires that the Company maintain a minimum cash balance of $40.0 million. 29

~~The outstanding~~Table ~~balance at December 31, 2011 was $38.1 million. As~~ of ~~June 30, 2012, there was no balance outstanding and there was no amount available for borrowing under the facility.~~ Contents

~~Amounts outstanding~~in ~~under~~deferred ~~the~~revenue ~~agreement~~on ~~(including~~the ~~any~~condensed ~~cash~~consolidated ~~management~~balance orsheets. ~~hedging~~Additionally, ~~agreements~~ as ~~provided in the agreement) are secured by substantially all~~ of ~~the~~September 30, ~~Company's existing and future assets~~2012, ~~except~~$0.1 million ~~intellectual~~was ~~property~~recorded ~~and certain other exceptions as set forth~~ in ~~the~~deferred ~~Agreement~~revenue ~~and~~ related ~~security~~to ~~documents.~~training services.

~~Additionally~~During December 2010, the Company ~~may~~entered ~~not~~into ~~create,~~a ~~issue,~~service ~~incur,~~agreement ~~assume~~to orprovide betechnical ~~liable~~development, indesign, ~~respect~~analysis ofand orconsultation ~~suffer~~services to ~~exist,~~the ~~any~~Joint ~~indebtedness~~Venture. Additionally, ~~except~~the ~~for~~Company ~~permitted~~entered ~~indebtedness~~into oran ~~create,~~agreement ~~incur,~~to ~~assume or~~provide ~~suffer~~sample tobattery ~~exist,~~system ~~any~~packs ~~lien~~to onthe ~~its~~Joint ~~property,~~Venture. ~~except~~For ~~for~~the ~~permitted~~three ~~liens.~~and ~~Under~~nine ~~the~~months ~~credit~~ended ~~agreement~~September 30, an2011 ~~event~~and offor ~~default would~~the ~~occur~~three ifand ~~the~~nine ~~Company~~months ~~fails~~ended toSeptember 30, ~~pay~~2012, ~~any~~the ~~obligation~~Company ~~due~~recognized or$1.9 million, ~~fail~~$3.7 million, or$4.4 million ~~neglect~~and to$5.7 million, ~~perform~~respectively, ~~keep~~of orproduct ~~observe~~and ~~any~~service ~~material~~revenue ~~term~~from ~~provision,~~the ~~condition,~~Joint ~~covenant~~Venture oron ~~agreement~~the ~~within~~condensed ~~the~~consolidated ~~credit~~statements ~~agreement~~of operations. As of December 31, 2011 and do ~~not~~September 30, or2012, ~~are~~$1.5 million ~~not~~and ~~able~~$5.5 tomillion, ~~remedy~~respectively, ~~the~~is ~~default~~included within accounts receivable, net on the ~~allowed~~condensed ~~grace~~consolidated ~~period,~~balance orsheets afor ~~material~~amounts ~~adverse~~due from the Joint Venture.

2910. Subsequent Events

~~Table~~Refer to Footnote 1 for a more detailed discussion of ~~Contents~~events that occurred after the September 30, 2012 Balance Sheet date.

~~A123 Systems, Inc.~~ 30

Table ~~Notes~~of ~~to Condensed Consolidated Financial Statements (Continued)~~ Contents

Item 82. ~~Financing~~Management’s ~~Arrangements~~Discussion ~~(Continued)~~and Analysis of Financial Condition and Results of Operations

~~change~~ The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Form 8-K filed with the Securities and Exchange Commission, or SEC, on May 30, 2012 and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our ~~business~~Annual ~~occurs~~Report on Form 10-K filed with the SEC, on March 12, 2012. ~~Upon~~This anQuarterly ~~event~~Report on Form 10-Q contains “forward-looking statements” within the meaning of ~~default~~Section 21E of the Securities Exchange Act of 1934, as amended, or the ~~financial~~Exchange ~~institution~~Act. These statements are often identified by the use of words such as “may,” ~~declare~~“expect,” ~~all~~“believe,” ~~obligations~~“anticipate,” ~~immediately~~“intend,” ~~due~~“could,” “estimate,” or “continue,” and ~~payable~~similar expressions or variations. Such forward-looking statements are subject to risks, ituncertainties ~~may~~and ~~stop~~other ~~advancing~~factors ~~money~~that could cause actual results and the timing of certain events to differ materially from future results expressed or ~~extending~~implied ~~credit~~by such forward-looking statements. Factors that could cause or itcontribute ~~may apply~~to ~~against~~such differences include, but are not limited to, those discussed in the ~~obligation~~section ~~balances~~titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and ~~deposits~~elsewhere ~~which~~in ~~the~~this ~~Company~~Quarterly ~~holds~~Report. ~~with~~The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the ~~financial~~date ~~institution~~of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, ~~among~~while ~~other~~we ~~remedies~~may ~~available~~elect to ~~the~~update ~~financial~~these ~~institution~~forward-looking ~~under~~statements at some point in the ~~terms~~future, we have no current intention of doing so except to the ~~credit agreement~~extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

~~As of June 30, 2012, the Company was in compliance with the covenants and terms of the agreements.~~ Overview

Prior 9to the sale of substantially all of our assets in January, 2013, we designed, developed, manufactured and sold advanced, rechargeable lithium-ion batteries and battery systems. ~~Related~~Our ~~Party~~target ~~Transactions~~ markets were the transportation, electric grid services, commercial and government markets.

~~Transactions~~We ~~with~~have ~~Holders~~incurred ofsignificant ~~Common~~net ~~Stock—In~~losses ~~November 2011, the Company entered into a technology license agreement, a product supply agreement~~ and ~~a stock~~negative ~~purchase~~operating ~~agreement~~cash ~~with~~flows ~~IHI~~since ~~Corporation ("IHI"), an industrial equipment manufacturer located in Japan~~inception. ~~IHI~~At ~~agreed to make a $25.0~~September ~~million equity investment in the Company's common stock under the stock purchase agreement~~30, ~~which closed on November 18~~2012, ~~2011.~~we ~~In addition, the Company~~ had ~~exclusively licensed, for~~ an ~~initial~~accumulated ~~term~~deficit of 10$939.4 ~~years,~~million ~~its~~including ~~advanced battery system technology and systems integration know-how to manufacture battery systems and modules for the transportation market in Japan for~~ a ~~one-time non-refundable license fee of~~ $7290.5 million. ~~During the license term, the Company will also receive royalty payments based on a percentage of IHI's~~ net ~~sales~~losses ~~of products~~incurred ~~that use or embody the licensed technology and know-how, minus the cost of battery cells purchased by IHI from the company~~ for ~~use with such products. The Company will be~~ the ~~exclusive~~ ~~supplier~~nine ofmonths ~~lithium~~ended ~~ion battery cells to IHI under a product supply agreement for the battery systems and modules that IHI produces. As of December~~September ~~31, 2011 and June~~ 30, 2012~~, the~~. ~~balance~~We ~~due~~had of $131.~~6 million~~3 ~~and $1.1~~ million, ~~respectively,~~in iscash ~~included within accounts receivable, net on the condensed consolidated balance sheets. As of December 31, 2011~~ and ~~June 30,~~cash ~~2012,~~equivalents ~~the~~at ~~deferred revenue balance related to the technology license fee was $7.5~~September ~~million and $7.1 million, respectively. During the three and six months ended June~~ 30, 2012, ~~amortization~~down offrom ~~the license fee resulted in the recognition of~~ $0186.29 million ~~and~~at ~~$0.4~~December ~~million of revenue from IHI~~31, ~~respectively~~2011. In January 2012, the Company entered into a value added reseller agreement and a professional services agreement with IHI. As of June 30, 2012, the Company recorded $0.2 million of deferred revenue related to the professional services agreement.

~~Transactions~~On ~~with~~October 16, ~~Joint~~2012, ~~Venture~~we ~~Partner's~~(including ~~Affiliate—In~~all ~~December~~of ~~2009,~~our ~~the~~domestic ~~Company~~subsidiaries) ~~entered~~filed ~~into~~voluntary apetitions ~~joint~~for ~~venture~~relief ~~with~~under ~~SAIC~~Chapter to11 ~~assist~~of ~~the~~Title ~~Company~~11 ~~in growing~~of ~~business~~the ~~and~~United ~~sales~~States Code in ~~China's~~the ~~transportation~~United ~~industry.~~States ~~The~~Bankruptcy ~~Company~~Court ~~entered~~for ~~into~~the ~~two~~District ~~development~~of ~~agreements~~Delaware. ~~with~~Our ~~SAIC.~~intent ~~During~~under the ~~three~~Chapter ~~and~~11 ~~six~~filing ~~months~~was ~~ended June 30~~to, ~~2011,~~among ~~the~~other ~~Company recorded~~things, ~~revenue~~obtain ~~related~~access to ~~the~~new ~~development~~financing and ~~supply~~facilitate ~~agreements~~one ~~with~~or ~~SAIC~~more ~~of $0.2 million and $0.4 million~~transactions, ~~respectively.~~including ~~There was no revenue recorded during~~ the ~~three~~sale ~~and~~of ~~six~~certain ~~months ended~~of ~~June 30,~~its ~~2012~~automotive ~~related~~business ~~to the development and supply agreements~~assets. AsWe ofcontinued ~~December 31,~~operating ~~2011~~our ~~and~~businesses ~~June 30,~~in ~~2012,~~ the ~~balance~~ordinary ~~due~~course ~~from~~as ~~SAIC~~we ~~was~~attempted ~~$0.1 million~~to ~~and~~complete ~~$40,~~the ~~000, respectively,~~sale ~~which~~of ~~is included within accounts receivable, net on~~ the ~~condensed~~automotive ~~consolidated~~assets ~~balance~~and ~~sheets.~~continued ~~There~~to ~~was~~actively nopursue ~~deferred~~strategic ~~revenue~~alternatives ~~recorded~~for asour ofother ~~December 31, 2011 and June 30, 2012~~businesses.

~~Transactions~~On November 5, 2012, we entered into an agreement with ~~Cost-Method~~Wanxiang ~~Investment—In~~regarding ~~January~~debtor ~~2010,~~in possession financing (the ~~Company~~“Wanxiang ~~entered~~DIP ~~into~~Loan aAgreement”) ~~supply~~pursuant ~~agreement~~to ~~with~~which ~~Fisker.~~Wanxiang ~~The~~provided ~~Company~~us ~~also~~with ~~holds common~~$50.0 ~~stock~~million in ~~Fisker.~~financing ~~The~~to ~~Company~~support ~~recognizes~~our ~~revenue~~continued onoperations ~~product~~during ~~shipments~~the topendency ~~Fisker,~~of ~~within~~our ~~the~~bankruptcy ~~condensed~~case. ~~consolidated~~As ~~statements~~a result of ~~operations,~~the ~~when~~execution ~~all~~of ~~revenue~~the ~~recognition~~Wanxiang ~~criteria~~DIP ~~are~~Loan ~~met.~~Agreement, ~~During~~ the ~~three~~JCI DIP Loan Agreement was terminated and ~~six~~all ~~months~~amounts ~~ended~~borrowed ~~June 30,~~from ~~2011,~~JCI were repaid.

30On December 6, 7 and 8, 2012, we conducted, pursuant to bid procedures approved by the Bankruptcy Court, an auction under Section 363 of the federal Bankruptcy Code for the sale of our assets (the “Auction”), and announced on December 9, 2012 that we had reached an agreement on the terms of an asset purchase agreement with Wanxiang through which Wanxiang would acquire substantially all of our assets for $256.6 million and an additional asset purchase agreement with Navitas Systems LLC (“Navitas”) through which Navitas would acquire our Ann Arbor Michigan-based government business, including all U.S. Military contracts, for $2.25 million (together, the “Proposed Sales”).

~~Table~~On ofDecember 11, ~~Contents~~2012, the Bankruptcy Court issued an order approving the Proposed Sales, and asset purchase agreements between us and Wanxiang (the “Wanxiang APA”) and between us and Navitas (the “Navitas APA” and together with the Wanxiang APA, the “Asset Purchase Agreements”) were executed. Under the Wanxiang APA, Wanxiang agreed to acquire our automotive, grid and commercial business assets, including technology, products, contracts and U.S. facilities in Michigan, Massachusetts and Missouri; our operations in China; and our equity interest in Shanghai Advanced Traction Battery Systems Co., our joint venture with Shanghai Automotive. The sale was subject to certain closing conditions, including approval from the Committee on Foreign Investment in the United States. Under the Navitas APA, Navitas agreed

~~A123 Systems, Inc.~~ 31

Table ~~Notes~~of ~~to Condensed Consolidated Financial Statements (Continued)~~ Contents

to 9acquire our U.S. ~~Related~~government ~~Party~~business ~~Transactions~~assets, ~~(Continued)~~including our technology, products, intellectual property and contracts, as well as the lease for our facility in Ann Arbor, Michigan. The sale was subject to certain closing conditions, including the completion of the transactions contemplated by the Wanxiang APA as well as Navitas and Wanxiang entering into certain agreements related to the provision of transition services or the license of intellectual property between the companies. As a result of Wanxiang being the successful bidder at the Auction, the JCI Asset Purchase Agreement was terminated, and on December 11, 2012, the Company paid JCI an aggregate of $5.5 million, representing a “Breakup Fee” fee of $2.5 million, as well as expenses of up to $3.0 million required to be reimbursed by us.

~~the Company~~On ~~recorded $14.3~~January ~~million~~29, ~~and $16.0 million of revenue from Fisker~~2013, ~~respectively. During~~ the ~~six~~Proposed ~~months~~Sales ~~ended~~were ~~June 30,~~closed ~~2012,~~with ~~the~~Wanxiang ~~Company~~and ~~recorded~~Navitas. We received $0258.2 6 million of ~~revenue~~ ~~from~~net ~~Fisker.~~proceeds ~~There~~in ~~was~~conjunction nowith ~~revenue~~this ~~recorded during the three months ended June 30~~sale, ~~2012.~~of Atwhich ~~December 31, 2011 and June 30, 2012, the Company has deferred~~ $450.~~4 million~~0 ~~and $2.2~~ million, ~~respectively,~~was ofused ~~service~~to ~~and~~repay ~~product~~the ~~revenue~~funds ~~related~~received tounder the ~~development~~Wanxiang ~~and~~DIP ~~supply~~financing agreement. ~~The~~executed ~~balance due from Fisker as of December~~November 315, ~~2011 and June 30,~~ 2012~~, of $3~~.~~7 million and $0.2 million, respectively, is included within accounts receivable, net on the condensed consolidated balance sheets.~~

~~Transactions~~On ~~with~~February 6, ~~Equity-Method~~2013, ~~Investment—During~~we ~~March~~filed ~~2010,~~with the ~~Company~~Bankruptcy ~~entered~~Court ~~into~~ a ~~technology~~proposed ~~license~~Joint ~~contract~~Plan toof ~~license~~Liquidation ~~certain~~(as ~~patents and technology~~may tobe ~~the~~amended, ~~Company's~~modified ~~Joint~~or ~~Venture~~supplemented ~~for~~from ~~the~~time ~~term~~to oftime, the ~~Joint~~“Proposed ~~Venture,~~Plan”) ~~which~~and ~~extends~~related todisclosure ~~April 28~~statement (as may be amended, ~~2030.~~modified Inor ~~conjunction~~supplemented ~~with~~from ~~the~~time ~~license~~to ~~agreement~~time, the ~~Joint~~“Disclosure ~~Venture~~Statement”) ~~paid~~for the ~~Company~~resolution ~~the first~~and ~~payment~~satisfaction of ~~the~~all ~~license~~Claims ~~fee~~against ofand ~~$1.0 million~~Interests in ~~July 2010~~us. ~~Revenue~~The onPlan ~~the~~provides ~~license~~for ~~fee~~the ~~will~~liquidation beof ~~amortized~~assets ~~over~~of the ~~term~~Estate, ofincluding the ~~license.~~investigation ~~Revenue~~and ~~recognition~~prosecution onof ~~the~~Estate ~~license~~Causes ~~fee~~of isAction, ~~expected~~by a Liquidation Trust to ~~commence~~ ~~upon~~be formed pursuant to the ~~successful~~proposed ~~completion~~Plan ofand ~~training~~a ~~provided~~Liquidation Trust Agreement. The Liquidation Trust is to ~~employees~~be ofmanaged ~~the~~by ~~Joint~~a ~~Venture.~~Liquidation AsTrustee ofas ~~December 31,~~well ~~2011~~as ~~and~~by ~~June 30,~~a ~~2012,~~Liquidation Trust Oversight Committee selected by the $1Official Creditors’ Committee.~~0 million~~ ~~license~~The ~~fee~~Liquidation isTrust ~~recorded in~~shall ~~deferred~~be ~~revenue~~responsible onfor ~~the~~making ~~condensed~~distributions ~~consolidated~~to ~~balance~~holders ~~sheets.~~of ~~Additionally~~claims and, if applicable, interests, as well as all other administrative tasks necessary for ultimate resolution of ~~June 30,~~the ~~2012~~Chapter 11 cases, ~~$0.1 million~~pursuant ~~was~~to ~~recorded~~the interms ~~deferred~~of ~~revenue~~the ~~related~~proposed toPlan ~~training~~and ~~services.~~the Liquidation Trust Agreement.

~~During December~~On 2010, the Company entered into a service agreement to provide technical development, design, analysis and consultation services to the Joint Venture. Additionally, the Company entered into an agreement to provide sample battery system packs to the Joint Venture. For the three and six months ended JuneMay 3020, ~~2011~~2013 ~~and for~~ the ~~three~~Proposed ~~and~~Liquidation ~~six~~Plan ~~months~~was ~~ended June 30,~~approved ~~2012,~~by the ~~Company~~Bankruptcy ~~recognized~~Court ~~$1.4 million,~~to ~~$1.8 million,~~be ~~$0.9 million~~effective ~~and~~in ~~$1.3 million, respectively, of product and service revenue from the Joint Venture on the condensed consolidated statements of operations. As of December 31, 2011 and~~ June/July ~~30, 2012, $1~~2013.~~5 million and $2.8 million, respectively, is included within accounts receivable, net on the condensed consolidated balance sheets for amounts due from the Joint Venture.~~

Financial ~~10.~~Operations ~~Subsequent Events~~ Overview

~~(a) Registered~~Results ~~Direct Offering~~ of ~~Common~~Consolidated ~~Stock and Warrants~~ Operations

~~On July 10,~~The ~~2012,~~following ~~the~~table ~~Company~~sets ~~sold~~forth anthe ~~aggregate~~results of ~~7,692,308~~our ~~shares~~operations ofas ~~the~~a ~~Company's~~percentage ~~common stock and warrants to purchase additional shares~~ of ~~such~~revenue ~~common stock~~ for aneach ~~exercise price~~ of ~~$0.001 per share to certain existing institutional investors. The Company agreed to sell~~ the ~~common~~following ~~shares at an initial negotiated purchase price of $1.30, subject to adjustment as described below.~~ periods:

Pursuant to the July 2012 Warrants, the Company issued to the institutional investors 6,662,852 additional shares of common stock in two separate issuances on July 12, 2012 and July 30, 2012 due to the decrease in the volume weighted average stock price compared to the initial purchase price of $1.30. The Company also paid $2.2 million to the institutional investors due to a limitation on the number of shares that could be settled under the warrants. The net offering proceeds to the Company from the issuance of 14,355,160 shares of common stock, after deducting the placement agent's fees and other estimated offering expenses of approximately

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2012		2011		2012
Revenue	100	%	100	%	100	%	100	%
Cost of revenue	130	%	208	%	144	%	376	%
Gross loss	–30	%	–108	%	–44	%	–276	%
Operating expenses	64	%	182	%	97	%	231	%
Operating loss	–94	%	–290	%	–141	%	–507	%
Other expense, net	–4	%	–34	%	–4	%	–36	%
Loss from operations, before tax	–98	%	–324	%	–145	%	–543	%
Provision for income taxes	1	%	0	%	1	%	1	%
Net loss	–99	%	–324	%	–146	%	–544	%

31Three Months Ended September 30, 2011 and 2012

~~Table of Contents~~Revenue

~~A123~~We ~~Systems, Inc.~~derive revenue from products sales and providing services.

~~Notes to Condensed Consolidated Financial Statements (Continued)~~ 32

Table ~~10.~~of ~~Subsequent Events (Continued)~~ Contents

$1.0 million and the cash settlement of $2.2 million on the warrants, were approximately $6.8 million.

	Three Months Ended September 30,
	2011		2012		$ Change			% Change
	(Dollars in thousands)
Revenue
Products
Transportation	$	34,450	$	17,226	$	(17,224	)	–50.0	%
Commercial	4,612		4,114		(498		)	–10.8	%
Electric grid	20,541		37		(20,504		)	–99.8	%
Total products	59,603		21,377		(38,226		)	–64.1	%
Services	4,716		4,083		(633		)	–13.4	%
Total revenue	$	64,319	$	25,460	$	(38,859	)	–60.4	%

~~(b) Memorandum~~Products ofRevenue. Products ~~Understanding~~revenue is derived from ~~Wanxiang~~the ~~Group~~sale ~~Corporation~~ of our batteries and battery systems. For the three months ended September 30, 2011 and 2012, products revenue represented 93% and 84% of our total revenue, respectively.

~~On August~~A significant portion of our revenue is generated from a limited number of customers. For the three months ended September 830, ~~2012~~2011, our two largest customers during the ~~Company~~period ~~announced~~accounted afor ~~non-binding~~approximately ~~Memorandum~~38% and 30% of ~~Understanding~~our ~~("MOU")~~total ~~with~~revenue. ~~Wanxiang~~For ~~Group~~the ~~Corporation~~three ~~("Wanxiang")~~months ended September 30, 2012, our two largest customers during the period accounted for approximately 17% and 13% of our total revenue. For the three months ended September 30, 2012, we recognized all revenue related to Q2 prismatic cell shipments from the Livonia facility as we were able to reasonably estimate that the defect rate for such shipments was less than 1%, thus allowing us to estimate our warranty obligation resulting from such battery modules and packs produced in our Livonia, Michigan facility during Q2 2012.

~~Under the~~The ~~proposed~~decrease ~~terms~~in ofsales ~~the~~to ~~MOU,~~customers ~~Wanxiang~~in ~~would provide~~ the ~~Company~~transportation ~~with~~market upfor tothe ~~$75.0 million~~three inmonths ~~initial~~ended ~~debt~~September 30, ~~financing~~2012 ~~under~~compared ato ~~Senior Secured Bridge Facility (~~the ~~"Bridge Facility")~~three ~~with~~months anended ~~initial credit extension of $25.0~~September ~~million~~30, ~~(with~~2011 ~~cash~~was ~~and~~primarily ~~collateral~~due ofto ~~letters~~the ofdecrease ~~credit)~~in ~~and $50~~demand.~~0 million~~ Sales to becustomers ~~funded~~in ~~after~~ the ~~satisfaction~~commercial ofmarket ~~certain~~decreased ~~closing~~slightly ~~conditions.~~for ~~Upon~~the ~~satisfaction of~~three ~~certain~~months ~~closing~~ended ~~conditions~~September 30, ~~Wanxiang~~2012 ~~would~~compared ~~purchase~~to ~~$200.0 million~~the ~~aggregate~~three ~~principal~~months ~~amount~~ended ofSeptember 30, ~~8.00%~~2011 ~~Senior~~primarily ~~Secured~~due ~~Convertible~~to ~~Notes~~variations ofin ~~the~~demand ~~Company~~from ~~(the~~existing "8customers.~~00%~~ ~~Convertible Notes").~~ The ~~agreement~~ ~~would~~amount ~~also~~of ~~include~~change ~~the~~in ~~potential~~sales ~~for Wanxiang~~ to ~~invest~~customers upin tothe anelectric ~~additional~~grid ~~$175.0 million~~market iffor itthe ~~exercises~~three ~~warrants~~months toended ~~purchase~~September 30, ~~common~~2012 ~~stock~~compared ofto the ~~Company~~three ~~that~~months ~~would~~ended beSeptember 30, ~~issued~~2011 ~~in connection~~was ~~with~~primarily ~~the~~due ~~Bridge~~to ~~Facility (~~the ~~"Bridge~~timing ~~Warrants")~~of ~~and~~installation inof ~~connection with~~ the ~~8.00% Convertible~~grid ~~Notes~~products, ~~(the~~and ~~"Convertible~~treatment ~~Note~~of ~~Warrants"~~newly ~~and~~executed ~~together~~contracts ~~with~~under the ~~"Bridge~~completed ~~Warrants,"~~contract ~~the "Warrants")~~method ~~for~~due ~~cash.~~to ~~Incurrence~~lack of ~~the~~a ~~remaining~~reliable ~~$50.0 million~~cost ofestimate ~~loans~~for ~~under~~such ~~the~~agreements. ~~Bridge~~Most ~~Facility~~of ~~would~~our beelectric ~~subject~~grid toproducts ~~the~~involve ~~satisfaction~~project-based ofcontracts ~~certain~~with ~~approvals~~multiple ~~and~~elements ~~conditions,~~in ~~including,~~which ~~without limitation~~there ~~approval~~could ~~from~~be ~~the~~separate ~~Committee~~units of ~~Foreign~~accounting ~~Investments~~within in the ~~United~~arrangement ~~States~~if ~~(or~~sufficient ~~"CFIUS")~~evidence ~~and~~of ~~Chinese~~separability ~~regulators~~is presented. ~~Issuance~~When ofsufficient ~~the~~evidence ~~Convertible~~of ~~Notes~~separability ~~and~~is ~~the~~unobtainable, ~~related~~we ~~warrants~~account ~~would~~for ~~also~~such beagreements ~~subject to~~on ~~additional~~a ~~conditions,~~completed ~~including,~~contract ~~without~~method. ~~limitation~~The ~~approval~~timing ~~from~~of ~~the~~when ~~Company's~~we ~~shareholders,~~complete ~~termination of~~ the ~~Hart-Scott-Rodino~~required ~~waiting~~deliverables ~~period,~~for the ~~conversion~~units ~~or redemption~~ of ~~all of~~accounting ~~the~~and ~~Company's~~when ~~outstanding~~all ~~2013~~other ~~Senior~~revenue ~~Notes~~recognition ~~and~~criteria ~~the~~are ~~repurchase~~met ormay ~~retirement~~cause ofsome atvariability ~~least~~in ~~90 percent~~timing of ~~the~~revenue ~~Company's 2016 Notes~~recognition.

~~According to~~Services ~~the~~Revenue. Services ~~proposed~~revenue ~~terms of the MOU, if the entire amount of the initial debt financing~~ is ~~provided~~primarily toderived ~~the~~from ~~Company~~contracts ~~and~~awarded ~~the~~by ~~full amount of~~ the ~~Warrants and 8~~U.~~00%~~S. ~~Convertible~~federal ~~Notes are issued and exercised for cash~~government, ~~Wanxiang's~~other ~~total~~government ~~capital~~agencies ~~investment in the Company from these agreements would be approximately $450.0 million. The total amount of shares of the Company's common stock issuable upon exercise~~ and ~~conversion~~commercial ~~of the Warrants and 8~~customers.~~00%~~ ~~Convertible~~These ~~Notes~~activities ~~would~~range ~~represent~~from ~~approximately~~pure ~~80%~~research, ofin ~~the~~which ~~then~~we ~~outstanding~~investigate ~~common~~design ~~stock~~techniques ofon ~~the~~new ~~Company.~~battery ~~The~~technologies ~~MOU~~at ~~is non-binding and~~ the ~~execution~~request of ~~definitive~~a ~~documentation~~government isagency ~~subject~~or tocommercial ~~negotiation and~~customer, ~~among~~to ~~other~~custom ~~items,~~development ~~the~~projects ~~amendment~~in ofwhich ~~agreements~~we ~~with certain of the Company's existing lenders. The Company and Wanxiang~~ are ~~currently~~paid ~~negotiating definitive documentation and intend~~ to ~~close~~enhance ~~the~~or ~~full~~modify ~~transaction~~an byexisting ~~the~~product ~~end of 2012. The Company cannot provide any assurance, however, that definitive documentation will be executed,~~ or, ifdevelop ita isnew ~~executed,~~product ~~that the conditions~~ to ~~funding~~meet ~~the~~a ~~full~~customer’s ~~investment will be fulfilled~~specifications.

32The decrease in services revenue was primarily related to a $1.2 million decrease in services revenue related to our government contracts that were completed or substantially completed in the prior year resulting to a decrease in government-related research and development work for the three months ended September 30, 2012. This decrease was partially offset by a $0.6 million increase in services revenue for the three months ended September 30, 2012 related to a new development contract with a commercial customer.

~~Table~~Cost of ~~Contents~~Revenue and Gross Loss

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

	Three Months Ended September 30,
	2011			2012			$ Change			% Change
	(Dollars in thousands)
Cost of revenue
Products	$	78,014		$	43,189		$	(34,825	)	-44.6	%
Services	5,878			9,738			3,860			65.7	%
Total cost of revenue	$	83,892		$	52,927		$	(30,965	)	-36.9	%
Gross loss
Products	$	(18,411	)	$	(21,812	)	$	(3,401	)	–18.5	%
Services	(1,162		)	(5,655		)	(4,493		)	–386.7	%
Total gross loss	$	(19,573	)	$	(27,467	)	$	(7,894	)	–40.3	%

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Form 8-K filed with the Securities and Exchange Commission, or SEC, on May 30, 2012 and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the SEC, on March 12, 2012. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this Quarterly Report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.33

Table ~~Overview~~ of Contents

WeCost ~~design,~~of ~~develop~~Products Revenue. Cost of products revenue includes the cost of raw materials, ~~manufacture~~labor and ~~sell~~components ~~advanced~~that are required for the production of our products, ~~rechargeable~~as ~~lithium-ion~~well ~~batteries~~as manufacturing overhead costs (including depreciation), inventory obsolescence charges, and ~~battery~~warranty ~~systems~~costs. ~~Our~~Raw ~~target markets~~material costs, which are our most significant cost item over the ~~transportation~~past two years, ~~electric~~have ~~grid~~historically ~~services~~been stable, ~~commercial~~but these costs are subject to macroeconomic factors and ~~government~~may ~~markets~~increase in the future. We have incurred costs associated with unabsorbed manufacturing expenses prior to a factory operating at normal operating capacity.

~~Our sales~~The ~~cycles~~decrease ~~vary~~in bycost ~~product and market segment. Most~~ of ~~our~~products ~~batteries~~revenue ~~and~~for ~~battery systems typically undergo a lengthy development and qualification period prior to commercial production. We expect that~~ the ~~total~~three ~~time~~months ~~from~~ended ~~customer~~September 30, ~~introduction~~2012 towas ~~commercial~~primarily ~~production~~driven ~~will~~by ~~range up to five years depending on~~ the ~~specific~~decrease in product ~~and market served. Our long and unpredictable~~ sales, ~~cycles~~which ~~and~~reduced ~~the~~cost ~~potential large size~~ of ~~battery~~goods ~~supply~~by ~~and~~$34.2 ~~development~~million. ~~contracts~~Additionally, ~~cause~~there ~~our~~were ~~period-to-period~~increases ~~financial~~in ~~results~~costs toassociated bewith ~~susceptible~~scrap ~~to significant variability. Since most of our operating~~ and ~~capital~~payroll related expenses ~~are incurred up-front based on the anticipated timing~~ of ~~estimated~~$4.2 ~~design~~million ~~wins~~ and ~~customer~~$1.0 ~~orders~~million, ~~the~~respectively, ~~loss~~which ~~or delay~~were ofoffset ~~any~~by ~~such orders could have~~ a ~~material~~decrease ~~adverse effect on our results of operations for any particular period. The variability~~ in ~~our~~manufacturing ~~period-to-period~~supplies ~~results will also be driven by likely period-to-period variations in product mix and by the seasonality experienced by some~~ of ~~the end markets into which we sell our products~~$1.7 ~~In the electric grid market~~million, ~~revenue recognition is volatile due to the timing of deployment, delivery,~~ and ~~commissioning.~~a Asdecrease ~~such, the timing~~ of ~~these~~unabsorbed ~~events~~overhead ~~will~~cost ~~significantly affect the comparison~~ of ~~period-to-period~~ ~~revenues~~$4.1 million.

~~We have~~Cost ~~experienced~~of ~~significant~~Services ~~losses since inception, as we have continued to invest to fund our growth, as well as the recent significant losses, in our business~~Revenues. Cost ~~In particular, we have invested in product development and sales and marketing in order to meet product requirements~~ of ~~our~~services ~~target markets and to secure design wins that are expected to lead to strong~~ revenue ~~growth and~~includes ~~in general and administrative overhead to develop~~ the ~~infrastructure~~direct tolabor ~~support~~costs ~~the business. We have also invested in the expansion~~ of ~~our~~engineering ~~manufacturing~~resources ~~capacity~~committed to ~~meet~~funded ~~anticipated~~service ~~demand~~contracts, ~~and our~~as ~~battery~~well ~~systems~~as ~~capabilities~~third-party toconsulting, ~~provide~~and ~~battery~~associated ~~systems~~direct ~~solutions~~material toand ~~our~~equipment ~~customers~~costs. ~~In order to improve our financial performance~~Additionally, we ~~must~~include ~~increase~~overhead ~~revenue~~expenses ~~and~~such ~~diversify~~as ~~our~~occupancy ~~revenue~~costs ~~across~~associated with the ~~markets~~ ~~that~~project weresources, ~~serve.~~engineering ~~Our~~tools ~~revenue~~and ~~growth~~supplies and ~~revenue~~program ~~diversification~~management ~~will depend on our ability to win new business~~ expense.

33The increase in costs of services revenue for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 is due to a significant loss incurred under a service agreement.

~~Table~~Products ofGross ~~Contents~~Loss. We experienced a products gross loss during the three months ended September 30, 2012, primarily due to the decreased operating levels in our manufacturing facilities, as well as other charges noted above.

~~and meet~~Services ~~customer~~Gross ~~demand~~Loss. Services asgross ~~well~~loss asincreased ~~our~~in ~~customers'~~the ~~abilities~~three months ended September 30, 2012 as compared to ~~achieve~~the ~~their~~three ~~sales~~months ~~plans~~ended ~~and~~September 30, ~~business~~2011 ~~objectives.~~due ~~Higher~~to ~~revenue~~the ~~will~~timing ~~increase~~of ~~gross~~project ~~margin~~milestones, asloss ~~higher~~incurred ~~production~~on ~~volumes~~a ~~will~~contract ~~provide for~~and ~~increased~~the ~~absorption~~mix of ~~manufacturing~~current ~~overhead~~contracts. ~~and~~We ~~will~~recognize ~~reduce~~services project costs as incurred and, onfor aprograms ~~percentage~~which ~~basis~~include milestones, we recognize services revenue upon the ~~costs~~completion ~~associated~~of ~~with~~project ~~our~~milestones ~~production~~when ~~capacity~~collectability is reasonably assured. As such, our services gross loss or profit fluctuates period over period based on the timing of milestones.

~~We have~~Operating incurred significant net losses and negative operating cash flows since inception. At June 30, 2012, we had an accumulated deficit of $856.9 million, including a $207.9 million net losses incurred for the six months ended June 30, 2012. We had $47.7 million in cash and cash equivalents at June 30, 2012, down from $186.9 million at December 31, 2011. Expenses

~~On March 26,~~Operating ~~2012,~~expenses weconsist ~~launched~~of aresearch, ~~field~~development ~~campaign to replace battery modules~~ and ~~packs that may contain defective prismatic cells produced at our Livonia~~engineering, ~~Michigan~~sales ~~manufacturing facility.~~and ~~The cost of this field campaign is estimated at $51.6 million. In addition~~marketing, wegeneral ~~recorded an inventory charge of approximately $15.2 million related to inventory produced at our Michigan facilities that may be defective. As a result of this field campaign~~ and ~~the~~administrative ~~charge for existing prismatic cell inventory, we have begun to rebuild our inventory~~ and ~~manage~~production ~~our~~start-up ~~backlog~~expenses. ~~for existing~~Personnel ~~customer~~related ~~orders~~expenses ~~while~~comprise ~~simultaneously replacing~~ the ~~defective~~most ~~customer~~significant ~~modules~~component ~~and packs. As a result~~ of ~~this~~these ~~field campaign, we expect to continue to incur significant net losses and negative operating cash flows over the next several quarters~~expenses.

On May 11, 2012, we amended our revolving credit facility with our lead bank. This amendment eliminates the borrowing facility and provides for up to $15.0 million as security for letters of credit. All outstanding letters of credit are required to be cash collateralized at 105% of their face amount. At June 30, 2012, we had $10.8 million of restricted cash to collateralize primarily the outstanding letters of credit.

	Three Months Ended September 30,
	2011		2012		$ Change			% Change
	(Dollars in thousands)
Operating expenses
Research, development and engineering	$	19,181	$	18,612	$	(569	)	-3.0	%
Sales and marketing	4,515		3,753		(762		)	-16.9	%
General and administrative	16,289		14,392		(1,897		)	-11.6	%
Production start-up	1,097		—		(1,097		)	–100.0	%
Goodwill impairment loss	—		9,581		9,581			100.0	%
Total operating expenses	$	41,082	$	46,338	$	5,256		12.8	%

~~At June 30~~Research, ~~2012,~~Development weand ~~had~~Engineering ~~$47~~Expenses.~~7 million~~ Research, ofdevelopment ~~cash~~ and ~~cash~~engineering ~~equivalents.~~expenses ~~Additionally,~~consist ~~$30.0 million~~primarily of ~~cash~~expenses ~~was~~for ~~released~~personnel ~~from~~engaged ~~restricted~~in ~~cash~~the ondevelopment ~~July 6,~~of ~~2012~~new ~~as discussed~~products ~~below. Our credit facility~~ and the ~~2013~~enhancement ~~Senior~~of ~~Notes~~existing ~~(discussed~~products, ~~below)~~as ~~contain~~well aas ~~covenant~~lab ~~requiring~~materials, usquality toassurance ~~maintain~~activities anand ~~unrestricted~~facilities ~~cash~~costs ~~balance~~and ofother atrelated ~~least $40~~overhead.~~0 million.~~ ~~During~~These ~~the six~~expenses ~~months~~also ~~ended~~include ~~June 30,~~pre-production ~~2012,~~costs werelated ~~used on average $18.0 million~~ to ~~$25.0 million~~long-term ~~per~~supply ~~month~~agreements inunless ~~net~~reimbursement ~~operating~~from ~~and~~the ~~investing~~customer ~~cash~~is ~~flows~~contractually guaranteed. ~~Based~~A onportion ~~our historical use~~ of ~~cash~~research, wedevelopment ~~expect~~and ~~our cash~~engineering ~~balance~~expenses towas ~~fall~~offset ~~below~~by ~~this~~cost-sharing ~~required~~funding. ~~minimum~~Our byresearch, ~~the~~development ~~end~~and ofengineering ~~August~~expenditures ~~2012.~~are summarized as follows:

The above circumstances, along with our history and near term forecast of incurring significant net losses and negative operating cash flows, raise substantial doubt on our ability to continue as a going concern. We are considering a broad set of solutions to improve our liquidity, including measures to reduce costs and improve efficiency, accessing additional sources of capital through existing and potentially new arrangements, and other strategic options. See Subsequent Event—Memorandum of Understanding from Wanxiang Group Corporation following Liquidity and Capital Resources. In connection with this proposed transaction, we are currently in discussions with the holders of the 2013 Senior Notes and our lead bank that holds the revolving credit facility to modify the respective agreements to reduce the minimum unrestricted cash balance from $40.0 million to a lower amount. Although our intent is to improve our operating efficiencies, to obtain additional financing (as discussed below in Subsequent Event) and to modify the terms and covenants in our 2013 Senior Notes and our revolving credit facility, there is no assurance that we will be able to obtain such financing on favorable terms, if at all, or to modify the covenants, or to successfully further reduce costs in such a way that would continue to allow us to operate our business. 34

~~On January 25,~~Table ~~2012, we sold an aggregate~~ of 12,500,000 units to an institutional investor at a negotiated price of $2.034 per unit, with each unit consisting of (i) one share of our common stock ("Common Stock") and (ii) one warrant to purchase one share of Common Stock ("January 2012 Warrants"), in a registered direct offering. The net proceeds from the sale of the units, after deducting the placement agent's fees and other estimated offering expenses, was approximately $23.5 million. The Contents

	Three Months Ended September 30,
	2011			2012		$ Change			% Change
	(Dollars in thousands)
Research, development and engineering expenses
Aggregated research, development and engineering expenditures	$	22,074		$	18,612	$	(3,462	)	-15.7	%
Research, development and engineering reimbursements	(2,893		)	—		2,893			100.0	%
Research, development and engineering expenses	$	19,181		$	18,612	$	(569	)	-3.0	%

~~Table~~The decrease in research, development and engineering expenses for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was primarily attributable to a decrease of ~~Contents~~$1.4 million related to a reduction in lab supplies, a decrease of $0.7 million in professional services fees, a decrease of $0.5 million in equipment and facilities costs, a $0.3 million decrease in the cost associated with the disposition of assets, offset by an increase of $2.4 million in expenses associated with an increase in payroll. Research, development and engineering expense was 30% of revenue for the three months ended September 30, 2011, compared to 73% for the three months ended September 30, 2012.

~~January 2012~~Sales ~~Warrants~~and ~~have~~Marketing ~~an exercise price of $2~~Expenses.71 Sales ~~per share,~~ and ~~the~~marketing ~~January~~expenses ~~2012~~consist ~~Warrants~~primarily ~~are exercisable until July 28, 2014. In the event~~ of apersonnel-related ~~fundamental change~~expenses, astravel ~~defined~~and inother ~~the January 2012 Warrants, the warrant holders are entitled to a fair value settlement for the lost option value determined on a Black~~out-~~Scholes~~of-~~based~~pocket ~~calculation~~expenses ~~with~~for ~~defined~~marketing ~~assumptions within the warrant. In addition~~programs, wesuch ~~had~~as ~~the~~trade ~~right~~shows, ~~subject~~industry ~~to certain conditions~~conferences, tomarketing ~~require~~materials ~~the~~and ~~investors~~corporate ~~to purchase up to a total of 12~~communications,~~500,00~~ ~~additional shares of common stock during specified time periods in June~~ and ~~July.~~facilities Wecosts ~~did not meet the required conditions for the June put right~~ and onother ~~July 5,~~related ~~2012, we and the investor agreed to terminate the July put right~~overhead. ~~Accordingly, we did not sell any additional shares to this investor.~~

~~On May 24,~~The ~~2012,~~decrease wein ~~sold~~sales ~~$50.0 million~~and inmarketing ~~aggregate~~expenses ~~principal~~for ~~amount~~the ofthree ~~6.00%~~months ~~senior~~ended ~~convertible notes~~September 30, ~~and~~2012 ~~warrants~~compared to ~~purchase~~the ~~12,711,864~~three ~~shares~~months ofended ~~common stock~~September 30, ~~equal~~2011 ~~to 30%~~was ofprimarily ~~the~~attributable ~~number~~to ofa ~~shares~~decrease ~~underlying the 2013 Senior Notes. As~~ of ~~June 30, 2012,~~ $301.0 million ofin ~~proceeds~~payroll ~~subjected~~related toexpenses, aoffset ~~control~~by ~~account~~an ~~agreement~~increase ~~was~~in ~~recorded~~other asgeneral ~~restricted~~sales ~~cash. Such~~and ~~proceeds~~marketing ~~were~~expenses ~~released~~of ~~from~~$0.2 ~~restricted~~million. ~~cash~~Sales onand ~~July 6,~~marketing ~~2012,~~expense ~~upon~~was ~~satisfaction~~7% of ~~the~~revenue ~~conditions~~for of the ~~agreements~~three ~~with~~months ~~the~~ended ~~holders~~September 30, of2011, ~~the~~compared ~~2013 Senior Notes. Pursuant~~ to ~~the~~15% ~~agreements with~~for the ~~holders~~three ofmonths ~~such~~ended ~~notes and credit facility provider~~September 30, ~~we must maintain a minimum cash balance of $40~~2012.~~0 million.~~

~~If our~~General ~~cash~~and ~~balance~~Administrative ~~falls~~Expenses. General ~~below~~and ~~$40.0 million~~administrative expenses consist primarily of personnel-related expenses related to our executive, itlegal, ~~would~~finance, behuman ~~considered~~resource anand ~~event~~information oftechnology ~~default~~functions, ~~under~~as ~~our~~well ~~revolving~~as ~~credit~~fees ~~facility~~for professional services, and ~~the~~allocated ~~2013~~facility ~~Senior~~overhead ~~Notes~~expenses. Professional services consist principally of external legal, accounting, tax, audit and other consulting services.

~~Upon an~~The ~~event~~decrease ofin ~~default~~general ~~under~~and administrative expenses for the ~~revolving~~three ~~credit~~months ~~facility~~ended September 30, 2012 compared to the ~~bank~~three ~~could~~months ~~elect~~ended toSeptember 30, ~~declare~~2011 ~~all~~was ~~amounts~~primarily ~~outstanding~~due to bea ~~immediately~~$5.1 ~~due~~million ~~and~~charge ~~payable~~taken in 2011 associated with the settlement of litigation with Hydro-Quebec and ~~terminate~~the ~~all~~Board ~~commitments~~of ~~to extend~~Regents ~~further~~of ~~credit. If~~the weUniversity ~~are~~of ~~unable~~Texas toand ~~repay~~a ~~those~~$0.2 ~~amounts~~decrease in depreciation expense, ~~the~~partially ~~lenders~~offset ~~could~~be ~~proceed~~an ~~against~~increase ~~the~~of ~~collateral~~$3.5 million ~~granted~~in tolegal ~~them~~services toand ~~secure~~a ~~such~~$0.5 ~~indebtedness~~million increase in accounting fees. AsGeneral and administrative expense was 25% of ~~June~~revenue for the three months ended September 30, ~~2012~~2011, wecompared ~~had~~to ~~$8.6 million~~57% ~~of outstanding~~for ~~letters~~the ofthree ~~credits~~months ~~and~~ended noSeptember 30, ~~borrowings~~2012.

~~An event~~Production of default under our 2013 Senior Notes would trigger the 2013 Senior Notes' redemption rights in which the holder may require us to redeem all or any portion of the Note by delivering an event of default redemption notice to us which will include the redemption pricestart-up. Production ~~The~~start-up ~~redemption~~expenses ~~price~~consist ~~equals the greater~~ of ~~(i) the~~salaries ~~product~~and ofpersonnel-related ~~(A) the~~costs, ~~conversion~~site ~~amount~~selection ~~to be redeemed~~costs, ~~multiplied~~including bylegal ~~(B) the~~and ~~redemption~~regulatory ~~premium~~costs, ~~(125%)~~rent and ~~(ii)~~ the ~~product~~cost of ~~(A) the~~operating ~~conversion~~a ~~rate~~production inline ~~effect~~before atit ~~such~~is ~~time~~qualified asfor ~~the holder delivers an event of default redemption notice with respect to the conversion amount to be redeemed~~production, ~~multiplied~~including ~~by (B)~~ the ~~greatest~~cost ~~closing sale price~~ of ~~the~~raw ~~shares~~materials ofrun ~~our~~through ~~common stock during~~ the ~~period~~production ~~beginning~~line onduring the ~~date~~ ~~immediately~~qualification ~~preceding such event of default and ending on the date the holder delivers the event of default redemption notice~~phase. ~~We must deliver the redemption price to the holder within five business days after receiving the event of default redemption notice.~~

~~On July 10,~~The ~~2012,~~first weproduction ~~sold~~line anin ~~aggregate~~Livonia, ofMichigan ~~7,692,308~~was ~~shares~~qualified offor ~~our~~production ~~common~~in ~~stock~~December 2010. ~~and~~Our ~~warrants~~second toproduction ~~purchase~~line ~~additional~~in ~~shares~~our ofLivonia, ~~such~~Michigan ~~common~~plant ~~stock~~began ~~for~~qualification anin ~~exercise~~the ~~price~~first quarter of ~~$0.001~~2011 ~~per share~~and towas ~~certain~~completed ~~existing~~in ~~institutional~~the ~~investors~~third quarter of 2011. WeOur ~~agreed~~coating toplant ~~sell~~at ~~the~~our ~~common~~Romulus, ~~shares~~Michigan atfacility anbegan ~~initial~~qualification ~~negotiated~~in ~~purchase~~the ~~price~~first quarter of ~~$1.30,~~2011 ~~subject~~and towas ~~adjustment~~completed asin ~~described~~the ~~below.~~fourth quarter of 2011.

~~Pursuant to~~We ~~the~~did ~~July~~not ~~2012~~incur ~~Warrants,~~any weproduction ~~issued~~start-up toexpenditures during the ~~institutional~~three ~~investors~~months ~~6,662,852~~ended ~~additional shares of common stock in two separate issuances on July~~September ~~12, 2012 and July~~ 30, 2012 ~~due to the decrease in the volume weighted average stock price compared to the initial purchase price of $1~~.~~30.~~ During ~~We also paid $2.2 million to~~ the ~~institutional~~three ~~investors~~months ~~due to~~ended ~~a limitation on the number of shares that could be settled under the warrants. The net offering proceeds from the issuance of 14~~September 30,~~355,160~~ ~~shares of common stock~~2011, ~~after~~aggregate ~~deducting~~production ~~the~~start-up ~~placement agent's~~expenditures ~~fees~~were ~~and~~offset ~~other~~by ~~estimated~~reimbursements ~~offering expenses~~ of ~~approximately~~ $1.0 ~~million and the cash settlement of $2~~.~~2 million on the warrants, were approximately $6.~~8 million.

~~As part~~Goodwill ofimpairment loss. We conducted our ~~continuing~~annual ~~efforts~~goodwill totest ~~reduce~~as ~~expenses~~of September 30, 2012. The results of the first step of the impairment test indicated that goodwill was impaired as of September 30, 2012. In light of challenges in ~~February~~our industries and our declining sales during the three months ended September 30, 2012, as well as: (i) limited demand for end products that are manufactured with equipment sold by us, (ii) the liquidity challenges we ~~began~~are ~~closing~~facing, (iii) the deterioration of our ~~facility~~customers financial condition, and (iv) the sustained decline in ~~Korea~~our ~~while~~stock ~~relocating~~price and a ~~portion~~significant ofdecline in our ~~new~~financial ~~product~~outlook ~~development~~for ~~and~~the ~~advanced~~next few years, we determined that sufficient impairment indicators existed to require performance of an additional interim goodwill impairment analysis as of September 30, 2012.

Table of Contents

~~manufacturing engineering~~Based ~~teams~~on tothe ~~other~~results ~~facilities.~~of ~~Our need to align~~ our ~~manufacturing~~impairment ~~capacity~~test, ~~with near-term customer demand and our need to reduce operating expenses are~~ the ~~key factors~~implied ~~that~~fair ~~drove~~value ~~the~~of ~~decision~~goodwill towas ~~restructure.~~substantially Welower ~~expect~~than ~~to complete~~ the ~~shutdown~~carrying ofvalue ~~our Korean facility during the second half~~ of ~~2012~~goodwill. ~~During~~As ~~the~~a ~~six months ended June 30~~result, ~~2012,~~ we ~~incurred $1.3 million~~recorded ina ~~termination benefits and relocation expenses related to the shutdown of our facility in Korea, of which~~ $09.6 ~~million~~ ~~is reflected in research, development and engineering expenses, $0.4~~ million in ~~product~~goodwill ~~cost~~impairment ofcharge ~~revenue~~on ~~and $0.3~~September ~~million in general and administrative expenses in the condensed consolidated statements of operations. Additionally~~30, $32012.3 million of costs associated with the impairment of assets and lease remediation costs of $0.7 million are reflected in product cost of revenue in the condensed consolidated statements of operations.

~~The accompanying~~Other ~~condensed~~Income ~~consolidated financial statements have been prepared assuming we will continue to operate as a going concern~~(Expense), which contemplates the realization of assets and settlement of liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern. Net

Other ~~Financial~~income ~~Operations~~(expense), ~~Overview~~ net consists primarily of interest income on cash balances, interest expense on borrowings, change in fair value of derivative liabilities, foreign currency-related gains and losses, equity earnings and gain or loss on long-term investments.

Results of Consolidated Operations

	Three Months Ended September 30,
	2011			2012			$ Change			% Change
	(Dollars in thousands)
Other income (expense), net
Interest expense, net	$	(2,227	)	$	(15,585	)	$	(13,358	)	–599.8	%
Gain (loss) on foreign exchange	(98		)	419			517			–527.5	%
Gain on change in fair value of warrant derivative liability	—			25,248			25,248			100.0	%
Impairment of long-term investment	—			(5,943		)	(5,943		)	-100.0	%
Loss debt and warrant issuance and conversion	—			(12,544		)	(12,544		)	-100.0	%
Other (expense) income, net	(143		)	(220		)	(77		)	-53.8	%
Total other expense, net	$	(2,468	)	$	(8,625	)	$	(6,157	)	-249.5	%

The ~~following~~change ~~table~~in ~~sets~~interest, ~~forth~~net for the ~~results~~three months ended September 30, 2012 was primarily due to the $10.5 million increase in interest expense related to the extinguishment of ~~our~~the ~~operations~~2013 asSenior aNotes ~~percentage~~issued during the three months ended September 30, 2012, with the remaining $5.1 million consisting of ~~revenue~~interest expense for ~~each~~our ofother ~~the~~debt ~~following~~obligations. ~~periods~~The (increase in ~~thousands):~~ net foreign exchange gains for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, is due to the effect of currency exchange rate changes on transactions that are non U.S. dollar denominated and charged or credited to earnings.

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2012			2011			2012
Revenue		100	%		100	%		100	%		100	%
Cost of revenue		148	%		272	%		161	%		530	%
Gross loss		(48	)%		(172	)%		(61	)%		(430	)%
Operating expenses		97	%		218	%		135	%		276	%
Operating loss		(146	)%		(389	)%		(196	)%		(706	)%
Other income (expense), net		(7	)%		(97	)%		(4	)%		(38	)%
Loss from operations, before tax		(152	)%		(487	)%		(199	)%		(744	)%
Provision for income taxes		0	%		1	%		1	%		2	%
Net loss		(152	)%		(488	)%		(200	)%		(746	)%
Other Operating Data:
Shipments (in watt hours, or Wh) (in thousands)		42,569			16,292			56,895			26,208

The gain on the change in fair value of the derivative liabilities recognized during the three months ended September 30, 2012 relates to the decrease in fair value of $7.9 million related to the January 2012 Warrants, the decrease in fair value of $8.2 million related to the May 2012 Warrants, the decrease in fair value of $4.9 million related to the July 2012 Warrants, the decrease in fair value of $2.1 million related to the Wanxiang Warrants and the decrease in fair value of $3.6 million related to the embedded derivatives, offset by the $1.4 million decrease in fair value of the redemption feature within other current assets that was included in the August 2012 Amendment of the 2013 Senior Notes.

36During the three months ended September 30, 2012, we performed an analysis and valuation of our investment in Fisker Automotive accounted for under the cost method, resulting in an impairment charge of $6.0 million. Additionally, we incurred $12.5 million in expense relating to debt issuance and conversion costs. Other expense related to our share in the losses recognized on our Chinese joint venture accounted for under the equity method for the three months ended September 30, 2012 is consistent compared to the three months ended September 30, 2011.

~~Table~~Provision for Income Taxes. Through September 30, 2012, we incurred net losses since inception and have not recorded provisions for U.S. federal income taxes since the tax benefits of ~~Contents~~our net losses have been offset by valuation allowances.

We ~~Three~~have ~~Months~~recorded ~~Ended~~a ~~June 30,~~tax ~~2011~~provision for foreign taxes associated with our foreign subsidiaries and ~~2012~~ state income taxes where our net operating loss deductions are limited by statutes.

~~Revenue~~ 36

WeTable ~~derive~~of ~~revenue from product sales and providing services.~~ Contents

	Three Months Ended June 30,
	2011		2012		$ Change			% Change
	(Dollars in thousands)
Revenue
Product
Transportation	$	24,388	$	6,952	$	(17,436	)		(71.5	)%
Commercial		5,176		4,501		(675	)		(13.0	)%
Electric grid		—		34		34			100.0	%
Total product		29,564		11,487		(18,077	)		(61.1	)%
Services		6,789		5,498		(1,291	)		(19.0	)%
Total revenue	$	36,353	$	16,985	$	(19,368	)		(53.3	)%

Nine Months Ended September 30, 2011 and 2012

~~Product~~ Revenue. Product revenue is derived from the sale of our batteries and battery systems. For the three months ended June 30, 2011 and 2012, product revenue represented 81% and 68% of our total revenue, respectively.

A significant portion of our revenue is generated from a limited number of customers. For the three months ended June 30, 2011, our two largest customers during the period accounted for approximately 39% and 10% of our total revenue. During the three months ended June 30, 2012, our two largest customers during the period accounted for approximately 17% and 12% of our total revenue. For the three months ended June 30, 2012, we did not recognize any revenue related to prismatic cell shipments from the Livonia facility as we are not yet able to reasonably estimate our warranty obligation resulting from the battery modules and packs produced in our Livonia, Michigan facility.

	Nine Months Ended September 30,
	2011		2012		$ Change			% Change
	(Dollars in thousands)
Revenue
Products
Transportation	$	71,152	$	28,652	$	(42,500	)	–59.7	%
Commercial	12,922		11,429		(1,493		)	–11.6	%
Electric grid	20,551		83		(20,468		)	-99.6	%
Total products	104,625		40,164		(64,461		)	–61.6	%
Services	14,144		13,170		(974		)	-6.9	%
Total revenue	$	118,769	$	53,334	$	(65,435	)	–55.1	%

~~In 2012,~~Products weRevenue. The ~~expect~~decrease ~~our~~in ~~revenue~~sales ~~will~~in ~~come~~the ~~from~~transportation aindustry ~~relatively~~for ~~small~~the ~~number~~nine ofmonths ~~customers.~~ended ~~The~~September 30, ~~loss~~2012 ofcompared ~~one~~to orthe ~~more~~nine ofmonths ~~those~~ended ~~customers~~September 30, ~~could~~2011 ~~have~~was aprimarily ~~material~~due ~~adverse~~to ~~effect~~the ondecrease ~~our short-term~~in ~~revenue~~demand. WeSales ~~expect~~to customers in the ~~transportation~~commercial market ~~and~~slightly decreased for the ~~electric~~nine ~~grid~~months ~~market~~ended toSeptember 30, ~~represent~~2012 compared to the ~~largest~~nine ~~portion~~months ofended ~~our~~September 30, ~~revenue~~2011 inprimarily ~~the~~due ~~near~~to ~~and~~variations ~~long~~in ~~term.~~demand from existing customers.

The ~~decrease~~ amount of change in sales to customers in the ~~transportation~~electric grid market for the ~~three~~nine months ended ~~June~~September 30, 2012 compared to the ~~three~~nine months ended ~~June~~September 30, 2011 was primarily due to the ~~decrease~~timing inof ~~demand.~~installation ~~Additionally, revenue recognition was precluded on shipments~~ of ~~prismatic packs in relation to~~ the ~~field~~grid ~~campaign~~products, ~~launched~~and intreatment ~~March~~of ~~2012.~~newly ~~Sales~~executed tocontracts ~~customers~~under in the ~~commercial~~ ~~market~~completed ~~slightly~~contract ~~decreased~~method ~~for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 primarily~~ due to ~~variations~~lack ~~in demand from existing customers. The amount~~ of ~~change~~reliable incost ~~sales~~estimates ~~to customers in the electric grid market~~ for ~~the~~such ~~three months ended June 30, 2012 compared to the three months ended June 30, 2011 was insignificant~~agreements. Most of our electric grid products involve project-based contracts with multiple elements in which there are separate units of accounting within the arrangement if sufficient evidence of separability is present. When sufficient evidence of separability is unobtainable, we account for such arrangements on a completed contract method. The timing of when we complete the required deliverables for the units of accounting and when all other revenue recognition criteria are met may cause some variability in timing of revenue recognition. ~~We anticipate that revenue recognition in the electric grid market for future periods will continue to be volatile due to the timing of deployment, delivery and commissioning of systems.~~

Services Revenue. Services revenue isduring ~~primarily~~the ~~derived~~nine ~~from~~months ~~contracts~~ended ~~awarded~~September 30, by2012 ~~the~~decreased ~~U.S.~~slightly ~~federal~~compared ~~government,~~to ~~other~~services ~~government agencies~~revenue ~~and commercial~~during ~~customers.~~the ~~These~~nine ~~activities~~months ~~range~~ended ~~from~~September 30, 2011.

37Cost of Revenue and Gross Profit (Loss)

Table of Contents

	Nine Months Ended September 30,
	2011			2012			$ Change			% Change
	(Dollars in thousands)
Cost of revenue
Products	$	157,928		$	183,161		$	25,233		16.0	%
Services	13,422			17,628			4,206			31.3	%
Total cost of revenue	$	171,350		$	200,789		$	29,439		17.2	%
Gross loss
Products	$	(53,303	)	$	(142,997	)	$	(89,694	)	–168.3	%
Services	722			(4,458		)	(5,180		)	-717.5	%
Total gross loss	$	(52,581	)	$	(147,455	)	$	(94,874	)	–180.4	%

~~pure research,~~Cost of Products Revenue. The increase in ~~which~~cost weof ~~investigate~~products ~~design~~revenue ~~techniques~~was onprimarily ~~new~~due ~~battery~~to ~~technologies~~an atincrease ~~the~~in ~~request~~warranty expense of a$52.8 million ~~government~~and ~~agency~~$15.0 orincrease ~~commercial~~in ~~customer,~~inventory toreserve ~~custom~~and ~~development~~scrap ~~projects~~charges inprimarily ~~which~~related weto ~~are~~our ~~paid~~ field campaign to ~~enhance~~replace orprismatic ~~modify~~battery anmodules ~~existing~~and ~~product~~packs orthat ~~develop~~may acontain ~~new~~

Filing Compare · B456 SYSTEMS, INC.