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In this paper, two identical surface-mounted permanent magnet machines are analyzed, with particular reference to rotor eddy current loss, when they are back-to-back connected and used as a motor and a generator, respectively, the motor being driven by pulsewidth modulation (PWM) inverters and the generator being connected to the 3-phase resistance load. Losses in both motor and generator under three different DC supply voltages and PWM duty ratios, including the eddy current losses in sleeves and magnets, and the iron losses, are predicted using finite element analysis. Thermal fields are analyzed using analytical lumped-circuit method based on the obtained losses. Predicted temperature rises of machines are compared with measured results and good agreement is achieved. The analysis reveals that the mmf time harmonics due to nonsinusoidal phase current and PWM carrier harmonics induce significant eddy current losses in magnets and sleeve of the motor, causing very large difference in temperature rises of the motor and generator. It is also found that the difference becomes more significant with the decrease of PWM duty ratio and increased DC supply voltage.