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

                                    FORM 10-Q


[ X ]  Quarterly  Report  Pursuant  to Section 13 or 15(d) of the  Securities
     Exchange Act of 1934 for the quarterly period ended March 31, 2005

                                       or

[  ]  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: 001-16171

                            Beacon Power Corporation
             (Exact name of registrant as specified in its charter)

              Delaware                              04-3372365
  (State or other jurisdiction of               (I.R.S. Employer
   incorporation or organization)              Identification No.)


           234 Ballardvale Street
         Wilmington, Massachusetts                  01887-1032
   (Address of principal executive offices)         (Zip code)

                                 (978) 694-9121
              (Registrant's telephone number, including area code)
                            ------------------------

     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 _X_ No ___

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

     The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of May 6, 2005 was 43,665,143.

<PAGE>
<TABLE>
<CAPTION>

                    BEACON POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                                Table of Contents

                                                                                                      Page

PART I.  Financial Information

     Item 1.  Financial Statements.

<S>                                                                                                <C>
         Consolidated Balance Sheets at March 31, 2005 (unaudited) and December 31, 2004 (audited)    1

         Unaudited Consolidated Statements of Operations for the three months ended
             March 31, 2005 and 2004 and for the period from May 8, 1997 (date of inception) to
             March 31, 2005  ......................................................................   2

         Unaudited Consolidated Statements of Cash Flows for three months ended
           March 31, 2005 and 2004 and for the period from May 8, 1997 (date of
           inception) to March 31, 2005 ...........................................................   3

         Notes to Unaudited Consolidated Financial Statements .....................................   5-14

     Item 2.  Management's Discussion and Analysis of Consolidated Financial Condition and
           Results of Operations ..................................................................   15-27

     Item 3. Quantitative and Qualitative Disclosures about Market Risk ...........................   28

     Item 4.  Controls and Procedures .............................................................   28

PART II.  Other Information

     Item 1.  Legal Proceedings ...................................................................   29
     Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds .........................   29
     Item 3.  Defaults upon Senior Securities .....................................................   29
     Item 4.  Submission of Matters to a Vote of Security Holders .................................   29
     Item 5.  Other Information ...................................................................   29
     Item 6.  Exhibits ............................................................................   30

Signatures ........................................................................................   32

</TABLE>

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<TABLE>
<CAPTION>

                    BEACON POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                           Consolidated Balance Sheets

                                                                             March 31,       December 31,
                                                                               2005             2004
                                                                            (unaudited)       (audited)
                                                                           -------------    -------------
Assets
Current assets:
<S>                                                                       <C>              <C>
     Cash and cash equivalents ........................................   $   3,334,595    $   5,097,188
     Accounts receivable, trade, net ..................................             895           52,105
     Inventory ........................................................            --            222,593
     Unbilled costs on government contracts ...........................         416,705             --
     Prepaid expenses and other current assets ........................         599,658          817,396
                                                                           -------------    -------------
         Total current assets .........................................       4,351,853        6,189,282

Property and equipment, net ...........................................         277,316          258,647
Restricted cash .......................................................         310,011          310,011
Other assets and prepaid financing costs ..............................         354,484          327,646
                                                                           -------------    -------------
Total assets ..........................................................   $   5,293,664    $   7,085,586
                                                                           =============    =============
Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable .................................................   $     184,947    $     389,189
     Accrued compensation and benefits ................................         196,699          130,609
     Other accrued expenses ...........................................         466,196          393,569
     Accrued contract loss ............................................         320,646             --
     Restructuring reserve ............................................         976,758        1,062,644
                                                                           -------------    -------------
         Total current liabilities ....................................       2,145,246        1,976,011
                                                                           -------------    -------------
Commitments (Note 5)

Stockholders' equity:
     Preferred Stock, $.01 par value; 10,000,000 shares authorized
     no shares issued or outstanding ..................................            --               --
     Common stock, $.01 par value; 110,000,000 shares authorized;
     43,797,143 and  43,788,810 shares issued and outstanding at
     March 31, 2005 and December 31, 2004, respectively ...............         437,971          437,888
     Deferred stock compensation ......................................        (435,712)        (707,167)
     Additional paid-in-capital .......................................     134,424,216      134,411,911
     Deficit accumulated during the development stage .................    (131,178,397)    (128,933,397)
     Treasury stock, 132,000 shares at cost ...........................         (99,660)         (99,660)
                                                                           -------------    -------------
         Total stockholders' equity ...................................       3,148,418        5,109,575
                                                                           -------------    -------------
Total liabilities and stockholders' equity ............................   $   5,293,664    $   7,085,586
                                                                           =============    =============
        See notes to unaudited consolidated financial statements.
</TABLE>

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<TABLE>
<CAPTION>

                    BEACON POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                Consolidated Statements of Operations (Unaudited)

                                                                               Cumulative from
                                                                                 May 8, 1997
                                                                             (date of inception)
                                                Three months ended March 31,   through March 31,
                                                    2005              2004           2005
                                              -------------    -------------    -------------
<S>                                           <C>              <C>              <C>
Revenue ...................................   $     636,134    $      57,408    $   1,512,012
Cost of goods sold ........................         670,507           75,779        2,128,376
                                              -------------    -------------    -------------
Gross profit ..............................         (34,373)         (18,371)        (616,364)

Operating expenses:
     Selling, general and administrative ..       1,172,379        1,076,262       33,428,353
     Research and development .............         486,238        1,048,240       54,361,783
     Loss on sales and contract commitments         547,707             --            923,681
     Depreciation and amortization ........          18,191           46,587        4,156,157
     Restructuring charges ................            --               --          2,159,280
     Loss on impairment of assets .........            --               --          4,663,916
                                              -------------    -------------    -------------
           Total operating expenses .......       2,224,515        2,171,089       99,693,170
                                              -------------    -------------    -------------
Loss from operations ......................      (2,258,888)      (2,189,460)    (100,309,534)

Other income (expense):
Interest income ...........................          14,888           40,583        3,897,763
Interest expense ..........................            --               --         (1,093,703)
Gain on sale of investment ................            --               --          3,562,582
Other income (expense) ....................          (1,000)             150         (229,311)
                                              -------------    -------------    -------------
     Total other income (expense), net ....          13,888           40,733        6,137,331
                                              -------------    -------------    -------------
Net loss ..................................      (2,245,000)      (2,148,727)     (94,172,203)

Preferred stock dividends .................            --               --        (36,825,680)
Accretion of convertible preferred stock ..            --               --           (113,014)
                                              -------------    -------------    -------------
Loss to common shareholders ...............   $  (2,245,000)   $  (2,148,727)   $(131,110,897)
                                              =============    =============    =============
Loss per share, basic and diluted .........   $       (0.05)   $       (0.05)
                                              =============    =============
Weighted-average common shares outstanding       43,792,791       43,121,702
                                              =============    =============
</TABLE>
            See notes to unaudited consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>

                    BEACON POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                Consolidated Statements of Cash Flows (Unaudited)

                                                                                             Cumulative from
                                                                                               May 8, 1997
                                                                                           (date of inception)
                                                               Three months ended March 31,   through March
                                                                   2005            2004         31, 2005
                                                              ------------    ------------    ------------
Cash flows from operating activities:
<S>                                                           <C>             <C>             <C>
     Net loss .............................................   $ (2,245,000)   $ (2,148,727)   $(94,172,203)
     Adjustments to reconcile net loss to net cash used in
     operating activities:
        Depreciation and amortization .....................         18,191          46,587       4,156,158
        Loss on sale of fixed assets ......................           --              --           196,169
        Impairment of assets ..............................           --              --         4,654,213
        Restricted cash ...................................           --              --          (310,011)
        (Expenses paid) restructuring charge ..............        (85,886)        (85,886)        976,758
        Reserve for officers note .........................           --              --           102,044
        Interest expense relating to issuance of warrants .           --              --           371,000
        Non-cash charge for change in option terms ........           --              --           346,591
        Non-cash charge for settlement of lawsuit .........           --              --           303,160
        Amortization of deferred consulting expense, net ..           --              --         1,160,784
        Amortization of deferred stock compensation .......        278,010         349,401       2,268,868
        Options and warrants issued for consulting services           --              --         1,585,654
        Services and interest expense paid in preferred
        stock .............................................           --              --            11,485
        Gain on sale of investments .......................           --              --        (3,562,582)
     Changes in operating assets and liabilities:
        Accounts receivable ...............................         51,210          30,161            (895)
        Inventory .........................................        222,593        (368,102)           --
        Unbilled costs under government contracts .........       (416,705)           --          (416,705)
        Prepaid expenses and other current assets .........        217,738         178,887        (801,362)
        Accounts payable ..................................       (204,242)        217,084         184,947
        Accrued compensation and benefits .................         66,090          60,563         196,699
        Accrued interest ..................................           --              --           275,560
        Dividend receivable ...............................           --           (23,742)           --
        Accrued contract loss .............................        320,646            --           320,646
        Other accrued expenses and current liabilities ....         72,627         (81,863)        474,866
                                                              ------------    ------------    ------------
           Net cash used in operating activities ..........     (1,704,728)     (1,825,637)    (81,678,156)

Cash flows from investing activities:
     Purchase of investments ..............................           --              --        (1,190,352)
     Sale of investments ..................................           --              --         4,752,934
     Increase in other assets .............................           --              --          (412,072)
     Purchases of property and equipment ..................        (36,860)        (14,082)     (8,489,413)
     Sale of property and equipment .......................           --              --            71,240
                                                              ------------    ------------    ------------
        Net cash used in investing activities .............        (36,860)        (14,082)     (5,267,663)

Cash flows from financing activities:
     Initial public stock offering, net of expenses .......           --              --        49,341,537
     Payment of dividends .................................           --              --        (1,159,373)
     Shares issued under employee stock purchase plan .....           --              --           128,150
     Exercise of employee stock options ...................          5,833          26,700       1,442,100
     Cash paid for financing costs ........................        (26,838)           --          (354,484)
     Issuance of preferred stock ..........................           --              --        32,868,028
     Repayment of subscription receivable .................           --              --         5,000,000
     Proceeds from capital leases .........................           --              --           495,851
     Repayment of capital leases ..........................           --              --        (1,031,395)
     Proceeds from notes payable issued to investors ......           --              --         3,550,000
                                                              ------------    ------------    ------------
        Net cash (used in) provided by financing activities        (21,005)         26,700      90,280,414

(Decrease) increase in cash and cash equivalents ..........     (1,762,593)     (1,813,019)      3,334,595

Cash and cash equivalents, beginning of period ............      5,097,188       8,909,261            --
                                                              ------------    ------------    ------------
Cash and cash equivalents, end of period ..................   $  3,334,595    $  7,096,242    $  3,334,595
                                                              ============    ============    ============

Supplemental disclosure of non--cash transactions:
     Cash paid for interest ...............................   $       --      $       --      $    488,126
                                                              ============    ============    ============
     Cash paid for taxes ..................................   $       --      $      1,956    $     32,000
                                                              ============    ============    ============
     Assets acquired through capital lease ................   $       --      $       --      $    535,445
                                                              ============    ============    ============
</TABLE>
            See notes to unaudited consolidated financial statements.

<PAGE>

                   BEACON POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
              Notes to Unaudited Consolidated Financial Statements


Note 1.  Nature of Business and Operations

Nature of Business.  Beacon Power  Corporation  ("Beacon" or "the Company") is a
development  stage  company  that was  incorporated  on May 8,  1997.  Since its
inception,  Beacon Power  Corporation and its  subsidiaries  have been primarily
engaged in the  development  of flywheel  devices  for storing and  transmitting
kinetic energy.  Because the Company has not yet generated a significant  amount
of revenue from its principal  operations,  it is accounted for as a development
stage  company  under  Statement of Financial  Accounting  Standards  No. 7. The
Company has a single operating  segment,  developing  alternative power sources.
The Company's organizational structure has no divisions or subsidiaries dictated
by product lines, geography or customer type.

The Company has  experienced net losses since its inception and, as of March 31,
2005,  had an  accumulated  deficit of  approximately  $131 million and does not
expect to become  profitable or cash flow positive  until at least 2008 and must
raise  additional  funds to execute its  business  plan and  continue as a going
concern.

On April 25, 2005 a fund affiliated with Perseus,  L.L.C. committed to invest $3
million in the Company,  in exchange  for  approximately  3.5 million  shares of
common  stock,  warrants  covering up to 1.22  million  shares of common  stock,
exercisable at $1.01 per share and a two year extension of a 1,333,333  warrant,
exercisable  at $2.25 per share,  already held by Perseus.  See Note 11 for more
information.  Based on the  Company's  current  cash usage rates and  additional
expenditures  expected in support of its business plan, the Company has adequate
cash to fund operations through approximately October, 2005. The Company expects
to pursue  additional  funding as soon as  practicable  to further  support  its
continuing operations,  working capital,  flywheel prototype development and new
business development.  Expenditures under two state government contracts for the
development of a one-tenth-power  prototype of the Company's Smart Energy Matrix
have begun,  but further  expenditures  for full scale  development  and ramping
production  capabilities will not be made until additional  funding is obtained.
In the event that the  Company  elects to begin full  scale  development  of its
Smart  Energy  Matrix  systems,  the amount of equity  required  would  increase
substantially.

The Company is continuing,  on a reduced level, production of its Smart Power M5
inverter  product for solar energy  applications.  Although it is  continuing to
support the  product,  the Company  does not believe  that  inverters  will be a
significant  portion of the  Company's  business  going  forward.  The Company's
inverter  inventory  valuation was fully  reserved  during 2004 in the amount of
approximately   $1,025,000  and  a  provision  for  future   inverter   warranty
expenditures of approximately $28,000 was also recorded.

The Company designs, develops, configures and offers for sale, advanced products
and  services  to  support  more  reliable   electricity  grid  operation.   Its
sustainable  energy  storage and power  conversion  solutions  can help  provide
reliable  electric  power for the utility,  renewable  energy,  and  distributed
generation markets.  The Company's Smart Energy Matrix is a design concept for a
megawatt-level,  utility-grade flywheel-based energy storage solution that would
provide sustainable power quality services for frequency regulation, and support
the demand for  reliable,  distributed  electrical  power.  The  Company has the
following  products,  which are in  varying  stages of  development,  production
readiness or low volume production:

o    Smart Energy(TM) Matrix - A design concept for a high-power  flywheel-based
     system  combining  several  flywheels with power  electronics.  The Company
     believes the Smart Energy Matrix can provide frequency  regulation services
     for use by independent system operators and regional transmission operators
     to regulate  electrical  power.  The Company also  believes  that the Smart
     Energy  Matrix can regulate  the  frequency  of  electricity  produced by a
     distributed  generation  facility and compensate for temporary  differences
     between  the demand for  electricity  and the amount  being  produced.  The
     Company has a  preliminary  design for the Smart Energy Matrix and has been
     awarded contracts by the California State Energy Resources Conservation and
     Development  Commission  (CEC) and the New York State  Energy  Research and
     Development Authority (NYSERDA) for programs demonstrating the viability of
     the Company's flywheel based system for frequency regulation of electricity
     on the power grid. The Company has shifted virtually all of its development
     spending  towards  meeting  the  requirements  of these  two  programs.  To
     successfully provide frequency regulation,  the Company will need to obtain
     sufficient  funding to complete design of the matrix,  develop the flywheel
     components  and  power  electronics,  integrate  and  test the  matrix  and
     establish  manufacturing   capability  for  the  production  of  commercial
     products.

o    Smart Energy system - High-energy  flywheel-based  systems of 2kWh and 6kWh
     that store  electricity  for  telecommunications,  cable systems,  computer
     networks,  and Internet market  applications  have been produced in limited
     quantities and the Company has sufficient  capacity to return to production
     if market demand occurs. The Company believes that, based on existing Smart
     Energy  technology,  it could develop a higher energy 25kWh flywheel system
     for renewable  applications  if market  interest were sufficient to justify
     development.  The Company has been unable to successfully  market its Smart
     Energy 2kWh and 6kWh at commercially  acceptable  prices. At this time, the
     Company expects to use the results of its Smart Energy Matrix demonstration
     unit to assess  market  interest in its 25kWh design  product and determine
     whether there is sufficient  market demand at prices that would support the
     additional development activity required for the Company to bring this high
     energy product to market.

o    Smart  Power(TM) M5 inverter  system - An  electronic  system that converts
     direct current electricity produced by photovoltaic panels into alternating
     current  electricity for residential and commercial use. This product is in
     low volume  production  and the  Company  has  sufficient  capacity to ramp
     production if market demand  increases.  As a result of the market interest
     in the Company's  Smart Energy Matrix  design,  the Company has  redeployed
     virtually all of its research and development  effort from further inverter
     development to its Smart Energy Matrix flywheel  technologies.  As a result
     of this  change in focus and lower than  anticipated  sales  volumes of the
     Smart Power M5, the Company has also reduced its  marketing  efforts on the
     Smart  Power M5 and has  established  reserves  on its  balance  sheet  for
     inventories  and open  purchase  commitments.  Although it is continuing to
     support the product,  the Company does not believe that inverters will be a
     significant portion of the Company's business going forward.


Smart Energy Matrix

The Company has  identified  an  application  for its Smart  Energy  Matrix in a
well-established market with attractive pricing characteristics.  This market is
the sale of frequency  regulation  services for the  electrical  power grid.  In
order to maintain a constant frequency  alternating current, the power grid must
continuously  balance the supply of power  generated with the varying demand for
it. This balance is  maintained  today by  constant,  small  adjustments  in the
output of some of the  generators  operating on the grid. Not all generators can
be successfully operated with constantly varying output, but all generators that
are able to operate this way incur higher  operating costs due to increased fuel
consumption and maintenance.  Using the Company's Smart Energy Matrix, frequency
regulation  can,  for  the  first  time,  be  provided  separately  with  higher
performance  and lower  operating  costs.  The Smart Energy  Matrix is the first
product specifically designed to address this application.

Separate  from the  frequency  regulation  of the power grid  market  identified
above, the Company has identified an additional application for its Smart Energy
Matrix. That application is providing a high-power,  flywheel-based  system that
continuously  regulates the frequency of  electricity  produced by a distributed
generation facility and compensates for temporary differences between the demand
for electricity and the amount being produced. A distributed generation facility
is any  electrical  power source other than the power grid,  including  advanced
generators such as fuel cells, natural gas engines, wind turbines,  photovoltaic
arrays and microturbines  which usually supply local power to facilities such as
hospitals or manufacturing plants.

The Company has finished the preliminary designs for the Smart Energy Matrix and
believes that there is ample market  interest in the product to begin full scale
development  but  will  not  begin  significant   design  or  development  until
additional  funds have been  obtained.  Once begun,  the  development  cycle for
completion  of this  product is  expected  to be 18 to 24 months  and  achieving
significant  volume  production  capability  will take an  additional  six to 12
months.  Therefore, the Company will not generate revenues from this product for
approximately two to three years after development has commenced.

Smart Energy

The  Company  has offered for sale its Smart  Energy  flywheel  products,  which
deliver a low level of power for a long  period of time  (typically  measured in
hours).  These products  include the 2kWh and 6kWh Smart Energy  systems,  which
have  demonstrated  quality  performance and reliability at numerous sites.  The
Smart Energy  products are tailored to the  telecommunications,  cable  systems,
computer  networks,  and Internet  markets.  The Company believes that its Smart
Energy  products offer life cycle cost  advantages and  significant  performance
improvements over conventional, battery-based back-up power sources. The Company
is not actively  marketing these products and does not have orders for its Smart
Energy products or any inventory of finished products and does not have purchase
orders in place with  vendors  for  components.  In the event  that the  Company
identifies potential customers and then receives significant customer orders for
these  products,  it will need to place orders for  components  with vendors and
hire and train  manufacturing  personnel to assemble,  inspect and assist in the
installation of deliverable units.

Smart Power M5

The Smart Power M5 inverter system for the  photovoltaic  energy market converts
direct current  generated by solar cells from sunlight into alternating  current
required by residential and commercial  users for operating  electrical  devices
and reducing the amount of purchased power when it is connected to a power grid.
The Company has not been successful in selling a significant  number of units of
its Smart Power M5 and  therefore has shifted  virtually all of its  development
and sales activities from the Smart Power M5 to its flywheel based products. The
Company does not believe that  inverters  will be a  significant  portion of the
Company's business going forward and is uncertain as to when or at what price it
will be able to sell its inventories. In 2004, the Company established a reserve
for its Smart Power M5 inventory.

Revenues, Cost of Goods Sold and Operations

Revenue  Although  the  Company  has  shipped  a limited  number  of  commercial
products,  its operations  have not yet reached a level that would qualify it to
emerge from the development stage. Therefore it continues to be accounted for as
a development  stage company under Statement of Financial  Accounting  Standards
No. 7 "Accounting and Reporting by Development Stage Enterprises."

The  Company  recognizes  revenues  in  accordance  with  accounting  principles
generally  accepted in the United  States of America.  Revenues on its  flywheel
development  contracts are recognized on the percentage of completion basis. The
Company's method of revenue recognition on commercial product sales contracts is
to recognize  revenues when products are delivered to end users.  The Company is
not currently  delivering  commercial  flywheel  products.  The Company has been
awarded  contracts by the California  State Energy  Resources  Conservation  and
Development  Commission  (CEC)  and the  New  York  State  Energy  Research  and
Development Authority (NYSERDA) for programs  demonstrating the viability of the
Company's  flywheel based system for frequency  regulation of electricity on the
power grid.

NYSERDA  - On  February  10,  2005  the  Company  was  awarded  a  research  and
development  contract  from the New York State Energy  Research and  Development
Authority  (NYSERDA)  under a joint  initiative  between the U.S.  Department of
Energy  (DOE)  Energy  Storage  Research  Program and  NYSERDA,  entitled  "Grid
Frequency  Regulation  by Recycling  Energy in  Flywheels,"  to  demonstrate  an
advanced energy storage solution for frequency  regulation and grid stability in
New York State. The contract requires the Company's  flywheel based system to be
delivered and installed during the second half of 2005. The contract is expected
to cost approximately $1.4 million, of which, approximately $385,000 consists of
inventories the Company had previously expensed,  and will produce approximately
$645,000 of revenue,  nearly all of it in 2005. Under the contract,  the Company
will  demonstrate  a   one-tenth-power   prototype  of  the  Company's   planned
megawatt-level  system, known as the Smart Energy Matrix. The demonstration will
integrate the Company's  flywheels and  associated  power  electronics  into the
distribution power grid.

CEC - On  February  14,  2005  the  Company  was  awarded  a  contract  with the
California State Energy Resources  Conservation and Development Commission (CEC)
entitled  "Flywheel  Energy Storage System for Grid  Frequency  Regulation,"  to
demonstrate  a one-tenth  power  prototype  version of its Smart  Energy  Matrix
advanced  energy storage  solution for frequency  regulation and grid stability.
Under the  contract,  the Company  will  develop  and install a one-tenth  scale
prototype of the Company's  megawatt-level  system to demonstrate  the potential
benefits of using flywheel energy storage to provide frequency regulation of the
grid. A successful  demonstration  of  frequency  regulation  will also serve to
demonstrate  the  system's   technical  and  market   feasibility  in  the  grid
stabilization  market. The contract requires the Company's flywheel based system
to be delivered  and installed  during the second half of 2005.  The contract is
expected to cost approximately $1.6 million,  of which,  approximately  $140,000
consists of inventories the company had previously expensed,  and is expected to
produce approximately $1.2 million of revenue, with the majority of it in 2005.

For the Company's inverter products which are sold to distributors,  the Company
recognizes revenues based on the sales by its distributors to their customers.

The Company may enter into  contracts  to  research  and develop or  manufacture
products  with a loss  anticipated  at the date the  contract  is signed.  These
contracts  are entered into in  anticipation  that profits will be obtained from
future  contracts  for the same or similar  products.  These loss  contracts may
provide the Company with intellectual property rights that, in effect, establish
it as the sole producer of these products. Anticipated losses on these contracts
are recognized at the date the Company becomes contractually  obligated.  Future
losses on  contracts  are charged to earnings as soon as these losses are known.
Estimated costs in excess of revenues are classified  under current  liabilities
as "Accrued  contract loss." The Company  accounts for its long-term  government
contracts  using  the  percentage  of  completion  method.  Under  this  method,
percentage  of  completion is measured  principally  by the  percentage of labor
hours incurred to date for each contract to the estimated  total labor hours for
each  contract at  completion.  Costs  incurred in excess of amounts  billed are
classified as current assets under "Unbilled costs under government contracts."

Cost of goods  sold.  The  Company  costs its  products  at the lower of cost or
market.  Any cost in excess of this  measurement  is  expensed  in the period in
which it is incurred. In addition,  the Company continuously evaluates inventory
and  purchase  commitments  to insure  that  levels do not exceed  the  expected
deliveries for the next twelve months.  As the Company is in the early stages of
production,  its actual  manufacturing  costs incurred currently exceed the fair
market value of its products.  The Company provides a five-year  limited product
warranty  for its Smart Power M5 product line and accrues for  estimated  future
warranty costs in the period in which the revenue is recognized.

Operations.  The Company has  experienced net losses since its inception and, as
of March 31, 2005, had an accumulated deficit of approximately $131 million. The
Company's  business  strategy  is to continue to seek  Government  contracts  to
demonstrate the application of its flywheel technologies and identify and review
possible acquisitions or mergers of companies with complementing technologies or
markets.  The Company expects to use the results of its Government  contracts to
validate its  technologies  and expand  relationships  it is  developing to gain
market  access  for the  Company's  future  products  for the  renewable  energy
industry. The Company believes that there is sufficient market interest to begin
full-scale  development of its Smart Energy Matrix, however the Company will not
begin full-scale  development until it has obtained  additional funds. For other
contemplated flywheel-based systems the Company will continue to evaluate market
size,  growth  potential  and  competitive  advantages  that its products  could
provide and the probable market  penetration that could be achieved.  If markets
are  identified  in which the Company  believes  its flywheel  products  will be
successful,  and those  markets  express a tangible  interest  in the  Company's
products, the Company will seek to obtain additional funds to complete prototype
development  and  production  of  identified  products.  To  continue as a going
concern the Company must raise  additional  funds by October,  2005. The Company
does not expect to become  profitable  or obtain  positive  operating  cash flow
before 2008 and may not achieve positive cash flow even at that point or beyond.

Note 2.  Basis of Presentation and Summary of Significant Accounting Policies

The accompanying  unaudited consolidated financial statements have been prepared
using accounting  principles  generally accepted in the United States of America
except that certain  information and footnote  disclosure  normally  included in
consolidated financial statements prepared in accordance with generally accepted
accounting  principles  have been  condensed or omitted in this Form 10-Q. It is
suggested that these consolidated  financial statements presented herein be read
in conjunction with the Company's  consolidated  financial  statements and notes
thereto included in the Company's Annual Report on Form 10-K, for the year ended
December 31, 2004. In the opinion of the Company's management,  all adjustments,
consisting  of  normal  recurring  accruals  considered  necessary  for  a  fair
presentation,  have  been  included  in  the  accompanying  unaudited  financial
statements.  Operating results for the three months ended March 31, 2005 are not
necessarily  indicative  of the results  that may be expected  for the full year
ending December 31, 2005.

Going concern.

The accompanying  unaudited consolidated financial statements have been prepared
on a going concern basis,  which  contemplates the realization of assets and the
satisfaction  of liabilities  in the normal course of business.  The Company has
had minimal revenues and incurred losses of approximately $131 million since its
inception  and losses in the three months ending March 31, 2005 in the amount of
approximately  $2,245,000.  At March 31,  2005,  the Company  had  approximately
$3,335,000 of cash and cash equivalents on hand. These factors raise substantial
doubt  about  the  Company's  ability  to  continue  as  a  going  concern.  The
accompanying  financial  statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.

On April 25, 2005 a fund affiliated with Perseus,  L.L.C. committed to invest $3
million in the Company,  in exchange  for  approximately  3.5 million  shares of
common  stock,  warrants  covering up to 1.22  million  shares of common  stock,
exercisable at $1.01 per share and a two year extension of a warrant to purchase
1,333,333 shares of common stock,  exercisable at $2.25 per share,  already held
by Perseus.  See Note 11 "Subsequent events" for a more detailed  description of
this financing arrangement.

Based on the  Company's  current  cash usage rates and  additional  expenditures
expected in support of its business plan,  the Company's  existing cash balances
plus  the  Perseus   investment   are  adequate  to  fund   operations   through
approximately  October,  2005. The Company plans to pursue additional funding as
soon as  practicable  to further  support  its  continuing  operations,  working
capital,  flywheel prototype  development and new business  development.  In the
event  that the  Company  elects to begin full  scale  development  of its Smart
Energy Matrix systems, the amount of cash required would increase substantially.

The Company  recognizes  that its  continuation  as a going concern is dependent
upon its  ability to  generate  sufficient  cash flow to allow it to satisfy its
obligations  on a timely  basis.  The  generation  of  sufficient  cash  flow is
dependent,  in the short term,  on the  Company's  ability to obtain  additional
funding,  and in the long  term,  on the  success  of the  Company's  identified
products  to obtain a share of the target  market and the  establishment  of new
markets  in which its  technologies  could  provide  competitive  products.  The
Company  believes that the successful  achievement of these  initiatives  should
provide it with sufficient resources to meet its cash requirements. In addition,
the  Company  is  also  considering  a  number  of  other  strategic   financing
alternatives,  and has incurred substantial costs in these efforts;  however, no
assurance  can be made with  respect  to the  success  of these  efforts  or the
viability of the Company.

There have been no significant additions to or changes in accounting policies of
the Company since December 31, 2004. For a complete description of the Company's
accounting  policies,  see Note 2 to  Consolidated  Financial  Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.

Note 3. Inventory

Inventories  are  stated at the lower of cost  (first-in,  first-out  method) or
market and consist of raw materials, work in process and finished goods held for
resale. Inventory balances include the following amounts:

                                       March 31, 2005        December 31, 2004
                               -----------------------   ----------------------
Raw materials                           $          -          $     176,349
Work in progress                                   -                 46,244
Finished goods                                     -                      -
                               -----------------------   ----------------------
Inventories, net                        $          -          $     222,593
                               =======================   ======================

As of March 31, 2005, inventory of approximately $348,000 is included as part of
"Unbilled costs on government  contracts" in the Company's  consolidated balance
sheet.  Any inventories not associated with the Company's  government  contracts
were previously reserved.


Note 4.  Property and Equipment

Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>

                                                                  Estimated
                                                                   Useful       March 31,     December 31,
                                                                    Lives          2005           2004
                                                                  ----------   -----------    -----------
<S>                                                               <C>          <C>            <C>
Machinery and equipment .......................................   5 years      $   573,435    $   571,198
Service vehicles ..............................................   5 years           16,762         16,762
Furniture and fixtures ........................................   7 years          296,652        296,652
Office equipment ..............................................   3 years        1,431,184      1,396,562
Leasehold improvements ........................................   Lease term       533,352        533,352
Equipment under capital lease obligations .....................   Lease term       918,285        918,285
                                                                               -----------    -----------
     Total ....................................................                $ 3,769,670    $ 3,732,811
Less accumulated depreciation and amortization ................                 (3,492,354)    (3,474,164)
                                                                               -----------    -----------
     Property and equipment, net ..............................                $   277,316    $   258,647
                                                                               ===========    ===========
</TABLE>

Note 5.  Commitments

The Company's principal contractual obligations as of March 31, 2005 are as
follows:
<TABLE>
<CAPTION>
                                                                Cash payments due during the
                                                                   year ended December 31,
                                         Nine months ending    -----------------------------
Description of commitment                December 31, 2005          2006             2007       Thereafter          Total
-------------------------------------  ----------------------  -------------  --------------  -------------  ---------------
<S>                                                 <C>             <C>             <C>            <C>            <C>
Operating leases ....................               375,269         529,413         397,059              -        1,301,741
Non-cancelable purchase orders ......               215,295               -               -              -          215,295
                                      ----------------------   -------------  --------------  -------------  ---------------
Total commitments                                   590,564         529,413         397,059              -        1,517,036
                                      ======================   =============  ==============  =============  ===============
</TABLE>

The Company leases office and light manufacturing space under an operating lease
through  September  30, 2007.  At March 31,  2005,  the Company has provided the
lessor with an irrevocable  letter of credit with a balance of $310,011 which is
reduced  annually  during the lease term.  This letter of credit is secured by a
cash  deposit,  which  is  included  in  restricted  cash  in  the  accompanying
consolidated balance sheets.

The Company has firm non-cancelable  purchase  commitments with its suppliers to
fulfill its Smart Power M5 production  requirements  and to satisfy  contractual
obligations  for  its  research  and  development  programs  in  the  amount  of
approximately $215,295. In the fourth quarter of 2004 the Company fully reserved
all contractual obligations related to its Smart Power M5 purchase commitments.

Legal Proceedings. The Company may be subject to various legal proceedings, many
involving  routine  litigation  incidental to its  business.  The outcome of any
legal  proceeding  is not within the complete  control of the Company,  is often
difficult  to  predict  and may be  resolved  over  very long  periods  of time.
Estimating  probable losses  associated with any legal proceedings or other loss
contingencies  are  very  complex  and  require  the  analysis  of many  factors
including   assumptions   about  potential   actions  by  third  parties.   Loss
contingencies  are  recorded  as  liabilities  in  the  consolidated   financial
statements  when it is both (1)  probable  and known that a  liability  has been
incurred  and  (2)  the  amount  of the  loss is  reasonably  estimable.  If the
reasonable  estimate of the loss is a range and no amount  within the range is a
better estimate, the minimum amount of the range is recorded as a liability.  If
a loss contingency is not probable or not reasonably  estimable,  a liability is
not recorded in the consolidated financial statements.

On August 16,  2004,  Ricardo and Gladys  Farnes,  and TLER  Associates,  Ltd. a
Bahamas corporation  ("TLER"),  delivered a complaint to the Company,  naming as
defendants,   the  Company,   John  Doherty,   Richard  Lane,  and  unidentified
individuals  and  corporations.  The case was filed in  District  Court in Clark
County,  Nevada on or about  June 1, 2004,  and later was  removed to the United
States  District  Court for the  District of Nevada,  where it is  pending.  The
complaint alleges that in 2001, defendants (a) forged the signature of plaintiff
Ricardo  Farnes (a  principal  of TLER) to a document  purporting  to extend the
performance  period on a purchase  order issued by TLER to the Company,  and (b)
thereafter,   posted  on  the  internet  defamatory  and  personal   information
concerning the  plaintiffs.  The plaintiffs do not allege any specific amount of
damages,  and  instead  assert  that  damages  exceed  $10,000.  The Company has
answered the  complaint,  denying its material  allegations,  and is  vigorously
defending,  including by filing a motion for summary judgment seeking  dismissal
of all counts against the Company in the complaint. Although the outcome of this
matter cannot yet be  determined,  the Company does not expect that the ultimate
costs to  resolve  this  matter  will  have a  material  adverse  effect  on the
Company's consolidated  financial position,  results of operations or cash flows
and accordingly, no liability has been recorded.

Note 6.  Common Stock

Shareholder Rights Agreement.  In September 2002, and amended as of December 27,
2002 the Company's Board of Directors approved a Rights Agreement,  under which,
each  holder  of  common  stock on  October  7, 2002  automatically  received  a
distribution  of one  Right for each  share of common  stock  held.  Each  Right
entitles the holder to purchase 1/100th of a share of the Company's newly issued
preferred  stock for $22.50 in the event that any  person  not  approved  by the
board  of  directors  acquires  more  than  15%  (35% in the  case of one  large
shareholder  that already owned more than 15%) of the outstanding  common stock,
or in the event that the Company is acquired by another company, $22.50 worth of
the common stock of the other company at half its market value (in each case any
rights held by the acquiring person are not exercisable and become void).

Reserved  Shares.  At March 31,  2005 and  December  31,  2004,  11,593,470  and
11,601,803 shares of common stock were reserved for issuance under the Company's
stock option plan and for  outstanding  warrants,  respectively.  The  following
schedule shows warrants outstanding as of March 31, 2005:

                                                        Strike     Issued and
Warrant Class           Grant Date    Expiration Date    Price    Outstanding
--------------------- -------------- ---------------- ---------- --------------
Class E                    4/7/2000         4/7/2005     $ 1.25        510,672
Class F                   5/23/2000        5/23/2005     $ 2.25      3,222,221
Class F (extended)        5/23/2000        5/23/2007     $ 2.25      1,333,333
F Financing (Bridge)      4/21/2000        4/21/2005     $ 2.10         58,000
Consultants                8/2/2000         8/2/2005     $ 6.00         20,000
GE (CR&D)                10/24/2000       10/24/2005     $ 2.10        120,000
--------------------- -------------- ---------------- ---------- --------------
Total Warrants                                                       5,264,226
                                                                ===============

Note 7.  Related Party Transactions

Loan to Officer.  During 2001, the Company advanced approximately $565,000 to an
officer of the Company,  Mr. William  Stanton,  its former CEO and President and
currently a director of and consultant to the Company.  This advance is interest
bearing and secured by Mr.  Stanton's  holdings of Beacon  common  stock and was
provided  to him to allow the  exercise  of stock  options  and the  payment  of
related taxes. In 2004, Mr. Stanton was paid approximately $80,000 of consulting
fees by the Company,  of which,  Mr. Stanton paid the Company  $20,000 to reduce
his  outstanding  loan balance.  Through March 31, 2005,  the Company  collected
approximately  $464,000 in principal  payments on this  advance.  The balance of
this loan as of March 31, 2005 is $101,000  including  current year  interest of
approximately $1,000 and is fully reserved;  however, it has not been cancelled.
Mr. Stanton continues to serve as a director of the Company.

Perseus  Investment.  On April 25, 2005 a fund affiliated  with Perseus,  L.L.C.
committed to invest $3 million in the Company, in exchange for approximately 3.5
million shares of common stock,  warrants  covering up to 1.22 million shares of
common  stock,  exercisable  at $1.01 per share  and a two year  extension  of a
warrant to purchase  1,333,333 shares of common stock,  exercisable at $2.25 per
share,  already  held by  Perseus.  See Note 11  "Subsequent  Events" for a more
detailed description of this financing arrangement.


Note 8. Restructuring Charges

Restructuring and asset impairment charges.  The Company's initial products were
focused on the telecom  industry.  As a result of the overall economic  downturn
and in particular the significant decline in capital and maintenance spending in
telecom as well as the low price of  lead-acid  batteries,  the  Company has not
been successful in selling  products into this market.  Therefore,  in December,
2003, the Company recorded a non-cash asset impairment charge of $0.4 million in
order to reduce the carrying amount of its flywheel  related patents and patents
pending as the estimated  future cash flows  anticipated  from these assets were
substantially in doubt.  Also, in July, 2002, in an effort to reduce its monthly
cash-spending rate, the Company implemented a number of cost-cutting measures to
ensure the availability of resources  necessary to pursue its business  strategy
for a reasonable period but at a significantly lower cash expenditure rate. As a
result,  a  substantial  portion of its long-term  assets were idled,  including
machinery and equipment,  tooling,  office furniture and fixtures, and equipment
and  leasehold  improvements.  The Company  evaluated  all of its  property  and
equipment as required by Statement of  Financial  Accounting  Standards  No. 144
"Accounting  for the Impairment or Disposal of Long-Lived  Assets" and, in 2002,
incurred a  restructuring  and  impairment  charge of $6.5 million of which $4.3
million represents  impaired capital equipment and leasehold  improvements,  $.3
million relates to severance costs and $1.9 million relates to a reserve against
future lease payments and related  facility  costs.  The reserve  against future
lease  payments  is  classified  as  "Restructuring   Reserve"  in  the  current
liabilities section of the balance sheet.

A summary of the restructuring reserves is as follows:

                                               March 31,
                                  ------------------------------------
                                       2005                2004
                                  ----------------    ----------------
Beginning balance                     $ 1,062,644         $ 1,406,191
Charges for the period                          -                   -
Payments                                 (85,886)            (85,886)
                                  ----------------    ----------------
Ending balance                         $  976,758         $ 1,320,305
                                  ================    ================


Note 9.  Stock-Based Compensation

The  Company's  stock option plan  provides for the granting of stock options to
purchase up to 9,000,000  shares of the Company's  common stock.  Options may be
granted to employees,  officers,  directors and  consultants of the Company with
terms of up to 10 years.  Under the terms of the option  plan,  incentive  stock
options  ("ISOs") are to be granted at fair market value of the Company's  stock
at the date of grant, and nonqualified  stock options ("NSOs") are to be granted
at a price  determined by the Board of Directors.  ISOs and NSOs  generally vest
ratably over 36 months from the grant date and have  contractual  lives of up to
10 years.

The Company accounts for stock based employee  compensation  using the intrinsic
value  method   prescribed  in  Accounting   Principles  Board  Opinion  No.  25
(Accounting for Stock Issued to Employees) and related interpretations.  In 2002
the Company implemented FASB Statement of Financial Accounting Standards No. 148
("SFAS  148"),   "Accounting   for   Stock-Based   Compensation-Transition   and
Disclosure."  SFAS 148  amends  current  disclosure  requirements  and  requires
prominent  disclosures on both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported  results.  This  statement  is effective  for  financial
reports  containing  financial  statements for interim  periods  beginning after
December 15, 2002. SFAS 148 also provides  alternative methods of transition for
a voluntary change to fair-value based methods of accounting,  which the Company
has not adopted at this time.

Deferred  compensation  expense associated with stock awards to non-employees is
measured  using the  fair-value  method and is amortized over the vesting period
using a calculation  under FASB  Interpretation  No. 28,  "Accounting  for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans."

No  stock-based  compensation  is reflected  in net  earnings for stock  options
granted to employees as all options granted under the plan had an exercise price
equal to or greater than the market price of the underlying stock at the date of
the grant.  The  following  table  illustrates  the effect on net  earnings  and
earnings  per  share if the  Company  had  applied  the fair  value  recognition
provisions of FASB Statement No. 123 "Accounting  for Stock-Based  Compensation"
to stock-based employee compensation.


                                               Three months ended March 31,
                                                  2005            2004
                                              ------------ --------------
Net loss to common shareholders as reported   $(2,245,000)   $(2,148,727)
Pro forma compensation expense ............        82,686         92,867
                                              -----------    -----------
Net loss--pro forma .......................   $(2,327,686)   $(2,241,594)
Loss per share--as reported ...............   $     (0.05)   $     (0.05)
Loss per share--pro forma .................   $     (0.05)   $     (0.05)

Restricted Stock Units

In 2003 the  Company put into place a  long-term  incentive  plan (LTIP) for all
executives  and  employees  for 2003 and 2004.  Based on the  Company's  need to
conserve  cash and the  desire to retain its  professional  staff,  the  Company
determined  that it would be in the best interest of it, its employees,  and its
stockholders to implement a stock-based Deferred Compensation Plan.

The LTIP has  eliminated  the  previous  cash  bonus  structure  for  successful
performance and replaced it with a program whereby the Company establishes goals
that are  strategically  aligned to the Company's  performance  and,  therefore,
shareholder  value. The LTIP agreement is intended to provide employees deferred
compensation in the form of restricted stock units (or "RSUs") at no cost to the
recipient,  that can be converted into shares of Company's  common stock through
establishing and evaluating quarterly,  or in some cases yearly, targets for the
employee and,  following each quarter,  determining the number of RSUs to accrue
and to be granted in four equal  installments  in the fiscal year  following the
fiscal year with respect to which employee accrued the RSUs.  Employees have the
right to convert their RSUs into shares at any time after such grant, subject to
a quarterly vesting schedule. The Company's employees earned 738,921 and 667,151
RSUs for the fiscal years ended December 31, 2004 and 2003, respectively,  which
are not  available for exercise  until  satisfaction  of the  quarterly  vesting
period during the following  calendar  year. The grants are recorded as deferred
stock  compensation  until they are earned over the vesting  schedule,  at which
time,  the value of the RSUs will be  recorded  as  compensation  expense in the
Company's Income Statement.  Compensation  expense recorded for the three months
ending March 31 was $278,010 and $349,401 for 2005 and 2004, respectively.

Note 10.  Income Taxes

At December 31, 2004 the Company had  approximately $81 million of net operating
loss carry forwards  which begin to expire in 2012 and  additional  research and
development  tax  credits.  Valuation  allowances  have  reduced  the  potential
benefits  from  the  use of  these  carry  forwards  to  zero  as  their  future
utilization is not assured.

Under the provisions of the Internal Revenue Code, certain  substantial  changes
in the Company's ownership may limit, in the future, the amount of net operating
loss carry  forwards  which could be utilized  annually to offset future taxable
income and  income tax  liabilities.  The  amount of any  annual  limitation  is
determined  based upon the  Company's  value prior to an ownership  change.  The
Company's  agreement  to  effect  a  business   combination  with  NxtPhase  T&D
Corporation (see Note 11) may limit the value of these tax loss  carry-forwards,
but the Company has not yet made an assessment of this limitation.

Note 11.  Subsequent Events

On April 22, 2005 the Company entered into an agreement to acquire  NxtPhase T&D
Corporation  ("NxtPhase"),  a privately  held  Canadian  supplier of digital and
fiber optic products for electric power and grid  monitoring and control.  Under
terms of the agreement, the Company will acquire NxtPhase for approximately 15.7
million new common shares of the Company  (subject to adjustment as described in
the  agreement),  which will be  distributed  to  NxtPhase  stockholders.  Also,
immediately  after closing,  the Company will grant  restricted  stock units for
approximately 2.7 million new common shares of the Company's common stock to the
NxtPhase employees. As of April 22, 2005, the closing bid price of the Company's
shares as  reported  on The Nasdaq  Small Cap  Market  was $0.84 per share.  The
proposed  acquisition  is subject to  approval by the  stockholders  of both the
Company and NxtPhase,  and also requires  regulatory  approval.  This  agreement
results from  introductions  made by Perseus,  L.L.C.,  which is an affiliate of
both the Company and NxtPhase.

NxtPhase  manufactures  and  markets  optical  sensors  to measure  current  and
voltage,  protective relays and digital fault recorders - all key components for
reliable  electrical  grid  operation.   NxtPhase  sensors  are  gaining  market
acceptance  and are  protected  by a portfolio of more than 20 owned or licensed
patents.  Headquartered in Vancouver,  British Columbia,  NxtPhase has sales and
manufacturing  operations  in the U.S. and Canada.  Following  the  acquisition,
NxtPhase  will  operate as a wholly  owned  subsidiary  of the  Company and will
retain the NxtPhase brand name.

Many  of  NxtPhase's  products  are  in  the  early  stages  of  development  or
production,  and as such,  NxtPhase  does not yet have  revenues  sufficient  to
offset its cost of sales and operating costs.  NxtPhase and its predecessor have
incurred losses since their inception.

On April 25, 2005 a fund affiliated with Perseus,  L.L.C. committed to invest $3
million in the Company,  in exchange  for  approximately  3.5 million  shares of
common  stock,  warrants  covering up to 1.22  million  shares of common  stock,
exercisable at $1.01 per share and a two year extension of a warrant to purchase
1,333,333 shares of common stock,  exercisable at $2.25 per share,  already held
by Perseus.  Based on the  Company's  current  cash usage  rates and  additional
expenditures  expected in support of its business plan, the Company has adequate
cash to fund operations through approximately  October,  2005. The Company plans
to pursue  additional  funding as soon as  practicable  to further  support  its
continuing operations,  working capital,  flywheel prototype development and new
business  development.  In the event that the Company elects to begin full scale
development  of its Smart Energy  Matrix  systems,  the amount of cash  required
would increase substantially.

<PAGE>

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

Note Regarding Forward Looking Statements:

This  Quarterly  Report  on  Form  10-Q  contains   forward-looking   statements
concerning,   among  other  things,  the  Company's  expected  future  revenues,
operations  and  expenditures  and  estimates of the  potential  markets for the
Company's services.  Such statements made by the Company fall within the meaning
of the Private  Securities  Litigation Reform Act of 1995, as amended.  All such
forward-looking  statements are necessarily only estimates of future results and
the actual  results  achieved by the Company  may differ  materially  from these
projections  due to a number of factors as  discussed  in the  section  entitled
"Certain Factors Affecting Future Operating Results" of this Form 10-Q.

Critical accounting policies and estimates

The preparation of financial  statements  requires  management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures.  On an ongoing basis, management evaluates the
Company's  estimates and assumptions  including but not limited to those related
to  revenue  recognition,  asset  impairments,   inventory  valuation,  warranty
reserves, contract losses and other assets and liabilities. Management bases its
estimates  on  historical  experience  and  various  other  assumptions  that it
believes to be reasonable under the circumstances, the results of which form the
basis for making  judgments  about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

Revenue  Recognition.  Although the Company has shipped  products,  and recorded
contract  revenues,  its  operations  have not yet  reached a level  that  would
qualify it to emerge from the  development  stage.  Therefore it continues to be
accounted  for as a  development  stage  company  under  Statement  of Financial
Accounting  Standards  No. 7  "Accounting  and  Reporting by  Development  Stage
Enterprises."

The Company  recognizes  revenues,  in  accordance  with  accounting  principles
generally  accepted  in the  United  States of  America.  Generally,  revenue is
recognized  on transfer of title,  typically  when  products are shipped and all
related costs are  estimable.  For sales to  distributors,  the Company makes an
adjustment to defer revenue until they are subsequently  sold by distributors to
their customers.

Government Contract Revenue Recognized on the  Percentage-of-Completion  Method.
The Company  recognizes  contract  revenues  using the  percentage-of-completion
method,  based  primarily on contract costs incurred to date compared with total
estimated  contract costs.  Changes to total estimated  contract costs or losses
are recognized in the period in which they are determined.  Revenues  recognized
and/or  costs  incurred in excess of amounts  billed are  classified  as current
assets and  included in "Unbilled  costs on  government  contracts"  and amounts
billed to clients in excess of revenues  recognized  to date are  classified  as
current  liabilities  under  "Advance  billings on  contracts"  in the Company's
consolidated  balance  sheets.  Provisions  for contract  losses are included in
current  liabilities as "Accrued contract loss." Changes in project  performance
and  conditions,  estimated  profitability,  and final contract  settlements may
result in future revisions to construction contract costs and revenue.

Inventory  Valuation.  The Company  values its  inventory at the lower of actual
cost or the current  estimated  market  value.  It regularly  reviews  inventory
quantities  on hand and records a provision  for excess and  obsolete  inventory
based primarily on historical usage for the prior twelve month period and future
sales forecasts.  Although the Company makes every effort to ensure the accuracy
of its forecasts of future product demand, any significant unanticipated changes
in demand or technological  developments  could have a significant impact on the
value of its inventory and its reported operating results.

Warranty  Reserves.  The  Company's  warranties  require it to repair or replace
defective  products  returned to it during the applicable  warranty period at no
cost to the customer. It records an estimate for warranty-related costs based on
actual  historical return rates,  anticipated  return rates, and repair costs at
the  time of  sale.  A  significant  increase  in  product  return  rates,  or a
significant  increase  in the costs to repair  products,  could  have a material
adverse  impact on future  operating  results for the period or periods in which
such returns or additional costs materialize and thereafter.

Income  Taxes.  Deferred  tax assets and  liabilities  are  determined  based on
differences  between the financial  reporting and income tax bases of assets and
liabilities as well as net operating loss and tax credit  carryforwards  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences reverse. Deferred tax assets are reduced by a valuation allowance to
reflect the uncertainty associated with their ultimate realization.

Significant  management  judgment is required in  determining  the provision for
income  taxes,  the  deferred  tax  assets  and  liabilities  and any  valuation
allowance recorded against deferred tax assets. The valuation allowance is based
on the  Company's  estimates  of taxable  income  and the period  over which its
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or the Company adjusts these estimates in future periods it
may need to establish an  additional  valuation  allowance or reduce its current
valuation allowance which could materially impact its tax provision.

Long-Lived  Assets.  In  accordance  with  Statement  of  Financial   Accounting
Standards  No. 144  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets",  long-lived  assets to be held and used by the Company are  reviewed to
determine  whether  any  events or changes in  circumstances  indicate  that the
carrying  value  of the  asset  may not be  recoverable.  The  conditions  to be
considered include whether or not the asset is in service,  has become obsolete,
or whether external market  circumstances  indicate that the carrying amount may
not be  recoverable.  When  appropriate  the Company  recognizes  a loss for the
difference  between  the  estimated  fair  value of the asset  and the  carrying
amount.  The fair value of the asset is measured using either  available  market
prices or estimated discounted cash flows.

Overview

The Company's  initial  product  strategy was to develop high energy,  composite
flywheels  for back-up  powering of  telecommunications  applications.  With the
weakening of the  telecommunications  market,  which began in 2001,  the Company
recognized  that its  Smart  Energy  flywheel  products  as  alternative  backup
solutions  to the  telecommunications  industry  were  not on a path to  produce
meaningful  revenues.  With that recognition,  the Company initiated a series of
cost cutting  measures  throughout 2002 and 2003. The focus of these efforts was
to reduce cash usage while preserving the Company's intellectual  properties and
maintaining the integrity of its public company  requirements  while  evaluating
all potential  product  markets for the Company's  technologies  and considering
acquisitions  or mergers that could lead to  increased  shareholder  value.  The
Company has:

(i)  identified promising applications for its Smart Energy Matrix design in the
     electric utility power grid  marketplace.  In the first quarter of 2005 the
     Company was awarded development contracts by CEC and NYSERDA to demonstrate
     the  viability  of  the  Company's  flywheel   technologies  for  frequency
     regulation by grid operators.  The demonstrations will be a one-tenth-power
     prototype of the Smart Energy Matrix;

(ii) pursued  additional  development  and  design  contracts  for a variety  of
     applications  by government  agencies.  The Company has been  successful in
     obtaining  two small  contracts  and is  continuing  its  efforts to obtain
     additional research and development funding; and

(iii)entered  into an  agreement  on April  22,  2005 to  acquire  NxtPhase  T&D
     Corporation ("NxtPhase"), a privately held Canadian supplier of digital and
     fiber optic products for electric power and grid monitoring and control.

On April 25, 2005 an aggregate of $4.5 million of equity financing was committed
to the combined operations of the Company and NxtPhase by a fund affiliated with
Perseus,  L.L.C.  Included  in this  amount  is $2.9  million  in  exchange  for
approximately  3.5 million shares of common stock,  warrants covering up to 1.22
million shares of common stock,  exercisable at $1.01 per share and $0.1 million
to extend by two years  (until May 23,  2007) a  preexisting  warrant,  covering
1,333,333  shares of common stock at an exercise price of $2.25 per share.  Also
included in the Perseus  commitment is $1.5 million to fund NxtPhase  operations
during and after the acquisition by the Company.  Based on the Company's current
cash usage rates and additional expenditures expected in support of its business
plan, and the Perseus investment,  the Company has adequate cash to fund its own
operations through approximately October, 2005.

The Company has been  advised by Perseus and NxtPhase  management  that with the
above $1.5 million of additional financing, NxtPhase has sufficient cash to fund
its operations through approximately December, 2005.

The Company expects to pursue additional financing in 2005 to fund:

o        continuing as a going concern;
o        ongoing research and development of the Smart Energy Matrix;
o        completing the NxtPhase transaction;
o        working capital requirements; and
o        developing new business.

In the event that the  Company  elects to begin full  scale  development  of its
Smart  Energy  Matrix  flywheel  system,  the  amount of equity  required  would
increase substantially. The Company believes that there is ample market interest
for its Smart Energy Matrix but will not begin full scale  development  until it
obtains sufficient funding.

From  inception  through  March 31,  2005,  the Company has  incurred  losses of
approximately $131.0 million. The Company expects to continue to incur losses as
it expands its product development,  commercialization program, and expansion of
its manufacturing capabilities.

The Company  recognized an asset impairment charge in 2003 and restructuring and
asset  impairment  charges in 2002.  The  Company,  as required by  Statement of
Financial  Accounting  Standards  No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived Assets,"  periodically  evaluates all of its property and
equipment  in light of facts and  circumstances  and the outlook for future cash
flows.  As a result  of its  ongoing  evaluations,  in 2003 the  Company  took a
non-cash charge of  approximately  $0.4 million  representing  the impairment of
capitalized  costs  of  internally  developed  intellectual  property  including
various  patents  and  patents  pending  relating  to  the  Company's   flywheel
technology.  In 2002 the Company took a non-cash charge of $6.5 million of which
$4.3 million represented impaired capital equipment and leasehold  improvements,
$1.9 million  related to a reserve  against  future  lease  payments and related
facility  costs and $0.3 million  relating to  severance  costs.  These  charges
related to a substantial  portion of the Company's long-term assets being idled,
including  machinery and equipment,  tooling,  office furniture and fixtures and
leasehold improvements.  The portion of the reserve that relates to future lease
payments is classified  as  "Restructuring  reserve" in the current  liabilities
section of the balance sheet.


Results of operations:

Comparison of three months ended March 31, 2005 and 2004

                                             Three months ended March 31,
                                           2005    2004  $ Change   % Change
                                        ------- -------- --------- ----------
                                                     (in thousands)
Revenues .............................   $  636   $   57   $  579      1016%
Cost of goods sold ...................      671       76     (595)      783%
Selling, general and administrative ..    1,172    1,076      (96)        9%
Research and development .............      486    1,048      562        54%
Loss on sales and contract commitments      548     --       (548)        0%
Depreciation and amortization ........       18       47       29        62%
Interest and other income, net .......       14       41      (27)       66%


Revenues.  For the three  months  ending March 31,  2005,  the Company  recorded
revenues from its development  contracts of approximately  $620,000 and revenues
from the sale of its Smart Power M5 power conditioning  systems of approximately
$16,000..  Revenues  for the three months  ending March 31, 2004 were  generated
from sales of the Company's Smart Power M5.

During the  quarter  the Company  was  awarded  development  contracts  with the
California State Energy Resources  Conservation and Development Commission (CEC)
and the New York State Energy  Research and Development  Authority  (NYSERDA) to
demonstrate the viability of the Company's  flywheel  technologies for frequency
regulation.   The  demonstrations   will  be  conducted  using   one-tenth-power
prototypes of the  Company's  planned  megawatt-level  system known as the Smart
Energy Matrix. Under these contracts, the Company expects to develop and install
a system in both California and New York during 2005 to demonstrate the benefits
of using flywheel energy storage to provide frequency  regulation of the grid; a
service required by all grid operators.  Successful  demonstrations of frequency
regulation with CEC and NYSERDA may also demonstrate the system's  technical and
market  feasibility in other large,  important,  growing  markets related to the
North American grid.

Cost of Goods Sold.  Cost of goods sold for the three  months  ending  March 31,
2005  includes  costs  incurred to date for the Company's  flywheel  development
contracts in the amount of approximately  $617,000,  sell through adjustment and
warranty  accruals  for Smart Power M5 inverter  product  sold of  approximately
$6,000. Cost of goods sold, for the three months ending March 31, 2004, included
costs associated with the sell-through of Smart Power M5 inverters.  These costs
include materials and direct labor.

Selling,  General and Administrative Expenses. The Company's sales and marketing
expenses  consist  primarily  of  compensation  and  benefits  for its sales and
marketing  personnel and related business  development  expenses.  The Company's
general and  administrative  expenses  consist  primarily  of  compensation  and
benefits related to its corporate staff, professional fees, insurance and travel
costs.  Selling,  general  and  administrative  expenses  totaled  approximately
$1,172,000  and  $1,076,000  for the three months ended March 31, 2005 and 2004,
respectively.  The  increase of  approximately  $96,000 or 9% is  primarily  the
result  of  increases  in  the  cost  of  personnel   and  benefits  and  higher
professional fees.

Research  and  Development.  The  Company's  cost of  research  and  development
consists  primarily  of the cost of  compensation  and benefits for research and
development  and support  staff,  as well as materials  and supplies used in the
engineering  design  process.  These costs decreased for the three months ending
March 31, 2005 over the same period during 2004 due primarily to the  allocation
of resources from research and development departments to the Company's flywheel
development  contracts  presented  in  cost  of  goods  sold  in the  amount  of
approximately  $529,000.  As a result,  the Company expects its cost of research
and  development  for the  duration of these  contracts  to continue to be lower
compared to 2004.  The Company  expects  costs of  development  of its  flywheel
systems  will be more  significant  during the last  quarter  of 2005,  once its
flywheel  development  contracts  are  substantially   complete  and  it  begins
development  of a full scale  prototype  of the Smart  Energy  Matrix and it has
obtained  funding to  complete  this work.  Research  and  development  expenses
totaled  approximately  $486,000 and $1,048,000 for the three months ended March
31, 2005 and 2004,  respectively.  The  decrease of $562,000 or 54% is primarily
the result of  accounting  allocations  from  research  and  development  to its
development contracts.

Loss on Sales and Contract Commitments. The Company has established reserves for
anticipated  losses on its government  contracts with CEC and NYSERDA.  Expected
losses are approximately $548,000 ($207,000 for CEC and $341,000 for NYSERDA).
The reason for the expected losses is the Company's agreement to provide cost
sharing dollars in its original contract proposals. The Company did not accrue
such losses during 2004. The Company will re-evaluate its loss reserve and make
any necessary adjustments as appropriate.

Depreciation and  Amortization.  The Company's  depreciation and amortization is
primarily  related to depreciation on capital  expenditures and the amortization
of lease and  leasehold  costs  related  to its  facilities.  The  Company  also
amortized  the Smart Power M5  intellectual  property it acquired  from Advanced
Energy Systems in 2004.  Depreciation  and  amortization  totaled  approximately
$18,000  and  $47,000  for the  three  months  ended  March  31,  2005 and 2004,
respectively.  The decrease of $29,000 or 62% is attributable to the decrease in
the remaining net book values of the Company's assets.

Interest and Other Income/Expense,  net. The Company's  non-operating income and
expenses are primarily  attributable to interest  income  resulting from cash on
hand and accrued  dividends on the Company's  holdings in the Series A Preferred
stock of Evergreen Solar,  Inc. Interest and Other  Income/Expense,  net for the
three  months  ended  March 31,  2005 was  approximately  $14,000,  compared  to
approximately $41,000 for the same period in 2004. The decrease of approximately
$27,000 in 2005  compared to the prior year is the result of lower  interest due
to lower cash balances and lower  dividends  received since the Company sold its
Evergreen investment in 2004..


Liquidity and Capital Resources

                                          Quarter ending March 31,
                                           --------------------
                                              2005       2004
                                            -------    -------
                                               (in thousands)
Cash and cash equivalents ...............   $ 3,335    $ 7,096
Working capital .........................     2,207      7,098
Cash provided by (used in)
     Operating activities ...............    (1,705)    (1,826)
     Investing activities ...............       (37)       (14)
     Financing activities ...............       (21)        27
                                            -------    -------
Net decrease in cash and cash equivalents   $(1,763)   $(1,813)
                                            =======    =======
Current ratio ...........................       2.0        3.9
                                            =======    =======

The  Company's  cash  requirements  depend on many  factors,  including  but not
limited to  research  and  development  activities,  executing  its  development
contracts,  continued  efforts  to  commercialize  products,  facilities  costs,
general and  administrative  expenses,  and costs related to raising  additional
funding and costs related to the NxtPhase  transaction.  The Company  expects to
make significant  expenditures to fund its operations,  develop technologies and
explore  opportunities  to find  and  develop  additional  markets  to sell  its
products.  The  Company  has  taken  significant  actions  to  reduce  its  cash
expenditures  for  product  development  and  production  readiness  by reducing
headcount,  development  spending and capital  expenditures  over the past three
years.  The Company has focused its activity on market analysis in terms of size
of markets,  competitive aspects and advantages that its products could provide.
It has  continued  to do  preliminary  design  of  products  for  markets  under
consideration  for  its  flywheel  systems.  Based  on  the  Company's  rate  of
expenditure of cash and the additional  expenditures  expected in support of its
business plan, the Company will need to obtain  additional  financing by October
2005 to fund:


o        continuing as a going concern;
o        ongoing research and development primarily related to the Smart Energy
         Matrix;
o        completing the NxtPhase transaction;
o        working capital requirements; and
o        new business development,

If the Company elects to begin full scale development of its Smart Energy Matrix
flywheel systems, the amount of cash required would increase substantially.

Net  cash  used in  operating  activities  was  approximately  ($1,705,000)  and
($1,826,000)  for the three months ended March 31, 2005 and 2004,  respectively.
The primary  component to the  negative  cash flow from  operations  is from net
losses.  For the first  three  months  of 2005,  the  Company  had a net loss of
approximately  ($2,245,000).   This  included  employee  stock  compensation  of
approximately   $278,000,   facility   related  cash  payments  charged  against
restructuring   reserves  of   approximately   ($86,000)  and  depreciation  and
amortization  of  approximately   $18,000.   Changes  in  operating  assets  and
liabilities  generated  approximately  $330,000  of cash  during the first three
months of 2005.  For the first three months of 2004,  the Company had a net loss
of  approximately  ($2,149,000).  This included  employee stock  compensation of
$349,000,  facility related cash payments charged against restructuring reserves
of approximately  ($86,000),  and depreciation and amortization of approximately
$47,000.  Changes in operating  assets and liabilities  generated  approximately
$13,000 of cash during the first three months of 2004.

Net cash used in investing activities was approximately  ($37,000) and ($14,000)
for the three  months  ended  March 31,  2005 and  2004,  respectively,  for the
purchase of capital equipment.

Net cash generated/ (used) by financing  activities was approximately  ($21,000)
and $27,000 for the three  months  ended March 31, 2005 and 2004,  respectively.
For the first three months of 2005, the cash  generated by financing  activities
of approximately $6,000 related to the exercise of stock options, offset by cash
paid for financing  costs of ($27,000).  For the first three months of 2004, the
cash generated by financing  activities related to the exercise of stock options
in the amount of $27,000.

In the event that the  Company  elects to begin  full-scale  development  of its
Smart Energy Matrix flywheel systems,  the amount of cash required will increase
substantially.  The Company is not  expecting to become  profitable or cash flow
positive until at least 2008 and its ability to continue as a going concern will
depend on being able to raise  additional cash to fund  operations.  The Company
may not be able to raise  these  funds,  or if it is able to do so, it may be on
terms that are adverse to existing stockholders.

On April 25, 2005 a fund affiliated with Perseus,  L.L.C. committed to invest $3
million in the Company,  in exchange  for  approximately  3.5 million  shares of
common  stock,  warrants  covering up to 1.22  million  shares of common  stock,
exercisable at $1.01 per share and a two year  extension of 1,333,333  warrants,
exercisable at $2.25 per share, already held by Perseus. .

In addition,  Perseus is  providing  $1.5  million to fund  NxtPhase  operations
during and after the acquisition by the Company. The Company has been advised by
Perseus  and  NxtPhase  management  that  with the $1.5  million  of  additional
financing,   NxtPhase  has  sufficient  cash  to  fund  its  operations  through
approximately December, 2005.



Certain Factors Affecting Future Operating Results

The  following  factors,  as well as others  mentioned in the  Company's  Annual
Report on Form 10-K for the year ended  December  31,  2004,  could cause actual
results to differ materially from those indicated by forward-looking  statements
made in this Quarterly Report on Form 10-Q:

The Company has a history of losses and anticipates future losses.

     As shown in the unaudited  consolidated  financial statements,  the Company
     incurred significant losses from operations of approximately $2,245,000 and
     $2,149,000   for  the  three  months   ending  March  31,  2005  and  2004,
     respectively.  The Company has an  accumulated  deficit of $131 million and
     has  incurred  net losses in each year  since its  inception  in 1997.  The
     Company is unsure if or when it will become profitable. The size of its net
     losses will  depend,  in part,  on the growth rate of its  revenues and the
     level of its expenses.

     The Company expects future revenues,  if any, to come from a combination of
     the sale of services  related to its Smart Energy Matrix and sales of Smart
     Energy  Matrix  units.  The  Company has no revenues to date from its Smart
     Energy Matrix. The timing of future revenues, if any, is uncertain.

     The Company expects that it will be several years, if ever,  before it will
     recognize  significant  revenues  from the products it intends to offer and
     the  services it intends to provide.  A large  portion of its  expenses are
     fixed,  including expenses related to facilities,  equipment and personnel.
     In  addition,  the  Company  expects to spend  significant  amounts to fund
     product  development  based  on its core  technologies.  The  Company  also
     expects to incur  substantial  expenses  to  manufacture  its Smart  Energy
     Matrix product in the future. As a result,  operating expenses may increase
     significantly  over the next several years and,  consequently,  the Company
     may  need  to   generate   significant   additional   revenue   to  achieve
     profitability.  Even if the Company does achieve profitability,  it may not
     be able to sustain or increase profitability on a consistent basis.

The Company will have limited revenues in the near term. Unless it raises
additional funds to operate its business, it may not be able to continue as a
going concern, as its cash balances are sufficient to fund operations only
through approximately October, 2005.

     The Company  intends to focus on further  development  of the Smart  Energy
     Matrix to provide frequency  regulation  services and this product will not
     be available for revenues in the near-term. For the foreseeable future, the
     Company  will have  limited  revenues,  if any,  since the  Company has not
     generated  any  revenue  from the Smart  Energy  Matrix.  The  Company  has
     incurred  significant  losses  from  operations  since its  inception.  The
     Company had  approximately  $3,335,000 of cash and cash equivalents on hand
     at March 31, 2005. On April 25, 2005 a fund affiliated with Perseus, L.L.C.
     committed   to  invest  $3  million  in  the   Company,   in  exchange  for
     approximately  3.5 million shares of common stock,  warrants covering up to
     1.22 million  shares of common stock,  exercisable at $1.01 per share and a
     two year  extension  of a warrant to  purchase  1,333,333  shares of common
     stock,  exercisable at $2.25 per share,  already held by Perseus.  Based on
     the Company's current cash usage rates and additional expenditures expected
     in support of its  business  plan,  the Company has  adequate  cash to fund
     operations through approximately October, 2005.

     The  Company  will  require  substantial  funds  to  conduct  research  and
     development activities,  market its products and services, and increase its
     sales.  The  Company  anticipates  that such  funds will be  obtained  from
     external  sources  and  intends to seek  additional  equity or debt to fund
     future operations.  However, the Company's actual capital requirements will
     depend on many  factors.  If the  Company  experiences  unanticipated  cash
     requirements,  it may need to seek additional sources of funding, which may
     not be available on favorable terms, if at all. Such additional funding may
     only be available on terms that may, for example,  cause dilution to common
     stockholders,   and/or  have  liquidation  preferences  and/or  pre-emptive
     rights.  If the  Company  does not succeed in raising  additional  funds on
     acceptable terms, it may be unable to complete planned  development for its
     products and  services.  In addition,  the Company  could be forced to take
     unattractive steps, such as discontinuing product development, limiting the
     services it can offer,  reducing or foregoing  sales and marketing  efforts
     and  attractive  business   opportunities,   or  discontinuing   operations
     entirely.

     Miller Wachman, LLP, the Company's  independent auditors,  have included an
     explanatory paragraph related to a going concern uncertainty in their audit
     report on the Company's  consolidated  financial  statements for the fiscal
     year ended December 31, 2004,  which states that "the  Company's  recurring
     losses from  operations  and negative  cash flows raise  substantial  doubt
     about its ability to continue as a going concern."

     The  Company's  financial  statements  have been prepared on the basis of a
     going  concern,  which  contemplates  the  realization  of  assets  and the
     satisfaction  of liabilities in the normal course of business.  The Company
     has not made any adjustments to its financial statements as a result of the
     going  concern  uncertainty.  If the  Company  cannot  continue  as a going
     concern, it may have to liquidate its assets and may receive  significantly
     less than the values at which they are carried on its financial statements.
     Any shortfall in the proceeds from the liquidation of the Company's  assets
     would  directly  reduce the amounts  that holders of its common stock could
     receive in liquidation.

The Company's possible inability to continue as a going concern may negatively
impact the Company's ability to obtain customers.

     The uncertainty of the Company's ability to continue as a going concern may
     negatively impact the Company's  ability to successfully  attract customers
     for its products.  Even if customers find the Company's products attractive
     from a performance and price analysis,  the warranty and support activities
     that the Company's  long-life  products feature may prevent  customers from
     making  purchases in  sufficient  quantities  for the Company to be able to
     function as a going concern.

The Company's stock may be removed from The NASDAQ SmallCap Market System.

     On May 12,  2005,  the  Company's  stock  closed at $0.86 per share and had
     closed below $1.00 per share for 30  consecutive  business days. On May 13,
     2005  the  Company  received  a  letter  from  Nasdaq  dated  May 13,  2005
     indicating  that the  Company's  common stock has not met the $1.00 minimum
     bid price  requirement for continued  listing for the past 30 days and that
     the Company's  common stock is,  therefore,  subject to delisting  from the
     Nasdaq SmallCap  Market,  pursuant to Nasdaq  Marketplace  Rule 4310(c)(4).
     Therefore in accordance with  Marketplace Rule  4310(c)(8)(D),  the Company
     will be provided 180 calendar  days,  or until  November 9, 2005, to regain
     compliance or face delisting on November 9, 2005. To attain  compliance the
     Company's  common stock must close at $1.00 per share or more for a minimum
     of ten  consecutive  days before  November  9, 2005.  In the event that the
     Company's stock does not meet this requirement,  but meets the requirements
     for  inclusion on the Nasdaq  SmallCap  Market as set forth in  Marketplace
     Rule  4310(c),  the Company may be granted an  additional  180 calendar day
     period to regain  compliance.  There can be no  assurance  that the Company
     will continue to meet Nasdaq's SmallCap listing  requirements and therefore
     may no longer be eligible  for  quotation  on The NASDAQ  SmallCap  Market.
     Should  the  Company's  stock  lose its  eligibility  to be  quoted  on the
     SmallCap Market, it will seek to have its stock quoted on the OTCBB.  While
     the  Company  knows of no reason  that its stock will not be  accepted  for
     quotation on OTCBB, it cannot guarantee that  acceptance.  If the Company's
     stock is not  accepted  for listing on the OTCBB,  it will be listed on the
     pink sheets.

The Company has no history of being able to complete development of designs into
economically competitive commercially viable products

     The Company has no history of being able to complete development of designs
     into economically competitive commercially viable products. Examples of the
     Company's   challenges  in  developing  its  technologies  into  commercial
     products are the following:

     o    it may take longer than  anticipated  to develop  these  services  and
          products;
     o    as  there  are  costs   associated   with  the  development  of  these
          technically  challenging  products  the  economic  return  may  not be
          adequate to pay for these costs;
     o    the Company must ensure that warranty  expenses are kept to a minimum;
          and
     o    the Company must obtain additional financing.


The Company may fail to develop its 25kWH generation flywheel system which is a
critical requirement for the development of the Smart Energy Matrix.

     Although the Company has  successfully  developed  two high energy  systems
     (the 2kWH and 6kWH) that had similar technical challenges,  there can be no
     assurance that the Company will be able to  successfully  develop the 25kWH
     system.  The  successful  development  of the Company's new 25kWh  flywheel
     system,  which is the flywheel system that will be used in the Smart Energy
     Matrix, involves significant technological and cost challenges, including:

     o    it may take longer to develop the software and key hardware components
          such as the rim, motor, and bearing system;
     o    the  Company  is  relying  on  single-source  suppliers  to supply key
          components  to  meet  the  Company's  engineering  requirements,  cost
          objectives and development and production schedules. Specifically:
          o    the composite  rim, which has four times more volume than the rim
               in the 6kWh flywheel product;
          o    a high speed, vacuum friendly, permanent magnet, high power motor
               with  overall  dimensions  that will not  adversely  affect rotor
               dynamics; and
          o    an active  magnetic  bearing  system that supports the rotor over
               the entire speed range;
     o    the Company's  ability to develop cost  effective  designs on schedule
          for:
          o    rotor-cooling scheme to avoid overheating during operation;
          o    cost effective bearings to ensure acceptable  vibration levels at
               all speeds;
          o    touchdown  bearing system to stabilize the rotor during  abnormal
               conditions such as an earthquake.
     o    the ability to ramp up and maintain production rates;
     o    the cost of developing key components that have significant  technical
          risk;
     o    quality and cost control from key suppliers;


The Company may fail to develop the Smart Energy Matrix.

     The Company's  Smart Energy Matrix will integrate up to ten 25kWh flywheels
     into a common 40 foot shipping container. This effort will pose significant
     technological and cost challenges including:

     o    locating a contract  manufacturer  to install the  flywheels,  control
          electronics,  and  ancillary  equipment,  then perform  final test and
          deliver the Smart Energy Matrix to the end user;
     o    resolving  flywheel  vibration   transference  from  one  flywheel  to
          another;
     o    transporting the Smart Energy Matrix safely to customer locations;
     o    meeting the technical  requirements for interconnection to the utility
          grid;
     o    developing a  communication  and control  system  adequate to meet the
          performance standards of the grid managers; and
     o    designing flywheel accessibility in the Smart Energy Matrix for repair
          and reduce the cost of field service.


Although the market for frequency regulation services is large and growing the
Company has not demonstrated its ability to sell into that market.

     The  Company  believes  that the use of its  Smart  Energy  Matrix  will be
     successful  in the frequency  regulation  market.  However,  this market is
     being served by well-known utilities and independent service providers that
     use  conventional  generators and that have far greater  resources than the
     Company.  These utilities and independent  service  providers are primarily
     focused on the sale of energy and provide frequency  regulation services as
     a  secondary  source of revenue.  Companies  that are  providing  frequency
     regulation include Allegheny Energy Supply Company, Commonwealth Chesapeake
     Company,  Dominion  Virginia  Power,  Ingenco  Wholesale  Power,  NRG Power
     Marketing and Reliant Energy Services.

     Although  the Company  believes  that the products and services it plans to
     provide by using its products offer greater  effectiveness  than generators
     and could produce positive  investment  returns for the Company and perhaps
     other  independent  service  providers,  there can be no assurance that the
     Company will be able to establish  its products or services in that market.
     To date, the Company has not completed any services or product sales of the
     Smart Energy Matrix.

The Company's stockholders may be adversely affected if the Company issues debt
securities or additional equity securities to obtain financing.

     If the  Company  raises  additional  funds by issuing  debt  securities  or
     additional  equity  securities,  existing  stockholders  may  be  adversely
     affected  because new  investors  may have  superior  rights  than  current
     stockholders and current stockholders may be diluted.

If the Company is unable to increase its sales of inverter products, it may not
recover the capital that it has invested in developing these products.

     The Company has invested  considerable  capital in the  development  of its
     inverter  products,  including the Smart Power M5. To date, the Company has
     generated  limited revenue based on low volume sales of these products.  If
     the Company is unable to  increase  sales of its  inverter  products in the
     near  future,  it  may  be  forced  to  abandon  these  products,  and  may
     consequently  not be able to  recover  the full  amount of  capital  it has
     invested in developing inverter products.

The Company has limited experience manufacturing flywheel energy storage systems
on a commercial basis. In the event of significant sales, the Company will need
to develop or obtain manufacturing capacity for its products.

     Should the Company experience  significant customer demand for its products
     or services,  it will need to develop or obtain  manufacturing  capacity to
     meet quality, profitability and delivery schedules. The Company may need to
     establish   additional   manufacturing   facilities,   expand  its  current
     facilities  or expand  third-party  manufacturing.  The Company has limited
     experience in the manufacture of flywheel or inverter systems and there can
     be no  assurance  that  it  will be able  to  accomplish  these  tasks,  if
     necessary, on a timely basis to meet customer demand. The Company has taken
     actions to conserve cash including  idling its  manufacturing  capabilities
     through headcount reduction,  delaying the development of its manufacturing
     process documentation and halting capital build-out.

It is difficult to evaluate the Company and to predict its future performance
because of its short operating history and the fact that it is a development
stage company.

     The  Company is a  development  stage  entity  and has a limited  operating
     history.  Unless the Company can achieve  significant  market acceptance of
     its current or future products at volumes and with margins that allow it to
     cover its costs of  operations,  the Company may never  advance  beyond the
     start-up phase.

Because the Company depends on third-party suppliers for the development and
supply of key components for its products, it could experience disruptions in
supply that could delay or decrease its revenues.

     The Company's  business,  prospects,  results of  operations,  or financial
     condition  could  be  harmed  if  it is  unable  to  maintain  satisfactory
     relationships  with suppliers.  To accelerate  development  time and reduce
     capital investment, the Company relies on third-party suppliers for several
     key components of its systems. The Company does not have contracts with all
     of these  suppliers.  If these  suppliers  should  fail to  timely  deliver
     components that meet the Company's  quality,  quantity,  or cost standards,
     then the Company  could  experience  production  delays or cost  increases.
     Because certain key components are complex and difficult to manufacture and
     require  long  lead  times,   the  Company  may  have  difficulty   finding
     alternative suppliers on a timely or cost effective basis. As a result, the
     Company  could  experience  shortages  in  supply  or be  unable to be cost
     competitive in the markets it is pursuing.

The Company's financial performance could be adversely affected by its need to
hire and retain key sales personnel.

     The Company's  ability to meet its business plan may be adversely  affected
     if the Company cannot attract and retain sales  personnel.  Competition for
     skilled  sales people is intense and the Company may not be  successful  in
     attracting and retaining the sales talent  necessary to develop markets and
     achieve sufficient sales volume to operate profitably.

The Company's financial performance could be adversely affected if it is unable
to retain key executive officers.

     Because  the  Company's  future  success  depends to a large  degree on the
     management   provided   by   the   executive   officers,    the   Company's
     competitiveness  will depend significantly on whether it can retain members
     of its executive  team. The Company has employment  agreements with Messrs.
     Spiezio, Vice President of Finance, Chief Financial Officer,  Treasurer and
     Secretary; and Lazarewicz,  Vice President and Chief Technical Officer. The
     employment  agreement  between the Company and Mr. Capp, CEO and President,
     expired on December 31, 2004. Negotiations between Mr. Capp and the Company
     are ongoing.  There can be no assurance  that an agreement  will be reached
     with Mr. Capp.

     The Company's  ability to effectively  implement its business plan depends,
     to a significant  extent, on its ability to retain its executive  officers.
     There can be no assurance  that the Company will be successful in retaining
     its other executive officers.

     If the Company cannot reach  agreement with Mr. Capp and he elects to leave
     the Company,  pursuant to the terms of the expired employment agreement, if
     he ceases to be an employee  the Company is  obligated to pay him a monthly
     amount until December 31, 2005, equal to the sum of one-twelfth of his base
     salary at the time of expiration plus one-twelfth of his bonus for the most
     recent fiscal year. No monthly payment is required after December 31, 2005.
     If the  at-will  employment  continues  after  December  31,  2005 but then
     terminates,  no such monthly  amount will be paid. As of December 31, 2004,
     Mr.  Capp's base  salary was  $240,000  annually.  Based on the closing bid
     price of the Company's  common stock as of December 31, 2004 as reported on
     The NASDAQ  SmallCap  Market,  Mr.  Capp  received a bonus in the amount of
     $236,800,  paid in the form of a grant of 251,391  restricted  stock units,
     pursuant to the Company's  Second Amended and Restated 1998 Stock Incentive
     Plan.

The Company's financial performance could be adversely affected by its need to
retain and attract technical personnel.

     The  Company's  future  success  depends to a large degree on the technical
     skills  of its  engineering  staff and its  ability  to  attract  technical
     personnel.  Competition for skilled technical  professionals is intense and
     the Company may not be successful  in  attracting  and retaining the talent
     necessary to design, develop and manufacture its flywheel products.

Failure to protect the Company's intellectual property could impair its
competitive position.

     The  Company  cannot  provide  assurance  that  it has or  will  be able to
     maintain a significant  proprietary position on the basic technologies used
     in its  flywheel  systems.  The  Company's  ability to compete  effectively
     against alternative technologies will be affected by its ability to protect
     proprietary technology,  systems designs and manufacturing  processes.  The
     Company  does  not  know  whether  any  of its  pending  or  future  patent
     applications  under  which it has  rights  will  issue,  or, in the case of
     patents  issued or to be  issued,  that the claims  allowed  are or will be
     sufficiently  broad to protect the Company's  technology or processes  from
     competitors.  Even if all the Company's patent  applications are issued and
     are sufficiently broad, they may be challenged or invalidated.  The Company
     could  incur   substantial   costs  in  prosecuting  or  defending   patent
     infringement  suits,  and such suits would divert funds and resources  that
     could be used in the Company's business.  The Company does not know whether
     it  has  been  or  will  be  completely   successful  in  safeguarding  and
     maintaining its proprietary rights.

     Further, the Company's  competitors or others may independently  develop or
     patent  technologies  or processes  that are  substantially  equivalent  or
     superior to those of the Company.  If the Company is found to be infringing
     on third-party  patents,  the Company does not know whether it will be able
     to obtain  licenses to use such  patents on  acceptable  terms,  if at all.
     Failure to obtain needed  licenses could delay or prevent the  development,
     manufacture or sale of the Company's systems.

     The Company  relies,  in part, on  contractual  provisions to protect trade
     secrets and proprietary  knowledge.  These agreements may be breached,  and
     the Company may not have  adequate  remedies for any breach.  The Company's
     trade secrets may also be known without breach of such agreements or may be
     independently  developed by competitors or others. The Company's  inability
     to maintain the  proprietary  nature of its technology and processes  could
     allow   competitors  or  others  to  limit  or  eliminate  any  competitive
     advantages the Company may have.

The share prices of companies in the Company's sector have been highly volatile
and the Company's share price could be subject to extreme price fluctuations.

     The markets for equity securities of high technology  companies,  including
     companies in the power  reliability  and power quality  markets,  have been
     highly volatile recently and the market price of the Company's common stock
     has been, and may continue to be, subject to significant fluctuations. This
     could be in response to operating  results,  announcements of technological
     innovations or new products by the Company,  or its competitors,  patent or
     proprietary rights developments, energy blackouts and market conditions for
     high  technology  stocks in general.  In addition,  stock markets in recent
     years have  experienced  extreme price and volume  fluctuations  that often
     have been  unrelated or  disproportionate  to the operating  performance of
     individual  companies.  These  market  fluctuations,  as  well  as  general
     economic conditions, may adversely affect the market price of the Company's
     common stock,  which could affect its ability to attract additional capital
     to fund operations.

There may be other technologies under development that could prevent the Company
from achieving or sustaining its ability to sell products or services or to do
so at prices that will yield profits.

     There  are  a  number  of  technology   companies  in  various   stages  of
     development, there may be emerging technologies that the Company is unaware
     of and there may be combinations of technologies in the future. The Company
     cannot give  assurance  that some or all of its target markets for the sale
     of  product  or  services   will  not  be  displaced   by  these   emerging
     technologies.

The Company may invest cash in other companies in its sector to increase
shareholder value through strategic alliances or return on investment which do
not create gains and therefore reduce shareholder value.

     Given  the  Company's  financial   position,   its  ability  to  make  cash
     investments in other  companies is very limited at this time.  However,  in
     the future, the Company may make cash investments in other companies in its
     sector to gain strategic  alliances,  channels to market or appreciation in
     stock value.  These investments may not increase  shareholder  value. Given
     the  volatility  of share  prices for  companies  in this  sector,  general
     economic conditions and market fluctuations in general, the market price of
     investments may decrease and reduce shareholder value.

Product liability claims against the Company could result in substantial
expenses and negative publicity that could impair successful marketing of
products.

     The Company's  business  exposes it to potential  product  liability claims
     that   are   inherent   in  the   manufacture,   marketing   and   sale  of
     electro-mechanical  products, and as such, the Company may face substantial
     liability for damages  resulting  from the faulty design or  manufacture of
     products or  improper  use of  products  by end users.  The Company  cannot
     provide  assurance  that  its  product  liability  insurance  will  provide
     sufficient  coverage  in the event of a claim.  Also,  the  Company  cannot
     predict  whether it will be able to maintain  such  coverage on  acceptable
     terms,  if at all, or that a product  liability  claim would not materially
     adversely  affect its  business,  financial  condition  or the price of its
     common stock. In addition, negative publicity in connection with the faulty
     design or manufacture of the Company's  products would adversely affect its
     ability to market and sell its products.

Safety failures by the Company's flywheel products or those of its competitors
could reduce market demand or acceptance for flywheel services or products in
general.

     A serious accident involving either the Company's flywheels or competitors'
     similar products could be a significant  deterrent to market acceptance and
     adversely  affect  the  Company's  financial  performance.   There  is  the
     possibility of accident with any form of energy storage. In particular,  if
     a metal  flywheel  fails and the stored  energy is  released,  the flywheel
     could  break apart into  fragments  that could be ejected at a high rate of
     speed.  However, the Company's flywheels are based on a composite design so
     that in the event of a failure,  its  flywheel  will fail in a more  benign
     manner.

The Company has signed an Agreement to acquire NxtPhase which may cost more or
take longer to complete than expected, or not produce the revenues and cash flow
expected which may increase the Company's cash usage and thereforer increase the
Company's need for additional cash to sustain its operations

     The Company has agreed to acquire  NxtPhase and the costs  associated  with
     completing  the  transaction  may be greater than  expected and the time to
     complete  the  transaction  may be extended or the  transaction  may not be
     approved  by  NxtPhase   stockholders,   the  Company's   stockholders   or
     regualtors.  Further  if the  acquisition  is  completed  NxtPhase  may not
     achieve the revenues and cash flow  projections  that the Company  expects.
     These  factors  could  shorten the period of time that the  Company's  cash
     balances will be sufficient to fund  operations.  There can be no assurance
     that this acquisition will be perceived as positive by potential  investors
     and  therefore  investments  necessary  to  sustain  operations  may not be
     realized.

The Company may make acquisitions or mergers which may cost more or take longer
to complete than expected, or not produce the revenues and cash flow expected
which may increase the Company's cash usage and thereforer increase the
Company's need for additional cash to sustain its operations

     The Company has may make  acquisitions or mergers and the costs  associated
     with completing these transaction may be greater than expected and the time
     to complete the transactions may be extended or the transactions may not be
     approved by stockholders  or regulators.  Further if acquisition or mergers
     are completed  revenues and cash flow  projections that the Company expects
     may not be achieved.  These  factors  could shorten the period of time that
     the Company's  cash balances will be sufficient to fund  operations.  There
     can be no  assurance  that  acquisition  or mergers  will be  perceived  as
     positive  by  investors  and  therefore  investments  necessary  to sustain
     operations may not be realized.

The Company has limited experience in acquisitions and mergers and may not be
successful in identifying appropriate acquisitions or mergers or be unsuccessful
in integrating these entities.

     The Company and its  management  have  limited  experience  in  evaluating,
     integrating  and  coordinating  the  acquisition or merger of companies and
     therefore may not be successful in this effort.

Any weaknesses identified in the Company's internal controls as part of the
evaluation being undertaken by the Company and its independent public accountant
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse
effect on the Company's business.

     Section  404 of the  Sarbanes-Oxley  Act of 2002  requires  that  companies
     evaluate and report on their  systems of internal  control  over  financial
     reporting.   In  addition,  the  independent  accountants  must  report  on
     management's  evaluation.  The Company is in the process of documenting and
     testing its system of internal control over financial  reporting to provide
     the basis for its  report.  At this  time,  the  Company  is aware that its
     financial  reporting  information  systems  and  point-of-sale  information
     systems  require a  significant  level of  manual  controls  to ensure  the
     accurate  reporting of its results of operations  and  financial  position.
     Upon the completion of its review,  certain  deficiencies may be discovered
     that  will  require   remediation.   This   remediation   may  require  the
     implementation of certain  information  systems operating  protocols and/or
     additional  manual  controls,  the  costs of which  could  have a  material
     adverse effect on the Company's  business,  financial condition and results
     of operations.  Due to the ongoing  evaluation and testing of The Company's
     internal  controls,  there  can  be no  assurance  that  there  may  not be
     significant  deficiencies or material  weaknesses that would be required to
     be reported.  In addition,  the Company expects the evaluation  process and
     any required remediation, if applicable, to increase its accounting,  legal
     and  other  costs  and  divert  management  resources  from  core  business
     operations.

Ongoing compliance with the Sarbanes-Oxley Act of 2002 may require additional
personnel or systems changes.

     The Company's business plan may not have sufficient resources identified to
     insure ongoing  compliance with the  Sarbanes-Oxley  Act of 2002. Given the
     limited size of the Company and its cash  position the Company may not have
     sufficient  resources  to satisfy the  segregation  of duties  required for
     compliance  with  Section  404 of the  Sarbanes-Oxley  Act of 2002 or to be
     compliant the Company may need to obtain  additional  funding and cash flow
     positive timing may need to be extended.

Government regulation may impair the Company's ability to market its products.

     Government  regulation of the Company's  products,  whether at the federal,
     state or local  level,  including  any change in  regulations,  on tariffs,
     product buy downs or tax rebates  relating to purchase and  installation of
     its products,  may increase the cost and price of its systems, and may have
     a negative impact on the Company's revenue and  profitability.  The Company
     cannot provide  assurance that its products will not be subject to existing
     or future  federal and state  regulations  governing  traditional  electric
     utilities  and other  regulated  entities.  The  Company  expects  that its
     products and their installation will be subject to oversight and regulation
     at the local level in accordance with state and local  ordinances  relating
     to building codes,  safety and related  matters.  The Company does not know
     the extent to which any existing or new  regulations may impact its ability
     to  distribute,  install  and  service  its  products.  Once the  Company's
     products  reach  the  commercialization  stage,  federal,  state  or  local
     government entities may seek to impose regulations.

Terrorist attacks have contributed to economic instability in the United States;
continued terrorist attacks, war or other civil disturbances could lead to
further economic instability and depress the Company's stock price.

     On  September  11,  2001,  the United  States  was the target of  terrorist
     attacks of unprecedented  scope.  These attacks have caused  instability in
     the global  financial  markets,  and have  contributed to volatility in the
     stock  prices of  United  States  publicly  traded  companies,  such as The
     Company.  These attacks may lead to armed hostilities or to further acts of
     terrorism and civil  disturbances in the United States or elsewhere,  which
     may further  contribute  to economic  instability  in the United States and
     could have a material adverse effect on the Company's  business,  financial
     condition and operating results.

<PAGE>
Item 3.  Quantitative and Qualitative Disclosure about Market Risk

The Company's cash equivalents and investments,  all of which have maturities of
less than one year,  may expose the  Company  to  interest  rate risk but not to
market risk of  principal.  At March 31,  2005,  the  Company had  approximately
$60,000 of cash  equivalents  that were held in non-interest  bearing  accounts.
Also  at  March  31,  2005,  the  Company  had  approximately  $540,000  of cash
equivalents that were held in interest bearing checking  accounts and $2,734,000
invested in  interest-bearing  money market  accounts.  A 10% change in interest
rates  would  change  the  investment  income  realized  on an  annual  basis by
approximately $3,000.

Item 4.  Controls and Procedures

The Company's management,  with the participation of its Chief Executive Officer
and Chief Financial  Officer,  has evaluated the effectiveness of its disclosure
controls  and  procedures  (as defined in Rule  13a-15(e)  under the  Securities
Exchange  Act of 1934) as of the end of the  period  covered  by this  Quarterly
Report on Form 10-Q. Based on that evaluation,  the Chief Executive  Officer and
Chief Financial  Officer have concluded that the Company's  disclosure  controls
and  procedures  are  effective  in  enabling  the  Company to record,  process,
summarize,  and report  information  required to be included in its periodic SEC
filings within the required time period.

In addition,  the  Company's  management,  with the  participation  of its Chief
Executive Officer and Chief Financial Officer,  has evaluated whether any change
in the Company's  internal control over financial  reporting (as defined in Rule
13a-15(f) under the Securities  Exchange Act of 1934) occurred during the period
covered by this Quarterly  Report on Form 10-Q.  Based on that  evaluation,  the
Chief Executive  Officer and Chief  Financial  Officer have concluded that there
has been no change in the Company's  internal  control over financial  reporting
during  the  period  covered  by this  Quarterly  Report  on Form  10-Q that has
materially affected,  or is reasonably likely to materially affect, its internal
control over financial reporting.


<PAGE>

                                     PART II

Item 1.  Legal Proceedings

On August 16,  2004,  Ricardo and Gladys  Farnes and TLER  Associates,  Ltd.,  a
Bahamas  corporation  ("TLER"),  delivered a complaint to the Company  naming as
defendants the Company, John Doherty, Richard Lane, and unidentified individuals
and corporations.  The case was filed in District Court in Clark County,  Nevada
on or about June 1, 2004,  and later was removed to the United  States  District
Court for the District of Nevada where it is pending. The complaint alleges that
in 2001  defendants  (a) forged the  signature  of plaintiff  Ricardo  Farnes (a
principal of TLER) to a document  purporting to extend the performance period on
a purchase order issued by TLER to the Company and (b) thereafter  posted on the
internet  defamatory and personal  information  concerning the  plaintiffs.  The
plaintiffs  do not allege any  specific  amount of damages  and  instead  merely
assert that damages  exceed  $10,000.  The Company has  answered the  complaint,
denying its material  allegations,  and is  vigorously  defending,  including by
filing a motion for summary  judgment,  seeking  dismissal of all counts against
the Company in the complaint.  Although the outcome of this matter cannot yet be
determined,  management  does not expect that the ultimate costs to resolve this
matter  will  have a  material  adverse  effect  on the  Company's  consolidated
financial position, results of operations or cash flows.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

         None

Item 3.  Defaults Upon Senior Securities

         None.

Item 4.  Submission of Matters to a Vote of Security Holders

         None.

Item 5.  Other Information

On May 13,  2005 the  Company  received a letter  from The Nasdaq  Stock  Market
Listing  Qualifications  panel  stating that the Company has not met the minimum
$1.00 per share bid price requirement for 30 consecutive business days and that,
in accordance with Marketplace Rule 4310(c)(8)(D),  the Company will be provided
180 calendar days, or until November 9, 2005, to regain compliance.


<PAGE>


Item 6.  Exhibits

    Exhibit
    Number       Description of Document

         3.1(1)  Sixth Amended and Restated Certificate of Incorporation of the
                 Company.

         3.2(1)  Amended and Restated Bylaws of the Company.

         4.1(2)  Rights Agreement dated September 25, 2002 between the Company
                 and EquiServe Trust Company, N.A.

         4.2(3)  Amendment No. 1 to Rights Agreement dated December 27, 2002
                 between the Company and EquiServe Trust Company, N.A.

      10.1.1(1)  Securities Purchase Agreement dated May 28, 1997 among the
                 Company, SatCon Technology Corporation and Duquesne Enterprises
                 (n/k/a DQE Enterprises, Inc.).

      10.1.2(1)  Securities Purchase Agreement dated April 7, 2000 among the
                 Company, Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a
                 DQE Enterprises, Inc.), Micro-Generation Technology Fund,
                 L.L.C. and SatCon Technology Corporation.

      10.1.3(1)  Securities Purchase Agreement dated April 21, 2000 among the
                 Company, Perseus Capital, L.L.C., Micro-Generation Technology
                 Fund, L.L.C., Mechanical Technology Incorporated, The Beacon
                 Group Energy Investment Fund II, L.P. and Penske Corporation.

      10.1.4(1)  Securities Purchase Agreement dated May 23, 2000 among the
                 Company, Perseus Capital, L.L.C., DQE Enterprises, Inc.,
                 Micro-Generation Technology Fund, L.L.C., Mechanical Technology
                 Incorporated, GE Capital Equity Investments, Inc., The Beacon
                 Group Energy Investment Fund II, L.P. and Penske Corporation.

      10.1.5(1)  Investor Rights Agreement dated May 23, 2000 among the Company,
                 Perseus Capital, L.L.C., DQE Enterprises, Inc.,
                 Micro-Generation Technology Fund, L.L.C., Mechanical Technology
                 Incorporated, GE Capital Equity Investments, Inc., The Beacon
                 Group Energy Investment Fund II, L.P., Penske Corporation,
                 SatCon Technology Corporation, James S. Bezreh, Russel S.
                 Jackson, Russell A. Kelley, Stephen J. O'Connor, Jane E.
                 O'Sullivan and Robert G. Wilkinson.

      10.1.6(1)  Form of Warrant of the Company issued pursuant to Class E
                 financing and list of holders thereof.

      10.1.7(1)  Form of Warrant of the Company issued pursuant to Class F
                 bridge financing and list of holders thereof.

      10.1.8(1)  Form of Warrant of the Company issued pursuant to Class F
                 financing and list of holders thereof.

      10.1.9(1)  Warrant of the Company dated August 2, 2000 issued to
                 Kaufman-Peters Company.

     10.1.10(1)  Warrant of the Company dated October 24, 2000 issued to GE
                 Capital Equity Investments, Inc.

     10.1.11(1)  Second Amended and Restated 1998 Stock Incentive Plan of the
                 Company.

     10.1.12(1)  Form of Incentive Stock Option Agreement of the Company.

     10.1.13(1)  Form of Non-Qualified Stock Option Agreement of the Company.

     10.1.14(1)  Form of Non-Qualified Stock Option Agreement of the Company
                 issued to certain consultants on July 24, 2000 and list of
                 holders thereof.

     10.1.15(1)  Amended and Restated License Agreement dated October 23, 1998
                 between the Company and SatCon Technology Corporation.

     10.1.16(1)  Lease dated July 14, 2000 between the Company and BCIA New
                 England Holdings LLC.

     10.1.17(1)  Letter Agreement dated October 24, 2000 among the Company, GE
                 Capital Equity Investments, Inc. and GE Corporate Research and
                 Development.

     10.1.18(1)  Form of Director and Officer Indemnification Agreement of the
                 Company.

     10.1.19(4)  Employment Agreement dated December 1, 2003 between the Company
                 and F. William Capp.

     10.1.20(9)  Employment Agreement dated April 25, 2004 between the Company
                 and Matthew L. Lazarewicz.

     10.1.21(3)  Employment Agreement dated October 25, 2002 between the Company
                 and James M. Spiezio.

     10.1.22(4)  Form of Restricted Stock Unit Agreement of the Company.

     10.1.23(5)  Assignment dated December 27, 2004 between the Company and CRT
                 Capital Group LLC.

     10.1.24(6)  Agreement dated January 31, 2005 between the Company and the
                 New York State Energy Research and Development Authority.

     10.1.25(7)  Agreement dated January 31, 2005 between the Company and
                 California State Energy Resources Conservation and Development
                 Commission.

     10.1.26(9)  Amendment to employment agreement between the Company and
                 Matthew L. Lazarewicz.

          31.1+ Principal Executive Officer--Certification pursuant to Section
                302 of the Sarbanes-Oxley Act of 2002.

          31.2+ Principal Financial Officer--Certification pursuant to Section
                302 of the Sarbanes-Oxley Act of 2002.

          32.1+ Principal Executive Officer--Certification pursuant to Section
                906 of the Sarbanes-Oxley Act of 2002.

          32.2+ Principal Financial Officer--Certification pursuant to Section
                906 of the Sarbanes-Oxley Act of 2002

(1)      Incorporated by reference from the Form S-1 filed on November 16, 2000
         (File No. 333-43386).
(2)      Incorporated by reference from the Form 8-K filed on October 4, 2002
         (File No. 001-16171).
(3)      Incorporated by reference from the Form 10-K filed on March 31, 2003
         (File No. 001-16171).
(4)      Incorporated by reference from the Form 10-K/A filed on May 17, 2004
         (File No. 001-16171).
(5)      Incorporated by reference from the Form 8-K filed on December 30, 2004
         (File No. 001-16171).
(6)      Incorporated by reference from the Form 8-K filed on February 14, 2005
         (File No. 001-16171).
(7)      Incorporated by reference from the Form 8-K filed on February 16, 2005
         (File No. 001-16171).
(8)      Incorporated by reference from the Form 8-K/A filed on November 2, 2004
         (File No. 001-16171).
(9)      Incorporated by reference from the Form 10-K filed on March 31, 2005
         (File No. 001-16171).
+        Filed herewith.


                                   SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

                                     BEACON POWER CORPORATION

          Date:  May 16, 2005        By:  /s/ F. William Capp
                                          -------------------
                                     F. William Capp
                                     President and Chief Executive Officer


                 May 16, 2005        By: /s/ James M. Spiezio
                                         -------------------
                                     James M. Spiezio
                                     Vice President of Finance, Chief Financial
                                     Officer, Treasurer and Secretary
                                     Principal Financial Officer