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 September 30, 2004,

                                       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 November 4, 2004 was 43,497,304.


<PAGE>

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

<TABLE>
<CAPTION>


<S>  <C>                                                                                                        <C>
                                                                                                                Page
PART I.  Financial Information

     Item 1.  Financial Statements:

         Consolidated Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003  ................    1

         Unaudited Consolidated Statements of Operations for the nine months ended
             September 30, 2004 and 2003 and for the Period May 8, 1997 (date of inception) to
             September 30, 2004  .............................................................................    2

         Unaudited Consolidated Statements of Cash Flows for nine months ended September 30, 2004
             and 2003 and for the Period May 8, 1997 (date of inception) to September 30, 2004  ..............    3

         Notes to Unaudited Consolidated Financial Statements ................................................   5-10

     Item 2.  Management's Discussion and Analysis of Consolidated Financial Condition and
             Results of Operations ...........................................................................   11-22

     Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................................   23

     Item 4.  Controls and Procedures ........................................................................   23

PART II.  Other Information

     Item 1.  Legal Proceedings ..............................................................................   24
     Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds ....................................   24
     Item 3.  Defaults upon Senior Securities ................................................................   24
     Item 4.  Submission of Matters to a Vote of Security Holders ............................................   24
     Item 5.  Other Information ..............................................................................   24
     Item 6.  Exhibits .......................................................................................   24

Signatures ...................................................................................................   26

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                     BEACON POWER CORPORATION AND SUBSIDIARY
                          (A Development Stage Company)
                           Consolidated Balance Sheets
                                                                                               (unaudited)
                                                                                              September 30,    December 31,
                                                                                                  2004            2003
                                                                                              -------------    -------------
Assets
Current assets:
<S>                                                                                           <C>              <C>
     Cash and cash equivalents ............................................................   $   4,508,871    $   8,909,261
     Accounts receivable, trade, net ......................................................           4,361          128,133
     Inventory, net .......................................................................         226,199          238,684
     Prepaid expenses and other current assets ............................................         438,689          773,226
     Investments in available-for-sale securities .........................................       1,521,749        1,163,758
                                                                                              -------------    -------------
         Total current assets .............................................................       6,699,869       11,213,062

Property and equipment, net ...............................................................         304,469          357,180
Restricted cash ...........................................................................         360,011          405,232
Other assets ..............................................................................          36,530           91,325
                                                                                              -------------    -------------

Total assets ..............................................................................   $   7,400,879    $  12,066,799
                                                                                              =============    =============

Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable .....................................................................   $      50,391    $     148,075
     Accrued compensation and benefits ....................................................         183,807          156,000
     Other accrued expenses ...............................................................       1,004,553          664,527
     Restructuring reserve ................................................................       1,148,531        1,406,191
                                                                                              -------------    -------------
         Total current liabilities ........................................................       2,387,282        2,374,793
                                                                                              -------------    -------------

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;
     43,625,236 and 43,107,526 shares issued and outstanding at
     September 30, 2004 and December 31, 2003, respectively ...............................         436,252          431,075
     Deferred stock compensation ..........................................................         (78,458)        (832,639)
     Additional paid-in-capital ...........................................................     133,763,648      133,796,667
     Other comprehensive income ...........................................................         864,980             --
     Deficit accumulated during the development stage .....................................    (129,873,165)    (123,603,437)
     Treasury stock, at cost ..............................................................         (99,660)         (99,660)
                                                                                              -------------    -------------
         Total stockholders' equity .......................................................       5,013,597        9,692,006
                                                                                              -------------    -------------

Total liabilities and stockholders' equity ................................................   $   7,400,879    $  12,066,799
                                                                                              =============    =============
</TABLE>
            See notes to unaudited consolidated financial statements.

<PAGE>


                     BEACON POWER CORPORATION AND SUBSIDIARY
                          (A Development Stage Company)
                Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
                                                                                                              Cumulative from
                                                                                                                 May 8, 1997
                                          Three months ended September 30,   Nine months ended September 30, (date of inception)
                                           ------------------------------    ------------------------------  through September 30,
                                                2004            2003             2004             2003             2004
                                           -------------    -------------    -------------    -------------    -------------

<S>                                        <C>              <C>              <C>              <C>              <C>
Revenue ................................   $      80,902    $        --      $     264,793    $        --      $     815,978
Cost of goods sold .....................         979,704             --          1,363,570             --          1,363,571
                                           -------------    -------------    -------------    -------------    -------------
Gross profit ...........................        (898,802)            --         (1,098,777)            --           (547,593)
                                           -------------    -------------    -------------    -------------    -------------

Operating expenses:
     Selling, general and administrative       1,033,406        1,259,121        3,328,117        3,738,788       31,381,699
     Research and development ..........         779,179          752,170        2,742,665        2,663,175       53,092,171
     Loss on sales commitments .........            --               --               --               --            375,974
     Depreciation and amortization .....          40,395           44,967          130,180          188,237        4,080,917
     Restructuring charges .............            --               --               --               --          2,159,280
     Loss on impairment of assets ......            --               --               --               --          4,663,916
                                           -------------    -------------    -------------    -------------    -------------
           Total operating expenses ....       1,852,980        2,056,258        6,200,962        6,590,200       95,753,957
                                           -------------    -------------    -------------    -------------    -------------
Loss from operations ...................      (2,751,782)      (2,056,258)      (7,299,739)      (6,590,200)     (96,301,550)

Other income (expense):
Interest income ........................          16,962           29,699           88,792          131,454        3,868,759
Interest expense .......................            --               (676)            --             (6,663)      (1,093,703)
Other income (expense) .................         880,025          318,374          941,219          308,423          659,524
                                           -------------    -------------    -------------    -------------    -------------
     Total other income (expense), net .         896,987          347,397        1,030,011          433,214        3,434,580
                                           -------------    -------------    -------------    -------------    -------------
Net loss ...............................      (1,854,795)      (1,708,861)      (6,269,728)      (6,156,986)     (92,866,970)

Preferred stock dividends ..............            --               --               --               --        (36,825,680)
Accretion of convertible preferred stock            --               --               --               --           (113,014)
                                           -------------    -------------    -------------    -------------    -------------
Loss to common shareholders ............   $  (1,854,795)   $  (1,708,861)   $  (6,269,728)   $  (6,156,986)   $(129,805,664)
                                           =============    =============    =============    =============    =============

Loss per share, basic and diluted              $   (0.04)       $   (0.04)       $   (0.14)       $   (0.14)
                                           =============    =============    =============    =============
Weighted-average common shares outstanding    43,538,541       42,883,762       43,312,183       42,837,456
                                           =============    =============    =============    =============
</TABLE>

            See notes to unaudited consolidated financial statements.


<PAGE>
<TABLE>
<CAPTION>



                     BEACON POWER CORPORATION AND SUBSIDIARY
                          (A Development Stage Company)
                Consolidated Statements of Cash Flows (Unaudited)
                                                                                             Cumulative from
                                                                                               May 8, 1997
                                                                                            (date of inception)
                                                             Nine months ended September 30, Through September
                                                                  2004            2003           30, 2004
                                                              ------------    ------------    ------------
Cash flows from operating activities:
<S>                                                           <C>             <C>             <C>
     Net loss .............................................   $ (6,269,728)   $ (6,156,986)   $(92,866,971)
     Adjustments to reconcile net loss to net cash used in
     operating activities:
        Depreciation and amortization .....................        130,179         188,237       4,080,916
        Loss on sale of fixed assets ......................           --              --           170,868
        Impairment of assets ..............................         (9,703)           --         4,654,213
        Restricted cash ...................................         45,221            --          (360,011)
        (Expenses paid) restructuring charge ..............       (257,660)       (257,660)      1,148,531
        Reserve for officers note .........................           --          (308,423)        119,975
        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 .......        697,363            --         1,987,616
        Warrants issued for consulting services ...........           --              --         1,569,366
        Services and interest expense paid in preferred
        stock .............................................           --              --            11,485
        Non-cash dividends received .......................        (90,351)           --           (90,351)
        Gain on sale of investments .......................       (880,025)           --          (880,025)
     Changes in operating assets and liabilities:
        Accounts receivable ...............................        123,772            --            (4,361)
        Inventory .........................................         12,485        (125,782)       (226,199)
        Prepaid expenses and other current assets .........        334,537       1,515,294        (658,324)
        Accounts payable ..................................        (97,684)         27,432          50,391
        Accrued compensation and benefits .................         27,807         (98,970)        183,807
        Accrued interest ..................................           --              --           275,560
        Dividend receivable ...............................         63,758            --              --
        Other accrued expenses and current liabilities ....        340,026         (57,358)      1,013,223
                                                              ------------    ------------    ------------
        Net cash used in operating activities .............     (5,830,003)     (5,274,216)    (77,638,756)

Cash flows from investing activities:
     Purchase of investments ..............................           --        (1,100,000)     (1,100,000)
     Sale of available-for-sale securities ................      1,413,607            --         1,413,607
     Increase in other assets .............................           --          (226,668)       (412,072)
     Purchases of property and equipment ..................        (30,845)         (5,916)     (8,452,553)
     Sale of property and equipment .......................         17,875          53,365          71,240
                                                              ------------    ------------    ------------
        Net cash used in investing activities .............      1,400,637      (1,279,219)     (8,479,778)

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 .....          2,276             463         126,490
     Exercise of employee stock options ...................         26,700         115,237       1,436,267
     Issuance of preferred stock ..........................           --              --        32,868,028
     Repayment of subscription receivable .................           --              --         5,000,000
     Proceeds from capital leases .........................           --              --           495,851
     Repayment of capital leases ..........................           --          (186,721)     (1,031,395)
     Proceeds from notes payable issued to investors ......           --              --         3,550,000
                                                              ------------    ------------    ------------
        Net cash provided by (used in) financing activities         28,976         (71,021)     90,627,405

(Decrease)increase in cash and cash equivalents ...........     (4,400,390)     (6,624,456)      4,508,871

Cash and cash equivalents, beginning of period ............      8,909,261      18,221,766            --
                                                              ------------    ------------    ------------
Cash and cash equivalents, end of period ..................   $  4,508,871    $ 11,597,310    $  4,508,871
                                                              ============    ============    ============

Supplemental disclosure of non--cash transactions:
     Cash paid for interest ...............................   $       --      $      6,700    $    488,126
                                                              ============    ============    ============
     Cash paid for taxes ..................................   $      1,956    $      4,700    $     32,456
                                                              ============    ============    ============
     Assets acquired through capital lease ................   $       --      $       --      $    535,445
                                                              ============    ============    ============
</TABLE>

            See notes to unaudited consolidated financial statements.

<PAGE>

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


Note 1.  Nature of Business and Operations

Nature of Business. Beacon Power Corporation is a development stage company that
was  incorporated  on May 8, 1997.  Beacon Power  Corporation and its subsidiary
(collectively  "Beacon" or "the Company") design,  develop,  configure and offer
for sale,  power  conversion  and energy  storage  systems that  provide  highly
reliable, high-quality, environmentally friendly, uninterruptible electric power
employing  both  proprietary  and  third-party  technology  and components for a
number of applications and potential applications. 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  high-power,   flywheel-based  system  that
     continuously  regulates the frequency of  electricity on the power grid and
     could be used by  independent  system  operators and regional  transmission
     operators to regulate  electrical power. The Smart Energy Matrix could also
     continuously   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 by that
     facility.  The Company has a preliminary design for the Smart Energy Matrix
     and has  initiated  a  program  to  develop  a  demonstration  unit for the
     technology and has shifted the majority of its development spending towards
     this program.

o    Smart  Power(TM)  250 - A  high-power,  flywheel-based  system  that  could
     provide  electricity until a longer-term backup power source comes on-line.
     The Company has a design  available for the Smart Power 250 and could begin
     development if sufficient market demand occurs. Given the limited financial
     and technology  resources available to the Company this product will not be
     further developed at this time.

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 is  sufficient to justify
     development.  The Company  has been unable to 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(TM)  Matrix  demonstration
     unit to  assess  the  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 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 and resources
     to ramp production if market demand increases. As a result of the increased
     market  interest in the Company's  Smart Energy Matrix design,  the Company
     has redeployed 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
     Energy M5, the Company is also reducing its marketing  efforts on the Smart
     Power M5. The Company does not believe that inverters will be a significant
     portion of the Company's business going forward.

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  capital by April 2005.  In the event that the Company
elects to begin full scale development of its Smart Energy Matrix or Smart Power
250 flywheel systems, the amount of equity required will increase substantially.
The Company may not be able to raise this capital, or if it is able to do so, it
may be on terms that are adverse to existing shareholders.

Smart Energy Matrix

The Company has identified an application  for its Smart Energy Matrix design in
a well-established market with attractive pricing  characteristics.  This market
is frequency  regulation  for the power grid.  Using the Company's  Smart Energy
Matrix  design,  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 that could specifically  addresses this application.
Using a similar design,  this product could continuously  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 finished the preliminary designs for the Smart Energy Matrix and
has initiated a small-scale  prototype using its existing flywheel technology in
order to display the  efficacy  of the  technology.  The Company  will not begin
full-scale  development  of  the  Smart  Energy  Matrix  until  the  small-scale
prototype  has  sufficiently  demonstrated  the  effectiveness  of the Company's
technology,  the market has expressed a more  tangible  interest and the Company
has sufficient funds to complete development.  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 expects that it will not receive  revenues from
this  product  for  approximately  two to  three  years  after  development  has
commenced.

Smart Power 250

For uninterrupted  power supply  applications the Company has a design available
for its Smart Power 250 flywheel system.  This system would provide short (10 to
60 seconds) duration power. When grid power is interrupted,  the Smart Power 250
design  would  provide  power  for a short  time  while a  diesel  generator  is
activated.  This  application  could be marketed to  commercial  and  industrial
facilities,  although  the market for this product is not yet  significant.  The
Company  believes that as power quality and distributed  generation  become more
widely used the market  demand for the Smart Power 250 could grow  substantially
and it could be of economic  benefit for the Company to begin  production as the
demand increases.

Smart Energy

The Company has available  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's Smart Energy systems have approximately  450,000 hours of operation in
customer sites without mechanical failure,  which the Company believes validates
the reliability of its technologies.  The Company believes that its Smart Energy
technology is an excellent  base to begin  development  of a higher energy 25kWh
flywheel system for renewable  applications when the Company determines that the
market interest is sufficient to justify that product's development.

Smart Power M5

The Smart Power M5 inverter system for the  photovoltaic  energy market converts
the 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's  Smart Energy M5 inverter  system has the capacity to
convert  direct  current  electricity  into up to  5,000  watts  of  alternating
current.  The  Smart  Power  M5 has  been  designed  for use in  North  American
grid-connected  solar  power  applications.  In  addition,  the  Company  has an
improved  Smart Power M5 inverter  system that is currently in the  Underwriters
Laboratory  testing  process.  This improved  inverter  system will have all the
functionality of the current Smart Power M5 with the added capability to be used
in off-grid applications.  The Company may also develop inverters for use in low
power wind turbine applications and its technologies could be used to develop on
and off grid inverters for use  throughout  the world if the Company  determines
that the market  interest is  sufficient  to justify  product  development.  The
Company began  delivering its  Underwriters  Laboratory  approved Smart Power M5
inverter  systems in December 2003, but deliveries  through  September 2004 have
been significantly lower than anticipated.

As a result of this and of the  increased  market  interest in its Smart  Energy
Matrix design,  the Company has redeployed its research and  development  effort
away from  further  inverter  development  and towards its Smart  Energy  Matrix
flywheel technologies by initiating a program to develop a small-scale prototype
using its existing flywheel  technology in order to display the efficacy of this
system.  The  Company  does not believe  that  inverters  will be a  significant
portion of the Company's business going forward and as a result, the Company has
recorded  reserves to reflect net  inventory  at the lower of cost or market for
the number of units that the Company now anticipates will be recorded as revenue
during the next twelve months.

Revenue

Although the Company has begun shipment 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 has
begun shipping its Smart Power M5 inverter system in the solar renewable  energy
market through domestic  distributors.  The Company has established that it will
recognize revenues,  in accordance with accounting principles generally accepted
in the United States of America, based on the sales by its distributors to their
customers.  The Company has determined  that this treatment will ensure that the
recognition  of revenue  cannot be impacted by any disputes  between the Company
and its  distributors  on product or possible  issues  resulting from technology
risk as new products are commercialized that may have enhanced  functionality to
product already delivered to distributors.

In addition,  the Company has been awarded a $98 thousand fixed-price government
contract for research and development of potential applications for its flywheel
based products.  The Company accounts for its fixed price  government  contracts
using the percentage-of-completion  method of accounting. Under this method, all
contract  costs are  charged to  operations  as  incurred;  and a portion of the
contract  revenues,  based on the estimated profits and the degree of completion
of the contract as measured by a comparison of the actual and  estimated  costs,
is  recognized as revenues  each  quarter.  Anticipated  losses on contracts are
charged to  earnings as soon as these  losses are known.  Through the end of the
third  quarter  this  contract  is  substantially  complete  and the Company has
recorded revenues of $96 thousand with associated costs of $143 thousand.

Cost of Goods Sold

The Company  costs its products at the lower of cost or market.  Costs in excess
of this  measurement  are expensed in the period in which they are 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 September
30,  2004,  had an  accumulated  deficit  of  approximately  $130  million.  The
Company's  business  strategy is to continue to obtain  Government  contracts to
demonstrate  the application of its flywheel  technologies,  identify and review
possible acquisitions or mergers of companies with complementing technologies or
markets  and  create  near-term  revenues  from the sale of its  Smart  Power M5
inverter products for solar power applications,  while building a reputation for
excellent performance from its equipment and its sales and service organization.
The Company  expects to use the results of Government  contracts to validate the
Company's  technologies and expand relationships it is developing to gain market
access for the Company's future products for the renewable energy industry.  The
Company will not begin  full-scale  development of its Smart Energy Matrix until
the small-scale prototype has sufficiently demonstrated the effectiveness of the
Company's technology,  the market has expressed a more tangible interest in this
product and the Company has sufficient  funds to complete  development.  For the
Company's  current and contemplated  flywheel-based  systems including its Smart
Energy  Matrix,  Smart  Power 250 and Smart  Energy  products,  the  Company  is
continuing 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 not have  sufficient cash
available  to complete  prototype  development  and  production  of its products
unless  additional  equity or debt  financing is obtained.  To continue as going
concern the Company  must raise  additional  funds by April,  2005.  The need to
raise funds would be greater in the event that  full-scale  product  development
begins.  The Company  does not expect to become  profitable  or obtain  positive
operational 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/A,  for the year
ended  December  31,  2003.  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 nine months ended September 30, 2004 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 2004.

Allowance for Doubtful Accounts

The Company  provides an allowance for doubtful  accounts equal to the estimated
uncollectible amounts due from its customers. The Company's estimate is based on
limited historical  collection  experience and a review of the current status of
trade accounts receivable. It is reasonably possible that the Company's estimate
of the allowance  for doubtful  accounts will change.  Accounts  receivable  are
presented  in the  Company's  balance  sheets net of an  allowance  for doubtful
accounts $0 at September 30, 2004 and December 31, 2003, respectively.

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,
if any,  are  recognized  in the  period in which  they are  determined.  Claims
against customers are recognized as revenue upon settlement. Revenues recognized
in excess of amounts  billed are  classified  as current  assets under  contract
work-in-progress, and included in "Prepaid expenses and other current assets" in
the Company's  balance  sheets.  Amounts billed to clients in excess of revenues
recognized to date are classified as current  liabilities under advance billings
on  contracts.   Changes  in  project  performance  and  conditions,   estimated
profitability,  and final contract settlements may result in future revisions to
construction contract costs and revenue.

Other than as described  above,  there have been no significant  additions to or
changes in  accounting  policies of the Company since  December 31, 2003.  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/A
for the year ended December 31, 2003.

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. The Company's provisions for inventory write-downs are based on its best
estimates of product sales prices and market demand  patterns,  and its plans to
transition its products. As a result of the lower than anticipated sales volumes
of the Smart Energy M5, the Company has  recorded  reserves for its M5 inventory
in the amount of $778,042  during 2004 to reflect net  inventory at the lower of
cost or market  for the  number of units that the  Company  anticipates  will be
recorded as revenue during the next twelve months.

Inventory balances include the following amounts:

                                         September 30, 2004  December 31, 2003
                                             -----------        -----------
Raw materials ............................   $   753,964        $   104,362
Work in progress .........................       129,830             26,001
Finished goods ...........................       120,447            108,321
                                             -----------        -----------
Total inventories ........................     1,004,241            238,684
Less: obsolescence reserve ...............      (778,042)              --
                                             -----------        -----------
Inventories, net .........................   $   226,199        $   238,684
                                             ===========        ===========


Note 4.  Property and Equipment

Property and equipment consists of the following:
<TABLE>
<CAPTION>

                                                 Estimated
                                                   Useful    September 30,   December 31,
                                                   Lives          2004           2003
                                                 ----------   -----------    -----------
<S>                                              <C>          <C>            <C>
Machinery and equipment ......................   5 years      $   616,714    $   627,406
Service vehicles .............................   5 years           16,762         62,327
Furniture and fixtures .......................   7 years          296,652        279,190
Office equipment .............................   3 years        1,398,835      1,398,835
Leasehold improvements .......................   Lease term       538,428        524,347
Equipment under capital lease obligations ....   Lease term       918,284        918,284
                                                              -----------    -----------
     Total ...................................                $ 3,785,675    $ 3,810,389
Less accumulated depreciation and amortization                 (3,481,206)    (3,453,209)
                                                              -----------    -----------
     Property and equipment, net .............                $   304,469    $   357,180
                                                              ===========    ===========
</TABLE>

Note 5.  Commitments

The Company's principal contractual  obligations as of September 30, 2004 are as
follows:
<TABLE>
<CAPTION>

                                   Three months ending              Year ending December 31,
                                      ------------  ----------------------------------------------------------
                                         December 31
Description of commitment                   2004        2005        2006        2007       2008      Thereafter    Total
                                         ---------   ---------   ---------   ---------   ---------   ---------   ---------
<S>                                        <C>         <C>         <C>         <C>        <C>         <C>        <C>
Operating leases .....................     122,670     397,059     500,359     529,413        --          --     1,549,501

Non-cancelable purchase orders .......     440,000        --          --          --          --          --       440,000
                                         ---------   ---------   ---------   ---------   ---------   ---------   ---------
Total commitments ....................     562,670     500,359     529,413     397,059        --          --     1,989,501
                                         =========   =========   =========   =========   =========   =========   =========
</TABLE>

At  September  30,  2004 the  Company  had open  purchase  orders to  vendors of
approximately   $700,000.   Of   this   amount,   approximately   $440,000   was
non-cancelable.  The amounts listed for operating leases represent  payments for
the occupancy of the  Company's  principal  executive  offices,  laboratory  and
manufacturing facilities located in Wilmington, Massachusetts.

The Company leases office and light manufacturing space under an operating lease
through  September 30, 2007. Under the terms of this lease, the Company provided
the lessor  with an  irrevocable  letter of credit.  At  September  30, 2004 the
balance of that letter of credit totaled $310,011.

The Company entered into a manufacturing agreement with a vendor for an integral
component of the Company's Smart Power M5 inverter system.  The Company provided
the vendor with an  irrevocable  letter of credit in the amount of $50,000  that
expired on October 3, 2004.

The above  letters of credit are secured by a cash  deposit.  The required  cash
deposit is included in restricted cash in the accompanying  consolidated balance
sheets.

Note 6.  Investments

In 2003 the Company invested $1,000,000 in Series A Preferred Stock of Evergreen
Solar,  Inc., a public company that specializes in renewable energy sources,  in
order to develop a  strategic  relationship  with that  company.  The  Company's
investment was part of a larger  financing  provided by several  investors.  The
Company  made its  investment  on the same terms as the other  investors in this
financing,  except  that the  Company was  permitted  to  purchase a  three-year
warrant for $100,000 that is  exercisable  for 2,400,000  shares of  Evergreen's
common stock at $3.37 per share.  Evergreen's  financing was a private placement
of $29,475,000 of Series A Preferred Stock and the above warrant.  Perseus 2000,
L.L.C.,  an affiliate of one of the  Company's  stockholders,  Perseus  Capital,
L.L.C.,  invested $3 million in  Evergreen's  Series A  Preferred  Stock in this
financing.  Mr. Philip J. Deutch and Mr. Kenneth M. Socha,  members of the Board
of Directors of the Company, are Managing Director and Senior Managing Director,
respectively,  of Perseus,  L.L.C.,  and Mr. Deutch led the  Evergreen  Series A
Preferred  Stock  financing  and is one of four  individuals  from the Evergreen
investor  group to be added to the  board of  directors  of  Evergreen.  Messrs.
Deutch and Socha disclosed their possible conflicts relating to this transaction
and abstained  from voting on the matter.  In addition,  Mr. Deutch did not take
part in any discussions  concerning this investment.  Beacon's  participation in
the  transaction  was evaluated,  debated and approved by all the  disinterested
directors  of  the  Company,   after  full  disclosure  of  relevant  facts  and
circumstances.

During the second quarter of 2004 all of the Company's holdings in its Evergreen
Series A Preferred  Stock were converted to 973,528  shares of Evergreen  common
stock.  Through  September 30, 2004 the Company sold 476,413 shares of Evergreen
common stock  yielding cash proceeds of  $1,413,610,  and net realized  gains of
$880,027.  At the end of the third quarter of 2004,  the Company held a total of
497,115 shares of Evergreen  common stock.  These  securities are carried on the
Company's  balance sheet at fair value and  classified as  "available-for-sale,"
and any unrealized gains or losses are recorded as other comprehensive income in
the equity  section of the Company's  balance  sheets,  as required by Financial
Accounting Standard 115,  "Accounting for Certain Investments in Debt and Equity
Securities."  On September 30, 2004 the total value of Evergreen's  common stock
on the Company's  balance sheet based on the then current per-share market price
of $2.86 was $1,421,749 and the warrant for Evergreen common stock was valued at
its purchase price of $100,000.  In October 2004 the remaining 497,115 shares of
Evergreen common stock were sold for approximately $1,585,000.

Note 7.  Common Stock

Reserved  Shares.  At September 30, 2004 and December 31, 2003,  11,428,365  and
11,755,157 shares of common stock were reserved for issuance under the Company's
stock option plan and for outstanding warrants, respectively.

Note 8.  Related Party Transactions

Advance to Officers. During 2001, the Company advanced approximately $565,000 to
an officer of the Company,  Mr. William  Stanton,  its former CEO and President.
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.  Through September 30, 2004, the Company collected
approximately  $459,000 in principal  payments on this  advance.  The balance of
this loan as of September 30, 2004 is $110,000  including  current year interest
of $4,008 and is fully reserved; however, it has not been cancelled. Mr. Stanton
continues to serve as a director of the Company.

Note 9. Restructuring 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
flywheel-based products into this market. Therefore,  beginning 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  have been  idled,  including  machinery  and  equipment,
tooling,   office   furniture   and   fixtures,   and  equipment  and  leasehold
improvements.  The Company has  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, as a result,  has taken 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 sheets.

A summary of the restructuring reserves is as follows:

                                                   September 30,
                                       -------------------------------------
                                            2004                 2003
                                       ----------------    -----------------
Beginning balance ..................      $ 1,406,191          $ 1,749,738
Charges for the period .............             --                   --
Payments ...........................         (257,660)            (257,660)
                                       ----------------    -----------------
Ending balance .....................      $ 1,148,531          $ 1,492,078
                                       ================    =================


Note 10.  Stock-Based Compensation

The Company accounts for its stock based  compensation using the recognition and
measurement principles of APB 25 "Accounting for Stock Issued to Employees", and
its related  interpretations.  FASB Statement of Financial  Accounting Standards
No. 148 ("SFAS 148"),  "Accounting for Stock-Based  Compensation-Transition  and
Disclosure" amends 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  have  not  been  adopted  at  this  time.
Compensation  expense associated with awards of stock or options to employees is
measured  using  the  intrinsic-value   method.  Deferred  compensation  expense
associated with awards to non-employees is measured using the fair-value  method
and is  amortized  over the vesting  period of three  years 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.

<TABLE>
<CAPTION>
                                                        Three months ended                Nine months ended
                                                           September 30,                    September 30,
                                                     --------------------------      --------------------------
                                                         2004           2003             2004           2003
                                                     -----------    -----------      -----------    -----------

<S>                                                  <C>            <C>              <C>            <C>
Net loss to common shareholders as reported ......   $(1,854,795)   $(1,708,861)     $(6,269,728)   $(6,156,986)
Pro forma compensation expense ...................        82,686        104,579          267,073        327,579
                                                     -----------    -----------      -----------    -----------
Net loss--pro forma ..............................   $(1,937,481)   $(1,813,440)     $(6,536,801)   $(6,484,565)
                                                     ===========    ===========      ===========    ===========
Loss per share--as reported ......................   $     (0.04)   $     (0.04)     $     (0.14)   $     (0.14)
Loss per share--pro forma ........................   $     (0.04)   $     (0.04)     $     (0.15)   $     (0.15)
</TABLE>

In 2003 the Company  established a restricted  stock unit ("RSUs") plan for 2003
and 2004 that  provides  bonuses in the form of deferred  stock in lieu of cash.
This plan  provides a bonus  structure to  employees on a deferred  compensation
basis  in the form of  restricted  stock  units  (or  "RSUs")  at no cost to the
recipient.  The RSUs  under this plan are  converted  into  shares of  Company's
common stock based on the  achievement of targets that are evaluated  quarterly,
or in some cases annually.  The  achievement of targets  determine the number of
RSUs each  employee  has earned and this amount is accrued with the grant of the
RSUs being spread over four equal  installments in the fiscal year following the
fiscal year with  respect to which the employee  accrued the RSUs.  Through this
vesting  schedule the RSUs convert to shares of common stock.  In the event that
the employee voluntarily  terminates  employment only those RSUs converted prior
to termination will be granted.  The Company's employees earned 667,151 RSUs for
the fiscal year ended  December 31,  2003.  The Company has the same RSU plan in
place for 2004 targets.  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.
For the nine months ending  September 30, 2004 the Company  recorded RSU related
compensation expense in the amount of $697,363.

Note 11.  Income Taxes

At December 31, 2004 the Company had  approximately $76 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.

<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.

Overview

When  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,  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. Based on
this  evaluation,  which  is  ongoing,  the  Company  (i)  believes  that it has
identified  two promising  applications  for its Smart Energy Matrix product and
(ii) has  introduced  its Smart  Energy M5 inverter  system  into the  renewable
energy  market and  delivered 31 units in 2003 and an additional 42 units during
the nine  months  ended  September  30,  2004.  The  Company is also  evaluating
potential  acquisitions  and mergers that would expand its product  offerings in
the  energy  markets  and  benefit  from  its  technological   capabilities  and
management expertise.

The Company must raise additional  equity to execute its business plan. 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 an
equity investment by early 2005 to fund:

o        continuing as a going concern;
o        ongoing research and development of inverter products;
o        manufacturing capability;
o        working capital requirements; and
o        new business development,

In the event that the  Company  elects to begin full  scale  development  of its
Smart Energy  Matrix or Smart Power 250 flywheel  systems,  the amount of equity
required  would  increase  substantially.  If the  Company  identifies  possible
acquisition or mergers, the amount of equity required could further increase.

On May 17,  2004,  Nasdaq  notified the Company that it had failed to maintain a
closing bid price of at least $1.00 per share for 30  consecutive  trading days.
Pursuant to the Nasdaq's rules,  the Company was given a 180-day  period,  until
November 15, 2004 to regain compliance.  If the Company's stock does not satisfy
the $1  minimum  bid  requirement  for 10  consecutive  business  days  prior to
November 15, 2004, the Company may be eligible for a second  180-day  compliance
period  if it  satisfies  all  other  Nasdaq  SmallCap  Market  initial  listing
requirements  exclusive  of bid  price.  If the  Company  is unable to meet this
listing  requirement,  and appeals for additional time to achieve compliance are
unsuccessful,  the Company's  stock would 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.  Although  the  Company  knows of no reason  that its  stock  will not be
accepted for quotation on the 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.

<PAGE>

Results of operations:

Comparison of nine months ended September 30, 2004 and 2003

                                         Nine months ended September 30,
                                    -----------------------------------------
                                        2004      2003    $ Change   % Change
                                    --------- --------- ---------- ----------
                                 (in thousands)
Revenues ..........................   $   265   $  --     $   265        n/a
Cost of goods sold ................     1,364      --      (1,364)       n/a
Selling, general and administrative     3,328     3,739       411         11%
Research and development ..........     2,743     2,663       (80)         3%
Depreciation and amortization .....       130       188        58         31%
Interest and other income, net ....     1,030       433       597        138%


Revenues.

The  Company  recorded  revenues  from  the  sale of its  Smart  Power  M5 power
conditioning  system of approximately  $169,000 through  September 30, 2004. The
Company also recorded approximately $96,000 of revenue from a $98,000 government
contract  under  the  percentage  of  completion  method.  The  Company  did not
recognize  revenues on those  products for the nine months ended  September  30,
2003.

Cost of Goods Sold.

Cost of goods sold,  for the nine months  ending  September  30, 2004,  includes
costs  associated  with both Smart  Power M5  inverters  and a  flywheel-related
government  contract.  The  costs  associated  with the Smart  Power M5  include
materials and direct labor. In addition to these costs,  the Company  recognized
an inventory  reserve of approximately  $778,000 for inventories that had become
obsolete due to design changes and reductions in expected sales volumes over the
next  twelve  months.  Additionally,  the  Company  recorded  a  charge  for its
non-cancelable  purchase commitments in excess of requirements related to the M5
inverter in the amount of approximately  $236,000.  On the government  contract,
the Company recorded all costs incurred to date of approximately $143,000.

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, and
insurance and travel costs. Selling, general and administrative expenses totaled
approximately  $3,328,000 and $3,739,000 for the nine months ended September 30,
2004 and 2003,  respectively.  The decrease of approximately  $411,000 or 11% is
primarily  the  result  of  decreases  in the  cost of  Directors  and  Officers
Liability Insurance premiums.

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  increased  for the nine months  ending  September  30, 2004 over the same
period during 2003 due primarily to increased  product  development  of products
for the Company's next generation photovoltaic product. The costs of development
of its flywheel systems will be more significant if the Company determines there
is sufficient market validation to initiate development of these products and it
has funding to complete this work. The Company  expects its cost of research and
development for the remainder of 2004 to continue to be slightly higher compared
to 2003. Research and development expenses totaled approximately  $2,743,000 and
$2,663,000 for the nine months ended September 30, 2004 and 2003,  respectively.
The  increase  of $80,000 or 3% is  primarily  the result of higher  development
costs relating to the Company's Smart Power M5 next generation product.

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 is also  amortizing  the Smart Power M5
intellectual  property  it  acquired  from  Advanced  Energy  Systems  in  2003.
Depreciation and amortization  totaled  approximately  $130,000 and $188,000 for
the nine months ended September 30, 2004 and 2003, respectively. The decrease of
$58,000 or 31% 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
realized gains on the sale of its available-for-sale securities, interest income
resulting from cash on hand, accrued dividends  receivable and the 7% conversion
premium from the  conversion  of Evergreen  Series A Preferred  Stock  holdings,
partially  offset  by  interest  expense  associated  with its  capital  leases.
Interest and Other  Income/Expense,  net for the nine months ended September 30,
2004 was approximately  $1,030,000,  compared to approximately  $433,000 for the
same period in 2003. The increase of approximately  $597,000 in 2004 compared to
the prior  year is the  result of  realized  gains on the sale of the  Company's
equity  investments  of  approximately  $880,000,  conversion  premium  from the
Company's  investment in Evergreen of approximately  $61,000, and lower interest
expenses  relating  to  expired  capital  leases of  $7,000,  offset by the loan
reserve of an officer  loan which was fully  reserved  in 2003 of  approximately
$308,000 and lower interest and dividends received due to lower cash balances of
$43,000.

Liquidity and Capital Resources

                                        Quarter ending September 30,
                                          -----------------------
                                              2004        2003
                                          -----------  ----------
                                                (in thousands)
Cash and cash equivalents ...............   $  4,509    $ 11,242
Working capital .........................      4,313      11,627
Cash provided by (used in)
     Operating activities ...............     (5,830)     (5,274)
     Investing activities ...............      1,401      (1,279)
     Financing activities ...............         29         (71)
                                            --------    --------
Net decrease in cash and cash equivalents   $ (4,400)   $ (6,624)
                                            ========    ========
Current ratio ...........................        2.8         5.3
                                            ========    ========

The  Company's  cash  requirements  depend on many  factors,  including  but not
limited  to  research  and   development   activities,   continued   efforts  to
commercialize products,  facilities costs, general and administrative  expenses,
and costs related to raising  additional equity and possibly costs related to an
acquisition or merger.  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,
infrastructure  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 and has purchased intellectual properties and incurred development costs
for its newest product in the renewable  energy  market.  The Company must raise
additional equity to execute its business plan and remain a going concern. 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 an
equity investment or additional financing by early 2005 to fund:

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

In the event that the  Company  elects to begin full  scale  development  of its
Smart Energy  Matrix or Smart Power 250 flywheel  systems,  the amount of equity
required would increase substantially.

Net  cash  used in  operating  activities  was  approximately  ($5,830,000)  and
($5,274,000)   for  the  nine  months  ended   September   30,  2004  and  2003,
respectively. The primary component to the negative cash flow from operations is
from net losses.  For the first nine months of 2004,  the Company had a net loss
of  approximately  ($6,270,000).  This included  employee stock  compensation of
approximately   $697,000,   facility   related  cash  payments  charged  against
restructuring reserves of approximately ($258,000),  non-cash dividends received
in stock of Evergreen Solar, Inc. of approximately  ($90,000),  gain on the sale
of  investments  of  approximately  ($880,000),  a reduction in restricted  cash
related  to the  lease  of the  Company's  facility  of  approximately  $45,000,
reductions  to the  asset  impairment  reserve  for  disposed  fixed  assets  of
approximately  ($10,000),  and  depreciation  and  amortization of approximately
$130,000.  Changes in operating assets and liabilities  generated  approximately
$805,000 of cash during the first nine months of 2004. For the first nine months
of 2003, the Company had a net loss of approximately ($6,157,000). This included
a reversal of a portion of the reserved note to its former CEO of  approximately
($323,000) net of interest  reserved of $14,577,  facility related cash payments
charged  against  restructuring  reserves  of  approximately   ($258,000),   and
depreciation and amortization of  approximately  $188,000.  Changes in operating
assets and  liabilities  generated  approximately  $1,261,000 of cash during the
first nine months of 2003.

Net cash  generated/(used) in investing activities was approximately  $1,401,000
and  ($1,279,000)  for the nine  months  ended  September  30,  2004  and  2003,
respectively.  The principal source of cash during the first nine months of 2004
was the partial  sale of the  Company's  holdings in  Evergreen  common stock of
approximately  $1,414,000  and the sale of capital  equipment  of  approximately
$18,000,  partially offset by the purchase of capital equipment of approximately
($31,000).  The principal uses of cash during the first nine months of 2003 were
primarily  related to an investment in Evergreen of  ($1,100,000),  increases in
other assets totaling ($227,000),  purchase of capital equipment of ($6,000) and
the principal  sources of cash were from the sale of certain impaired  machinery
and equipment of the Company in the amount of approximately $53,000.

Net cash  generated/(used) by financing activities was approximately $29,000 and
($71,000) for the nine months ended  September 30, 2004 and 2003,  respectively.
For the first nine months of 2004, the cash generated by financing activities of
approximately  $29,000 related to the exercise of stock options in the amount of
approximately  $27,000 and shares issued under the employee  stock purchase plan
of  approximately  $2,000.  For the first nine months of 2003, the cash used for
financing  activities  related to  repayment  of capital  leases of  ($187,000),
offset  by cash  proceeds  from  the  exercise  of  employee  stock  options  of
approximately  $115,000  and the  issuance  of stock  under the  employee  stock
purchase plan of approximately $1,000.

In the event that the  Company  elects to begin  full-scale  development  of its
Smart Energy  Matrix or Smart Power 250 flywheel  systems,  the amount of equity
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  capital.  The
Company may not be able to raise this capital, or if it is able to do so, it may
be on terms that are adverse to existing shareholders. The Company believes that
debt financing will likely not be available to meet its cash requirements.


Certain Factors Affecting Future Operating Results

The  following  factors,  as well as others  mentioned in the  Company's  Annual
Report on Form 10-K/A for the year ended December 31, 2003 (filed May 17, 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 May Not Be Able to Continue as a Going Concern, as its Cash Balances
Are Sufficient to Fund Operations Only Through Approximately April 2005.

     As shown in the  consolidated  financial  statements,  the Company incurred
     significant losses from continuing operations of approximately  $8,618,000,
     $20,839,000,  and  $26,146,000 and cash and cash  equivalents  decreases of
     approximately  $8,957,000,  $16,335,000 and  $27,850,000,  during the years
     ended  December  31,  2003,  2002 and 2001,  respectively.  The Company has
     $4,509,000 of cash and cash  equivalents on hand at September 30, 2004. The
     Company has  recorded  limited  revenue from sales of its  products.  These
     factors, among others,  indicate that the Company may be unable to continue
     as a going concern.

     The audit report on the Company's consolidated financial statements for the
     fiscal year ended December 31, 2003,  contained a going concern  exception,
     which  stated 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  expects its cash  position  to fund  operations  approximately
     through April 2005 according to its business plan. The Company is exploring
     opportunities  to  raise  additional   capital  through  equity  offerings,
     strategic alliances and other financing vehicles,  but it does not make any
     assurances that  sufficient  funds will be available to it on terms that it
     deems  acceptable,  if they are  available at all. In  addition,  the costs
     associated  with efforts to raise  additional  equity could reduce the time
     the Company has sufficient cash to operate.

The Company's Going Concern Issues May Negatively  Impact the Company's  Ability
to Obtain Sufficient Revenues to be a Going Concern.

     Concerns  about 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
     purchasing the Company's products in sufficient  quantities for the Company
     to be able to function as a going concern.

The Company Needs Additional Financing.

     The Company will need additional financing to execute its business plan and
     continue as a going concern.  The Company cannot be certain that it will be
     able to raise  additional  funds on terms  acceptable  to the Company or at
     all. If future financing is not available or is not available on acceptable
     terms,  the Company would not be able to continue as a going  concern.  See
     "Selected  Historical  Financial  Data" and  "Management's  Discussion  and
     Analysis of Financial Condition and Results of Operations."

The  Company's  Stockholders  May be  Adversely  Affected if the Company  Issues
Additional Equity to Obtain Financing.

     If the  Company  raises  additional  funds  by  issuing  additional  equity
     securities,  existing  stockholders  may be adversely  affected because new
     investors  may have  preferences  or rights  superior  to those of  current
     shareholders and existing stockholders may also be diluted.

The  Company  May Not Be Able to  Reduce  Its  Product  Cost  Enough to Make The
Company's Prices Competitive and Therefore It May Not Be Able to Realize Volumes
With Margins that Allow It to Cover Its Costs of Operations.

     There can be no assurance  that the Company will be  successful in lowering
     production  costs through  improved  product  designs or volume  discounts,
     which may prevent  widespread  market  acceptance  of its  products  due to
     higher pricing than those of its competitors.

The Company Has Limited  Experience  Manufacturing 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,
     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
     manufacturing  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 or at all. 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 capital
     build-out.  The Company will not achieve profitability if it cannot develop
     or obtain  efficient,  low-cost  manufacturing  capability,  processes  and
     suppliers  that  will  enable  the  Company  to meet  the  quality,  price,
     engineering, design and production standards or production volumes required
     to meet its product  commercialization  schedule, if any, or to satisfy the
     requirements of its customers or the market generally.

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 has a limited  operating  history  and is a  development  stage
     company.  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.

     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
     Results of Operations."

The Company Has Incurred  Losses Since Its Inception and  Anticipates  Continued
Losses Through at Least 2008.

     The  Company  has  incurred  net losses and  negative  cash flows since its
     inception  in May  1997.  The  Company  had  net  losses  of  approximately
     ($8,618,000)  in  2003,  ($20,839,000)  in  2002,  ($26,146,000)  in  2001,
     ($53,279,000) in 2000 and  ($6,630,000) in 1999.  Since its inception,  the
     Company  has had net  losses  totaling  approximately  ($129,806,000).  The
     Company  expects to  continue  to incur net losses  through at least  2008.
     Although the Company is looking for additional ways to economize and reduce
     costs,  its  efforts  may prove even more  expensive  than  anticipated  to
     successfully  develop products for potential markets. The Company's revenue
     must  grow  substantially  to  offset  these  higher  expenses  and  become
     profitable.  Even if the  Company  does  achieve  profitability,  it may be
     unable to sustain or increase its profitability in the future.

     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
     Results of Operations."

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 existing  suppliers or develop  relationships  with new
     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 that 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.  In addition,  there are a number of
     components that the Company has not purchased on a production  basis and it
     may be  difficult  for the  Company  to find  suppliers.  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 Executive Officers and Skilled Technical Personnel.

     Because  the  Company's  future  success  depends to a large  degree on the
     success  of its  technology,  the  Company's  competitiveness  will  depend
     significantly  on  whether it can  attract  and  retain  skilled  technical
     personnel,  especially  engineers,  and can retain members of its executive
     team.  The Company has  employment  agreements  with Messrs.  Capp, CEO and
     President;  Spiezio,  Vice President of Finance,  Chief Financial  Officer,
     Treasurer and Secretary; and Lazarewicz, Vice President and Chief Technical
     Officer.

     The Company may not be successful in attracting and retaining the personnel
     or executive talent necessary to develop products and operate profitably.

The Company's Financial Performance Could be Adversely Affected by Needs to Hire
and Retain Key Sales Personnel.

     Because  the  Company's  future  success  depends to a large  degree on the
     success  of its  sales  organization,  the  Company's  ability  to meet its
     business  plan will  depend  significantly  on whether it can  attract  and
     retain sales  personnel.  The sales  organization has been impacted by both
     health issues, and a resignation. The lead salesman for the Company's Smart
     Power  M5  Inverter  had  been  on  medical  leave,  returned  to work on a
     part-time basis and has now been  terminated due to lower than  anticipated
     revenues and the Company's  view that inverters will not be material to the
     Company in the future.  A salesman for both the Smart Power M5 Inverter and
     the Company's  flywheels systems resigned to pursue business  opportunities
     that did not  require  travel.  Competition  for  skilled  sales  people is
     intense and the Company may not be successful  in attracting  and retaining
     the personnel or executive  talent necessary to develop markets and operate
     profitably.

There  May Be Only a Modest  Number of  Potential  Customers  for the  Company's
Products.

     There may only be a limited number of potential customers for the Company's
     products,  in which case the  Company  will be subject to the risk that the
     loss of or reduced  purchases by any single customer could adversely affect
     its business.

If the  Company is Unable to  Successfully  Market,  Distribute  and Service Its
Products  Internationally it May Experience a Shortfall in Expected Revenues and
Profitability.

     In addition to the risks the Company faces when operating  within the U.S.,
     additional  risks are present if the Company operates  internationally.  To
     develop  sufficient  revenue  volumes for the Company to be profitable  the
     Company may need to market, distribute and service products internationally
     through   distributors.   The   Company  has  no   experience   developing,
     manufacturing  or selling  products to comply with the commercial and legal
     requirements of international  markets.  The Company's  ability to properly
     service  its   products   internationally   will   depend  on   third-party
     distributors to install and provide service. There is no assurance that the
     Company  will be able to locate  service  providers in every region or that
     these providers will effectively service its products.  Also, the Company's
     success in those  markets  will depend,  in part,  on its ability to secure
     foreign customers and its ability to manufacture products that meet foreign
     regulatory  and  commercial   requirements.   In  addition,   international
     operations  are  subject  to  other  inherent  risks,  including  potential
     difficulties in establishing  satisfactory  distributor  relationships  and
     enforcing  contractual  obligations  and  intellectual  property  rights in
     foreign countries, and fluctuations in currency exchange rates.

Any Failure to Protect  the  Company's  Intellectual  Property  Could  Seriously
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 inverter  and 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,  or will protect it 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, thereby harming its business prospects.

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 to Do So at Prices
that will Yield Profits.

     There are number of technology  companies in various stages of development.
     The Company  cannot give  assurance  that some or all of its target markets
     and pricing plans could not be displaced by emerging technologies.

The Company May Make  Investments  in Other  Companies  in an Effort to Increase
Shareholder Value Through  Strategic  Alliance or Return on Investment Which may
Not Create Gains and therefore Reduce Shareholder Value.

     Given the Company's financial position,  its ability to make investments in
     other companies is very limited at this time.  However,  in the future, the
     Company  may make  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 the investments may
     decrease and reduce shareholder value.

Provisions of Delaware Law and of the Company's  Charter and By-laws May Inhibit
a Takeover that Stockholders Consider Favorable.

     Provisions in the Company's  certificate  of  incorporation  and by-laws in
     Delaware  corporate law, and the Company's  shareholder rights plan adopted
     in September 2002, may make it difficult and expensive for a third party to
     pursue a tender  offer,  change in  control  or  takeover  attempt  that is
     opposed  by  the  Company's  management  and  board  of  directors.  Public
     stockholders  who might desire to participate in such a transaction may not
     have  an  opportunity  to  do  so.  Beginning  with  the  Company's  annual
     stockholder  meeting in 2001, it implemented a staggered board of directors
     that will make it difficult for  stockholders  to change the composition of
     the board of directors in any one-year.  Pursuant to a  shareholder  rights
     plan adopted in September  2002, the Company issued rights as a dividend on
     common  stock on  October  7, 2002  each of which  entitles  the  holder to
     purchase  1/100th of a share of newly issued  preferred stock for $22.50 in
     the event that any person not approved by the board of  directors  acquires
     more than 15% (30% in the case of one large  shareholder that already owned
     more than 15%) of the Company's  outstanding  common stock, or in the event
     of an acquisition by another  company,  $22.50 worth of the common stock of
     the other company at half its market value (in each case the rights held by
     the acquiring  person are not exercisable and become void). The shareholder
     rights plan was modified by rights plan amendment  dated December 27, 2002.
     The amendment increased the beneficial  ownership approved by the Company's
     board of directors from 30% to 35% for one large shareholder. Additionally,
     the Company's  board of directors may authorize  issuances of "blank check"
     preferred  stock that could be used to increase  the number of  outstanding
     shares and discourage a takeover attempt.  These  anti-takeover  provisions
     could  substantially  impede the ability of public  stockholders to benefit
     from a change in control or change in the Company's management and board of
     directors.

The Company May Make  Acquisitions  or Mergers that Do Not Produce  Revenues and
Cash Flow as Expected  and  Further  the  Companies  Need for  Addition  Cash to
Sustain Operations.

     The Company may  identify  acquisitions  or mergers  that it believes  will
     provide  beneficial  revenues and cash flow. There can be no assurance that
     these  estimates  will be  achieved  and the Company may find that its cash
     needs have increased.

The Company has Limited  Experience in  Acquisitions  and Mergers and May Not Be
Successful  in  Identifying  Appropriate  Acquisitions  or  Mergers  or  Not  Be
Successful 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.

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 Beacon.
     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.

Government Regulation May Impair the Company's Ability to Market 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,  pipeline  connections 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.

Product  Liability  Claims  Against  the  Company  Could  Result in  Substantial
Expenses and Negative  Publicity Which Could Impair Successful  Marketing of its
Products.

     The Company's  business  exposes it to potential  product  liability claims
     that  are   inherent   in  the   manufacturing,   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 The Company's
Competitors Could Reduce Market Demand or Acceptance for Flywheels in General.

     A serious accident involving either the Company's flywheels or competitors'
     similar  products could be a significant  deterrent to customer  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,  the  Company's  flywheel  would shut down
     rather than  disintegrate.  To date, the Company's  testing  validates this
     design conclusion. Also, the Company believes that one of the advantages of
     composite flywheels over metal flywheels is that in the event of a flywheel
     failure,  the flywheel tends to delaminate and shut down rather than (as in
     the case of metal) to break  into a number of large  fragments  that have a
     greater possibility of bursting a containment vessel and causing injury. At
     this early stage of  commercialization,  there are differing  approaches to
     containment safety with disagreement in the community on the most effective
     means.

The Market for Using the  Company's  Smart  Energy  Matrix to Provide  Frequency
Regulation has not been Established.

     The  Company  believes  that the use of its  Smart  Energy  Matrix  will be
     successful  in the frequency  regulation  market.  However,  this market is
     currently being served by independent service providers that use generators
     and although the Company  believes its product offers greater  efficiencies
     than  generators  and  could  produce  positive   investment   returns  for
     independent  service providers,  there can be no assurance that the Company
     will be able to establish its product in that market.

The  Value  Proposition  of the  Company's  Smart  Energy  Products  May  Not Be
Recognized.

     There  can be no  assurance  that  the  Company  will be  able  to  compete
     successfully  against batteries.  To compete  successfully the Company must
     establish  the  value   proposition   of  its  products  based  upon  their
     dependability,  environmental benefits, and long maintenance-free life. The
     performance  of batteries has improved  while battery  prices have declined
     due to  lower  demand  from  the  communications  markets  and  others  and
     increased  competition  resulting from an increase in the number of battery
     manufacturers.  These changes in battery  pricing and  performance  make it
     even more  difficult for the Company to establish the value  proposition of
     its Smart Energy products.

The Company Might Fail to Develop Successful Flywheel Products.

     The successful  development  of the Company's  flywheel  products  involves
     significant  technological and cost challenges and will require  additional
     financing to complete. Major risks include:

     o    maintaining the development schedule and achieve technical success, as
          such development could take substantially longer than anticipated;
     o    the cost of developing  key  components of the Company's  systems that
          have  significant  technical  risk and which  may not be  economically
          feasible for a competitive product;
     o    ensuring long-life and maintenance free performance through design and
          quality control;
     o    ensuring quality and cost control from suppliers; and
     o    raising the necessary financing.

The Value Proposition of the Company's Inverter Systems May Not Be Recognized.

     There  can be no  assurance  that  the  Company  will be  able  to  compete
     successfully  and gain market  share in the  renewable  energy  market.  To
     compete  successfully  the Company must establish its value  proposition as
     cost effective for end users based upon its product's price, dependability,
     operational benefits, and long life.

The Channels to Market for Photovoltaic Products are Not Stable and have Changed
Substantially in the Last Year.

     The photovoltaic market is growing rapidly,  but the sales and distribution
     channels  are not  stable.  In the last  year,  the cross  section of these
     distributors  has  changed  as  some  of  the  larger  photovoltaic  module
     manufacturers  have left the market for integrated  solutions to focus only
     on  module  manufacture.  As a  result,  success  of  products  such as the
     Company's  Smart Power M5  inverter  system  will be  dependent  on smaller
     distributors,  who have less financial  resources and,  therefore,  reduced
     ability to influence  the  acceptance  of new products as a result of lower
     advertising abilities and lower consumer  recognition.  When these types of
     changes  take place,  it often  results in a period of  uncertainty  in the
     sales and distribution channels,  leading to fewer and smaller orders being
     placed.  The Company is using a strategy of selling  through  full-service,
     wholesale  distributors,  and there can be no assurance  that this strategy
     will be  successful  in the  channel  configuration  that  continues  to be
     restructured.  The  Company's  ability to sell its  inverters  has not been
     successful thus far and the Company does not believe that inverters will be
     significant to its future.

The Company  May Not be Able to  Establish  a  Distribution  Channel to Sell Its
Inverter Systems.

     The Company expects to market its Smart Power M5 inverter system as well as
     future inverter products through distributor channels. The Company does not
     have  experience  in these  distribution  channels  or in the  photovoltaic
     markets,  and may not be successful in establishing  adequate market volume
     through  this  distribution  strategy.  Even if the  Company  were  able to
     establish  sufficient  sales volumes,  there can be no assurance that these
     channels  will  continue  to provide  adequate  volumes  for the  Company's
     products in the future.

The Company Faces Intense Competition in the Inverter Markets.

     There are a number of companies located in the United States,  Canada,  and
     abroad that are offering electronic  inverters into the photovoltaic market
     and the  number of  products  being  offered is  increasing.  Many of these
     companies   have   more   substantial   manufacturing,   marketing,   sales
     capabilities, and greater financial resources, as well as brand recognition
     and  established  market  positions.  They may also have greater  research,
     development and commercialization  capabilities.  There can be no assurance
     that the Company  will be able to compete or be able to adapt as quickly to
     changing customer needs.

The Company's High-Energy Flywheels Face Intensified  Competition from Batteries
Due to Batteries' Declining Prices and Improved Life. As a Consequence Customers
are Less Likely to Accept the Value  Proposition  of the  Company's  High-Energy
Flywheel Products.

     The  performance  of  batteries  has  improved  while  battery  prices have
     declined due to lower demand from the communications markets and others and
     increased  competition  resulting from an increase in the number of battery
     manufacturers.  These changes in battery pricing and performance  have made
     it very difficult for the Company to establish the value proposition of its
     high-energy flywheel products.

The Telecommunications Industry Continues to Experience Lower Rates of Build-Out
and Maintenance Spending.

     The Company initially targeted the  communications  markets for the sale of
     its  high-energy  products.  However,  this industry,  which had previously
     sustained high rates of infrastructure  build-out,  has experienced a sharp
     decline in build-out as well as  maintenance  spending  which began in 2000
     and has  continued  and there can be no certainty of when or if this market
     will  recover.  Significant  reductions  in both  maintenance  budgets  and
     capital  build-out  budgets at  telecommunications  companies  caused these
     potential  customers  to be  more  conservative  with  their  spending  and
     expenditure analysis and less willing to try new technology solutions, such
     as the Company's flywheel systems.

The Company Might Fail to Develop  Successful  Additional  High-Energy  Flywheel
Products.

     The successful  development  of additional  high-energy  flywheel  products
     involves  significant  technological  and cost  challenges and will require
     additional financing to complete. Major risks include:

     o    maintaining  the  development  schedule  for these  products,  as such
          development could take substantially longer than anticipated;
     o    the cost of developing  key  components of the Company's  systems that
          have  significant  technical  risk and which  may not be  economically
          feasible for a competitive product in the high-energy market;
     o    reducing  manufacturing  costs for the flywheel's  shaft, hub and rim,
          bearings and related  electronics to increase the Company's chances of
          achieving profitability;
     o    ensuring minimal warranty expenses through design and quality control;
     o    ensuring quality and cost control from suppliers;
     o    raising the necessary financing; and
     o    extending the product to new applications.

The Company Faces Intense Competition and May Be Unable to Compete  Successfully
in the High-Energy Flywheel Markets.

     The markets for uninterruptible  electric power are intensely  competitive.
     There are a number of companies located in the United States,  Canada,  and
     abroad that are offering battery based energy storage options.  The Company
     also competes with companies that are developing  applications  using other
     types of alternative  energy  storage.  In addition,  if large  established
     companies  decide  to  focus  on the  development  of  competing  or  other
     alternative energy products for sale to the Company's potential  customers,
     they may have the  manufacturing,  marketing,  and  sales  capabilities  to
     complete research, development and commercialization of commercially viable
     alternative  energy storage systems that could be more competitive than the
     Company's  systems  and could be brought  to market  more  quickly.  To the
     extent they already have name recognition, their products may enjoy greater
     initial market acceptance among potential customers.  These competitors may
     also be  better  able  than the  Company  to adapt  quickly  to  customers'
     changing demands and to changes in technology.


<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 September 30, 2004, the Company had  approximately
$60,000 of cash  equivalents  that were held in non-interest  bearing  accounts.
Also at  September  30,  2004,  the Company had  approximately  $233,000 of cash
equivalents that were held in interest bearing checking  accounts and $4,215,000
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 $4,000, which the Company does not believe is material.

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.  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

         None.

Item 6.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   (a) Exhibits
        31.1     Certification of Chief Executive Officer required by 13a-14(a)
        31.2     Certification of Chief Financial Officer required by 13a-14(a)
        32.1     Section 1350 Certification of Chief Executive Officer
        32.2     Section 1350 Certification of Chief Financial Officer


(b) Reports on Form 8-K

On August 16, 2004, the Company filed a current report on Form 8-K reporting
that it had issued a press release announcing its financial results for fiscal
quarter ended June 30, 2004.

On September 2, 2004, the Company filed a current report on Form 8-K reporting
that its independent audit firm, Deloitte & Touche, LLP had resigned. .

On October 15, 2004, the Company filed a current report on Form 8-K reporting
that Stephen P. Adik to join the Company's board of directors, and that it had
issued a press release on October 14, 2004, disclosing same.

On October 22, 2004 the Company filed a current report on Form 8-K reporting
that it had issued a press release announcing that F. William Capp , President
and Chief Executive Officer of the Company, was presenting at Ardour Capital
Investments LLC investor conference in New York City on that day.

On November 2, 2004, the Company filed an amended current report on Form 8-K/A
modifying the language previously reported on Form 8-K announcing that the
Company's independent audit firm, Deloitte & Touche, LLP had resigned, and also
announcing that it had engaged Miller Wachman LLP as its new independent audit
firm.

<PAGE>

                                   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:  November 12, 2004           By:  /s/ F. William Capp
                                               -------------------
                                               F. William Capp
                                               President and Chief Executive
                                               Officer


               November 12, 2004          By: /s/ James M. Spiezio
                                              --------------------
                                              James M. Spiezio
                                              Vice President of Finance, Chief
                                              Financial Officer, Treasurer and
                                              Secretary, Principal Financial
                                              Officer