** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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**x**                              QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the quarterly period ended June 30, 2007

**or**

**o**                                 TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

**For the transition period from       to       .**

**Commission File Number: 000-31973**

**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**                |   | **01887-1032**       |
| **Wilmington,  Massachusetts**            |   | (Zip code)           |
| (Address of  principal executive offices) |   |                 |

 

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

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act.)

| Large accelerated filer  o | Accelerated  filer  o | Non-accelerated  filer  x |
|--------------------------------------|---------------------------------|-------------------------------------|

 

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

The number of shares ofthe Registrant’s common stock, par value $.01 per share, outstanding as ofAugust 2, 2007, 2007 was 71,525,727.

 

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**BEACON POWER CORPORATION ANDSUBSIDIARY(A Development Stage Company)Table of Contents**

 
|                                | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                  | ** ** | **Page**   |
|--------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                  | ** ** | ** ** |
| PART  I. Financial Information |       |       |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item  1.   |       | Financial  Statements                                                                                                                                                                       |       |       |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       |       |       | Consolidated Balance Sheets at June 30, 2007  (unaudited) and December 31, 2006 (audited).                                                                                                  |       | 1          |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       |       |       | Unaudited Consolidated Statements of Operations for  the three and six months ended June 30, 2007 and 2006, and for the period  from May 8, 1997 (date of inception) through June 30, 2007. |       | 2          |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       |       |       | Unaudited Consolidated Statements of Cash Flows for  the six months ended June 30, 2007 and 2006 and for the period from May 8,  1997 (date of inception) through June 30, 2007.            |       | 3          |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       |       |       | Notes to Unaudited Consolidated Financial Statements.                                                                                                                                       |       | 4          |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 2.    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations.                                                                                                |       | 13         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 3.    |       | Quantitative and Qualitative Disclosures about Market  Risk.                                                                                                                                |       | 24         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 4T.   |       | Controls and Procedures.                                                                                                                                                                    |       | 24         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
| PART  II. Other Information    |       |       |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item  1.   |       | Legal  Proceedings.                                                                                                                                                                         |       | 25         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 1A.   |       | Risk  Factors.                                                                                                                                                                              |       | 25         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 2.    |       | Unregistered Sales of Equity Securities and Use of  Proceeds.                                                                                                                               |       | 25         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 3.    |       | Defaults Upon Senior Securities.                                                                                                                                                            |       | 25         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 4.    |       | Submission of Matters to a Vote of Security Holders.                                                                                                                                        |       | 25         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item  5.   |       | Other  Information.                                                                                                                                                                         |       | 26         |
|                           |       |       |       |                                                                                                                                                                                        |       |       |
|                           |       | Item 6.    |       | Exhibits.                                                                                                                                                                                   |       | 27         |
|                           |       |       |       |                                                                                                                                                                                        |
| Signatures                     |       |       |       | 29                                                                                                                                                                                          |

 

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**PART 1 —FINANCIAL INFORMATION**

**Item 1.**                          FinancialStatements

**BEACONPOWER CORPORATION AND SUBSIDIARY(A Development Stage Company)Consolidated Balance Sheets**
| ** **                                                                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                   | ** ** | **(Unaudited)**   | ** ** | **(Audited)**         | ** ** |
| **Assets**                                                                                                                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                              |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                   |       | $                 | 9,394,947  |                  | $          | 5,251,337 |   |
| Accounts  receivable, trade, net                                                                                                                                             |       | 84,600            |       | 506,402               |       |
| Unbilled costs  on contracts in progress                                                                                                                                     |       | 383,854           |       | 133,240               |       |
| Prepaid expenses  and other current assets                                                                                                                                   |       | 747,609           |       | 777,276               |       |
| Total current  assets                                                                                                                                                        |       | 10,611,010        |       | 6,668,255             |       |
| Property and equipment,  net                                                                                                                                                 |       | 850,372           |       | 415,406               |       |
| Restricted cash                                                                                                                                                              |       | 174,346           |       | 174,346               |       |
| Total assets                                                                                                                                                                 |       | $                 | 11,635,728 |                  | $          | 7,258,007 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                                                         |       |              |       |                  |       |
| Accounts payable                                                                                                                                                             |       | $                 | 689,403    |                  | $          | 453,077 |   |
| Accrued  compensation and benefits                                                                                                                                           |       | 631,012           |       | 456,075               |       |
| Other accrued  expenses                                                                                                                                                      |       | 1,196,940         |       | 834,832               |       |
| Advance billings  on contracts                                                                                                                                               |       | 177,293           |       | 445,719               |       |
| Accrued contract  loss                                                                                                                                                       |       | 369,040           |       | 821,032               |       |
| Restructuring  reserve                                                                                                                                                       |       | 128,704           |       | 347,408               |       |
| Total current  liabilities                                                                                                                                                   |       | 3,192,392         |       | 3,358,143             |       |
|                                                                                                                                                                         |       |              |       |                  |       |
| Commitments and  contingencies (Notes 5 and 9)                                                                                                                               |       |              |       |                  |       |
|                                                                                                                                                                         |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                   |       |              |       |                  |       |
| Preferred Stock,  $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding                                                                              |       | —            |       | —                |       |
| Common stock,  $.01 par value; 200,000,000 shares authorized; 71,366,206 and 59,524,687  shares issued and outstanding at June 30, 2007 and December 31, 2006,  respectively |       | 713,662           |       | 595,247               |       |
| Deferred stock  compensation                                                                                                                                                 |       | —            |       | —                |       |
| Additional  paid-in-capital                                                                                                                                                  |       | 165,007,196       |       | 154,426,395           |       |
| Deficit  accumulated during the development stage                                                                                                                            |       | (156,564,683      | )          | (150,408,939          | )          |
| Treasury stock,  421,692 shares at cost                                                                                                                                      |       | (712,839          | )          | (712,839              | )          |
| Total  stockholders’ equity                                                                                                                                             |       | 8,443,336         |       | 3,899,864             |       |
| Total liabilities and stockholders’ equity                                                                                                                              |       | $                 | 11,635,728 |                  | $          | 7,258,007 |   |

 

See notes to unaudited consolidated financialstatements.

1

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**BEACON POWER CORPORATION ANDSUBSIDIARY****(A Development StageCompany)Consolidated Statements of Operations (Unaudited)**

 
| ** **                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** ** | ** ** | **Cumulative from**          | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------|------------|------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** ** | ** ** | **May 8, 1997**         | ** ** |
| ** **                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **                     | ** ** | ** ** | ** ** | **(date of inception)** | ** ** |
| ** **                                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** | **through June 30,** | ** ** |
| ** **                                  | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007**                       | ** ** | **2006**   | ** ** | **2007**                          | ** ** |
| Revenue                                     |       | $                                                   | 449,328    |                                              | $          | 209,439                        |       | $          | 842,034    |                              | $          | 498,034 |   | $ | 4,173,747 |   |
| Cost of goods  sold                         |       | 419,544                                             |       | 206,418                                           |       | 811,790                        |       | 451,343    |       | 4,690,001                         |       |
| Gross profit                                |       | 29,784                                              |       | 3,021                                             |       | 30,244                         |       | 46,691     |       | (516,254                          | )          |
| Operating  expenses:                        |       |                                                |       |                                              |       |                           |       |       |       |                              |       |
| Selling, general and administrative         |       | 1,549,033                                           |       | 1,627,718                                         |       | 2,963,393                      |       | 3,557,250  |       | 48,061,961                        |       |
| Research and development                    |       | 1,823,812                                           |       | 1,086,553                                         |       | 3,483,370                      |       | 2,147,998  |       | 63,514,833                        |       |
| Loss on contract commitments                |       | —                                              |       | 687,786                                           |       | —                         |       | 687,786    |       | 3,295,250                         |       |
| Depreciation and amortization               |       | 30,673                                              |       | 27,189                                            |       | 56,641                         |       | 48,418     |       | 4,373,307                         |       |
| Casualty loss (recovery)                    |       | (168,003                                            | )          | —                                            |       | (60,060                        | )          | —     |       | 9,024                             |       |
| Restructuring charges                       |       | —                                              |       | —                                            |       | —                         |       | —     |       | 2,159,280                         |       |
| Loss on impairment of assets                |       | —                                              |       | —                                            |       | —                         |       | —     |       | 4,663,916                         |       |
| Total operating expenses                    |       | 3,235,515                                           |       | 3,429,246                                         |       | 6,443,344                      |       | 6,441,452  |       | 126,077,571                       |       |
| Loss from  operations                       |       | (3,205,731                                          | )          | (3,426,225                                        | )          | (6,413,100                     | )          | (6,394,761 | )          | (126,593,825                      | )          |
| Other income  (expense):                    |       |                                                |       |                                              |       |                           |       |       |       |                              |       |
| Interest income                             |       | 139,605                                             |       | 149,578                                           |       | 253,491                        |       | 295,083    |       | 4,798,878                         |       |
| Interest expense                            |       | —                                              |       | —                                            |       | —                         |       | —     |       | (1,093,703                        | )          |
| Gain on sale of investment                  |       | —                                              |       | —                                            |       | —                         |       | —     |       | 3,562,582                         |       |
| Other income (expense)                      |       | —                                              |       | 4,046                                             |       | 3,865                          |       | 5,427      |       | (232,421                          | )          |
| Total other income (expense), net           |       | 139,605                                             |       | 153,624                                           |       | 257,356                        |       | 300,510    |       | 7,035,336                         |       |
| Net loss                                    |       | (3,066,126                                          | )          | (3,272,601                                        | )          | (6,155,744                     | )          | (6,094,251 | )          | (119,558,489                      | )          |
| Preferred stock  dividends                  |       | —                                              |       | —                                            |       | —                         |       | —     |       | (36,825,680                       | )          |
| Accretion of  convertible preferred stock   |       | —                                              |       | —                                            |       | —                         |       | —     |       | (113,014                          | )          |
| Loss to common  shareholders                |       | $                                                   | (3,066,126 | )                                                 | $          | (3,272,601                     | )          | $          | (6,155,744 | )                                 | $          | (6,094,251 | ) | $ | (156,497,183 | ) |
| Loss per share,  basic and diluted          |       | $                                                   | (0.04      | )                                                 | $          | (0.06                          | )          | $          | (0.09      | )                                 | $          | (0.10 | ) |   |   |
| Weighted-average common  shares outstanding |       | 71,360,328                                          |       | 58,950,147                                        |       | 68,412,886                     |       | 58,825,782 |       |                              |       |

 

See notes to unaudited consolidated financialstatements.

2

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**BEACONPOWER CORPORATION AND SUBSIDIARY(A Development Stage Company)Consolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                   | ** ** | ** **                                        | ** ** | ** **                     | ** ** | **Cumulative from**          | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | ** **                                        | ** ** | ** **                     | ** ** | **May 8, 1997**         | ** ** |
| ** **                                                                   | ** ** | ** **                                        | ** ** | ** **                     | ** ** | **(date of inception)** | ** ** |
| ** **                                                                   | ** ** | **Six months ended June 30,** | ** ** | **through June 30,** | ** ** |
| ** **                                                                   | ** ** | **2007**                                          | ** ** | **2006**                       | ** ** | **2007**                          | ** ** |
| Cash flows from  operating activities:                                       |       |                                              |       |                           |       |                              |       |
| Net loss                                                                     |       | $                                                 | (6,155,744 | )                              | $          | (6,094,251                        | )          | $ | (119,558,489 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                              |       |                           |       |                              |       |
| Depreciation and amortization                                                |       | 56,641                                            |       | 48,418                         |       | 4,373,308                         |       |
| Loss (gain) on sale of fixed assets                                          |       | (3,865                                            | )          | —                         |       | 192,304                           |       |
| Impairment of assets, net                                                    |       | 553                                               |       | 229                            |       | 4,551,147                         |       |
| (Expenses paid) restructuring charge                                         |       | (218,704                                          | )          | (183,030                       | )          | 128,704                           |       |
| 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                                  |       | —                                            |       | 800,311                        |       | 3,699,721                         |       |
| Options and warrants issued for consulting services                          |       | —                                            |       | —                         |       | 1,585,654                         |       |
| Services and interest expense paid in preferred  stock                       |       | —                                            |       | —                         |       | 11,485                            |       |
| Gain on sale of investments                                                  |       | —                                            |       | —                         |       | (3,562,582                        | )          |
| Stock-based compensation                                                     |       | 1,036,564                                         |       | 548,771                        |       | 2,306,688                         |       |
| Changes in operating assets and liabilities:                                 |       |                                              |       |                           |       |                              |       |
| Accounts receivable                                                          |       | 421,802                                           |       | 411,703                        |       | (84,600                           | )          |
| Unbilled costs on government contracts                                       |       | (250,614                                          | )          | 230,510                        |       | (383,854                          | )          |
| Prepaid expenses and other current assets                                    |       | 29,667                                            |       | 298,742                        |       | (847,269                          | )          |
| Accounts payable                                                             |       | 236,326                                           |       | (1,385                         | )          | 689,403                           |       |
| Accrued compensation and benefits                                            |       | 174,937                                           |       | 322,843                        |       | 631,012                           |       |
| Advance billings on contracts                                                |       | (268,426                                          | )          | 249,728                        |       | 177,293                           |       |
| Accrued interest                                                             |       | —                                            |       | —                         |       | 275,560                           |       |
| Accrued loss on contract commitments                                         |       | (451,992                                          | )          | 12,228                         |       | 369,040                           |       |
| Other accrued expenses and current liabilities                               |       | 362,108                                           |       | (239,966                       | )          | 1,205,610                         |       |
| Net cash used in operating activities                                        |       | (5,030,747                                        | )          | (3,595,149                     | )          | (102,058,330                      | )          |
| Cash flows from  investing activities:                                       |       |                                              |       |                           |       |                              |       |
| Purchase of investments                                                      |       | —                                            |       | —                         |       | (1,190,352                        | )          |
| Sale of investments                                                          |       | —                                            |       | —                         |       | 4,752,934                         |       |
| Restricted cash                                                              |       | —                                            |       | —                         |       | (174,346                          | )          |
| Increase in other assets                                                     |       | —                                            |       | —                         |       | (412,072                          | )          |
| Purchases of property and equipment                                          |       | (492,372                                          | )          | (95,354                        | )          | (9,304,122                        | )          |
| Sale of property and equipment                                               |       | 4,077                                             |       | —                         |       | 202,674                           |       |
| Net cash used in investing activities                                        |       | (488,295                                          | )          | (95,354                        | )          | (6,125,284                        | )          |
| Cash flows from  financing activities:                                       |       |                                              |       |                           |       |                              |       |
| Initial public stock offering, net of expenses                               |       | —                                            |       | —                         |       | 49,341,537                        |       |
| Stock offering, net of expenses                                              |       | 9,652,095                                         |       | —                         |       | 26,760,572                        |       |
| Payment of dividends                                                         |       | —                                            |       | —                         |       | (1,159,373                        | )          |
| Shares issued under employee stock purchase plan                             |       | 10,557                                            |       | 10,302                         |       | 162,898                           |       |
| Exercise of employee stock options                                           |       | —                                            |       | 17,500                         |       | 2,203,622                         |       |
| Issuance of preferred stock                                                  |       | —                                            |       | —                         |       | 32,868,028                        |       |
| Repayment of subscription receivable                                         |       | —                                            |       | —                         |       | 5,000,000                         |       |
| Proceeds from capital leases                                                 |       | —                                            |       | —                         |       | 495,851                           |       |
| Repayment of capital leases                                                  |       | —                                            |       | —                         |       | (1,031,395                        | )          |
| Repurchase company stock                                                     |       | —                                            |       | —                         |       | (613,179                          | )          |
| Proceeds from notes payable issued to investors                              |       | —                                            |       | —                         |       | 3,550,000                         |       |
| Net cash provided by (used in) financing activities                          |       | 9,662,652                                         |       | 27,802                         |       | 117,578,561                       |       |
| (Decrease)  increase in cash and cash equivalents                            |       | 4,143,610                                         |       | (3,662,701                     | )          | 9,394,947                         |       |
| Cash and cash  equivalents, beginning of period                              |       | 5,251,337                                         |       | 13,890,162                     |       | —                            |       |
| Cash and cash  equivalents, end of period                                    |       | $                                                 | 9,394,947  |                           | $          | 10,227,461                        |       | $ | 9,394,947 |   |
| Supplemental  disclosure of cash flow information:                           |       |                                              |       |                           |       |                              |       |
| Cash paid for interest                                                       |       | $                                                 | —     |                           | $          | —                            |       | $ | 488,126 |   |
| Cash paid for taxes                                                          |       | $                                                 | —     |                           | $          | —                            |       | $ | 32,750 |   |
| Assets acquired  through capital lease                                       |       | $                                                 | —     |                           | $          | —                            |       | $ | 535,445 |   |

 

See notes to unaudited consolidated financialstatements.

3

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**BEACONPOWER CORPORATION AND SUBSIDIARY(A Development Stage Company)Notes to Unaudited Consolidated Financial Statements**

**Note 1.  Nature of Business andOperations**

*Nature of Business*

Beacon Power Corporation (the “Company”, “Beacon”, “we”,“our”, or “us”) (a development stage company) was incorporated on May 8,1997.  Since our inception, we have been primarily engaged in thedevelopment of flywheel devices for storing and transmitting kineticenergy.  During 2000, we completed an initial public offering of ourcommon stock and raised approximately $49.3 million net of offering expenses,and during 2005, we raised approximately $17 million via private placements ofour common stock.  An additional $9.8 million was raised through the saleof common stock and warrants pursuant to our shelf registration statementduring the first quarter of 2007. We expect to generate revenues in the futurefrom the commercialization of our flywheel energy storage systems to supplyfrequency regulation services to the electricity grid.  We believe thatour sustainable energy storage and power conversion solutions can help providereliable electric power for the utility, renewable energy, and distributedgeneration markets. In addition, we believe as the commercialization of ourtechnologies continues other cost-effective applications for our flywheelsystems will develop that will provide additional revenues. Because we have notyet generated a significant amount of revenue from our principal operations, weare accounted for as a development stage company under Statement of FinancialAccounting Standards No. 7.

*Operations*

We have experienced net losses since our inceptionand, as of June 30, 2007, had an accumulated deficit of approximately $156.6million.  We are focused on the commercialization of our Smart EnergyMatrixTM flywheel system for frequency regulation and completion of ourgovernment research and development contracts.  This ongoing research anddevelopment and deployment of our Smart Energy MatrixTM flywheel system willrequire substantial additional outlays of capital.

We expect to have positive EBITDA (earnings beforeinterest, taxes, depreciation and amortization) and be cash flow positive by2010; however, we will need to raise additional capital in 2007 and 2008 aswell as secure project financing for the construction of our frequencyregulation facilities.  Based on ourforecasted cash usage rates, we estimate that we have adequate cash to fundoperations into the fourth quarter of 2007. Estimated cash outlays to move andto close out the lease on the Wilmington facility are expected to be between$0.2 million and $0.4 million.  The netcash required for structural improvements at the Tyngsboro facility to supportour office, research and development and manufacturing requirements areexpected to be $2.0 to $2.8 million.  Inthe short term, capital equipment of approximately $1.0 million will berequired to meet the 2008 production schedule. Additional capital expenditureswill be required in the future to optimize the plant for maximum capacity. Theamount and timing of these expenditures are dependent on requirements ofequipment needed to meet production schedules as well as having sufficientfunding. We will seek to obtain additional equity investments during 2007 and2008 to cover expenses relating to continuing operations including ongoingresearch and development efforts, ramping up our manufacturing and assemblycapacity, and designing and building frequency regulation facilities.

**Note 2.  Basis of Presentation and Summary ofSignificant Accounting Policies**

**Basis of Presentation**

The accompanying unaudited consolidated financialstatements have been prepared using accounting principles generally accepted inthe United States of America except that certain information and footnotedisclosures normally included in consolidated financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted in this Form 10-Q.  We suggest that the consolidated financialstatements presented herein be read in conjunction with our consolidatedfinancial statements and notes thereto included in our Annual Report on Form10-K, for the year ended December 31, 2006.  In our management’s opinion,all adjustments, consisting of normal recurring accruals considered necessaryfor a fair presentation have been included in the accompanying unauditedfinancial statements.  Operating results for the six months ended June 30,2007 are not necessarily indicative of the results that may be expected for thefull year ending December 31, 2007.

4

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*Going Concern*

The accompanying consolidated financial statementshave been prepared on a going concern basis, which contemplates the realizationof assets and the satisfaction of liabilities in the normal course ofbusiness.  As shown in our consolidated financial statements, we have hadminimal revenues, and incurred losses of approximately $156.6 million since ourinception, including losses during the six months ending June 30, 2007 ofapproximately $6.2 million.  We have approximately $9.4 million of cashand cash equivalents on hand at June 30, 2007.  Since our operating cashrequirements far exceed any cash generated from operations, we may be unable tocontinue as a going concern.  The consolidated financial statementscontained herein do not include any adjustments relating to the recoverabilityand classification of liabilities that might be necessary should we be unableto continue as a going concern.

We recognize that our continuation as a going concernis dependent upon our ability to generate sufficient cash flow to allow us tosatisfy our obligations on a timely basis.  The generation of sufficientcash flow is dependent, in the short term, on our ability to obtain additionalequity financing, and in the long term, on our ability to successfullyestablish a share of the frequency regulation market based on deploying ourSmart Energy MatrixTM flywheel systems that are now under development, as wellas obtain sufficient project financing to develop our frequency regulationfacilities.

*Consolidation*

The accompanying consolidated financial statementsinclude the accounts of Beacon Power Corporation and our subsidiary BeaconPower Securities Corporation.  Our former subsidiary, Beacon AcquisitionCo., was inactive in 2005 and was dissolved in January 2006.  Allsignificant inter-company accounts and transactions have been eliminated inconsolidation.

*Loss per Share—Basic and Diluted*

Basic and diluted losses per share have been computedusing the weighted-average number of shares of common stock outstanding duringeach period. Warrants, options and other securities exercisable for commonshares are used in the calculation of fully-diluted EPS only if theirconversion to common shares would decrease income or increase loss per sharefrom continuing operations.  Since the both quarter and six months endedJune 30, 2007 and 2006 reflect losses, including the potential conversion ofwarrants and options in the diluted EPS calculation would decrease loss per share.Thus, they are considered anti-dilutive and are not included in the calculationof earnings per share.

**Summary of Significant Accounting Policies**

*Use of Estimates*

The preparation of consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results could differ from those estimates.

*Stock-Based Compensation*

During the first quarter of 2006, we adopted theprovisions of, and accounted for, stock-based compensation in accordance withthe Financial Accounting Standards Board’s Statement of Financial AccountingStandards No. 123R (“SFAS 123R”), “Share-Based Payment”. Under the fair valuerecognition provisions of SFAS 123R, stock-based compensation cost is measuredat the grant date based on the fair value of the award and is recognized as anexpense as it is earned over the requisite service period, which is the vestingperiod. To implement this standard, we elected the modified-prospective transitionmethod, under which prior periods are not revised for comparative purposes. Thevaluation provisions of SFAS 123R apply to new grants and to grants that wereoutstanding as of the effective date and are subsequently modified. Estimatedcompensation expense for grants that were outstanding as of the effective datewill be recognized over the remaining vesting period using the compensationcost estimated for the SFAS 123 pro forma disclosures.

The adoption of SFAS 123R had a material impact on ourconsolidated financial position and results of operations.

5

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**Note 3.  Accounts Receivable**

Our trade accounts receivable include amounts due fromcustomers and are reported net of a reserve for uncollectible accounts asfollows:

|                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Accounts  receivable, trade |       | $                 | 91,207     |                  | $          | 525,270 |   |
| Reserve                     |       | (6,607            | )          | (18,868               | )          |
| Accounts receivable,  net   |       | $                 | 84,600     |                  | $          | 506,402 |   |

 

Two of our research and development contracts containholdback provisions that allow our customers to withhold 10% from each invoicepayment. At June 30, 2007 and December 31, 2006 we had approximately $67,600and $54,600, respectively, of holdbacks in our accounts receivablebalance.  These holdbacks are payable once work has been satisfactorily completedand the final report has been received and approved. We believe these holdbackswill be collected upon completion of the contracts, and therefore have notrecorded any reserve against these amounts.

**Note 4.  Property and Equipment**

Details of our property and equipment follow:

|                                                 | ** ** | **Estimated** | ** ** | ** **        | ** ** | ** **            | ** ** |
|-------------------------------------------------|------------|---------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **Useful**    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                                      | ** ** | **Lives**     | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Machinery and  equipment                        |       | 5  years      |       | $                 | 1,258,316  |                  | $          | 814,875 |   |
| Service vehicles                                |       | 5  years      |       | 16,763            |       | 16,763                |       |
| Furniture and  fixtures                         |       | 7  years      |       | 255,940           |       | 255,940               |       |
| Office equipment                                |       | 3  years      |       | 1,502,565         |       | 1,486,951             |       |
| Leasehold  improvements                         |       | Lease  term   |       | 533,352           |       | 533,352               |       |
| Equipment under  capital lease obligations      |       | Lease  term   |       | 850,579           |       | 918,285               |       |
| Total                                           |       |          |       | $                 | 4,417,515  |                  | $          | 4,026,166 |   |
| Less accumulated  depreciation and amortization |       |          |       | (3,567,143        | )          | (3,610,760            | )          |
| Property and  equipment, net                    |       |          |       | $                 | 850,372    |                  | $          | 415,406 |   |

 

**Note 5.  Commitments and Contingencies**

The following table summarizes our commitments at June30, 2007:
| **Description of  Commitment** | ** ** | **Remainder of year ending  December 31, 2007** | ** ** | **Year ending  December 31, 2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------|------------|-----------|------------|
| Operating leases                    |       | $                                                                        | 132,353    |                                              | $          | —         |       | $         | —     |   | $ | 132,353 |   |
| Purchase  obligations               |       | 1,794,877                                                                |       | —                                            |       | —         |       | 1,794,877 |       |
| Total Commitments                   |       | $                                                                        | 1,927,230  |                                              | $          | —         |       | $         | —     |   | $ | 1,927,230 |   |

 

6

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We lease office, light manufacturing and assemblyspace under an operating lease that expires September 30, 2007. We haveprovided the lessor with an irrevocable letter of credit securing ourperformance under this lease with a balance at June 30, 2007 of $174,346, whichis reduced annually during the lease term.  This letter of credit issecured by a cash deposit, which is included in restricted cash in theaccompanying consolidated balance sheets.

Subsequent to the end of the quarter, on July 23,2007, we entered into a seven-year lease with GFI Tyngsboro, LLC, as landlord,for a 103,000 square foot new facility that will have sufficient manufacturingcapability for the production of more than 1,000 flywheels per year.  The new premises are located at 65 MiddlesexRoad, Tyngsboro, Middlesex County, Massachusetts, and will serve as our newcorporate headquarters and expanded manufacturing facility as of around October2007.  As part of the lease agreement, weissued to the landlord pursuant to an exemption from registration under theSecurities Act of 1933, as amended, 150,000 shares of our common stock and awarrant exercisable for 500,000 shares of our common stock in return for lowercash payments payable by us under the lease. We have agreed to file a registration statement within 30 days after thedate of the lease to register the 150,000 shares issued to the landlord.Estimated cash outlays to move and to close out the lease on the Wilmingtonfacility are expected to be between $0.2 million and $0.4 million.  The net cash required for structuralimprovements at the Tyngsboro facility to support our office, research anddevelopment and manufacturing requirements are expected to be $2.0 to $2.8million.  In the short term, capitalequipment of approximately $1.0 million will be required to meet the 2008production schedule.  Additional capitalexpenditures will be required in the future to optimize the plant for maximumcapacity.  The amount and timing of theseexpenditures are dependent on requirements of equipment needed to meetproduction schedules as well as having sufficient funding.

Cash payments under the Tyngsboro lease are asfollows:

| Fiscal Year | ** ** | **Amount** | ** ** |
|------------------|------------|------------|------------|
| 2007             |       | $          | 81,250     |   |
| 2008             |       | 503,687    |       |
| 2009             |       | 701,687    |       |
| 2010             |       | 727,437    |       |
| 2011             |       | 753,188    |       |
| Thereafter       |       | 2,201,626  |       |
| Total            |       | $          | 4,968,875  |   |

 

In addition, we are responsible for real estate taxesand all operating expenses of the facility.

At June 30, 2007, we had firm, non-cancelable purchasecommitments with our suppliers to acquire components for the development of theSmart Energy 25 flywheel system (a key component to the Smart Energy Matrix),and to satisfy contractual obligations for our research and developmentprograms in the amount of approximately $1.8 million.

*Legal Proceedings*

We may from time to time be subject to legalproceedings, often likely to involve routine litigation incidental to ourbusiness.  The outcome of any legal proceeding is not within our completecontrol, may often be difficult to predict and may be resolved over very longperiods of time.  Estimating probable losses associated with any legalproceedings or other loss contingency is very complex and requires the analysisof many factors including assumptions about potential actions by thirdparties.  A loss contingency is recorded as a liability in theconsolidated financial statements when it is both (i) probable and known that aliability has been incurred and (ii) the amount of the loss is reasonablyestimable.  If the reasonable estimate of the loss is a range and noamount within the range is a better estimate, the minimum amount of the rangeis recorded as a liability.  If a loss contingency is not probable or notreasonably estimable, a liability is not recorded in the consolidated financialstatements.

7

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**Note 6.  Restructuring and AssetImpairment Charges**

We periodically evaluate all of our property andequipment as required by Statement of Financial Accounting Standards No. 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets.” In 2002, we incurred arestructuring and impairment charge of $6.5 million of which $4.3 millionrepresented impaired capital equipment and leasehold improvements, $0.3 millionrelated to severance costs and $1.9 million related to a reserve against futurelease payments and related facility costs.  The reserve against futurelease payments is classified as “Restructuring Reserve” in the currentliabilities section of the balance sheet.

At June 30, 2007 and December 31, 2006, therestructuring reserves were as follows:

|                         | ** ** | **Six months ended  June 30,** | ** ** | **Twelve months ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                      | ** ** | **2006**                                             | ** ** |
| Beginning  balance      |       | $                                             | 347,408    |                                                 | $          | 713,469 |   |
| Charges for the  period |       | —                                        |       | —                                               |       |
| Reductions              |       | (218,704                                      | )          | (366,061                                             | )          |
| Ending balance          |       | $                                             | 128,704    |                                                 | $          | 347,408 |   |

 

**Note 7.  Stock Warrants**

The following schedule shows warrants outstanding asof June 30, 2007:
| **Description**                                | ** ** | **Grant Date** | ** ** | **Expiration  Date** | ** ** | **Strike Price** | ** ** | **Issued and  Outstanding** | ** ** |
|------------------------------------------------|------------|---------------------|------------|----------------------|------------|-----------------------|------------|----------------------------------|------------|
| May 24, 2005  Financing                        |       | 5/24/2005           |       | 5/24/2010            |       | $                     | 1.008      |                             | 800,000    |   |
| November 8, 2005  Financing (Investors)        |       | 11/8/2005           |       | 11/8/2010            |       | $                     | 1.99       |                             | 3,287,821  |   |
| November 8, 2005  Financing (Placement Agents) |       | 11/8/2005           |       | 11/8/2010            |       | $                     | 2.21       |                             | 450,000    |   |
| February 15,  2007 Shelf Issue                 |       | 2/15/2007           |       | 2/15/0012            |       | $                     | 1.33       |                             | 6,261,786  |   |
| Total warrants  outstanding                    |       |                |       |                 |       |                  |       | 10,799,607                       |       |

 

We have outstanding three series of warrants topurchase our common stock. Holders of the warrants are not entitled to receivedividends, vote, receive notice of any meetings of stockholders or otherwisehave any right as stockholders with respect to their warrant shares.

*April 2005 Financing Warrant*

In connection with the investment by Perseus 2000Expansion, L.L.C., we issued a warrant for 800,000 shares of our common stockat an exercise price of $1.008.

*November 2005 Financing Warrants*

As part of a financing transaction in November 2005,we issued warrants to purchase an aggregate of 2,960,527 shares of our commonstock to ten “accredited investors.”  Each warrant was exercisable for aperiod of five years and the per share exercise price for the warrant shareswas $2.21.  The terms of these warrantsincluded anti-dilution provisions which required us to adjust the exerciseprice and the number of shares of our common stock to be issued upon exercise ofthe warrants under certain circumstances, which include:

·                  Subdivisions,stock dividends or combinations of our common stock

·                  Reclassifications,exchanges, substitutions, or in-kind distributions that result in a change inthe number and/or class of the securities issuable upon exercise of thewarrants

·                  Reorganizations,mergers and similar transactions; and

8

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·                  Issuance ofadditional shares of our common stock, or securities convertible into ourcommon stock, at a price per share lower than the closing stock price on thedate of this transaction, which was $1.85.

In February 2007, we issued stock at a price per sharebelow the $1.85 threshold noted above. Based on the warrants’ anti-dilution provisions, the exercise price ofthese warrants was adjusted from $2.21 to $1.99 and 327,294 additional warrantswere issued to the investors.  Warrantsissued to the placement agents were not subject to adjustment.

*February2007 Shelf Warrants*

In February 2007, we sold 11,814,687 units of theCompany at a purchase price of $0.90 per unit. Each unit consisted of one share of our common stock, par value $0.01per share, and a warrant to purchase 0.5 shares of common stock at an exerciseprice of $1.33 per share, for a total of 6,261,786 warrants.  These warrants become exercisable as ofAugust 16, 2007, and expire five years from date of issue. The units wereissued pursuant to a prospectus supplement filed with the Securities andExchange Commission in connection with our registration statement on Form S-3filed on September 1, 2006, which became effective on December 14, 2006.  We filed a request with the Securities andExchange Commission on July 23, 2007 that this registration statement on FormS-3 be withdrawn and the unsold securities deregistered, and filed a new shelfregistration statement on Form S-3 for $50 million on August 6, 2007.

*July 2007Warrants*

Subsequent to the end of the quarter, we entered intoa lease for a new facility.  We agreedunder the terms of the lease to issue to the landlord pursuant to an exemptionfrom registration under the Securities Act of 1933, as amended, a warrantexercisable for 500,000 shares of our common stock. This warrant may beexercised at any time over the term of the lease, which is seven years.  See Subsequent Events (Note 9.)  The warrant and the shares issuable uponexercise of the warrant are restricted securities and may not be sold withoutregistration under the Securities Act of 1933, as amended, and applicable statesecurities laws or an exemption there from.

**Note 8.  Stock Based Compensation**

**Description of Plans**

*Stock Option Plan*

Our Third Amended and Restated 1998 Stock IncentivePlan allows for the granting of stock options to purchase up to 23,000,000shares of our common stock.  Options may be granted to our employees,officers, directors, consultants and advisors.  Under the terms of theoption plan, incentive stock options (“ISOs”) are to be granted at the fairmarket value of our common stock at the date of grant, and nonqualified stockoptions (“NSOs”) are to be granted at a price determined by the Board ofDirectors.  In general, the Board has authorized vesting periods of one tothree years and terms of varying length but in no case more than 10years.  Our stock option program is a long-term retention program that isintended to attract, retain and provide incentives for talented employees,officers and directors, and to align stockholder and employee interests. We consider our option program critical to our operation and productivity;essentially all of our employees participate.  At June 30, 2007, we had8,659,547 shares reserved for issuance under this plan, excluding sharescurrently reserved for outstanding options and RSUs.

*Employee Stock Purchase Plan*

Our Employee Stock Purchase Plan (the “ESPP”) allowssubstantially all of our employees to purchase shares of our common stock at adiscount through payroll deductions.  Participating employees may purchaseour common stock at a purchase price equal to 85% of the lower of the fairmarket value of the common stock at the beginning of an offering period or onthe exercise date.  Employees may designate up to 15% of their basecompensation for the purchase of common stock under this plan.  The ESPPprovides for the purchase of up to 2,000,000 shares of our common stock. At June 30, 2007, we had 1,850,354 shares reserved for issuance under thisplan.

9

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*Restricted Stock Unit Arrangements*

Our Third Amended and Restated 1998 Stock IncentivePlan permits the grant of restricted stock units (“RSUs”) to our employees,officers, directors and other service providers.  We use RSUs to (i) align our employees’ interestswith those of the Company, (ii) motivate our employees to achieve key productdevelopment milestones and thus create stockholder value, (iii) retain keyemployees by providing equity to such employees and (iv) conserve cash, bypaying bonuses in the form of RSUs, rather than in cash, but with the number ofsuch RSUs calculated on a discounted basis to compensate for the reducedliquidity as compared to cash.  With respect to the RSUs that are grantedin lieu of cash bonuses, the number of RSUs granted are based on performance,and are automatically converted into shares of common stock in four equaltranches in the fiscal year following the year of performance. Certain otherRSUs are granted to our officers as a form of equity incentive, are not tied toperformance, and vest over a three-year period in equal quarterlyinstallments.  There are also other performance-based restricted stockunits (PSUs) granted to our officers that cliff-vest upon the achievement ofcertain earnings-based milestones and upon the Company achieving a level ofrevenue such that it is no longer treated as a development stage company foraccounting purposes, both such vesting events subject to the recipient officerbeing employed by us during the period ending with the milestones. The unvestedportion of any RSU or PSU grant is subject to forfeiture upon the holder’sresignation or termination for cause.

Restricted stock activity for the year ended December31, 2006, and for the six months ended June 30, 2007, is as follows:

|                                                      | ** ** | **Six months ended  June 30,** | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                      | ** ** | **2006**                               | ** ** |
| ** **                                           | ** ** | **(number of shares)**              | ** ** |
| Shares issued related  to vested RSUs:               |       |                                          |       |                                   |       |
| Current year grant  based upon prior year bonus plan |       | —                                        |       | 587,374                                |       |
| Vesting of remaining  shares from prior year grants  |       | 7,022                                         |       | 108,786                                |       |
| Based upon current year  executive officer agreement |       | 6,010                                         |       | 10,533                                 |       |
|                                                 |       |                                          |       |                                   |       |
| Vested RSUs not yet  converted to stock              |       | 9,521                                         |       | 3,511                                  |       |
|                                                 |       |                                          |       |                                   |       |
| RSU’s granted but not  vested:                  |       |                                          |       |                                   |       |
| Related to 2006  executive officer agreement         |       | 21,075                                        |       | 28,097                                 |       |
| Related to 2007  executive officer agreement         |       | 60,128                                        |       | —                                 |       |
| Related to  performance-based executive plan*        |       | 1,265,823                                     |       | 1,265,823                              |       |

----

*                   Subjectto achievement of performance requirements.

10

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**Stock Option Plan Schedules**

Stock option activity for the first six months of 2007was as follows:  

|                                 | ** ** | ** **         | ** ** | **Weighted-** | ** ** | **Weighted-** | ** ** |
|---------------------------------|------------|--------------------|------------|---------------|------------|---------------|------------|
| ** **                      | ** ** | ** **         | ** ** | **Average**   | ** ** | **Average**   | ** ** |
| ** **                      | ** ** | **Number of** | ** ** | **Exercise**  | ** ** | **Fair**      | ** ** |
| ** **                      | ** ** | **Shares**         | ** ** | **Price**     | ** ** | **Value**     | ** ** |
| Outstanding, December  31, 2006 |       | 6,546,886          |       | $             | 1.23       |          |       |   |
| Granted                         |       | 2,132,408          |       | $             | 0.95       |          | $          | 0.55 |   |
| Exercised                       |       | —             |       | $             | —     |          |       |   |
| Canceled,  forfeited or expired |       | (75,196            | )          | $             | 1.41       |          |       |   |
| Outstanding, June 30, 2007      |       | 8,604,098          |       | $             | 1.16       |          |       |   |
|                                 |            |                    |            |               |            |               |            |  |  |

 

The following table summarizes information about stockoptions outstanding at June 30, 2007:
| ** **         | ** ** | ** **          | ** ** | **Weighted-**         | ** ** | ** **    | ** ** | ** **          | ** ** | **Vested**    | ** ** |
|--------------------|------------|---------------------|------------|-----------------------|------------|---------------|------------|---------------------|------------|---------------|------------|
| ** **         | ** ** | ** **          | ** ** | **Average**           | ** ** | **Weighted-** | ** ** | ** **          | ** ** | **Weighted-** | ** ** |
| ** **         | ** ** | **Number**          | ** ** | **Remaining**         | ** ** | **Average**   | ** ** | **Vested**          | ** ** | **Average**   | ** ** |
| ** **         | ** ** | **of Options** | ** ** | **Contractual**       | ** ** | **Exercise**  | ** ** | **Number**          | ** ** | **Exercise**  | ** ** |
| **Exercise Price** | ** ** | **Outstanding**     | ** ** | **Life (Years)** | ** ** | **Price**     | ** ** | **of Options** | ** ** | **Price**     | ** ** |
| $0.26 - $0.74      |       | 3,239,886           |       | 7.04                  |       | $             | 0.70       |                | 3,239,886  |          | $          | 0.70 |   |
| $0.82 - $1.26      |       | 3,630,427           |       | 7.76                  |       | $             | 0.93       |                | 1,745,048  |          | $          | 0.93 |   |
| $1.51 - $2.19      |       | 1,276,535           |       | 7.88                  |       | $             | 1.84       |                | 841,869    |          | $          | 1.93 |   |
| $2.50 - $3.10      |       | 130,000             |       | 2.85                  |       | $             | 2.64       |                | 130,000    |          | $          | 2.64 |   |
| $4.10 - $5.27      |       | 222,250             |       | 3.67                  |       | $             | 4.40       |                | 222,250    |          | $          | 4.40 |   |
| $6.00 - $9.31      |       | 105,000             |       | 3.31                  |       | $             | 6.40       |                | 105,000    |          | $          | 6.40 |   |
| Total              |       | 8,604,098           |       |                  |       |          |       | 6,284,053           |       |          |       |

 

**Stock Compensation**

Beginning on January 1, 2006, we adopted SFAS 123R.See Note 2 for a description of our adoption of SFAS 123R. We currently use theBlack-Scholes option pricing model to determine the fair value of stock optionsand employee stock purchase plan shares. The valuations determined using thismodel are affected by our stock price as well as assumptions we make regardinga number of complex and subjective variables, including our stock pricevolatility, expected life of the option, risk-free interest rate and expecteddividends, if any.

We estimate the volatility of our common stock byusing historical volatility.  We estimate the expected term of the shareor option grant, and determine a risk-free interest rate based on U.S. Treasuryissues with remaining terms similar to the expected term of the stock oroptions. We do not anticipate paying any cash dividends in the foreseeablefuture and therefore use an expected dividend yield of zero in our valuationmodel. We are required to estimate forfeitures at the time of grant and revisethose estimates in subsequent periods. All stock-based payment awards areamortized as they are earned over the requisite service periods of the awards,which are generally the vesting periods.

Restricted stock units (RSUs) are valued at the stockprice at date of grant, and expensed ratably over the performance period orvesting period, as appropriate.  The number of PSUs for which stockcompensation expense is calculated is based upon management’s assessment of thelikelihood of achieving the performance targets.

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The assumptions used to value stock option grants forthe three and six months ended June 30, 2007 and 2006, respectively, are asfollows:
| ** **                                                                               | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free interest rate                                                                  |       | 4.52%-5.05%                                         |       | 4.96%-4.99%                                       |       | 4.48%-5.05% |   | 4.68%-4.99% |   |
| Expected life of option                                                                  |       | 3  years                                            |       | 3  years                                          |       | 3  years |   | 3  years |   |
| Expected dividend  payment rate, as a percentage of the stock price on the date of grant |       | 0%                                                  |       | 0%                                                |       | 0% |   | 0% |   |
| Assumed volatility                                                                       |       | 95%-100%                                            |       | 106%-106%                                         |       | 95%-100% |   | 106%-108% |   |
| Expected forfeitures                                                                     |       | 10%                                                 |       | 10%                                               |       | 10% |   | 10% |   |

 

Stock-based compensation expense recognized on our consolidatedstatement of operations for the three and six months ended June 30, 2007, and2006 are as follows:
| ** **                                                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Selling, general and  administrative                                      |       | $                                                   | 297,280    |                                              | $          | 395,029 |   | $ | 660,488 |   | $ | 942,662 |   |
| Research and  development                                                 |       | 159,028                                             |       | 151,901                                           |       | 376,076 |   | 406,420 |   |
| Total stock  compensation expense                                         |       | $                                                   | 456,308    |                                              | $          | 546,930 |   | $ | 1,036,564 |   | $ | 1,349,082 |   |
|                                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Components of stock  compensation expense:                                |       |                                                |       |                                              |       |   |   |   |   |
| Amortization of  deferred compensation from restricted stock units (RSUs) |       | $                                                   | —     |                                              | $          | 340,022 |   | $ | — |   | $ | 800,311 |   |
| Compensation  expense related to other RSUs                               |       | 152,081                                             |       | 28,340                                            |       | 310,600 |   | 28,340 |   |
| Compensation  expense related to stock options                            |       | 304,227                                             |       | 178,568                                           |       | 725,964 |   | 520,431 |   |
| Total stock compensation expense                                          |       | $                                                   | 456,308    |                                              | $          | 546,930 |   | $ | 1,036,564 |   | $ | 1,349,082 |   |

 

As of June 30, 2007, there was approximately$2,256,000 of unrecognized compensation cost, adjusted for estimatedforfeitures, related to unvested stock-based payments granted to our employeesand directors. Total unrecognized compensation cost will be adjusted for futurechanges in estimated forfeitures and recognized over the remaining vestingperiods of the stock option grants.

**Note9.  Subsequent Events**

**Shelf Registration**

On July 23, 2007, we filed a request with theSecurities and Exchange Commission to withdraw the shelf registration on FormS-3 that we filed on September 1, 2006 and to deregister the unsold securitiesunder that filing.  On August 6, 2007, wefiled a $50 million shelf registration on Form S-3 with the Securities andExchange Commission to replace the shelf registration that was withdrawn.

**Amendment to our Rights Plan**

On August 8, 2007, we executed Amendment No. 2 to ourRights Agreement with Computershare Trust Company, N.A. (fka Equiserve TrustCompany, N.A.), as Rights Agent, to remove the provisions in the RightsAgreement that allowed Perseus Capital and its affiliates to acquire thirtyfive percent (35%) of our common stock without triggering the right of ourcommon stock holders to acquire our Series A Junior Participating PreferredStock. As a result, the percentage that applies to Perseus Capital and itsaffiliates for triggering such rights is now the same as applies to all otherAcquiring Persons, namely, when such Acquiring Person becomes the beneficialowner of fifteen percent (15%) or more of our common stock.

**Potential Delisting of the Company’s Stock Averted**

On March 27, 2007, we received a letter from theNasdaq Stock Market indicating that for the last 30 consecutive business days,the bid price of our common stock had closed below the minimum $1.00 per sharerequirement for continued inclusion on the Nasdaq Stock Market based onMarketplace Rule 4310(c)(4).  On July 3,2007, we received a letter from the NASDAQ Stock Market stating that, becauseour common stock had closed at $1.00 per share or greater for at least tenconsecutive business days, we have regained compliance with Marketplace Rule4310(c)(4).

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**Lease Agreement for New Facility**

On July 23, 2007, we entered into a real propertylease with GFI Tyngsboro, LLC, as landlord, for approximately 103,000 squarefeet at the premises located at 65 Middlesex Road, Tyngsboro, Middlesex County,Massachusetts for a term expiring September 30, 2014.  The new premises will serve as our newcorporate headquarters and expanded manufacturing facility as of around October2007. As part of the lease agreement, we issued to the landlord pursuant to anexemption from registration under the Securities Act of 1933, as amended,150,000 shares of our common stock and a warrant exercisable for 500,000 sharesof our common stock, in return for lower cash payment payable by us under thelease.  We have agreed to file aregistration statement within 30 days after the date of the lease to registerthe 150,000 shares issued to the landlord. Estimated cash outlays to move andto close out the lease on the Wilmington facility are expected to be between$0.2 million and $0.4 million.  The netcash required for structural improvements at the Tyngsboro facility to supportour office, research and development and manufacturing requirements areexpected to be $2.0 to $2.8 million.  Inthe short term, capital equipment of approximately $1.0 million will berequired to meet the 2008 production schedule. Additional capital expenditures will be required in the future tooptimize the plant for maximum capacity. The amount and timing of these expenditures are dependent onrequirements of equipment needed to meet production schedules as well as havingsufficient funding.

Cash payments under the Tyngsboro lease are asfollows:

| Fiscal Year | ** ** | **Amount** | ** ** |
|------------------|------------|------------|------------|
| 2007             |       | $          | 81,250     |   |
| 2008             |       | 503,687    |       |
| 2009             |       | 701,687    |       |
| 2010             |       | 727,437    |       |
| 2011             |       | 753,188    |       |
| Thereafter       |       | 2,201,626  |       |
| Total            |       | $          | 4,968,875  |   |

 

In addition, we are responsible for real estate taxesand all operating expenses of the facility.

**Testing of 25kWh Flywheel**

On August 2, 2007, we announced that our redesignedSmart Energy 25 flywheel system achieved two important development milestones:full speed operation of the flywheel (16,000 rpm) and full power (100 kWcharging and discharging) through the power electronics. We also successfullyconfirmed that our hybrid lift circuit – which was redesigned following a testmalfunction in December 2006 – met its revised performance specifications******to lift and support the flywheel ina stable manner during operation.

We will continue to test our Smart Energy 25 flywheelsystems in order to finalize the configuration of our initial commercialsystem.****The testing performed todate has given us confidence to proceed with procurement of some long lead-timeitems that are necessary to deploy our first megawatt of regulation in April,2008. The remaining elements in the test program are performance and failuretesting******of certain components of ourpower electronics and flywheel systems******undervarious operating conditions***.***We expectthat these tests will be completed before the end of September 2007. 

We are continuing our multiple supplier strategy tominimize costs through competition while insuring uninterrupted delivery ofcomponents.  We are also beginning costoptimization through design refinements through close collaboration with oursupplier base. We expect this to be an ongoing activity as we continue to makedesign improvements in response to opportunities presented by our manufacturingpartners as well as material prices and availability.

**Item 2.**                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**Note Regarding Forward Looking Statements:**

This Quarterly Report on Form 10-Q containsforward-looking statements concerning, among other things, our expected futurerevenues, operations and expenditures, and estimates of the potential marketsfor our products and services.  Such statements made may fall within themeaning of the Private Securities Litigation Reform Act of 1995, asamended.  All such forward-looking statements are necessarily onlyestimates of future results and the actual results we achieve may differmaterially from these projections due to a number of factors as discussed inthe section entitled “Risk Factors” of this Form 10-Q. New risks can arise andit is not possible for management to predict all such risks, nor can managementassess the impact of all such risks on our business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statement.  Giventhese risks and uncertainties, investors should not place undue reliance onforward-looking statements as a prediction of actual results.  Allforward-looking statements speak only as of the date of this 

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Quarterly Report on Form 10-Q.  We undertake noobligation to revise or update publicly any forward-looking statement in orderto reflect any event or circumstance that may arise after the date of thisQuarterly Report on Form 10-Q, other than as required by law.

**Critical Accounting Policies and Estimates**

The preparation of financial statements requiresmanagement to make estimates and judgments that may significantly affect thereported amounts of assets, liabilities, revenues, expenses and relateddisclosures. On an ongoing basis, management evaluates our estimates andassumptions including, but not limited to, those related to revenuerecognition, asset impairments, inventory valuation, warranty reserves andother assets and liabilities.  Management bases its estimates onhistorical experience and various other assumptions that it believes to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources.  Actual results may differ fromthese estimates under different assumptions or conditions.

*Revenue Recognition*

Although we have shipped products and recordedcontract revenues, our operations have not yet reached a level that wouldqualify us to emerge from the development stage.  Therefore we continue tobe accounted for as a development stage company under Statement of FinancialAccounting Standards No. 7 “Accounting and Reporting by Development StageEnterprises.”

We recognize revenue in accordance with accountingprinciples generally accepted in the United States of America.  Generally,revenue is recognized on transfer of title, typically when products are shippedand all related costs are estimable.  For sales to distributors, we makean adjustment to defer revenue until our products are subsequently sold bydistributors to their customers.

*Research and Development Contract Revenue Recognized on thePercentage-of-Completion Method*

We recognize contract revenue using thepercentage-of-completion method, based primarily on labor hours incurred to datecompared with total estimated direct labor hours.  Changes to totalestimated contract costs or losses, if any, are recognized in the period inwhich they are determined.  Revenues recognized in excess of amountsbilled are classified as current assets, and included in “Unbilled costs oncontracts in process” in our balance sheets.  Amounts billed to clients inexcess of revenues recognized to date are classified as current liabilitiesunder “Advance billings on contracts.”  Changes in project performance andconditions, estimated profitability, and final contract settlements may resultin future revisions to construction contract costs and revenue.

All of our research and development contracts aresubject to cost review by government agencies. Our reported results from thesecontracts could change adversely as a result of these reviews.

*Loss on Contract Commitments*

Each quarter, we perform an evaluation of expectedcosts to complete our in-progress contracts that we account for using thepercentage-of-completion method.  In the event that the total expectedcost to complete a contract exceeds the expected total contract revenue, weimmediately record a loss on the contract to the extent that the expected costexceeds the expected revenue from the contract.

*Warranty Reserves*

Our warranties require us to repair or replacedefective products returned to us during the applicable warranty period at nocost to the customer. We record an estimate for warranty-related costs based onactual historical return rates, anticipated return rates and repair costs atthe time of sale. A significant increase in product return rates, or asignificant increase in the costs to repair products, could have an adverseimpact on future operating results for the period or periods in which suchreturns or additional costs materialize and thereafter.

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*Income Taxes*

Deferred tax assets and liabilities are determinedbased on differences between the financial reporting and income tax basis ofassets and liabilities as well as net operating loss and tax creditcarryforwards, and are measured using the enacted tax rates and laws that willbe in effect when the differences reverse.  Deferred tax assets arereduced by a 100% valuation allowance to reflect the uncertainty associated withtheir ultimate realization.

Significant management judgment is required indetermining the provision for income taxes, the deferred tax assets andliabilities and any valuation allowance recorded against deferred taxassets.  The valuation allowance is based on our estimates of taxableincome and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjustthese estimates in future periods, we may need to establish an additional valuationallowance or reduce our current valuation allowance, which could materiallyimpact our tax provision.

*Long-Lived Assets*

In accordance with Statement of Financial AccountingStandards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”long-lived assets we hold and use are reviewed to determine whether any eventsor changes in circumstances indicate that the carrying value of the asset maynot be recoverable.  The conditions to beconsidered include whether or not the asset is in service, has become obsolete,is damaged, or whether external market circumstances indicate that the carryingamount may not be recoverable.  Whenappropriate we recognize a loss for the difference between the estimated fairvalue of the asset and the carrying amount. The fair value of the asset is measured using either available marketprices or estimated discounted cash flows.

*Sarbanes-Oxley Compliance*

Companies that are considered “accelerated filers” as defined in Exchange Act Rule 12b-2 were required to comply with theprovisions of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) as of thefirst fiscal year ending on or after November 15, 2004.  Non-acceleratedand foreign private issuers must comply with SOX by the first fiscal year endingon or after December 15, 2007.  Based on our market capitalization as ofJune 30, 2006, we were considered a “small business issuer” and hence areconsidered to be a “non-accelerated filer” with respect to our quarterlyfilings during 2007.  However, as of June30, 2007 our market capitalization exceeded $75 million, and we will become anaccelerated filer effective with our annual report on Form 10-K for 2007. Wehave begun activities aimed at complying with the requirements ofSarbanes-Oxley for our current fiscal year.

**Recently Issued Accounting Pronouncements and Regulations**

*Accounting for NonrefundableAdvance Payments for Goods and Services to be Used in Future Research andDevelopment Activities*

In March 2007, the EmergingIssues Task Force (EITF) issued EITF Issue No. 07-3, which was ratified in June2007.  This Issue requires nonrefundableadvance payments for goods and services to be used or rendered in futureresearch and development to be deferred and capitalized, and recognized asexpense as the goods are delivered or the related services are performed.  If an entity does not expect the goods to bedelivered or services to be rendered, the capitalized advance payment should becharged to expense.  This Issue does notapply to refundable advance payments for goods and services to be used infuture research and development activities. This EITF is effective for fiscal years beginning after December 15,2007, including interim periods within those fiscal years. As of June 30, 2007,we had outstanding advance payments for goods and services to be used in futureresearch and development activities of approximately $225,000, some of whichmay be refundable, which were included as part of  “Prepaid and other current assets” on ourbalance sheet.  Our policy has been toexpense these items as the goods or services are received.  Accordingly, we believe our currentaccounting policy is consistent with the treatment of such advances required byEITF Issue No. 07-3; therefore we do not expect this policy to impact ourresults of operations or financial position.

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**Overview**

Wedesign, develop, configure and expect to begin offering for sale, advancedproducts and services to support more reliable and cost-effective electricitygrid operation. The focus of our research and development has been to establishcommercially viable flywheel-based energy storage technologies that can providehighly reliable energy solutions for the worldwide electricity grid atcompetitive costs. We expect to generate revenues from the commercialization ofour flywheel energy storage systems to supply frequency regulation services tothe electricity grid in North America. We believe that as we expand ourproduction capabilities we can become a provider of frequency regulationservices to grid operators on a global basis. In addition, we believe that asthe commercialization of our technologies continues we will develop othercost-effective applications for our flywheel systems that will provideadditional revenue opportunities.

Our initial market focuswill be on the geographic regions of the domestic grid that have beenderegulated. These regions and their Independent System Operator (ISO)designations are: New England (ISO New England); California (California ISO);Texas (ERCOT); New York (New York ISO); and the Mid-Atlantic (PJM Interconnection).These regional ISOs or grid operators purchase frequency regulation servicesfrom independent providers in open bid markets that they manage and maintain.We are seeking to become one such provider. We believe our technology willoffer grid operators the benefits of greater reliability; faster response time;cleaner operation, including zero direct emissions of carbon dioxide, nitrogenoxide, sulfur dioxide and mercury; and lower maintenance costs compared toconventional power generation facilities that also provide frequency regulationservices.  We believe that we will havelower operating costs and faster response times than the majority of otherentities that provide frequency regulation services, which we believe willallow us to have sufficient margins to make the company economically viable.

In North America, the frequency regulation market inareas that are deregulated and accessible via open-bid market mechanisms wasvalued at over $650 million in 2006. Based on global electrical production, webelieve that the worldwide frequency regulation market is several times thisamount. Significant growth in the US open-bid market is expected due to acombination of factors. Under the open-bid market, grid operators forecast theneed for frequency regulation as a percentage of expected power demand, andapproved suppliers submit bids for these services.

To fully exploit thisregulatory-driven open-bid market, we expect to design, build, own and operatea number of frequency regulation facilities. Our business model, which is asale-of-services model, is similar to that of independent power producers whoalso design, build, own and operate their own power plants. Each Smart EnergyMatrixTM frequency regulation facility will be up to 20 megawatts (MW) in size.A Smart Energy MatrixTM is a multi-flywheel energy storage system designed toprovide reliable and sustainable frequency regulation services for electricitygrids.  A Smart Energy MatrixTM can bescaled to any size to provide one or more megawatts of frequency regulationcapacity.  Smart Energy MatrixTM frequencyregulation plants that are 20 MW or less in size offer the advantage of beingeligible to use fast-track interconnection regulations that allow plants ofthis capacity or smaller to be approved more quickly in accordance withstreamlined regulatory rules. A key benefit of our business model is that webegin to obtain revenues from the sale of services immediately upon installationof each megawatt.  Another key benefit ofour business model is that we avoid the costs and lengthy procurement cyclestypically associated with marketing capital equipment to the utility sector.

The key qualificationfor our participation in these markets is the ability to demonstrate that ourtechnology can provide the required services within the rules determined by thegrid operators. To attain this qualification and accelerate market entry weinstalled scale-power prototypes in New York and California for formal fieldtrials.  Both trials have beensuccessfully concluded, and have resulted in certification or other approvalfrom ISOs in three regions:  CaliforniaISO, New York ISO, and PJM Interconnection (Mid-Atlantic).

We must raise additional funds to execute our business plan.  Although funding of approximately $10 millionwas raised in February 2007, based on our current and forecasted rates ofexpenditure of cash, we estimate that we have sufficient cash to fundoperations into approximately the fourth quarter of 2007.  Estimated cash outlays to move and to closeout the lease on the Wilmington facility are expected to be between $0.2million and $0.4 million.  The net cashrequired for structural improvements at the Tyngsboro facility to support ouroffice, research and development and manufacturing requirements are expected tobe $2.0 to $2.8 million.  In the shortterm, capital equipment of approximately $1.0 million will be required to meetthe 2008 production schedule. Additionally, capital expenditures will berequired in the future to optimize the plant for maximum capacity.  The amount and timing of these expendituresare dependent on requirements of equipment needed to meet production schedulesas well as having sufficient funding.  Weneed to obtain additional investments in 2007 and 2008 to cover expensesrelated to continuing operations including ongoing research and developmentefforts, ramping up our manufacturing and assembly capacity and 

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designing and building frequency regulation facilities.

We are continuing to develop the Smart Energy 25flywheel, which is the core component of the Smart Energy MatrixTM system. In order to complete development of the Smart Energy MatrixTM system, as well asto build, operate and receive fees for frequency regulation services of atleast one megawatt from a commercial-sized flywheel-based frequency regulationsystem, and have sufficient working capital to continue to execute our businessplan through 2007, we will need to raise approximately $20 million of newfunding. Also, we will need to raise additional amounts to finance constructionof the additional frequency regulation facilities that are contemplated by ourbusiness plan.

As our business develops, we may from time to timeevaluate possible acquisitions of enterprises or technologies that we wouldconsider synergistic from a market, technology or product perspective.

From inception through June 30, 2007, we have incurredlosses of approximately $156.6 million. We expect to continue to incur lossesas we expand our product development and begin to increase our manufacturingand assembly capacity.

*Revenues*

We were awarded fixedprice research and development contracts from government agencies and arepursuing similar contracts from other government agencies.  We have recognized revenues on our existingcontracts using the percentage of completion method.  We are continuing to evaluate markets for ourflywheel systems but we have not recognized revenues from these products.  We have placed development prototypeflywheels with potential customers and shipped pre-production units.  These flywheel products were provided topotential customers without charge or on a demonstration basis to allow usaccess to field test information and to demonstrate the application of ourtechnologies.

*Cost of Goods Sold*

Cost of goods sold on fixed price research anddevelopment contracts are predominantly being recorded on the percentage ofcompletion method and consist of direct labor and material, subcontracting, andassociated overhead costs.

*Selling, General and Administrative Expenses*

Our sales and marketingexpenses consist primarily of compensation and benefits for sales and marketingpersonnel and related business development expenses.  In 2006 we added adirector of marketing and sales to investigate additional applications for ourtechnologies.  We expect sales and marketing expenses to continue toincrease as we expand efforts to define new markets for our products.  Wecontinue to rely on our engineering personnel to provide technicalspecifications and product overviews to our potential customer base. General and administrative expenses consist primarily of compensation andbenefits related to our corporate staff, professional fees, insurance andtravel. We expect our selling, general and administrative expenses to increaseslightly in 2007 over 2006 due primarily to the implementation and reportingexpenses associated with compliance with the internal control provisions of theSarbanes-Oxley Act of 2002, fundraising activities, and marketing, sales andbusiness development expenses related to the Smart Energy Matrix.

*Research and Development*

Our cost of research and development consistsprimarily of the cost of compensation and benefits for research and developmentand support staff, as well as materials and supplies used in the engineeringdesign and development process.  These costs are expected to increase in2007 as compared to 2006 as we complete the development and testing of theSmart Energy 25 flywheel and the design of the Smart Energy Matrix TM andfrequency regulation facility.

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*Loss on Contract Commitments*

We will establishreserves for anticipated losses on contract commitments if, based on costestimates to complete the commitment, we determine that a loss will beincurred. We evaluate our estimated costs to complete our governmentcontracts on a quarterly basis, and establish or adjust our reserves whenappropriate.  We are most likely torecognize probable losses on contract commitments early in a product’sintroduction prior to being able to realize expected decreases in cost per unitthrough engineering design changes, operating efficiencies, and volumepurchasing discounts. We recorded a $1.4 million charge in 2006 for anticipatedlosses on our research and development contracts.  No additional charges have been recordedduring the first six months of fiscal 2007.

*Depreciation and Amortization*

Our depreciation andamortization is primarily related to depreciation on capital expenditures andthe amortization of lease and leasehold costs related to our facilities.  We have intellectual property in the form ofpatents on our flywheel vacuum system, our heat pipe cooling systems, DC outputparalleling, metal hub, low-loss motor, co-mingled rims and earthquake-tolerantbearings on our flywheel products, and anti-islanding software, drawings, sourcecode, and production know-how on our SmartPower M5 inverter system, and expect to obtain other patents during 2007and beyond.  Costs related to patentdevelopment were being amortized during 2004, but we recorded impairmentcharges to write down these assets to zero on the balance sheet at December 31,2004.  These impairment charges were madedue to the uncertainty of realizing any future value from this property mainlydue the lack of substantial revenues to date. Accordingly, all costs incurred during 2007 and 2006 related to thedevelopment of intellectual property have been expensed as incurred.

*Interest and Other Income/Expense, net*

Our non-operating income and expenses are primarilyattributable to interest income resulting from cash on hand and gains or losseson the sale of our impaired assets.

**Results of Operations**

*Comparison of Three and Six Months ended June 30, 2007 and2006*
| ** **                              | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                              | ** ** | **(in thousands)**                             | ** ** |
| Revenue                                 |       | $                                                   | 449        |   | $ | 209 |   | $ | 240 |   | 115 | % |
| Cost of goods  sold                     |       | 419                                                 |       | 206 |   | (213 | ) | (103 | )% |
| Gross margin                            |       | 30                                                  |       | 3 |   | 27 |   | 900 | % |
| Selling, general  and administrative    |       | 1,549                                               |       | 1,628 |   | 79 |   | 5 | % |
| Research and  development               |       | 1,824                                               |       | 1,087 |   | (737 | ) | (68 | )% |
| Loss on sales  and contract commitments |       | —                                              |       | 688 |   | 688 |   | 100 | % |
| Depreciation and  amortization          |       | 31                                                  |       | 27 |   | (4 | ) | (15 | )% |
| Casualty loss  (recovery)               |       | (168                                                | )          | — |   | 168 |   | 0 | % |
| Interest and  other income, net         |       | 140                                                 |       | 154 |   | (14 | ) | (9 | )% |
| Net loss                                |       | $                                                   | (3,066     | ) | $ | (3,273 | ) | $ | 207 |   | 6 | % |

* *

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* *
| ** **                                | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                | ** ** | **(in thousands)**                           | ** ** |
| Revenue                                   |       | $                                                 | 842        |   | $ | 498 |   | $ | 344 |   | 69 | % |
| Cost of goods  sold                       |       | 812                                               |       | 451 |   | (361 | ) | (80 | )% |
| Gross margin                              |       | 30                                                |       | 47 |   | (17 | ) | 36 | % |
| Selling, general  and administrative      |       | 2,963                                             |       | 3,557 |   | 594 |   | 17 | % |
| Research and  development                 |       | 3,483                                             |       | 2,148 |   | (1,335 | ) | (62 | )% |
| Loss on contract  commitments             |       | —                                            |       | 688 |   | 688 |   | 100 | % |
| Depreciation and  amortization            |       | 57                                                |       | 49 |   | (8 | ) | (16 | )% |
| Casualty loss  (recovery)                 |       | (60                                               | )          | — |   | 60 |   | 0 | % |
| Interest and  other income (expense), net |       | 257                                               |       | 301 |   | (44 | ) | (15 | )% |
| Net loss                                  |       | $                                                 | (6,156     | ) | $ | (6,094 | ) | $ | (62 | ) | 1 | % |

 

*Revenue*

The following table provides details of our revenuesfor the three and six months ended June 30, 2007 and 2006:
| ** **                     | ** ** | ** **                           | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **   | ** ** | **Cumulative**   | ** ** | ** ** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|--------------------|------------|--------------|------------|------------------|------------|------------|------------|
| ** **                     | ** ** | ** **                           | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **   | ** ** | **Contract**     | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                           | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **   | ** ** | **Value**        | ** ** | **Total**  | ** ** |
| ** **                     | ** ** | **Percent**                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** | **Earned as** | ** ** | **Contract** | ** ** |
| ** **                     | ** ** | **complete**                         | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007**           | ** ** | **2006**     | ** ** | **of 2007** | ** ** | **Value**  | ** ** |
| ** **                     | ** ** | **(dollars in thousands)** | ** ** |
| CEC                            |       | 99%                                  |       | $                                                   | 43         |                                              | $          | 121                |       | $            | 64         |             | $          | 145        |       | $ | 1,219 |   | $ | 1,233 |   |
| NYSERDA PON 846                |       | 98%                                  |       | 19                                                  |       | 20                                                |       | 67                 |       | 198          |       | 632              |       | 646        |       |
| NYSERDA PON 800                |       | 82%                                  |       | (5                                                  | )          | 7                                                 |       | (1                 | )          | 23           |       | 51               |       | 63         |       |
| Air Force  Research Laboratory |       | 93%                                  |       | 246                                                 |       | 43                                                |       | 437                |       | 68           |       | 699              |       | 750        |       |
| Sandia DOE  Earmark            |       | 43%                                  |       | 117                                                 |       | —                                            |       | 247                |       | —       |       | 323              |       | 752        |       |
| Total Contract  Revenue        |       |                                 |       | $                                                   | 420        |                                              | $          | 191                |       | $            | 814        |             | $          | 434        |       | $ | 2,924 |   | $ | 3,444 |   |
| M5 and  accessories            |       |                                 |       | 29                                                  |       | 18                                                |       | 28                 |       | 64           |       |             |       |       |       |
| Total                          |       |                                 |       | $                                                   | 449        |                                              | $          | 209                |       | $            | 842        |             | $          | 498        |       | $ | 2,924 |   | $ | 3,444 |   |

 

In the three-month period ended June 30, 2007, werecorded revenue from flywheel-related research and development contractscalculated using the percentage of completion method of approximately $420,000and approximately $29,000 from the sale of our Smart Power M5TM inverter systemsand related solar products.  In the same period for 2006, we recordedresearch and development contract revenue of approximately $191,000 andapproximately $18,000 from the sale of our inverter systems and solarproducts.  Contract revenue was higher for the second quarter of 2007compared to same period of 2006 by approximately $229,000 or 199%.  Contract revenue during the second quarter of2007 was lower on the CEC and NYSERDA contracts than during the same period of2006 by approximately $91,000, since the majority of the milestones on thosecontracts had been reached in earlier periods. However, this decrease was more than offset by revenue increases on ourAir Force Research Laboratory contract of approximately 

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$203,000 and additional revenue of approximately$117,000 on the Sandia DOE Contract which was awarded to us during the thirdquarter of fiscal 2006.

In the six months ended June 30, 2007, we recordedrevenue from flywheel-related research and development contracts calculatedusing the percentage of completion method of approximately $814,000 andapproximately $28,000 from the sale of our Smart Power M5TM inverter systems andrelated solar products.  In the same period for 2006, we recorded researchand development contract revenue of approximately $434,000 and approximately$64,000 from the sale of our inverter systems and solar products. Contract revenue was higher for the first six months of 2007 compared to sameperiod of 2006 by approximately $380,000 or 88%.  Contract revenue during the first six monthsof 2007 was lower on the CEC and NYSERDA contracts than during the same periodof 2006 by approximately $236,000, since the majority of the milestones onthose contracts had been reached in earlier periods.  However, this decrease and the decrease ininverter revenue of approximately $36,000 were more than offset by revenueincreases on our Air Force Research Laboratory contract of approximately$369,000 and additional revenue of approximately $247,000 on the Sandia DOEContract which was awarded to us during the third quarter of fiscal 2006.

*Cost of Goods Sold*

Cost of goods sold for the three and six month periodsended June 30, 2007, and 2006 include primarily costs incurred in performanceof our research and development contracts calculated using the percentage ofcompletion method in the amounts of approximately $420,000 and $814,000,respectively.  Cost of goods sold for the three and six month periodsended June 30, 2007, increased approximately $213,000 and $360,000,respectively, over the corresponding three and six month periods in 2006.  The increases are consistent with theincreases in contract revenue based on the percentage of completion accountingmethodology.

*Selling, General and Administrative Expense*

The following details thekey changes in our Selling, General and Administrative expenses for the threeand six month periods ended June 30, 2007 in comparison to the equivalentperiods during the prior year:

|                                | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                     | ** ** | **(in thousands)**                         | ** ** |
| Period Ended  June 30, 2006    |       | $                                               | 1,628      |                                          | $          | 3,557 |   |
| Increases  (decreases):        |       |                                            |       |                                          |       |
| Stock compensation expense     |       | (98                                             | )          | (282                                          | )          |
| Public company expenses        |       | (8                                              | )          | (103                                          | )          |
| Audit fees                     |       | (57                                             | )          | (122                                          | )          |
| Subcontractors and consultants |       | (108                                            | )          | (90                                           | )          |
| Office equipment upgrades      |       | —                                          |       | (27                                           | )          |
| Other                          |       | (19                                             | )          | (38                                           | )          |
| Salaries and benefits          |       | 38                                              |       | 26                                            |       |
| Legal and professional fees    |       | 173                                             |       | 42                                            |       |
| Period Ended June 30,  2007    |       | $                                               | 1,549      |                                          | $          | 2,963 |   |

 

Comparisonof six months ended June 30, 2007 to the six months ended June 30, 2006:

Selling, general and administrative expenses totaledapproximately $2,963,000 and $3,557,000 for the six months ended June 30, 2007,and 2006, respectively. The reduction of approximately $594,000 or 17% wasprimarily the result of lower stock compensation of approximately $282,000mainly due to a decrease in our stock market price, a reduction in publiccompany expenses of approximately $103,000, a reduction in audit fees ofapproximately $122,000, a reduction in subcontractors and consultants ofapproximately $90,000, a reduction in the amount spent on office equipmentupgrades of approximately $27,000, and other various items of approximately$38,000. These decreases were offset by an increase in salaries and benefits of$26,000 and legal and professional fees of approximately $42,000. We expect ourselling, general and administrative expenses to be somewhat higher in 2007 than2006 due primarily to implementation and reporting expenses associated withcompliance with the 

20

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Sarbanes-Oxley Act of 2002, increases in staffingneeded to support our transition to a production facility, increased marketingand sales expenses associated with flywheel products and fund-raising efforts.

Comparisonof three months ended June 30, 2007, to the three months ended June 30, 2006:

Selling, general and administrative expenses totaledapproximately $1,549,000 and $1,628,000 for the three months ended June 30,2007, and 2006, respectively.  Thisrepresents a reduction of approximately $79,000 or 5%.  This reduction was primarily due to the samefactors as noted in the comparison of the six months ended June 30, 2007, tothe six months ended June 30, 2006.

*Research and Development Expense*

The following details thekey changes in our Research and Development expenses for the three and sixmonth periods ended June 30, 2007, in comparison to the equivalent periodsduring the prior year:

|                                     | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **(in thousands)**                         | ** ** |
| Period Ended  June 30, 2006         |       | $                                               | 1,087      |                                          | $          | 2,148 |   |
| Increases  (decreases):             |       |                                            |       |                                          |       |
| Expense materials                   |       | 324                                             |       | 510                                           |       |
| Salaries and benefits               |       | 232                                             |       | 659                                           |       |
| Consultants and subcontractors      |       | 208                                             |       | 276                                           |       |
| Facility costs                      |       | 43                                              |       | 59                                            |       |
| Hiring expenses                     |       | 64                                              |       | 42                                            |       |
| Stock compensation expense          |       | 7                                               |       | 30                                            |       |
| Travel                              |       | (3                                              | )          | 12                                            |       |
| Allocation of overhead to contracts |       | (181                                            | )          | (184                                          | )          |
| Software maintenance                |       | 18                                              |       | (25                                           | )          |
| Other                               |       | 25                                              |       | (44                                           | )          |
| Period Ended June 30,  2007         |       | $                                               | 1,824      |                                          | $          | 3,483 |   |

 

Comparisonof six months ended June 30, 2007, to the six months ended June 30, 2006:

For the six months ended June 30, 2007, research anddevelopment expenses increased by approximately $1,335,000 or 62%, incomparison to the equivalent period in 2006. This increase is primarily due to increased expenses fordevelopment materials of approximately $510,000, increased headcount-relatedexpenses resulting from hiring of engineering personnel to support our flywheeldevelopment of approximately $659,000, increased usage of consultants of  approximately $276,000, increased facilitycosts of approximately $59,000, increased hiring expense of approximately$42,000, increased stock compensation expenses of approximately $30,000 andincreased travel costs of approximately $12,000.  These increases were partially offset byincreased allocation of overhead to contracts of approximately $184,000 basedon more direct labor hours spent on contract activity during this period thanduring the equivalent period in 2006, lower software maintenance expenses ofapproximately $25,000, and reductions in other expenses of approximately$44,000.  We expect research and development costs to increasesubstantially in 2007 over 2006 levels due to increased headcount anddevelopment material to support the development of both the 25kWh flywheelsystem and the Smart Energy Matrix.

Comparisonof three months ended June 30, 2007, to the three months ended June 30, 2006:

Research and development expenses totaledapproximately $1,824,000 and $1,087,000 for the three months ended June 30,2007, and 2006, respectively.  Thisrepresents an increase of approximately $737,000 or 68%.  This increase was primarily due to the samefactors as noted in the comparison of the six months ended June 30, 2007, tothe six months ended June 30, 2006.

21

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*Loss on Contract Commitments*

We recorded contractcommitment losses on our research and development contracts in 2005 of$1,535,000 based on expected cost overruns related to material, labor andoverhead, as well as unplanned overruns in the amount of labor required tocomplete the contracts.  During thesecond quarter of 2006, we recorded additional charges totaling approximately$688,000 to the contract loss reserve. This amount consisted of net increases in estimated material, labor, andtravel costs expected to complete existing contracts of approximately $275,000;increases in the labor and overhead rates applied to the contracts based onactual costs of approximately $368,000, and other costs of $45,000.  Based on our assessments of the estimated coststo complete our contracts as of June 30, 2007, no additional charges to thecontract loss reserve were required for the three or six months ended June 30,2007.

*Depreciation and Amortization*

The increase in depreciation expense for the first sixmonths of 2007 as compared to the first six months of 2006 of approximately$8,000, or 17%, is primarily attributable to depreciation on new assetsacquired during 2007.  Likewise, the increase in depreciation expense forthe three months ended June 30, 2007, over the comparable period in 2006 ofapproximately $4,000, or 15%, is also attributable to depreciation on newassets acquired during that period.  Weexpect depreciation during the remainder of 2007 to be higher than 2006 due tocapital expenditures relating to the increase of production capacity inmanufacturing.

*Interest and Other Income/(Expense), net*

Interest income for the quarter ended June 30, 2007,was approximately $10,000 less than for the equivalent period in 2006. Theprimary reason for this difference is that cash balances available forinvesting which were approximately $1 million lower, on average, than duringthe same period in the prior year.  Inaddition, during the second quarter of 2006 we received approximately $4,000 aspartial settlement of a class action suit relating to unfair practices engagedin by certain insurance brokerage firms.

The decrease in interest and other income for thefirst six months of 2007 as compared to the same period during 2006 ofapproximately $44,000, or 15%, is primarily attributable to lower cash balancesavailable for investing, particularly during the first half of the firstquarter of the current fiscal year. As a result of our sale of stock duringmid-February 2007, cash available for investing increased by approximately $10million.  This decrease was partially offset by the receipt of a partialsettlement related to a class action suit, as noted above.

*Net Loss*

As a result of the changes discussed above, the netloss for the six months ended June 30, 2007 was approximately $6,156,000 whichcompares to a net loss during the same period in 2006 of approximately$6,094,000, an increase in net loss of approximately $62,000 or 1%.

**Liquidity and Capital Resources**

|                                            | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                           | ** ** |
| Cash and cash  equivalents                 |       | $                                                 | 9,395      |   | $ | 10,227 |   |
| Working capital                            |       | 7,419                                             |       | 8,459 |   |
| Cash provided by  (used in)                |       |                                              |       |   |   |
| Operating activities                       |       | (5,031                                            | )          | (3,595 | ) |
| Investing activities                       |       | (488                                              | )          | (96 | ) |
| Financing activities                       |       | 9,663                                             |       | 28 |   |
| Net decrease in  cash and cash equivalents |       | $                                                 | 4,144      |   | $ | (3,663 | ) |
| Current ratio                              |       | 3.3                                               |       | 4.2 |   |

 

22

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Our cash requirementsdepend on many factors including, but not limited to, research and developmentactivities, continued efforts to commercialize our products, facility costs aswell as general and administrative expenses. Since we are still in the development stage and have not yet begun ourexpected principal operations, we do not generate enough cash from operationsto satisfy our working capital requirements. We expect to make significant expenditures to fund our operations,develop technologies and explore opportunities to find and develop additionalmarkets to sell our products. In previous years, we took significant actions toreduce our cash expenditures for product development, infrastructure andproduction readiness by significantly reducing headcount, development spendingand capital expenditures. However, as we near completion of development of theSmart Energy MatrixTM and prepare to begin commercial activity aimed at revenuegeneration in 2008, we have begun to increase our headcount, and have spentadditional funds on development materials, capital equipment and marketanalyses to understand the size of markets, competitive aspects and advantagesthat our products could provide.   Weexpect to use more cash resources during 2007 as we continue to work on ourgovernment research and development contracts and develop the capacity tomanufacture our Smart Energy 25 flywheels in anticipation of putting afrequency regulation facility into service during the second quarter of 2008.

We must raise additional equity to execute our business plan.  Based on our current and forecasted rates ofexpenditure of cash, we have sufficient cash to fund operations intoapproximately the fourth quarter of 2007. We need to obtain additionalinvestments during 2007 and 2008 to fund:

·                  Therenovation of and move to our new headquarters

·                  Ourcontinuation as a going concern

·                  Ongoingresearch and development of the Smart Energy 25 flywheel and the Smart EnergyMatrixTM multi-flywheel system

·                  Theramp up of our manufacturing and assembly capacity

·                  Purchasingthe components for assembly of the flywheel systems to populate our firstfrequency regulation facility

·                  Thebuild-out of the first facility to provide frequency regulation services to theelectricity grid

·                  Workingcapital requirements; and

·                  Theidentification and development of new business opportunities that would enhanceour business model.

We are continuing to develop the Smart Energy 25flywheel, which is the core component of the Smart Energy MatrixTM flywheelsystem.  In order to complete development of the Smart Energy MatrixTMflywheel system, as well as to build, operate and receive fees for frequencyregulation services of at least one megawatt from our flywheel-based commercialfrequency regulation system, and have sufficient working capital to continue toexecute our business plan through 2007, in addition to the $10.6 milliontransaction in February, we will need to raise approximately $20 million offunding during the remainder of 2007, which includes the cost of structuralimprovements to and moving to our new headquarters.  Also, beginning in 2008 we will need to raiseadditional amounts beyond the foregoing $20 million to finance construction ofthe various additional frequency regulation facilities that are contemplated byour business plan.

**Operating Activities**

Net cash used in operating activities wasapproximately $3,595,000 and $5,031,000 for the six months ended June 30, 2006,and 2007, respectively.  The primary component to the negative cash flowfrom operations is from net losses.  For the six months ending June 30,2007, we had a net loss of approximately $6,156,000.  Adjustments toreconcile net loss to cash flow in 2007 include non-cash stock compensation ofapproximately $1,037,000, depreciation and amortization of approximately$56,000, and a net reduction in the asset impairment reserve of approximately$1,000, and changes in operating assets and liabilities of approximately $254,000  offset by a gain on the sale of fixed assetsof approximately $4,000 and facility-related cash payments charged againstrestructuring reserves of approximately $219,000.  During the same period in 2006, we had a netloss of approximately $6,094,000.  Adjustments to reconcile net loss tocash flow include non-cash stock compensation of approximately $1,349,000,depreciation and amortization of approximately $48,000, offset byfacility-related cash payments charged against restructuring reserves ofapproximately $183,000.  Changes in the operating assets and liabilitiesgenerated approximately $1,285,000 of cash during the first six months of 2006.

23

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**Investing Activities**

Net cash used in investing activities wasapproximately $488,000 for the six months ending June 30, 2007, and $95,000during the same period of 2006.  The principal use of cash in 2007 forinvesting activities was the purchase of property and equipment in the amountof approximately $492,000, offset by the sale of property and equipment ofapproximately $4,000.  The principal use of cash for investing activitiesduring the first six months of 2006 was the purchase of property and equipmentin the amount of approximately $95,000.

**Financing Activities**

Net cash provided by financing activities wasapproximately $9,663,000 for the first six months of 2007 and $28,000 duringthe same period of 2006.  During the first half of fiscal 2007, we raisedapproximately $9,652,000 from the sale of stock from our shelf registration,and approximately $11,000 for the issuance of stock to our employees under theemployee stock purchase plan.  During theequivalent period of 2006, we received approximately $10,000 from the issuanceof stock under the employee stock purchase plan, and approximately $18,000 fromthe exercise of employee stock options.

As part of our new business development, we mayevaluate possible acquisitions of enterprises or technologies that we considersynergistic from a market, technology or product perspective. We may makeinvestments in companies for strategic business reasons.  Because ourprimary motivation in making these investments may not be to realize a profiton the investment itself, but rather to expand our business prospects, theseinvestments may lack any financial return to the Company, may result in a lossof principal and may lack liquidity.

**Item 3.**                          Quantitativeand Qualitative Disclosure About Market Risk

Our cash equivalents, which have maturities of lessthan three months, may expose our assets to interest rate risk.  At June30, 2007, we had approximately $109,000 of cash equivalents that were held innon-interest bearing accounts, approximately $515,000 of cash equivalents thatwere held in interest bearing checking accounts, and approximately $8,771,000invested in interest-bearing money market accounts at high-quality financialinstitutions, some of which are invested in off-shore securities.  The fair value of these investmentsapproximates their cost. The funds invested in money market accounts may not becovered under FDIC Insurance, and therefore may be some risk of loss, which wedeem to be low.

**Item 4T.**                  Controls andProcedures

Based on our market capitalization as of June 30,2006, we were considered a “small business issuer” and hence are considered tobe a “non-accelerated filer” with respect to our quarterly filings during2007.  However, as of June 30, 2007 ourmarket capitalization exceeded $75 million, and we will become an acceleratedfiler effective with our annual report on Form 10-K for 2007. We have begunactivities aimed at complying with the requirements of Sarbanes-Oxley for ourcurrent fiscal year.  To that end, wehave engaged Control Solutions to assist us with updating our documentation,performing a risk assessment, and testing the effectiveness of our controls.

Our management, with the participation of ourprincipal executive officer and principal financial officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of the end of the period covered by this Quarterly Report on Form10-Q.  Based on that evaluation, the principal executive officer andprincipal financial officer have concluded that our disclosure controls andprocedures are effective in enabling us to record, process, summarize andreport information required to be included in our periodic SEC filings withinthe required time period.  Management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives, and management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Based on the evaluation of our disclosure controls andprocedures as of June 30, 2007, our principal executive officer and principalfinancial officer concluded that, as of such date, our disclosure controls andprocedures were effective at the reasonable assurance level.

24

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In addition, our management, with the participation ofour principal executive officer and principal financial officer, has evaluatedwhether any change in our internal control over financial reporting (as definedin Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred duringthe period covered by this Quarterly Report on Form 10-Q.  Based on thatevaluation, the principal executive officer and principal financial officerhave concluded that there has been no change in our internal control over financialreporting during the period covered by this Quarterly Report on Form 10-Q thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

**Part II — OTHERINFORMATION**

**Item 1.**                          LegalProceedings

None.

**Item 1A.**                 Risk Factors

Except as set forthbelow, there have not been any material changes during the six months endedJune 30, 2007, to the risk factors set forth in Part I, Item IA of our AnnualReport on Form 10-K for the year ended December 31, 2006, and filed with theSecurities and Exchange Commission on March 30, 2007 and amended on May 2,2007.

***Our ability to obtain site interconnection or otherconstruction approvals in a timely manner for specific regulation plants fromIndependent System Operators (ISOs) is uncertain and this could adverselyaffect projected revenue milestones.***

While ourtechnology has been certified, approved or otherwise qualified for use by threeISOs, ISOs typically require site specific interconnection studies and approvalsbefore a plant can be built at a specific location, which, if not providedand/or approved by the ISO in a timely manner, could delay our revenuemilestones. For example, for plants in the 10-20 MW range, an electricalinterconnection study is required to assess any potential adverse impacts onthe grid associated with the proposed plant location. While these studies andapprovals are a typical and customary requirement for every type of powergeneration technology, potential for delay exists since the studies aresometimes done by the ISOs themselves. In some cases, ISOs allow the studies tobe done by the plant sponsor, but in every case results must be reviewed andapproved by the ISO before a specific plant location is approved.  Additionally, our ability to meet ourprojected revenue milestones could be adversely affected by delays in obtainingsite zoning approvals, or other delays which may occur with any constructionproject. While we believe we have allowed sufficient time for the completion ofthese site-specific interconnection studies and other project requirementsconsistent with our revenue milestones, there can be no assurance that delaysin completion and/or approval of such studies or other delays will not occur,and that such any delays will not cause an adverse impact on our achievement offorecasted revenue milestones.

**Item 2.**                          UnregisteredSales of Equity Securities and Use of Proceeds

None.

**Item 3.**                          DefaultsUpon Senior Securities

None.

**Item 4.**                          Submissionof Matters to a Vote of Security Holders

On June 25, 2007, we held our annual meeting ofshareholders.  At this meeting, stockholders voted on four matters: (1) to amend our Sixth Amended and Restated Certificate of Incorporation todeclassify our Board of Directors so that all directors are elected annually;(2) to amend our Sixth Amended and Restated Certificate of Incorporation toincrease the number of authorized shares of common stock by 90,000,0000 shares,(3) to elect directors for a term of one year, and (4) to ratify the selectionof Miller Wachman LLP as the Corporation’s independent auditors for 2007. The result of the votes was as follows:

25

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| **Matter voted upon:** | ** ** | **Votes For:**                                                                                                                                   | ** ** | **Votes Against** | ** ** | **Votes Withheld** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **                                                                                                                                            | ** ** | ** **             | ** ** | ** **              | ** ** |
| 1                                |       | Amend our Sixth  Amended and Restated Certificate of Incorporation to declassify our Board of  Directors so that all directors are elected annually.  |       | 61,214,267             |       | 403,634                 |       | 118,440 |   |
| ** **                       | ** ** | ** **                                                                                                                                            | ** ** | ** **             | ** ** | ** **              | ** ** | ** ** | ** ** |
| 2                                |       | Amend our Sixth  Amended and Restated Certificate of Incorporation to increase the number of  authorized shares of common stock by 90,000,000 shares. |       | 57,321,822             |       | 4,181,506               |       | 233,013 |   |
|                             |       |                                                                                                                                                  |       |                   |       |                    |       |   |   |
| 3                                |       | Election of  Directors for a one-year term:                                                                                                           |       | **Votes For:**         | ** ** | **Votes Withheld**      | ** ** | ** ** | ** ** |
|                             |       |                                                                                                                                                  |       |                   |       |                    |       |   |   |
|                                  |       | F. William Capp                                                                                                                                       |       | 60,585,256             |       | 1,151,085               |       |   |   |
|                             |       | Stephen P. Adik                                                                                                                                       |       | 60,563,241             |       | 1,173,100               |       |   |   |
|                                  |       | Daniel E. Kletter                                                                                                                                     |       | 60,611,851             |       | 1,124,490               |       |   |   |
|                             |       | Virgil G. Rose                                                                                                                                        |       | 60,599,509             |       | 1,136,832               |       |   |   |
|                                  |       | Jack P. Smith                                                                                                                                         |       | 60,679,654             |       | 1,056,687               |       |   |   |
|                             |       | Edward A. Weihman                                                                                                                                     |       | 60,717,398             |       | 1,018,943               |       |   |   |
|                             |       |                                                                                                                                                  |       |                   |       |                    |       |   |   |
|                             | ** ** | ** **                                                                                                                                            | ** ** | **Votes For:**         | ** ** | **Votes Against**       | ** ** | **Votes Withheld** | ** ** |
| 4                                |       | Ratification of the  selection of Miller Wachman LLP as the Corporation’s independent auditors for  2007.                                        |       | 61,028,409             |       | 496,243                 |       | 211,689 |   |

 

The total shares outstanding and eligible to vote asof the record date of May 11, 2007, were 70,944,514 shares.  Proxies representing 61,736,341 shares or 87percent of the eligible voting shares were received and tabulated.

**Item 5.**                          OtherInformation

None.

26

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** **

**Item 6.  Exhibits**
| Exhibit    | ** ** | ** ** | ** ** | ** **                                                                                                                                              |
|------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Ref**    | ** ** | **Description of Document**                                                                                                                             |
|       |       |       |       |                                                                                                                                                    |
| 1.1        |       | (5)        |       | Free Writing Prospectus — Form of Investor Purchase  Agreement.                                                                                    |
|       |       |       |       |                                                                                                                                                    |
| 1.2        |       | (6)        |       | Prospectus Supplement to Prospectus dated December  14, 2006.                                                                                           |
|       |       |       |       |                                                                                                                                                    |
| 3.1        |       | (1)        |       | Sixth Amended and Restated Certificate of  Incorporation.                                                                                               |
|       |       |       |       |                                                                                                                                                    |
| 3.2        |       | (8)        |       | Amended and Restated Bylaws, as amended.                                                                                                                |
|       |       |       |       |                                                                                                                                                    |
| 3.3        |       | (2)        |       | Certificate of Designation of Series A Junior  Participating Preferred Stock, filed with The Secretary of State of Delaware  on October 4, 2002.        |
|       |       |       |       |                                                                                                                                                    |
| 4.1        |       | (3)        |       | Form of specimen stock certificate.                                                                                                                     |
|       |       |       |       |                                                                                                                                                    |
| 10.1       |       | (7)        |       | Placement Agency agreement with Merriman Curhan  & Company.                                                                                         |
|       |       |       |       |                                                                                                                                                    |
| 10.2       |       | (4)        |       | Employment agreement dated March 2, 2007 between the  Company and F. William Capp                                                                       |
|       |       |       |       |                                                                                                                                                    |
| 10.3       |       | (4)        |       | Employment agreement dated March 2, 2007 between the  Company and James M. Spiezio                                                                      |
|       |       |       |       |                                                                                                                                                    |
| 10.4       |       | (4)        |       | Employment agreement dated March 2, 2007 between the  Company and Matthew L. Lazarewicz                                                                 |
|       |       |       |       |                                                                                                                                                    |
| 10.5       |       | (4)        |       | Restricted Stock Unit and Option Agreement dated  March 2, 2007 between the Company and F. William Capp.                                                |
|       |       |       |       |                                                                                                                                                    |
| 10.6       |       | (4)        |       | Restricted Stock Unit and Option Agreement dated  March 2, 2007 between the Company and James M. Spiezio.                                               |
|       |       |       |       |                                                                                                                                                    |
| 10.7       |       | (4)        |       | Restricted Stock Unit and Option Agreement dated  March 2, 2007 between the Company and Matthew L. Lazarewicz.                                          |
|       |       |       |       |                                                                                                                                                    |
| 10.8       |       | (4)        |       | Option Agreement dated March 2, 2007 between the  Company and F. William Capp.                                                                          |
|       |       |       |       |                                                                                                                                                    |
| 10.9       |       | (4)        |       | Option Agreement dated March 2, 2007 between the  Company and James M. Spiezio.                                                                         |
|       |       |       |       |                                                                                                                                                    |
| 10.10      |       | (4)        |       | Option Agreement dated March 2, 2007 between the  Company and Matthew L. Lazarewicz.                                                                    |
|       |       |       |       |                                                                                                                                                    |
| 10.11      |       | (9)        |       | Lease dated as of July 23, 2007 between the Company  and GFI Tyngsboro, LLC.                                                                            |
|       |       |       |       |                                                                                                                                                    |
| 31.1       |       | +          |       | Certification of Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                |
|       |       |       |       |                                                                                                                                                    |
| 31.2       |       | +          |       | Certification of Principal Financial and Accounting  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                 |
|       |       |       |       |                                                                                                                                                    |
| 32.1       |       | +          |       | Certification of Principal Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

27

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|      |   |   |   |                                                                                                                                                    |
|------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2 |   | +      |   | Certification of Principal Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

----

(1)             Incorporatedby reference from the Form S-1 filed on November 16, 2000 (File No. 333-43886)and the DEF 14A filed on May 25, 2007 (File No. 000-31973)..

(2)             Incorporatedby reference from the Form 10-K filed on March 30, 2007 (File No. 000-31973).

(3)             Incorporatedby reference from the Form S-3 filed on December 8, 2005 (File No. 333-130207).

(4)             Incorporatedby reference from the Form 8-K filed on March 7, 2007 (File No. 000-31973).

(5)             Incorporatedby reference from the Form FWP filed on February 12, 1007 (File No.333-137071).

(6)             Incorporatedby reference from the Form 424B5 filed on February 13, 2007 (File No.333-137071).

(7)             Incorporatedby reference from the Form 8-K filed on February 13, 2007 (File No. 000-31973).

(8)             Incorporatedby reference from the Form 10-Q filed on May 3, 2007 (File No. 000-31973).

(9)             Incorporatedby reference from the Form 8-K filed on July 23, 2007 (File No. 000-31973).

+                    Filedherewith.

28

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                                                                                                                                                                                                                                                                                                                 |   | BEACON POWER CORPORATION |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|
|                                                                                                                                                                                                                                                                                                            |   |                     |   |   |
|                                      Date:    August 7, 2007                                                 |   | By:                      |   | /s/ F. William Capp |
|                                                                                                                                                                                                                                                                                                            |   |                     |   | F. William Capp |
|                                                                                                                                                                                                                                                                                                            |   |                     |   | President and Chief Executive Officer |
|                                                                                                                                                                                                                                                                                                            |   |                     |   |   |
|                                                  August 7, 2007 |   | By:                      |   | /s/ James M. Spiezio |
|                                                                                                                                                                                                                                                                                                            |   |                     |   | James M. Spiezio |
|                                                                                                                                                                                                                                                                                                            |   |                     |   | Vice President of Finance, Chief Financial Officer, |
|                                                                                                                                                                                                                                                                                                            |   |                     |   | Treasurer and Secretary |
|                                                                                                                                                                                                                                                                                                            |   |                     |   | Principal Financial Officer |

 

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