Use these links to rapidly review the documentTable of Contents Item 8. Consolidated Financial Statements and Supplementary Data



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010Oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from            to


Commission file number 000-31973

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

Delaware(State or other jurisdiction of
incorporation or organization)

04-3372365(I.R.S. Employer
Identification No.)65 Middlesex Road
Tyngsboro, MA(Address of principal executive offices)

01879(Zip code)


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



Securities
registered pursuant to Section 12(b) of the Act:

Title of each class:

Name of each exchange on which registered:Common Stock, par value $.01 per share

The NASDAQ Stock Market LLCPreferred Share Purchase Rights

(NASDAQ Capital Market)


Securities
registered pursuant to Section 12(g) of the Act:None

Indicate
by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes     No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes     No ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a "smaller reporting
company" per rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o

Smaller reporting company o


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

As of June 30, 2010 the market value of the voting and non-voting common stock of the registrant held by non-affiliates of the
registrant was $62,328,940. In determining the market value of non-affiliated voting stock, shares of the registrant's common stock beneficially owned by each executive officer, director
and any known person to be the beneficial owner of more than 20% of the registrant's voting stock have been excluded. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

The
number of shares of the Registrant's common stock, par value $.01 per share, outstanding as of March 14, 2011, was 25,128,828.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for Beacon Power Corporation's Annual Meeting of Stockholders, to be filed no later than April 30, 2011 for the
year ended December 31, 2010, are incorporated by reference into Part III of this Form 10-K.



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Table of Contents



PART I


-1-Item 1.

Business


-1-Item 1A.

Risk Factors


-20-Item 1B.

Unresolved Staff Comments


-29-Item 2.

Properties


-30-Item 3.

Legal Proceedings


-30-Item 4.

(Removed and Reserved)


-30-PART II


-31-Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


-31-Item 6.

Selected Consolidated Financial Data


-32-Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operation


-33-Item 7A.

Quantitative and Qualitative Disclosures about Market Risk


-69-Item 8.

Consolidated Financial Statements and Supplementary Data


-70-Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


-139-Item 9A.

Controls and Procedures


-139-Item 9B.

Other Information


-139-PART III


-140-Item 10.

Directors, Executive Officers and Corporate Governance


-140-Item 11.

Executive Compensation


-140-Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


-140-Item 13.

Certain Relationships and Related Transactions and Director Independence


-140-Item 14.

Principal Accounting Fees and Services


-140-PART IV


-141-Item 15.

Exhibits, Financial Statement Schedules


-141-SIGNATURES


-146-


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Note Regarding Forward Looking Statements:

This Annual Report on Form 10-K may include statements that are not historical facts and are considered
"forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Beacon Power Corporation's current views about future
events and financial performances. These "forward-looking" statements are identified by the use of terms and phrases such as "will," "believe," "expect," "plan," "anticipate," and similar expressions
identifying forward-looking statements. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual
results to differ materially from our expectation. These factors include, for example: a limited commercial operating history; a history of losses and anticipated continued losses from operations; the
complexity and other challenges of arranging project financing and resources for one or more frequency regulation power plants, including uncertainty about whether we will be able to comply with the
conditions or ongoing covenants of the Federal Financing Bank loan for our Stephentown, New York, facility; our need to comply with any disbursement or other conditions under the Department of Energy
(DOE) Smart Grid grant program; a need to raise additional equity to fund our projects and our other operations in uncertain financial markets; conditions in target markets, such as that some ISOs are
taking longer than others to comply with FERC's requirement to update market rules to include new technology such as ours, and also such as that frequency regulation pricing is lower in the
short-term than at many times in the past; our ability to obtain site interconnection approvals, landlord approvals, or other zoning and construction approvals in a timely manner; limited
experience manufacturing commercial products or supplying frequency regulation services on a commercial basis; limited commercial contracts for revenues to date; our ability to construct and operate
plants in a variety of locations; our ability to make our technology fully compatible with 50 Hz. electrical design requirements for use in overseas markets; our ability to sell regulation services
and plants at attractive margins; the uncertainty of the global economy; meeting the technical requirements of foreign markets based upon their specific grid and market characteristics; dependence on
third-party suppliers; competition from companies with greater financial resources, especially from companies that are already in the frequency regulation market; possible government regulation that
may impede the ability to market products or services or impact market size; possible product liability claims and the negative publicity which could result; any failure to protect intellectual
property, or any possible infringement of third party patents; our ability to
retain key executives and continue to attract additional talented human resources; and the historical volatility of our stock price. Such statements made by us fall within the safe harbors provided by
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All such forward-looking statements are necessarily only
estimates of future results and the actual results we achieve may differ materially from these estimates due to these and other risk factors as discussed in the sections entitled "Item 1A. Risk
Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K. Beacon Power Corporation expressly does not
undertake any duty to update forward-looking statements.

Explanatory Note Regarding Share Amounts:

All share amounts and per share prices in this Annual Report on Form 10-K have been retroactively adjusted to
reflect the effect of our reverse stock split, on a one-for-ten basis, effective February 25, 2011, unless otherwise indicated.

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PART I

Item 1.    Business

Overview

Beacon Power Corporation, a Delaware corporation incorporated on May 8, 1997, and its subsidiaries (collectively "Beacon," "the
Company," "we," "our" or "us"), design, manufacture and operate flywheel-based energy storage systems that we have begun to deploy in company-owned merchant plants that sell frequency regulation
services in open-bid markets (which we refer to as our "sale of services" or "merchant plant" model). We also intend to sell systems on a turnkey equipment basis in domestic and overseas
markets that lack open-bid auction mechanisms. In addition, we may share ownership of some plants with utilities or other investors; enter into bi-lateral contracts with
utilities that provide or purchase regulation services to satisfy their obligations to pay for or provide regulation services; and/or participate in pilot programs to demonstrate our technology. Our
flywheel systems support stable, reliable and efficient electricity grid operation. We expect the market for our systems to benefit from
increased electricity demand and the rapid expansion of intermittent renewable resources, including wind and solar.

Since
our inception, we have been primarily engaged in the development of advanced flywheel technology that stores and recycles energy on a highly efficient, emissions-free,
reliable basis. We believe our technology provides more sustainable and effective frequency regulation and energy balancing services for the electricity grid, utilities, and distributed generation and
renewable energy markets. Frequency regulation is an essential service that balances the flow of electricity on the grid, minimizes harmful fluctuations, and maintains proper frequency to ensure grid
stability and reliability. Our constantly spinning, fast-response flywheels provide this critical service by recycling energy to and from the grid, acting as a type of "shock absorber."
Because of their extremely fast speed of response, flywheels can address and correct frequency deviations more effectively than conventional regulation methods, at a lower cost of operation.
Additionally, our flywheel systems make it easier for the grid to integrate intermittent renewable energy sources, such as wind and solar power, whose variability increases the amount of regulation
needed. Our technology offers grid operators the benefits of greater reliability; faster response time; cleaner operation, including zero direct emissions of carbon dioxide (CO2), nitrogen
oxide (NOx), sulfur dioxide (SO2) and mercury; and lower maintenance costs compared to conventional power generation facilities that also provide frequency regulation services. We believe
these competitive advantages will allow us to achieve attractive operating margins and become profitable.

Our
Smart Energy 25 flywheel system includes the flywheels and their associated power electronics. A 1 megawatt (MW) Smart Energy Matrix is an array of ten Smart Energy 25
flywheel systems that provides 1 MW of energy storage. A frequency regulation installation includes one or more Smart Energy Matrices, along with ancillary equipment and site work. Our
typical full-scale installation is designed to have a capacity of 20 MW, capable of +/- 20 MW and a 40 MW regulation range.

In
November 2008, we began operating and earning frequency regulation revenue within the New England Independent System Operator region (ISO-NE) under its Alternative
Technologies Regulation pilot program (pilot program) with a 1 MW Smart Energy Matrix. We added a second MW of capacity in July 2009, and a third in December 2009. In August 2010, we
began to redeploy a portion of the latter 2 MW to our Stephentown, New York plant. From January 2009 through September 2010, our flywheel systems have been on-line and available for
providing frequency regulation service 98% of the time, on average, and have been earning revenue from providing frequency regulation services in ISO-NE. The redeployment of a portion of
this regulation capacity to Stephentown beginning in August 2010 resulted in a decrease in the frequency regulation revenue earned in ISO-NE for the last half of 2010, when compared to the
first half of the year.

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We
energized and interconnected 8 MW of flywheel energy storage at our Stephentown plant on January 24, 2011, and began earning frequency regulation revenue at that time. As of
that date, all interconnection systems between the Stephentown plant and local utility provider, NYSEG, were operational to enable the full 20 MW plant to come online. Additional MW of energy storage
capacity will be progressively energized and interconnected, thereby increasing the plant's revenue. As of this filing, 14 MW of capacity is operating and earning revenue. We anticipate all 20 MW will
be on-line and earning revenue during the second quarter of 2011.

We
plan to increase our revenues by:



The
location of our merchant plants and the sequence in which they will be constructed depend on a number of factors, including but not limited to:



Because
we have not yet generated substantial commercial revenues, we are accounted for as a development stage company under the Financial Accounting Standards Board's (FASB) Accounting
Standards Codification (ASC) Topic 915. We maintain our corporate offices, manufacturing and research and development facilities at 65 Middlesex Road, Tyngsboro, MA 01879. Our telephone number is
978-694-9121.

For
the sale of frequency regulation services in the United States, our primary market focus is on the geographic regions of the domestic grid under Federal Energy Regulatory Committee
(FERC) control that provide open-bid regulation markets. These regions and their Independent System Operator (ISO) or Regional Transmission Operator (RTO) designations are: New England
(ISO-NE); New York (New York ISO or NYISO); Mid-Atlantic (PJM Interconnection); California (California ISO or CAISO) and Midwest ISO (MISO). These regional ISOs/RTOs, or grid
operators, purchase frequency regulation services from independent providers in open-bid markets that they manage and maintain. For example, under an open-bid market like that
operated by NYISO, grid operators forecast the need for frequency regulation as a percentage of expected power demand, and approved suppliers

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submit
bids for these services. Bids are stacked from lowest to highest prices until the cumulative amount of bids is sufficient to meet the calculated need. The price submitted by the highest
selected bidder determines the price paid to every bidder that has been selected to provide service. Each ISO may calculate payments for frequency regulation services based on formulas that yield
different revenue results than other ISOs, even when there are equivalent frequency regulation clearing prices.

We
have also recently initiated market development efforts in Texas (ERCOT), which is not regulated by FERC. Consequently, ERCOT is not subject to FERC Order No. 890, which
mandated that non-generation resources like ours be allowed to compete in these open-bid markets. However, we expect that as ERCOT continues to expand its wind resources in
Texas, and issues related to increasing wind penetration and grid stability become better understood, the potential benefits of applying our technology in ERCOT to help balance frequency, maintain
grid stability and grid reliability will increase in value. We have been working to identify and recommend market rule modifications that will be needed to allow us to enter the ERCOT market on an
economically attractive basis, and when the right conditions are in place, we plan to enter the ERCOT market.

For
the sale of plants on a turnkey basis, our market focus in the United States is on geographic regions that lack open-bid markets for regulation services. Within this
market segment, our primary focus will be on utilities that are experiencing or expect to experience increased requirements for regulation capacity due to current or projected impacts of increased
deployment of variable wind generation in their balancing areas. Our secondary focus will be on the largest cooperative and government-owned utilities, and on islands or protectorates that are part of
the United States. Internationally, we are actively pursuing opportunities for the sale of services via merchant plants and for the outright sale of plants in a number of countries, both directly and
with the assistance of local marketing and distribution partners. We are currently pursuing business development activities in 12 foreign countries.

The Frequency Regulation Market

Levels of power supply and demand on the electricity grid change from second to second and minute to minute. The need to balance
electricity supply and demand on the grid requires a special service to maintain stable power frequency. This service is called frequency regulation. Deviations from nominal grid frequency can have a
negative impact on the operation of electrical devices that obtain power from the grid. In North America, grid frequency is maintained at 60 cycles per second (Hertz, or Hz). In Europe and other parts
of the world, the same requirement exists for balancing power supply and demand on the grid, but at a frequency of 50 Hz. In North America, the effectiveness of maintaining grid frequency is measured
by performance standards established by the North American Electric Reliability Corporation (NERC). Financial penalties can be imposed on grid operators when performance standards fall below levels
deemed acceptable. Similar standard-setting entities for frequency regulation exist in most other parts of the world.

Our
Smart Energy Matrix stores excess energy when power on the grid exceeds demand and injects it back to the grid when demand exceeds generated power. Our systems respond
up to 100 times faster than fossil fuel generators that provide frequency regulation. Certain ISOs have implemented tariff changes that provide additional or enhanced payment mechanisms ("performance
pricing") to compensate resources, such as ours, for faster regulation response. On February 17, 2011, the Federal Energy Regulatory Commission (FERC) proposed a rule to make performance
pricing mandatory by issuing a Notice of Proposed Rulemaking (NOPR) that would require each of the grid operators under its jurisdiction to begin the process of developing regulation market tariffs to
provide pay-for-performance. Should FERC's rule requiring such pay-for-performance tariffs for frequency regulation be adopted, both the revenues earned
by our merchant plants and the demand for the purchase of our flywheel technology in vertical markets could increase substantially.

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Our
flywheel systems also make it easier for the grid to integrate intermittent renewable energy sources, such as wind and solar power, whose variability increases the need for
regulation. Because our flywheels recycle electricity already generated, they do not consume fossil fuel or produce CO2 greenhouse gas emissions or other air pollutants, such as
NOX or SO2. In addition, the energy conversion efficiency of our flywheels does not significantly degrade over time or as a function of the number of charge/discharge cycles
incurred. We believe that our low operating costs will allow us to participate with a favorable profit margin in the open-bid markets, and utilities in non-open bid markets
will also find the attributes of our system attractive and will purchase our systems on a turnkey basis.

In
North America, the frequency regulation market in areas that are accessible via open-bid auction mechanisms (ISO-NE, NYISO, PJM, MISO, CAISO and ERCOT) was
valued at approximately $495 million in 2010 versus $530 million in 2009. ERCOT, whose market is mostly structured via bilateral contracts rather than via open-bid auction,
represented $108 million of this total. In 2010, the reduction in total market size was due primarily to a drop in prices in some markets. We believe that this contraction was due to lower
electricity demand caused by the recession, increased energy conservation and low natural gas prices (which is the primary fossil fuel used for regulation in the U.S. market). We expect the value of
the open-bid regulation market to increase as more wind generation comes online in the next several years, which we expect will significantly increase the demand for regulation services.
We are also aggressively pursuing creation of a "pay-for-performance" compensation mechanism in all markets that would increase the amount our flywheels receive to provide
regulation service versus other resources. (See "Regulatory and Market Affairs" section.)

In
2010 we expanded marketing and sales activities by hiring two full-time business development executives and establishing relationships with overseas distribution partners
in preparation for selling systems on a turnkey basis.

Growth
in both the US and the international markets is expected from a combination of factors, including:



We
believe our operating cost structure will be significantly lower than that of most incumbent frequency regulation service providers. Our Smart Energy 25 flywheel has been designed to
operate with low energy losses, minimal mechanical maintenance for 20 or more years and no significant degradation in energy conversion efficiency. In particular, our technology is different from most
frequency regulation methods in that it does not use fossil fuel, which is the largest variable cost for most competing regulation providers. Further, while battery-based providers have entered the
market for frequency regulation services, we believe we have a significant advantage because our technology can perform an extensive number of charge/discharge cycles without degradation of energy
storage capacity. In contrast, the storage capacity of chemical batteries degrades as a function of cycles, which will significantly increase their lifecycle costs.

Since
our Smart Energy Matrix does not burn fuel, the environmental benefits of our technology are dramatic. A DOE-funded study stated that our technology may
reduce CO2 emissions by up to 89% compared to some conventional frequency regulation service providers who burn fossil fuel to provide regulation. We believe that the cleaner performance
of our flywheel systems offers significant value to regulators, grid operators, and utilities facing increasing demands to lower CO2 emissions. In the longer

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term,
if the federal government implements a carbon-reduction program in the form of a cap-and-trade program or carbon tax, we believe that the resulting costs to
carbon-intensive regulation providers will increase at a faster rate than our carbon-related costs, which are associated with the purchase of a small amount of electrical make-up energy.

In
some states, additional environmentally related revenues may be available in the form of renewable energy or other credits. Since 2009, we have earned alternative energy credits under
the Massachusetts Alternative Energy Portfolio Standard (APS) program, and sold them to a power producer that needed to meet its regulatory requirements for such credits, thus creating a limited
source of incremental revenue.

Regulatory and Market Affairs

Since late 2009 we have actively promoted the adoption of performance-based payments for fast-response regulation
resources. Such payments would compensate regulation resources based on actual system performance rather than nominal resource capacity. On May 26, 2010, FERC held a Technical Conference on
Frequency Regulation Compensation and invited our Chief Executive Officer, F. William Capp, to present on the concept of "pay-for-performance." Subsequently, on June 16,
2010, we submitted comments to FERC reiterating our support of tariffs that compensate regulation resources based on
performance. We continued throughout 2010 to engage in this dialogue in an effort to encourage the expansion of performance-based tariffs in all ISO markets. Currently, ISO-NE is the only
grid operator that utilizes a performance-based tariff that rewards resources for speed of response. On January 19, 2011, PJM began the process for stakeholder consideration of a regulation
market incentive payment for resources that respond more quickly and accurately to a control signal. On February 17, 2011, FERC issued a Notice of Proposed Rulemaking ("NOPR") that, if adopted,
would require each ISO to implement a "pay-for-performance" compensation structure for frequency regulation, and to make market rule changes that would provide our resources
full compensation for the opportunity cost component that we currently do not receive in some markets. If performance-based regulation tariffs are adopted, we believe that the economics of our plants
in areas of the country managed by FERC will be significantly enhanced, and our economically addressable markets will also expand.

We
continue to make progress within each of the ISOs by working with them directly to implement changes to market rules to allow energy storage technologies to participate on a
non-discriminatory basis in their regulation markets. The ISOs have demonstrated a heightened commitment to work collaboratively with us to integrate our technology into their grids. In
addition to market rule changes, several ISOs are evaluating or proposing changes to their regulation dispatch signals in order to ensure that our Smart Energy systems are deployed most efficiently
and effectively for the benefit of the power grid. These changes would take greater advantage of our flywheels' fast-response capability, while recognizing that our resource has limited
energy storage capacity. The proposed market rule changes, coupled with more efficient regulation dispatch signals, will allow our resource to maximize its regulation revenue while minimizing our
consumption and cost of electricity. The current status of each open-bid ISO market is as follows:



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Defense applications

We believe that our flywheel technology is increasingly attractive as an energy storage device for U.S. Department of Defense (DoD)
applications including, but not limited to, naval vessels and fixed installations. We continue to pursue teaming relationships and defense and military-related projects that we believe will provide
enhanced combat capabilities, improve energy security to fixed installations, and reduce DoD's fossil fuel consumption. Funding received through these initiatives could help provide
non-dilutive R&D funding for key technology innovations and advancements that may later be transferred to commercial market applications.

In
February 2009, we announced that we had entered into a contract with the U.S. Naval Sea Systems Command (NAVSEA) to evaluate the use of flywheel energy storage for multiple shipboard
applications. This contract may lead to a conceptual design of a flywheel system for future naval surface combatants and possible retrofit into existing Navy ships. NAVSEA's objective is to advance
and improve its shipboard Integrated Power Systems (IPS) at both the major component and system level. Integrated Power Systems are an essential part of the Navy's all-electric ship
program. Based on the anticipated power requirements to support advanced launch systems, weapons, sensor systems and other shipboard functions, electrical energy storage is now recognized as a
fundamental element of an all-electric IPS.

Under
terms of this multiyear contract, we have or will perform an analysis of future shipboard energy storage needs; identify several flywheel applications that could offer the greatest
benefit to future naval combatants; assist the Navy's power plant upgrade development team by characterizing the flywheel applications under consideration and assisting in system-level studies; and
validate the results of those studies. Based on the results, we will develop a conceptual flywheel design and simulation model for one or more applications. The value of the initial research and
development work is estimated at $900,000. Of this, the first phase of the work, which was funded at $500,000, has already been completed. On February 17, 2011, we received a $50,000 amendment
to deliver a final report on the
work accomplished to date such that NAVSEA would better be able to make a determination on future funding. Subsequent phases involve work estimated at an additional $2.1 million. We anticipate,
at a minimum, receiving funding in 2011 to provide NAVSEA with a final report relating to the work we previously completed so they can determine how to proceed with this project.

Other Flywheel-based Market Opportunities

Other applications for which we believe our technologies may be well suited include:



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Although
our focus in the near term will be to deploy company-owned merchant flywheel installations for the frequency regulation market and sell turnkey systems for that same market, we
are evaluating these additional applications to determine whether they represent commercially attractive market opportunities. We may elect to collaborate with partners to improve our ability to
access to such markets through the provision of capital and/or distribution resources.

Competition

Our existing competition consists primarily of fossil fuel generators and hydro generators, including
run-of-river and pumped hydro resources. Emerging competition includes batteries, in particular batteries based on lithium ion technology. Each of these competitors is
discussed in more detail below.

Fossil-Fueled Regulating Generators

We believe our Smart Energy Matrix flywheel regulation technology offers significantly superior performance and cost
benefits compared to conventional fossil-fueled regulating generators. Flywheel-based regulation is more effective than fossil-fueled generators in providing regulation because of its faster response.
A study done by Pacific Northwest National Laboratory (PNNL), part of the U.S. DOE, concluded that 1 MW of fast-response regulation can be expected to deliver at least twice the system
regulation value of the average conventional regulation resource in California, and up to 17 times as much regulation balancing effect compared to the slowest fossil-based generators.

Grid
operators typically allow their regulation resources at least 5 minutes to fully respond to their call for regulation. For example, a conventional fossil-based resource with a 4 MW
per minute ramp rate would, by the end of the allowed 5 minute period, achieve its maximum regulation output capacity of +/- 20 MW. In contrast, our flywheel energy storage systems are capable of
ramping to full rated output in less than 4 seconds. Compared to the fossil-based resource with a 4 MW per minute ramp rate, our 20 MW plant is capable of injecting (or withdrawing) twice the energy
over the same 5-minute time period. The PNNL study also found that if California's regulation fleet included about one-third fast-response resources, California's
system-wide regulation capacity requirement could be reduced by as much as 40%. Similar savings should be possible in most other ISOs, including PJM, once fast-response
regulation resources are introduced into their mix of fleet resources. We believe that this projection is supported by the experience of ISO New England, the only ISO whose regulation tariff currently
provides a price incentive for fast regulation resources and favors the selection of fast resources in the bidding and selection process.

Not
all fossil-fueled generators can provide frequency regulation services. Some, such as nuclear power plants operating in North America, are unable to vary their output or are
prohibited by regulators from doing so in the manner needed to participate in the frequency regulation market. Others may be capable of providing such services, but choose not to do so because of the
higher operating and maintenance costs that their type of generating equipment incurs when performing regulation. This is due to the constant up- and down-throttling required
to provide fossil fuel-based frequency regulation, which reduces the economic life of conventional generating equipment.

Storage-based
regulation produces far lower emissions of CO2 than fossil fuel regulating generators, even when the carbon footprint of the make-up energy we must
buy (due to conversion inefficiency) is factored into the analysis. Our plants do not burn fossil fuel, and therefore produce zero direct emissions of CO2 or other combustion gases,
including sulfur dioxide, nitrogen oxide and airborne mercury. For example, over the 20-year life of our 20 MW plant, KEMA, Inc. projects that one of our flywheel regulation plants
located in the PJM Interconnection would save 52% of the CO2 that a base-load coal plant providing regulation would produce. This equates to 159,599 tons of CO2
savings over 20 years. Compared to a base-load natural gas generator performing regulation, CO2 savings would be 23% and 45,672 tons over 20 years, respectively.
Compared to pumped hydro, the

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best
conventional frequency regulation resource, a flywheel plant would still save 26%, or 53,252 tons of CO2, over 20 years. The reason for the improvement versus pumped hydro is
the higher energy conversion efficiency of flywheel energy storage. KEMA also notes that continued reliance on thermal generating units to meet expanding regulation requirements due to growth in
electricity demand and the effects of adding more wind resources to the grid would increase emissions of CO2, NOX and other pollutants, thereby dampening one of the main
benefits of wind generation.

Any
type of carbon tax that may be put into place in the future can be expected to increase the cost of regulation from carbon-intensive regulation resources, especially
coal-fired units. For example, a study done by the California Energy Storage Alliance (CESA) compared the economics of a Combined Cycle Gas-fired Turbine (CCGT) with flywheel
energy storage performing regulation services. The study found that the internal rate of return (IRR) for a CCGT asset performing regulation in California would drop significantly if the CCGT unit had
to pay a carbon tax. In contrast, the IRR of a merchant flywheel resource would remain almost unchanged.

Another
benefit of energy storage-based regulation versus fossil-fueled regulation is that ours is a single-purpose solution that deploys just the amount of regulation needed. Flywheel
energy storage resources can provide regulation service "à la carte". Generators must sometimes be brought online at night just to provide regulation service, which can exacerbate the
problem of frequency control if the base-load energy they must also provide is not needed and cannot easily be exported from the balancing area. In fact, grid operators have faced
so-called "negative clearing prices" (requiring operators to pay for others to accept their energy) during periods of relatively high wind generation and low electricity demand. Flywheels
can address this issue by providing just regulation services without having to generate any base-load energy.

Another
challenge for conventional regulation technologies is the long lead time required for siting and constructing fossil-based regulating generators. Because it requires no fuel
supply and has zero direct emissions of any type, an energy storage-based regulation resource can be sited, permitted and built more rapidly than a fossil-based regulating generator. The ability to
site, permit and build a regulation plant quickly can be a decided advantage, especially in smaller balancing areas and where wind generators are being rapidly deployed.

Hydro Regulating Generators

Although some hydro-powered generators are excellent regulating generators, not all existing hydro facilities were designed to provide
regulation services, and existing hydro resources are geographically limited. Due to long lead times required to site and build hydro facilities, as well as the trend toward tougher environmental
review of proposed new hydro plants, we do not expect to see significantly greater competition from hydro facilities in the near future. Recently imposed operating restrictions designed to reduce fish
kills and restore river system ecology may actually constrain some existing hydro units' supply of regulation. Hydro units that face increasing restrictions related to their provision of regulation
may actually provide future sales opportunities because, as determined by PNNL, these different resources may be co-optimized to operate better in tandem than either can operate alone.

Battery-based Regulation Resources

In recent years, significant progress has been made in certain battery technologies with respect to their cycling capability and power
degradation characteristics. Two lithium ion battery manufacturers in particular are pursuing the frequency regulation market, and either or both could become meaningful competitors. A123 Systems, a
public company based in Massachusetts, is a developer of nanophosphate lithium ion batteries. In 2008, A123 built and deployed a 2 MW energy storage system that was purchased by AES Corporation, a
global public utility. The 2 MW system has been installed in California for some time, but has not been in operation due to regulatory and technical issues.

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Co-located
near an AES-owned generator, the system is expected to become operational in 2011 now that CAISO has agreed to adopt market rules that will allow storage-based
regulation resources to compete in California. Also see "Regulatory and Market Affairs" for further information on anticipated market rule changes for storage-based regulation in California.

In
the fourth quarter of 2008, AES Corporation deployed a second lithium ion battery system, this one supplied by Altair Nanotechnologies, Inc. The 1 MW lithium-titanate system is
connected to a 34 kV circuit in PJM's service territory and is providing frequency regulation. Altair Nanotechnologies is a leading provider of advanced materials and products for power and
energy systems. Altair Nanotechnologies has a joint development agreement with AES Energy Storage LLC, a subsidiary of the AES Corporation, to develop grid-scale energy storage
applications. Altair Nanotechnologies is a publicly traded Canadian company with significant financial and other resources.

In
November 2009, AES Energy Storage and A123 Systems announced the commercial operation of a 12 MW frequency regulation and spinning reserve project in the Atacama Desert in Chile. AES
Energy Storage is a subsidiary of AES. This is AES Energy Storage's first project outside the United States. Since December 2010, AES has been operating 8 MW of a planned 20 MW frequency
regulation asset in Johnson City, New York.

Our
flywheel is a mechanical battery designed for a 20-year life, with virtually no maintenance required for the mechanical portion of the flywheel system over its lifetime.
Of critical importance in performing frequency regulation with energy storage-based systems is their cyclic life (or charge/discharge) capability. Our experience to date in ISO-NE shows
that 6,000 or more effective full charge/discharge cycles per year are required to perform frequency regulation in New England. Our flywheel systems are capable of over 125,000 equivalent
charge/discharge cycles over their operating lifetime, with zero degradation in energy storage capacity over time. In comparison, battery-based systems, including Li-ion batteries, are
much more limited in their cyclic capability. While the initial cost of a battery-based regulation asset is lower than a flywheel asset, we believe the reverse is true when the value of replenishment
and/or replacement costs is reflected in the present value of all costs. In order to achieve 20 years of operation, we believe battery-based systems will require either significant initial
over-sizing, and/or periodic battery replenishment and/or replacement over the life of the plant. For battery-based regulation resources, the value of such replenishment and/or replacement
may be considerably greater than the initial capital cost of the battery asset.

In
vertical markets, characterization of battery replenishment and/or replacement costs as "operating costs" may be a disadvantage for that technology. The rate of return allowed by
public utility commissions is typically based on initial capital cost, while operating costs are typically a pass-through expense that is not allowed to earn a regulated rate of return. In
contrast, a greater percentage of total lifetime costs for flywheels appears as initial capital cost, thus allowing utilities to earn a higher regulated return on the purchase of flywheel assets.

As
explained in "Regulatory and Market Affairs," we expect ISOs to adopt market rules that reward the superior performance of fast-response storage-based regulation. If this
happens, we believe that features of such performance-based tariffs will follow the example of ISO-NE, which utilizes a so-called mileage calculation to quantify the
effectiveness of storage-based regulation resources. If a mileage calculation or similar tariff feature is adopted by other ISOs, we believe the ability of flywheels to transfer large amounts of
energy to and from the grid without capacity degradation could allow flywheels to earn more revenue on a comparative basis than battery-based systems. Due to their cyclic limitations, we believe that
battery-based regulation service providers may be forced to choose to respond more slowly and/or simply transfer less energy to and from the grid, resulting in lower revenue per unit of MW capacity
under a performance-based tariff. We believe that this performance adjustment would be necessary to avoid excessive operating costs that would otherwise occur to battery-based systems performing
regulation services due to extreme cyclic degradation.

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In
establishing supplier relationships with two lithium-ion battery manufacturers, AES Corporation has signaled its intent to bring battery-based regulation to market. AES
Corporation is a Fortune 1000 company and has significant financial and other resources.

Discussion of Operations

We have experienced net losses since our inception and, as of December 31, 2010, had an accumulated deficit of approximately
$229 million. We are focused on commercializing our Smart Energy Matrix flywheel system for frequency regulation and the sale of turnkey systems. We do not expect to have positive
EBITDA (earnings before interest, taxes, depreciation and amortization) or positive cash flow from operations until we have deployed a sufficient number of merchant plants and/or sold turnkey systems,
and we must raise additional capital from a combination of equity, debt and/or turnkey sales to execute our business plan and continue as a going concern. In the future, as the number of our merchant
regulation facilities increases and we develop sustainable cash flows from operations and the sale of turnkey plants, we expect to fund additional plants from a combination of cash flow from
operations, non-recourse project financing and project equity.

Revenues

Our revenue during the three years ended December 31, 2010, 2009 and 2008, came primarily from three sources:



Our
business plan anticipates earning revenue primarily from the provision of frequency regulation service and the sale of turnkey flywheel systems. In the past, we have also earned
revenue from research and development contracts with government agencies, and we continue to pursue similar contracts. Additionally, we have earned revenue from the sale of APS certificates or similar
"clean energy" credits. However, revenue from such credits has not been material. Further, we have a small inventory of inverters and accessories that we sell, although that revenue is insignificant.

ISO-NE Pilot Program

In November 2008, we began operating our first 1 MW Smart Energy Matrix on the electricity grid in Tyngsboro,
Massachusetts. The 1 MW system was installed under ISO New England's Alternative Technologies Regulation pilot program. The pilot program was approved by FERC as part of ISO New England's compliance
with FERC Order No. 890, which is intended to promote greater competition in electricity markets, strengthen the reliability of the grid, and allow so-called
"non-generation" resources (which include our flywheel technology), to participate in frequency regulation markets on a non-discriminatory basis. The pilot program allows us to
generate revenue for regulation services while ISO-NE develops permanent market rules that will govern application of the technology. We added a second megawatt of capacity in Tyngsboro in
July 2009, and a third megawatt in December 2009, all of which have earned revenue through the pilot program. We have redeployed a portion of these 3 MW to the Stephentown site and we may also
redeploy additional systems to our NorthWestern Energy project described elsewhere in this report. As available, we may operate up to 1MW of capacity from time to time in the ISO-NE pilot
program.

Revenue
we have received from the pilot program is less than what we expect to receive under permanent market rules in the ISO-NE region, principally because under its pilot
program rules we are not eligible for opportunity cost payments, which represent approximately one-third of the revenue

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received
by conventional regulating generators. We expect that ISO-NE will develop a proposal for permanent market rules during the first quarter of 2011, to take effect by the end of
2011. These rules are expected to allow us to receive the economic equivalent of the opportunity cost payment component. Independently, in its February 2011 NOPR, FERC also proposed changes to tariffs
in order to make sure that energy storage resources receive the benefit of this opportunity cost compensation feature. Additionally, we expect ISO-NE's new market rules to retain its
pay-for-performance feature, whereby fast-response regulation resources, such as our flywheels, will continue to receive higher-than-average
mileage payments on the basis of their greater speed and effectiveness.

Recently,
FERC has shown increasing support for the concept of paying fast-response regulation resources on the basis of actual system performance rather than nominal
capacity, and in February 2011, FERC issued a notice of proposed rulemaking that proposes to require grid operators to begin the process of developing regulation market tariffs to provide such
payments. We will continue to engage in this dialogue in an effort to encourage the expansion of performance-based tariffs. Currently, ISO-NE is the only grid operator that utilizes a
performance-based tariff that rewards resources for speed. Other ISOs, including PJM, are considering changing their tariffs to provide higher revenues for faster performance. Should performance-based
regulation tariffs be widely adopted, the economics of our plants would be enhanced and we would expect our addressable markets to expand.

20 MW Frequency Regulation Plant in Stephentown, New York

In August 2010, Stephentown Regulation Services, LLC (SRS), a wholly-owned subsidiary of Beacon, closed on a loan guaranteed by
the DOE, which, over time, will allow us to borrow up to approximately $43 million to finance 62.5% of the estimated $69 million total project cost of our 20 MW plant currently
under construction in Stephentown, New York.

On
May 24, 2010, we announced that we had signed a contract with the New York State Energy Research and Development Authority (NYSERDA) relating to a $2 million grant. This
grant will provide $1.5 million to pay for a portion of the interconnection and other aspects of the Stephentown facility, $100,000 for a visitor information center to be built at the
Stephentown site, and $400,000 for other NYSERDA project tasks not specifically related to SRS project costs.

We
energized and interconnected 8 MW of flywheel energy storage at our Stephentown plant on January 24, 2011, and began earning frequency regulation revenue at that time. As of
that date, all interconnection systems between the Stephentown plant and the local utility provider, NYSEG, were operational to enable the full 20 MW plant to come online. As of the date of this
filing, 14 MW are operating and earning revenue. Additional MW of energy storage capacity will be progressively energized and interconnected, with all 20 MW expected to be operational and earning
revenue during the second quarter of 2011.

$24 Million DOE Smart Grid Stimulus Grant for Second Regulation Plant

In November 2009, the DOE announced that it had awarded us a Smart Grid Stimulus Grant valued at $24 million, for use in
construction of a second 20 MW flywheel energy storage plant. The funding award is to design, build, test, commission and operate a 20 MW flywheel energy storage frequency regulation plant in the PJM
Interconnection region. We currently expect that this facility will be built on a property situated in Hazle Township, Pennsylvania, for which we have entered into an option agreement with an economic
development agency of the State of Pennsylvania. Under the terms of this two-year option, we are paying $2,500 for each of four six-month option periods, or until the option is
converted to a lease. The option allows us to lease the property for 21 years at the rate of $3,250 per month. The site covered by this option is located in an economic development zone, which
provides an exemption from the payment of state sales tax on equipment used to build the plant and an exemption from property taxes through 2017. We have filed for interconnection, and have completed
the system impact study and an environmental assessment for this site.

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Site Development Efforts for Future Plants

In April 2010, we entered a two-year option that provides the right to purchase a property in Chicago Heights, Illinois,
for $1 million. The property is zoned industrial, and contains certain improvements relevant to our planned use, including equipment that may be usable for physical interconnection to 138 KVA
transmission lines. In consideration for this option, we are paying the owner $2,000 per month. If we elect to purchase the land, the option payments will be applied to the purchase price. We have
filed for interconnection and have completed both a system impact study and an environmental assessment for this site, and a facilities upgrade study is scheduled for completion before the end of the
second quarter of 2011.

In
2009, we entered into an option to lease land in Glenville, New York. This option was amended and extended until December 31, 2011, at a cost of $1,500 per month. We have filed
for interconnection and completed a system impact study for this site.

Conclusion

Since our inception in 1997, we have funded our development and operations primarily through the sale of stock. In November 2000, we
completed our initial public offering, raising approximately $49.3 million net of offering expenses. Since our initial public offering, we have raised approximately $123.5 million as of
December 31, 2010, through the sale of common stock and the exercise of warrants related to those stock sales. In December 2010, we raised approximately $8.7 million, net of offering
costs, from the sale of mandatorily redeemable convertible preferred stock and associated preferred and common warrants. We estimate that to continue to implement our
business plan we will need to raise approximately $15 to $20 million during 2011 in order to fund operations, $5 million of which is anticipated from the callable preferred stock
warrants issued in December 2010.

Our
profit and losses as well as uses of cash may fluctuate significantly from quarter to quarter due to fluctuations in revenues, costs of development, costs of materials to build
flywheels and other components of our Smart Energy Matrix and the market price for regulation services. In addition, our cash may fluctuate by period due to the timing of capital
expenditures to expand manufacturing capabilities and/or construct frequency regulation facilities and the related timing of project financing or equity raises. These fluctuations in cash requirements
could put additional pressure on our cash position. There can be no assurance that we will be able to raise the required capital on a timely basis or that sufficient funds will be available to us on
terms that we deem acceptable, if they are available at all. See "Liquidity and Capital Resources" for more information concerning our access to and uses for capital.

Our Technology

Our Smart Energy 25 flywheel is a 4th-generation advanced energy storage solution designed to meet the requirements of demanding
utility grid energy-balancing applications. It features a long-life, low-maintenance design, highly cyclic (charge-discharge) capability, zero fuel consumption and produces no
CO2 or other emissions. An array of Smart Energy flywheel units can be configured to form a Smart Energy Matrix plant, which can store and return megawatts of energy to maintain
grid reliability and stability.

The
Smart Energy 25 flywheel offers many technical and performance advantages, including:



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The
Smart Energy 25 flywheel system includes a rotating carbon-fiber composite rim, levitated on hybrid magnetic bearings operating in a near-frictionless vacuum-sealed
environment. The rim is fabricated from a patented combination of high-strength, lightweight fiber composites, including carbon and fiberglass combined with resins, which allow the
flywheel to rotate at high speeds (16,000 rpm) and store large amounts of energy as compared to flywheels made from metals. To reach its operational speed, the system draws electricity from the grid
to power a permanent magnet motor. As the rim spins faster, it stores energy kinetically. The flywheel can spin for extended periods with great efficiency because friction and drag are reduced by the
use of magnetic bearings in a vacuum-sealed environment. Because it incurs low friction, little power is required to maintain the flywheel's operating speed.

When
a grid operator signals the system to absorb power, the Smart Energy Matrix uses power from the grid to drive the motor/generator, which in turn increases the speed of the flywheel.
When a signal is sent for electrical power to be provided, the momentum of the spinning flywheel drives a generator and the kinetic energy is converted into electrical energy for release to the grid.

Our
flywheel frequency regulation systems have been demonstrated to be a more responsive and environmentally friendly alternative to conventional fossil fuel-powered
regulation methods. Our Smart Energy Matrix 20 MW frequency regulation plant is a commercial facility that improves the performance and reliability of the grid, while facilitating the use of renewable
energy sources and reducing air pollution. Comprised of 200 high-speed, high-energy flywheels and associated electronics, a 20 MW plant provides 20 MW of "up and down"
regulationequal to a 40 MW swing.

The
Smart Energy Matrix is designed to recycle excess energy when generated power exceeds load and deliver it when load increases. Flywheel-based regulation is highly responsive,
achieving full up or down power in seconds after receiving an ISO-transmitted or other control signal. Unlike
conventional, fossil fuel-burning frequency regulation plants, our technology does not consume fossil fuel or produce particulates or other air emissions. This should make it possible to
rapidly permit and site a 20 MW flywheel-based plant almost anywhere on the grid relatively close to a transmission line.

Research and Development

Our research and development efforts are essential to our ability to successfully design and deliver our systems, as well as to modify
and improve existing products to reflect the evolution of markets and customer needs while reducing our costs. Our engineers work closely with the ISOs to define system features and performance
requirements to address specific ISO needs. Research and development expenses, including engineering expenses, were approximately $6,689,000 in 2010, $6,796,000 in 2009 and $15,398,000 in 2008.

Advanced Research Projects AgencyEnergy (ARPA-E) Project

In September 2010, we finalized a contract with DOE's ARPA-E to develop critical components of a highly-advanced "flying
ring" flywheel energy storage system over a two-year period. ARPA-E is an agency within DOE that provides R&D funding for transformational new energy technologies and systems.
The award is valued at a total of $2.8 million. ARPA-E grant recipients share a portion of the

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program
cost, and we would contribute a minimum of $560,000, or 20%, of the $2.8 million program total. The actual contract net cost is expected to be higher due to the difference between
contract and our GAAP overhead rates. Our proposal calls for initiating development of a next-generation flywheel energy storage module with a size of 100kWh and 100kW, capable of storing
four times the energy at one-eighth the cost-per-energy-unit, as compared to our current Gen 4 flywheel. The new flywheel would be capable of more than
40,000 full charge/discharge cycles in its lifetime, thereby achieving a cost per storage cycle below ARPA-E's goal of $0.025/kWh. If we are successful in developing the initial design,
additional effort would be required before this new flywheel could be commercialized.

We
expect that the ARPA-E-funded flywheel system, if carried through to a commercial product, would be suitable for a variety of other applications where the cost
per unit of stored energy is the most critical factor, and the number of charge-discharge cycles is somewhat less important. One new application of particular interest to the DOE is
so-called "ramping" support for wind and solar power. The goal would be to provide one hour of flywheel storage as an energy-balancing resource for intermittent renewable energy assets,
and thereby reduce the amount of fossil-based backup power that might be used to provide the same effect. The benefit would be to enable significantly greater market penetration of renewable
generation resources in a clean and sustainable way. Some of the technology developed under the APRA-E program may also lead to reduced costs and increased performance for our current
generation of flywheels. Other potential applications include wind-diesel-storage hybrid systems that reduce diesel fuel consumption on island-based grids, uninterruptible power supply
(UPS) applications that require an hour or more of assured power, and electrical demand limiting for commercial, industrial, institutional and government facilities that pay high demand charges under
time-of-use electricity tariffs.

Renewable Generation Integration Project

During the second quarter of 2008, we began providing contract services for a wind-related R&D project
co-funded by the California Energy Commission, identified as CEC-PIER Contract 500-07-020, Agents for Renewables Project. Project partners include
Southern California Edison and the California ISO. The objective of the project is to find better ways to coordinate and maximize energy production and delivery from wind generation resources located
in the Tehachapi area of California. The technical approach includes the application of "intelligent agent" controls and our flywheel energy storage in an effort to find ways to deliver as much
wind-generated electricity as possible without exceeding the dynamic ratings limits of the locally-constrained transmission system. "Intelligent agent" control technology has been
identified as a key element of the DOE SmartGrid initiative and is often defined as an advanced control technology that executes autonomously, operates in real-time, communicates with
other agents or users, exploits domain knowledge, and exhibits goal-oriented behavior.

We
are supporting the project's prime contractor, Alternative Energy Systems Consulting, Inc., with the design, development and demonstration of an agent-based system
that:



The
project used portions of the previously used flywheel scale-power demonstration system owned by the CEC and tested for regulation on PG&E's grid in 2006 and 2007. One 100 kW Smart
Energy 25 flywheel replaced the seven smaller flywheels previously used by the CEC project. Our share of the scope of work is valued at approximately $469,000, of which we will receive $250,000 from
the CEC and we will provide matching funding of approximately $219,000, which was recorded as a contract loss in 2009.

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Another
goal of the project is to identify ways to commercialize any new application that may be developed. This project is exploratory and there can be no assurance that a commercially
feasible application will be developed. However, this project is consistent with our interest in potential applications that have a high cyclic requirement, move a large amount of energy through the
flywheel matrix, potentially address a large global market and facilitate renewable energy.

The
system was installed in 2010 and testing was completed February 11, 2011. Data analysis and a final report for the project are expected by the third quarter of 2011.

Wide-Area Energy Storage and Management System to Balance Intermittent Resources in the Bonneville Power Administration and California ISO Control Areas

In 2008 we completed R&D work under Phase I of a planned multi-phase R&D project with the Pacific Northwest National
Laboratory (PNNL), Bonneville Power Administration (BPA), the California ISO and the California Energy Commission. Under Phase I, we provided $30,000 of in-kind project support to
the consortium of project partners. The goals of the project include developing principles, algorithms, market integration rules, and a functional design and specification for energy storage and
control system with the ability to help the BPA and the California ISO better cope with wind generation intermittency and unexpected fast ramps from the deployment of new wind resources in their
balancing areas. The system resulting from this project, if ultimately deployed, would be expected to accomplish these goals by recycling excess energy, controlling dispatchable load and distributed
generation and managing inter-area exchanges of excess energy between the BPA and California ISO Control Areas. A final goal for the project is to complete a cost-benefit
analysis and develop a business model that can justify large-scale investment in the practical deployment of such a system.

Because
flywheel storage is capable of compensating for the inaccuracies caused by the response delay, dead zone, and deviation characteristics of the hydro power plant, simulation
showed that the aggregated hydro power plant and flywheel storage plant could provide a faster and more accurate regulation service than that of the hydro plant alone. Simulation results demonstrated
the feasibility and efficiency of the proposed Wide Area Energy Management and Energy Storage system, and it was concluded that a total system consisting of hydro resources and flywheels could be
highly effective in mitigating the effects of intermittent wind resources in BPA's and CAISO's service territories.

Phase II
of this project was approved in 2009 and completed in 2010 under contract terms discussed with PNNL, the prime contractor. We received $104,000 in payment for our portion
of the work. Phase II goals included providing numerical factors needed for the possible future design of the system architecture and completion of a technical design specification.

SmartLink Microgrid Control System

During 2010, we were granted a patent on our SmartLink microgrid control system. The patent will be the underlying
technology of our new SmartLink system, which we believe may be used in a broad range of existing and future distributed generation (DG) applications. The patent describes Methods and
Systems for Intentionally Isolating Distributed Power Generation Sources. Our invention applies to the use of energy storage of any kind, and automatically allows DG resources to continue operating
when the main power grid fails. Currently, the majority of DG resources turn off automatically when the grid fails. In contrast, when the grid fails, our invention immediately creates a
DG-powered microgrid stabilized by energy storage which continues to operate without support from the primary grid.

Inspiration
for our SmartLink system came directly from the major northeast blackout of August 2003, in which sites with DG were left without power, even though they had
on-site generation. We believe this could become an important source of revenue in addition to frequency regulation. Our SmartLink system may be useful whenever grid
instability occurs during an outage or in support of a

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broad
range of customer markets and applications. These include load reduction, standby power, peak shaving, net metering, residential solar, combined heat and power (CHP), grid support, premium
power, island systems and remote agricultural markets.

DG
is considered a smart grid enabler because it places generation closer to the consumers of energy, or loads, allowing greater control, reliability, efficiency and
self-reliance. Distributed generation systems can be grid-connected, grid-independent, hybrid systems, and microgrids, and may be found in the public sector,
private industry, and military applications.

Manufacturing

We moved to our corporate headquarters at 65 Middlesex Road, Tyngsboro, Massachusetts in January 2008, under a seven-year
lease that began in July 2007, with options to renew for two additional seven-year periods. The 103,000 square-foot Tyngsboro facility was fully renovated and
built-out to our specifications and currently has a manufacturing capacity of more than 600 flywheels per year on a multi-shift basis. The manufacturing capacity of the facility could be
further expanded to over 1,000 flywheels per year if necessary.

Business Development

Business development activities include sales, marketing, plant site identification, development of grant, loan and other potential
funding opportunities, and legislative initiatives and regulatory reform activities designed to open additional markets to our merchant plants and attract customers for the sale of turnkey plants in
both the United States and overseas. Since 2008, we pursued a broad and successful program of regulatory reform in a number of ISOs with the goal of opening the markets to our technology and ensuring
that we will be paid on a fair and equitable basis for frequency regulation services. More recently, these regulatory activities have included efforts to promote the adoption of performance-based
compensation for fast-response energy storage regulation by FERC, ISOs and PUCs. (See "Regulatory and Market Affairs" for further details on this and other regulatory reform activities.)

Adoption
of performance-based compensation, as would be required under FERC's February 2011 NOPR, would have a significant impact on our business and enterprise value. First, it would
significantly increase the prices paid by ISOs to our merchant plants in open-bid markets. Second, it would influence the way that vertical utilities evaluate the purchase of new
regulation assets. For example, a fast-response regulation asset deemed twice as effective compared to a conventional slow-response asset would receive a higher score in the
Cost/Benefit tests typically used by public utility commissions to decide whether or not to allow a utility to make the investment and pass the cost into its rate base. PNNL has studied our technology
and its impact on the grid and forecasts that our technology is 2 to 17 times more effective than conventional slower resources. We therefore expect that acceptance of the concept by FERC and the ISOs
that fast-response regulation should be paid more for providing superior regulation service in
the organized markets should indirectly spur demand for our technology in vertical markets both in the United States and overseas.

In
addition to our domestic activities, in 2011 we will continue to seek opportunities in Europe and Asia to demonstrate our technology and sell plants. An important part of our business
development process is the completion of various grid or electrical studies that evaluate and quantify the potential economic and environmental advantages of deploying our technology in a particular
country. In 2010 we completed several such major studies. They showed strong commercial potential for our flywheel technology. In preparation for potential plant sales, we are in the process of
adapting our technology for use on 50 Hz grids. We will also continue to evaluate the market potential for our systems on islands, which generally require a much higher percentage of regulation
resources compared to larger mainland grids. Larger islands may also utilize our fast-response storage for spinning reserve and frequency response in addition to frequency regulation,
leading to an even better value proposition.

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Backlog

At December 31, 2010, we did not have any firm commercial sales commitments for our products and services. As of the end of
2010, we had two ongoing research and development contracts and a grant from NYSERDA from which we expect to derive revenue in 2011 of approximately $2,376,000. The multi-year contract
with the U.S. Naval Sea Systems Command that we were granted in February 2009 has a potential value of up to $3 million, of which $500,000 was previously funded and which has been completed. In
February 2011, we received a $50,000 amendment to provide a report for work accomplished to date..

On
February 28, 2011, we announced we had signed a lease agreement with NorthWestern Corporation d/b/a NorthWestern Energy for a one-megawatt (1MW) Beacon Smart Energy
Matrix flywheel energy storage system. The system will be installed by us and operated in conjunction with Mill Creek Generating Station (MCGS), a gas-fired regulating reserve plant
recently commissioned in Montana and owned by NorthWestern Energy. The system is expected to be operational by the end of 2011.

The
initial term of the lease will be 15 months, which at NorthWestern Energy's option, can be extended up to two additional 12-month terms. NorthWestern Energy will
pay us $500,000 for the first 15-month term and $500,000 for each subsequent term should it choose to extend the lease to a second or third term. At any point NorthWestern Energy can opt
to purchase the 1 MW system outright for approximately $4 million. A portion of the lease payments already made under the agreement would be applied to the purchase, depending on when the
purchase was made.

Intellectual Property

Our success depends upon our ability to develop and maintain the proprietary aspects of our technologies and to operate without
infringing on the proprietary rights of others. To some extent, our success also depends upon the same abilities on the part of our suppliers.

We
rely on a combination of patent, trademark, trade secret and copyright law and contract restrictions to protect the proprietary aspects of our technology. We seek to limit disclosure
of our intellectual property by requiring employees, consultants, and any third parties with access to our proprietary information to execute confidentiality agreements and by restricting access to
that information. Our patent and trade secret rights are of material importance to our current and future prospects. We are actively pursuing both national and foreign patent protection.

The
intellectual property rights of our flywheel-based products are primarily embodied in patents that we hold or are pending, but in addition include flywheel technologies and patents
that we are licensed to use. We hold one or more U.S. patents on our flywheel vacuum system, heat pipe cooling system, output paralleling algorithm, metal hub, low-loss motor,
co-mingled rims, earthquake-tolerant bearings, bearing cooling device, bearing damper, lift system, touch-down system, and SmartLink microgrid control system. (See
Research and Development, above) We also hold one or more foreign patents on our vacuum system, co-mingled rims, metal hub, earthquake-tolerant bearings and bearing damper. Our patents
expire on various dates between 2020 and 2029. We also have 25 pending U.S. and foreign patent applications, and several other applications being prepared for filing. We hold a perpetual, exclusive,
royalty-free, worldwide license from SatCon Technology Corporation to use its flywheel technologies and patents for stationary terrestrial flywheel applications. Our plans for exploring
the development of systems for use in space or naval applications do not use the patents licensed from SatCon. See "Defense Applications" above. This license includes 15 issued U.S. patents and 12
foreign patents and applications that expire on various dates between 2012 and 2021, and covers SatCon's technologies and patents and all improvements made by SatCon through November 16, 2000,
the date of our initial public offering. We are not entitled to any improvements to the flywheel technology that SatCon develops subsequent to that date. We expect to develop additional intellectual

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properties
and trade secrets as we continue developing additional Smart Energy flywheel technology. We own all technology improvements that we have developed that are based on the technology licensed
from SatCon.

Government Regulation

We operate in a heavily regulated industry. This environment presents both opportunities and challenges. The principal opportunity is
that we have been able to work within the regulatory framework to gain market rule changes that allow our technology to compete in open-bid markets on a fair and equitable basis. In the
future, we believe we may succeed in fostering further changes which would result in higher payments for the regulation services provided by our technology due to its fast response characteristics. A
cap-and-trade program or carbon tax regulations, if enacted, would have the effect of increasing the cost of operation of our fossil fuel-based competitors, and
potentially provide an additional revenue source for us. While such a cap-and-trade program or carbon tax may be unlikely in the short to medium term, we believe it is
reasonably possible in the longer term.

The
primary challenge imposed by government regulation is the lead time generally required to obtain the necessary state, local and federal permits, approvals and interconnection
agreements needed to construct our merchant plants. Internationally, there are a number of countries where our technology could provide regulation services without government intervention or
regulatory reform; however, some overseas markets will require regulatory changes in order for us to enter the markets and compete on a fair and equitable basis.

In
July 2010, the New York State legislature passed a law that specifically exempts flywheel-based energy storage facilities of less than 80 MW from New York Public Service Commission
(PSC) jurisdiction. Prior to this statute, we were required to apply for (and had obtained) PSC approval via a certificate of public convenience and necessity, or CPCN, for the Stephentown facility.
The exemption relieves us from the regulatory burden of having to provide the PSC with periodic updates and obtain PSC approval of facility documents for our Stephentown plant. It will also eliminate
entirely the need for us to apply for additional CPCNs, as would have been required should we decide to build a plant in Glenville, New York, or elsewhere within the NYISO region.

See
also "Regulatory and Market Affairs" for further discussion of how government regulation affects our business.

Employees

At December 31, 2010, our headcount was 73 full-time employees, five part-time employees and a number of
independent contractors and temporary employees. Our staff included 29 technical employees made up of engineers and technicians
involved in research and development activities and 24 manufacturing and materials handling workers involved in production and research and development activities. We also had nine employees in sales,
marketing, business development, compliance and customer service. The remaining 11 people were involved in administrative tasks. None of our employees is represented by a union and we consider our
relations with employees to be good.

Other Information

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission
(the "SEC"). You may read and copy any documents that we file at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public free of charge at the SEC's website at
www.sec.gov.

Our
web address is www.beaconpower.com. All of our filings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all

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amendments
to those reports are made available free of charge on our website as soon as reasonably practical after being filed electronically with, or furnished to, the SEC. The content on our website
does not constitute part of this annual report. We also make available our Corporate Governance policies and our Code of Conduct on our website. Additionally, paper copies of these documents may be
obtained free of charge by writing our Investor Relations department at our principal executive office.

Item 1A.    Risk Factors

We have limited experience building and operating merchant frequency regulation plants. In order to be commercially-viable in the long term, we need to be competitive with
respect to open-bid pricing for frequency regulation and with both conventional fossil-based regulating generators and other emerging storage technologies.

To date, we have designed, built and operated up to 3 MW in Tyngsboro under the ISO-NE pilot program. As of March 2011, we
have 14 MW of frequency regulation operating in Stephentown, New York, and expect to have all 20 MW in operation in the second quarter of 2011. We have also previously built and successfully deployed
both 2 kWh and 6 kWh flywheel systems in limited volumes. The further development of our Smart Energy Matrix and increasing our production and deployment of our systems involves certain
cost, technological and infrastructure challenges, which include:



We
have limited experience with such a transition, and in the event we are not successful in meeting these challenges, we may not be able to bid competitively with competing technologies
and therefore not achieve the revenues and margins required to become profitable. This could have a material adverse effect on our ability to continue as a going concern.

Frequency regulation service pricing is currently below the pricing that has prevailed for some years. However, if such low pricing continues for an extended period, it will
adversely affect our revenue and cash flows, and if it becomes durationally significant so as to substantially threaten our Stephentown facility, it would increase the risk that the DOE may consider
the pricing to constitute a material adverse effect, leading to an alleged default under our loan documentation. We regard the current pricing as anomalously low, and believe that it is likely to
return to levels consistent with past history, and also be enhanced if the FERC's NOPR on performance pricing is implemented.

Over the longer term, the market pricing for frequency regulation services has historically tended to follow the pricing for energy.
Hence, when the price of energy drops, frequency regulation prices may be adversely affected, which could materially affect our revenue. Electricity prices have been below recent historical averages
due in part to the economic recession, and the impact of a decrease in energy prices. Consequently, during 2010, recent frequency regulation clearing prices were significantly lower than their
historical average, including in the regions where we are developing plants, with some

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markets
seemingly affected more than others. During the fourth quarter of 2010 in particular, frequency regulation pricing in the New York ISO region dropped to historically low levels for that
market. The reasons for historical anomalies in pricing trends can be difficult to determine, but we believe that the general reasons for pricing pressure (described above) were exacerbated in the
fourth quarter of 2010 when a new market participant bid in a low manner which we believe that entrant may not be willing to sustain. We believe that the unusually low frequency regulation pricing
will be temporary, and think it likely that there will be a trend back toward historical pricing levels, as predicted by an independent market report commissioned by the DOE and issued in February
2011. It found no evidence to support the position that current pricing levels represent a long-term change. Also, as mentioned elsewhere, on February 17, 2011, FERC issued a NOPR
that, if adopted as proposed, would direct ISOs to implement a "pay-for-performance" compensation structure for frequency regulation which we regard as particularly helpful for
fast response resources such as ours, and would significantly enhance the economics of our plants (including in Stephentown).

However,
there are no guarantees that pricing will return to historical average levels. If the lower frequency regulation pricing levels, contrary to these expectations, reflect a
long-term change in the market, or if they otherwise continue indefinitely, this could have a material adverse effect on revenues, cash flow and our ability to raise equity on terms that
we consider attractive, to meet our debt service obligations and to continue as a going concern. It is also possible that under our loan guarantee documentation with the DOE, the DOE could, at some
point in time, take the position
that durationally significant low pricing substantially threatens the Stephentown project entity, and constitutes a material adverse effect. If so, the DOE might refuse to permit additional advances
under the DOE loan documents or otherwise take the position that a default has occurred under DOE loan documents.

Reductions in demand for electricity may have a negative impact on both the demand for and pricing of frequency regulation services and therefore our revenue.

We expect the overall size of the global frequency regulation market to grow, in part due to the need for more regulation resulting
from the increased use of intermittent energy sources, such as wind and solar. A sustained drop in the price of energy may adversely affect the growth of these industries, and consequently, the
overall size of and rate of growth for the frequency regulation market. A reduced demand for frequency regulation could result in lower pricing, which would have a material adverse effect on our
achieving our business plan.

We have to demonstrate that the performance of our 20 MW Smart Energy Matrix is consistent with design expectations.

In order to achieve market acceptance, we will need to demonstrate that the actual performance of our planned 20 MW Smart Energy
MatrixTM frequency regulation plants is consistent with projected performance. While we now have 14 MW interconnected and operating on the utility grid in Stephentown and we expect to
expand to a full 20 MW during the second quarter of 2011, there remains a risk that the plant will not perform as expected, and if it does not, it could adversely affect our profitability and our
ability to continue as a going concern.

We will be unable to sell plants overseas until we can demonstrate that our technology is compatible with 50 Hz electrical design requirements.

Our technology is currently designed to meet 60 Hz electrical design requirements for North America. Failure to make our technology
fully compatible with 50 Hz electrical design requirements in either a timely or correct manner will impede our ability to sell plants in regions of the world that require 50 Hz compatibility,
including but not limited to Europe, China, and a portion of Japan. If adapting our flywheel system to operate at 50 Hz cannot be achieved in a time period that meets our

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planned
deployment outside the United States, it could have a material adverse effect on achieving our business goals.

Our business plan includes the construction and operation of frequency regulation plants in a variety of locations, as well as the sale of turnkey systems.

Our business development plans, which involve the construction and operation of multiple frequency regulation plants, will pose
significant technological, logistical and cost challenges such as:



To
be profitable, we will need to obtain site interconnection approvals, landlord approval, or other zoning and construction approvals in a timely manner; obtain equity and/or project
financing; organize, develop, finance, build and operate in a number of geographically dispersed locations; and participate within the market rules of the open-bid markets. However, we
have limited experience with deploying and operating large, multiple geographically dispersed frequency regulation installations. If we are unable to execute these tasks, it will have a material
adverse effect on our profitability and could adversely affect our ability to continue as a going concern.

We face a number of challenges related to the DOE loan guarantee on our first 20 MW plant.

In developing the Stephentown facility, we entered into obligations that are new to us. These include the following:



There
can be no assurance that we will be successful in meeting any or all of these challenges and failure to meet all of these challenges could have a material adverse effect on our
financial performance.

Some
of the factors described above, such as putting our technology into escrow and other demands, guarantees and loan covenants required under the terms of the DOE loan may affect the
terms of future project financing or make it more difficult to obtain such financing. There can be no assurance that we will be successful in obtaining future project financing or that that financing,
if

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available,
will be on terms that are economically viable and that required guarantees can be met. Failure to obtain additional financing would have a material adverse effect on our financial
viability.

The commercialization of our Smart Energy Matrix will require substantial funds. Our stockholders may be adversely affected if we issue securities or
equity-linked securities to obtain financing.

We will require substantial funds to manufacture and deploy our systems, market our services and increase our revenue. We anticipate
that such funds will be obtained from a combination of equity, debt, and/or the sale of turnkey systems. The extent of the funds needed is dependent, in part, on the volume of flywheels that we
produce and deploy and/or sell as turnkey systems.

A
large portion of our expenses are fixed, including those related to facilities, equipment and key personnel. To execute our business plan, we will incur substantial costs to
manufacture and deploy our Smart Energy Matrix systems. If we do not succeed in raising additional funds, we will be unable to execute our business plan. If this occurs, it will have a
material adverse impact on our business, including our ability to continue as a going concern.

A
fundamental component of our business plan is the use of project financing to fund, at least in part, our Smart Energy Matrix installations. The fact that we are in the
early stages of deploying our merchant plants makes it harder to obtain project financing. Additionally, adverse conditions in the overall credit market further complicate our ability to arrange
financing, at least in the near term. We have limited experience in obtaining project financing. The funding we require may not be available on favorable terms, if at all. Such funding may only be
available on terms that cause substantial dilution to common stockholders, and/or have liquidation preferences and/or pre-emptive rights. If we raise funds by issuing debt securities or
equity securities, existing stockholders may be adversely affected because new investors may have rights that are superior to current stockholders or through the dilutive effect of new equity
securities on current stockholders.

Our stock price has been volatile and purchasers of our common stock could incur substantial losses.

The market price of our common stock has historically been volatile, and fluctuates significantly in response to multiple factors, some
of which are beyond our control. The stock market in general experiences wide volatility that has often been unrelated or disproportionate to the operating performance of particular companies. These
broad market fluctuations could result in significant movement in the price of our common stock, which may cause investors to be adversely affected and potentially incur substantial losses. The market
price for our stock may be influenced by many factors, including:



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Historically, the amount of frequency regulation required in the United States typically has been one percent of all power produced. If a reduction in this percentage
occurs, our revenue and profitability could be adversely affected.

Various regulatory organizations, such as FERC and the North American Electric Reliability Corporation (NERC), as well as the ISOs,
oversee the markets and can implement rules and regulations that may alter the percentage of frequency regulation required. Each ISO decides what amount of regulation it needs to procure in order to
meet NERCs requirements. This can vary based on each ISO's evaluation of its region. We cannot predict how these organizations may act in the future, and if any ISO decides to reduce its amount of
regulation procurement, it would reduce the size of the market in which we compete and could have a material adverse effect on our ability to achieve our business plan.

We have a history of losses, anticipate future losses and will have limited revenues in the near term. Unless we raise substantial additional capital to operate our
business, we may not be able to continue as a going concern.

We had approximately $10,866,000 in cash and cash equivalents on hand at December 31, 2010. We believe that our December 2010
cash balances, combined with anticipated funds from the exercise of preferred stock warrants issued in December 2010, are sufficient to fund operations into the third quarter of 2011. We have incurred
significant losses from operations since our inception. As shown in our consolidated financial statements, we incurred losses from operations of approximately $22,308,000, $18,944,000 and $23,838,000,
and operating cash decreases of approximately $15,613,000, $16,698,000 and $18,182,000 during the years ended December 31, 2010, 2009 and 2008, respectively. Our business model is based on
owning and operating a number of 20 MW frequency regulation merchant plants, and the sale of turnkey systems. Our goal is to reduce the cost to complete these plants, and we believe we are on target
to do so. However, to fund our merchant plants, we will need to sell turnkey plants to utilities or raise capital in both 2011 and 2012. In the event that we are
not successful in selling turnkey plants and are unable to raise capital or the timing is delayed, it will have a material adverse effect on our ability to execute our business plan and could impact
our ability to continue as a going concern.

Miller
Wachman LLP, our independent auditor, has included an explanatory paragraph expressing uncertainty in their audit report on our consolidated financial statements for the
fiscal year ended December 31, 2010, which identifies our recurring losses and negative cash flows and raises doubt about our ability to continue as a going concern.

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

We are dependent on third-party suppliers for materials and components used to manufacture our flywheels and build our Smart Energy Matrix plants. Increases in
purchase prices or decreases in availability of materials and commodities may affect our ability to achieve profitability. In particular, our systems require carbon fiber, steel and aluminum, the cost
of which may be impacted by the price and availability of energy and other factors.

We purchase components and commodities from third-party suppliers. Delays in availability or receipt of these items or cost increases,
could negatively impact our ability to manufacture our flywheels, deploy our Smart Energy Matrix plants or become profitable. Certain commodities, such as

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carbon
fiber, aluminum and steel are basic elements of our flywheel systems. Some of these commodities have, in the past, been subject to shortages and price changes. Future shortages or price changes
could impact our ability to manufacture our flywheel systems in a timely manner and at a reasonable cost. Additionally, certain components which we purchase are technically difficult to manufacture,
and suppliers may have difficulty manufacturing products that meet our specifications and requirements. Although we have taken steps to establish at least two suppliers for our critical components,
failure of a key supplier to produce acceptable components on a timely basis could have a significantly adverse effect on our ability to execute our business plan. Further, there are no guarantees
that, should we receive additional funding that would allow us to accelerate our deployment schedule our suppliers would be able to meet our accelerated production requirements, which would limit our
ability to accelerate our deployment. Certain components we use in our manufacturing process have lengthy lead times from order date to delivery at our facility.

Our competitive position could be impaired if we either fail to protect our intellectual property or infringe third-party patent rights.

We cannot provide assurance that we have or will be able to maintain a significant proprietary position on the basic technologies used
in our flywheel systems. Our ability to compete effectively against alternative technologies will be affected by our ability to protect proprietary technology, systems designs and manufacturing
processes. We do not know whether any of our pending or future patent applications under which we have rights will issue, or, in the case of patents issued or to be issued, that the claims allowed are
or will be sufficiently broad to protect our technology or processes from competitors. Even if all of our patent applications are issued and are sufficiently broad, they may be challenged or
invalidated. In the past, we have incurred substantial costs in prosecuting or defending patent infringement suits, and such suits have diverted funds and resources that could have been used in our
business.

Further,
our competitors or others may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing
on third-party patents, we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Even if we were able to obtain a license, the rights may be
nonexclusive, which could result in our competitors gaining access to the same intellectual property, and/or we may be required to pay license fees, royalties and/or other amounts. Failure to obtain
needed licenses could delay or prevent the development, manufacture or sale of our systems, and lead to materially adverse effects on our Company, including ceasing some aspects of our business.

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

Government regulations may impair our ability to construct and operate our plants profitably.

Government regulation of our services in the United States, whether at the federal, state or local level, including any change in
regulations, tariffs or zoning, may increase the cost of our services or decrease our revenue, and may have a negative impact on our profitability. We cannot provide assurance that our services will
not be subject to additional federal, state and local regulations governing traditional electric utilities and other regulated entities in the future. We expect that our Smart Energy
Matrix plants will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, environmental, safety and related
matters. For example, in certain ISOs, we may require permits from state utility commissions, and could be

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subject
to fines or construction delays if those commissions determined that we were not in compliance with the permits. We do not know the full extent to which current or future regulations may
affect our ability to build and operate our systems.

In
addition, if regulatory modifications change the structure of the markets, such modifications could adversely affect our business plan. If the market rules change in the future or
current modifications being developed as a result of FERC Order No. 890 or expected new market rules related to performance pricing are not implemented, we may be required to change our
business plan and there can be no assurance that we will be successful in doing so.

Similarly,
in international markets, we face the need in some countries to foster regulatory changes in order to enter and compete on a fair, equitable and economic basis. Even if
achieved, unforeseen adverse developments in the regulatory landscape of these countries could impair our ability to enter or operate profitably in these markets.

The exercise of options and warrants and other issuances of shares will likely have a dilutive effect on our stock price.

As of December 31, 2010, there were outstanding options to purchase an aggregate of 1,660,791 shares of our common stock at
prices ranging from $2.30 per share to $93.10 per share, of which options to purchase 1,217,582 shares were exercisable as of such date. As of December 31, 2010, there were outstanding warrants
to purchase 10,647,108 shares of our common stock, all of which were exercisable as of December 31, 2010.

The
exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of our common stock. Additional dilution may result from the
issuance of shares of our common stock in connection with collaborations or manufacturing arrangements or in connection with financing efforts.

Conversion of our outstanding preferred stock may lead to further dilution to holders of our common stock, and the outstanding preferred stock may reduce the amount
available to our common stockholders in the event of a liquidation.

We issued 10,000 shares of preferred stock at a purchase price of $1,000 per share in December 2010 as part of a financing. At the same
time, we issued warrants to purchase an additional 5,000 shares of preferred stock at an exercise price of $1,000 per share, as well as common stock warrants. The preferred stock warrants can be
exercised at any time by the holders, or we can force their exercise under certain circumstances. The preferred stock is currently convertible into shares of our common stock at a conversion price of
$2.5234 per share, subject to adjustment (including adjustment for future dilutive issuances of common stock below that price). The conversion price may also be adjusted further as a result of our
recent reverse stock split, based on the ratio of the volume weighted average trading prices of our common stock for the fifteen trading days before and after the reverse stock split. The amount of
this latter adjustment, if any, has not yet been determined. We are required to make installment payments on the preferred stock in fixed dollar amounts through the scheduled maturity date of the
preferred stock in February 2012. If certain equity conditions are met (including certain listing and trading volume requirements), we can pay the installment amounts, as well as dividends on the
preferred stock, in shares of our common stock.

As
of March 11, 2011, there were 1,442.5 shares of preferred stock outstanding (not including 737.87 shares that were pre-redeemed on March 1, 2011 for the
April 1, 2011 scheduled redemption) and unexercised warrants to purchase an additional 2,115 shares of preferred stock. The conversion of these shares of preferred stock into common stock
(either by the holder or upon our payment of dividends or installment amounts in shares of our common stock) could lead to further dilution of our existing common stockholders. In the event we are
unable to continue as a going concern or otherwise

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liquidate,
then the outstanding preferred stock will have a liquidation preference of $1,000 per share, plus accrued and unpaid dividends, plus an amount reflecting dividends remaining to maturity,
following which the holders of preferred stock will participate in distributions to holders of our common stock on an as-converted basis. In such an event, the preferred stock may
significantly diminish the amounts, if any, available for distribution to holders of our common stock.

Our financial performance could be adversely affected if we are unable to retain key executive officers.

Our future success and our ability to effectively implement our business plan depends to a large degree on the management provided by
the executive officers and thus on our ability to retain members of our executive team, which are: Mr. Capp, CEO and President; Mr. Spiezio, Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary; Mr. Lazarewicz, Vice President and Chief Technical Officer; and Ms. Judson, Vice President, Asset Management and Market Development. There can be no
assurance that we will be successful in retaining our executive officers. In March 2011, we entered into employment agreements with our executive officers that continue until terminated. The
executives have the right to terminate employment for "good reason", as defined in their executive agreements, and receive the compensation and benefits defined in those agreements. The executives may
also elect to terminate their employment, for any reason, upon at least 90 day written prior notice to the Company.

Our financial performance could be adversely affected if we are unable to retain or attract key personnel.

Our future success also depends to a large degree on the technical skills of our engineering staff and our ability to attract key
technical personnel and other staff. Competition for hiring skilled professionals can be intense. We may not be successful in attracting and retaining the talent necessary to design, develop and
manufacture our systems and deploy and operate our frequency regulation installations.

We currently purchase a small percentage of components for our flywheels from companies outside of the United States. We expect to expand our business to other countries.
Engaging in business outside of the United States exposes us to a variety of risks related to the specific countries in which we may operate.

Engaging in business outside the United States may expose us to a variety of risks, which include:



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Due
to the risks shown above, there is no guarantee that we would succeed in expanding and operating our business in countries outside of the United States. Failure to adequately address
these risks could potentially have a material adverse effect on our business.

If our Smart Energy Matrix systems were to malfunction and/or cause damage we could be subject to possible product liability claims for both damages and fines
that exceed our liability insurance coverage. Additionally, our stock price could drop as a result of negative publicity from such claims.

We have incorporated technical features in our flywheel systems that are designed to ensure that a failure will not result in any
significant damage, including secondary damage to the electrical grid. However, our Smart Energy Matrix is a complex system, and errors may occur during the manufacturing or installation
process. Should a failure take place, we may incur substantial costs to repair or replace the defective equipment. In addition, failures may result in product liability claims against us. Liability
claims may also be filed against us which have no merit, but which may require us to expend significant resources defending ourselves. Such claims, valid or not, could result in negative publicity.
This could have a materially adverse effect on our business.

Competitors in the frequency regulation market include established utilities, independent service providers and alternative energy storage technology companies with greater
resources than we have.

The frequency regulation services market is being served by well-known utilities and independent service providers that use
conventional generators. In addition, there are emerging energy storage technologies that have also begun providing this service. Most of these competitors have greater financial and technical
resources than we do.

We have anti-takeover defenses that could delay or prevent an acquisition and changes in control that could adversely affect the price of our common stock.

Provisions of our certificate of incorporation, by-laws, Rights Agreement and Delaware law may have the effect of deterring
unsolicited takeovers or delaying or preventing changes in control of management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current
market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest.

Our
certificate of incorporation permits the Company to issue preferred stock without stockholder approval upon such terms as the board of directors may determine, as was done in
December 2010. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding common stock. Although we have no present intention of issuing additional preferred stock,
issuance of a substantial number of preferred shares could adversely affect the price of our common stock.

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In
addition, our certificate of incorporation and our by-laws provide that:



These
provisions make it more difficult for our stockholders to change the composition of the board of directors, as well as approve transactions they may deem to be in their best
interests but that are not approved by the board of directors.

Pursuant
to a Rights Agreement, dated as of September 25, 2002, between the Company and Computershare Trust Company, N.A. (fka Equiserve Trust Company, N.A.), as Rights Agent, as
subsequently amended, we issued rights as a dividend on common stock on October 7, 2002, each of which initially entitles the holder to purchase 1/10th of a share of newly
issued preferred stock for $22.50, in the event that any person not approved by the board of directors acquires more than 15% of our outstanding common stock. If the rights become exercisable, each
right will entitle the holder to purchase $22.50 worth of our common stock or, in the event of an acquisition by another company, $22.50 worth of the common stock of the other company, at half its
market value. In each case, the rights held by the acquiring person are not exercisable and become void. The Rights Agreement, as amended, may have the effect of discouraging a third party from making
an offer to acquire us without the support of our Board of Directors, even if such an offer would be at a premium to the market price of our common stock at the time.

Our stock may be removed from The Nasdaq Stock Market if we do not maintain compliance with its listing rules:

On September 14, 2010, at the end of previously applicable grace periods provided under the Nasdaq Listing Rules, we received a
letter from The Nasdaq Stock Market informing us that our common shares had failed to comply with the $1.00 minimum bid price required for continued listing on The Nasdaq Capital Market under Listing
Rule 5550(a)(2), and as a result, without further action our common shares would be subject to delisting. We appealed the Staff's determination, and on December 6, 2010, we announced
that we had received a favorable ruling from the NASDAQ Listing Qualifications Panel which granted our request to remain listed on the NASDAQ, conditioned upon our satisfying the minimum bid price
requirement by March 14, 2011, and also remaining in compliance on that date with NASDAQ's other, normal requirements for maintaining a company's continued listing. Specifically, we were
required to evidence a closing bid price for our common stock of at least $1.00 per share for a minimum of ten consecutive business days by the close of business on March 14, 2011. In order to
meet this requirement, we completed a reverse stock split on February 25, 2011, as discussed in our consolidated financial statement footnotes under "Subsequent Events", and thus we have
regained compliance with the NASDAQ listing rules. However, should our stock price decrease in the future, there can be no assurance that we will be able to meet The Nasdaq Stock Market's minimum bid
price requirements and therefore may lose our eligibility for quotation on The Nasdaq Stock Market.

Item 1B.    Unresolved Staff Comments

None.

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Item 2.    Properties

Since January 2008, our principal executive offices, research and development, and manufacturing facilities have been located at 65
Middlesex Road, Tyngsboro, Massachusetts. This 103,000-square-foot facility, which has been renovated to meet our needs, is operated under a lease that expires in September
2014, with options to renew for two additional seven-year periods. The facility has a potential capacity for the production of more than 1,000 flywheels per year, although based on the
manufacturing build-out thus far, that capacity is currently approximately 600 flywheels per year on a multi-shift operating basis.

We
own land in Stephentown, New York, on which we have completed a significant portion of the construction for our first 20 MW frequency regulation facility, which became partially
operational in January 2011. Additionally, we have options to lease or purchase several other properties where we may build future Smart Energy Matrix plants.

Item 3.    Legal Proceedings

None.

Item 4.    (Removed and Reserved)

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is quoted on The NASDAQ Capital Market under the symbol "BCON." The following table sets forth the high and low
closing sales price of the common stock for the periods indicated.

High

LowTwelve months ended December 31, 2010Fourth Quarter

$
3.20

$
1.80Third Quarter

$
3.70

$
2.70Second Quarter

$
4.50

$
2.90First Quarter

$
4.90

$
3.80Twelve months ended December 31, 2009Fourth Quarter

$
7.20

$
4.50Third Quarter

$
8.70

$
6.40Second Quarter

$
10.30

$
4.30First Quarter

$
5.30

$
3.30


On
March 11, 2011, the last reported sale price of our common stock on The NASDAQ Capital Market was $2.60 per share, and there were 39 holders of record of common
stock. The number of record holders does not include holders of shares in "street name" through brokers.

We
have never declared or paid cash dividends on shares of our common stock. We expect to retain future earnings, if any, to finance the expansion of our business, and therefore do not
expect to pay cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

Until
approximately March 25, 2011, our common stock will be quoted on the NASDAQ Capital Market with the Suffix D appended to it (BCOND) to reflect the occurrence of our
one-for-ten reverse stock split on February 25, 2011, which is reflected in the above tables.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There was no stock repurchase activity in 2010.

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Item 6.    Selected Consolidated Financial Data

The following selected financial data should be read together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements, including the related notes, found elsewhere in this Form 10-K. The tables that follow present selected historical financial
data for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 and for the period from May 8, 1997, the date of Beacon's inception, through December 31, 2010.

Period from
May 8, 1997
(date of inception)
through December 31,
2010Twelve months ended December 31,2010

2009

2008

2007

2006(in thousands, except per share data)Consolidated Statements of Operations Data:Revenue

$
896

$
968

$
68

$
1,389

$
969

$
6,652Cost of goods sold (exclusive of items shown separately below)


539


991


53


1,248


845


6,709Gross profit


357


(23
)

15


141


124


(57
)Operating expenses:Operations and maintenance


3,590


2,931











6,521Research and development


6,689


6,796


15,398


8,387


4,748


97,301Selling, general and administrative


9,301


7,116


7,074


5,876


6,508


74,466Loss on contract commitments


971


239


86


(578
)

1,385


4,013Depreciation and amortization


2,114


1,839


1,295


145


96


9,710Casualty loss (recovery)











(69
)

69


Restructuring charges

















2,159Loss on impairment of assets

















4,664Total operating expenses


22,665


18,921


23,853


13,761


12,806


198,834Loss from operations


(22,308
)

(18,944
)

(23,838
)

(13,620
)

(12,682
)

(198,891
)Interest and other income (expense), net


(372
)

(116
)

270


702


519


7,262Net loss


(22,680
)

(19,060
)

(23,568
)

(12,918
)

(12,163
)

(191,629
)Preferred stock dividends

















(36,826
)Accretion of redeemable convertible preferred stock

















(113
)Loss to common shareholders

$
(22,680
)
$
(19,060
)
$
(23,568
)
$
(12,918
)
$
(12,163
)
$
(228,568
)Loss per share, basic and diluted

$
(1.19
)
$
(1.56
)
$
(2.59
)
$
(1.76
)
$
(2.06
)Shares used in computing net loss per share, basic and diluted


19,003


12,220


9,087


7,360


5,908


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As of December 31,2010

2009

2008

2007

2006(in thousands)Balance Sheet Data:Cash and cash equivalents

$
10,866

$
22,605

$
14,357

$
30,417

$
5,251Working capital


(8,750
)

18,364


6,198


28,820


3,310Total assets


75,937


50,002


38,596


39,778


7,258Long term debt


26,616


4,423


4,122





Total stockholders' equity


28,634


40,077


25,612


36,198


3,900


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion of our financial condition and results of operations should be read in conjunction with our financial
statements, the notes to those financial statements and other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other
parts of this document contain forward-looking statements that reflect plans, estimates, intentions, expectations and beliefs. Actual results could differ materially from those discussed in the
forward-looking statements. See "Note Regarding Forward-Looking Statements." Factors that could cause or contribute to such differences include, but are not limited to, those set forth in the "Risk
Factors" in Item 1A and contained elsewhere in this Form 10-K.

Overview

We have experienced net losses since our inception and, as of December 31, 2010, had an accumulated deficit of approximately
$229 million. We are focused on building, owning and operating merchant plants for frequency regulation and selling turnkey plants and systems. We do not expect to have positive EBITDA
(earnings before interest, taxes, depreciation and amortization) or positive cash flow from operations until we have deployed a sufficient number of merchant plants and/or sold turnkey systems.
Moreover, we must raise additional capital from a combination of equity, debt and/or turnkey sales to execute our business plan and continue as a going concern. In the future, as we increase the
number of our merchant regulation facilities and we develop sustainable cash flows from operations and the sale of turnkey plants, we expect to fund additional plants from a combination of cash flow
from operations, non-recourse project financing and project equity.

In
November 2008, we began operating our first 1 MW Smart Energy Matrix on the electricity grid in Tyngsboro, Massachusetts. This 1 MW system was installed under ISO New
England's Alternative Technologies Regulation pilot program. The pilot program was approved by FERC as part
of ISO New England's compliance with FERC Order No. 890, which is intended to promote greater competition in electricity markets, strengthen the reliability of the grid, and allow
so-called "non-generation" resources (which include our flywheel technology), to participate in frequency regulation markets on a non-discriminatory basis. The
pilot program allows us to generate revenue for regulation services while ISO-NE develops permanent market rules that will govern application of the technology. We added a second megawatt
of capacity in Tyngsboro in July 2009, and a third megawatt in December 2009, all of which have earned revenue through the pilot program. We have redeployed a portion of these three MW to the
Stephentown site and we may also redeploy additional systems to our NorthWestern Energy project. As available, we may operate up to 1 MW of capacity from time to time in the ISO-NE pilot
program.

During
2010, our focus as a company has been on securing the financing to complete our Stephentown plant, ramping up production in order to build the necessary flywheels, working with
NYSEG and NYISO on substation improvements required for interconnection to the grid, and completing activities required to develop the site, install, test and commission the equipment.

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On
August 6, 2010, SRS, a wholly-owned subsidiary of Beacon, closed on a loan guaranteed by the DOE, which, over time, will allow us to borrow up to approximately
$43 million to finance 62.5% of the estimated $69 million total project cost of our 20 MW plant currently under construction in Stephentown, New York. At the closing of the loan, Beacon
contributed the remaining 37.5% of the expected project costs in the form of $18.9 million in inventory, assets, eligible project costs and $7 million in cash, which was deposited into
an SRS cash account (known as the "base equity account") controlled by the collateral agent. We expect to receive 100% reimbursement from the FFB for ongoing budgeted project costs until such time as
62.5% of the aggregate of all eligible project costs have been funded. After 62.5% of the aggregate of all eligible project costs have been funded with loan proceeds, (a) 62.5% of each request
for funding will be funded with loan proceeds from the FFB, and (b) 37.5% of each request for funding will be funded with the proceeds taken from the base equity account. However, we are
responsible for any cost overruns for the project. As of December 31, 2010, we have drawn down approximately $4 million of the cash that was contributed to the project, and have received
advances of $22.2 million under the FFB loan for eligible project expenditures. The project is proceeding on budget, and we do not currently anticipate any cost overruns. Going forward, each
monthly disbursement from the loan will be subject to the satisfaction of certain conditions. See Liquidity and Capital Resources below.

On
May 24, 2010, we announced that we signed a contract with the New York State Energy Research and Development Authority (NYSERDA) relating to a $2 million grant. This
grant will provide $1.5 million to pay for a portion of the interconnection and other aspects of the Stephentown facility, which is being accounted for as a reduction of eligible project costs
on a percentage-of-completion basis; $100,000 for a visitor information center to be built at the Stephentown site; and $400,000 for other project tasks not specifically
related to SRS
project costs, which is being accounted for as Beacon grant revenue, also on a percentage-of-completion basis.

As
of the end of 2010, more than 10 MW of energy storage capacity were installed and fully tested and ready for grid interconnection. In addition, all support systems and ancillary
hardware for the plant's eventual matrix of 200 flywheels, including control software, power electronics, cooling and other equipment were in place, pending completion of work required on the local
utility provider, New York State Energy and Gas (NYSEG), substation. We energized and interconnected 8 MW of flywheel energy storage and began earning frequency regulation revenue in Stephentown as of
January 24, 2011. As of that date, all interconnection systems between the Stephentown plant and NYSEG were operational to enable the full 20 MW plant to come online. As of the date of this
filing, 14 MW of capacity is operational and earning revenue. Additional megawatts of energy storage capacity are expected to be progressively energized, with all 20 MW expected to be operational
during the second quarter of 2011.

In
2011 and 2012, we will continue to have capital needs that will require additional funding through a combination of equity, debt and/or cash proceeds from the sale of plants to fund
operations as we continue to build and deploy flywheel plants. The amount of debt and equity required will depend on the mix of merchant plants and plants sold on a turnkey basis. Our deployment plans
are affected by the timing of a number of factors and activities, including but not limited to the following:



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Our
profit and losses as well as uses of cash may fluctuate significantly from quarter to quarter due to fluctuations in revenues, costs of development, costs of materials to build
flywheels and other components of our Smart Energy Matrix and the market price for regulation services. In addition, our cash may fluctuate by period due to the timing of capital
expenditures for expanding manufacturing capabilities and/or construction of frequency regulation facilities and the related timing of project financing or equity raises. These fluctuations in cash
requirements could put additional pressure on our cash position. There can be no assurance that we will be able to raise the required capital on a timely basis or that sufficient funds will be
available to us on terms that we deem acceptable, if they are available at all. See "Liquidity and Capital Resources" for more information concerning our access to and uses for capital.

Revenue

Our revenue during 2010 came primarily from three sources:



Our
business plan anticipates earning revenue primarily from the provision of frequency regulation service and the sale of turnkey flywheel systems. We have also earned revenue from
research and development contracts, and we continue to pursue similar contracts. Additionally, we have earned revenue from the sale of APS certificates or similar "clean energy" credits. However,
revenue from such credits has not been material. Further, we have a small inventory of inverters and accessories that we sell, although that revenue is insignificant.

Revenues
we have received from this pilot program are less than those that we expect to receive under permanent market rules, principally because under ISO-NE's pilot program
rules, we are not eligible for opportunity cost payments, which represent approximately one-third of the revenue received by conventional regulating generators. We expect that
ISO-NE will develop a proposal for permanent market rules during the first quarter of 2011, to take effect, if approved by FERC, by the end of 2011. These rules will enable us to receive
the economic equivalent of this payment component. Additionally, we expect ISO-NE's new market rules to retain a pay-for-performance feature, whereby
fast-response regulation resources, such as our flywheels, will continue to receive higher-than-average mileage payments on the basis of their greater speed and
effectiveness.

Revenue
from frequency regulation from the pilot program decreased in the fourth quarter of 2010 from the third quarter of 2010 because we moved 2 of the 3 MW of capacity to our plant
under construction in Stephentown, New York. The remaining flywheels were taken out of service temporarily to upgrade certain components in the flywheels to match more recent versions currently being
installed in New York and to allow us to use the indoor facility to test new flywheels as they are produced. We have reinstalled a portion of the 1 MW previously in service inside our plant in
Tyngsboro to the facility outside our building. As a result, the percentage of time in service and the amount of regulation provided in the fourth quarter of 2010 are not consistent with prior
results.

On
February 17, 2011, FERC issued a NOPR that, if adopted as proposed, would direct each ISO to implement a "pay-for-performance" compensation structure
for frequency regulation. Currently, ISO-NE is the only grid operator that utilizes a performance-based tariff that rewards resources for speed. Should FERC's rule requiring
performance-based regulation tariffs be adopted, the economics of our plants would be significantly enhanced and our addressable markets would also significantly expand.

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Frequency regulation revenue in 2011 is expected to be significantly higher than in 2010, as we have begun to earn revenue from our NY plant in January 2011 and anticipate having all 20
MW online during the second quarter. Additionally, we expect our R&D contract revenue to be higher in 2011 than in 2010 due to expected completion of work under the ARPA-E contract.

Cost of Goods Sold

Our cost of goods sold (COGS) for frequency regulation services includes the cost of energy and retail transmission and distribution
(T&D) charges. In 2010, approximately one third of our frequency regulation COGS represented the cost of energy; the remaining two thirds consisted of T&D charges from the local utility. We incurred
the T&D charges because our pilot storage assets in Tyngsboro are connected to the grid through distribution-level power lines. Since our 20 MW facilities, including Stephentown, will be connected to
the grid at transmission-level, we will not incur these T&D fees. Consequently, we expect our gross margins for our 20 MW plants to be significantly higher than they have been for the pilot program.

Cost
of goods sold for R&D contracts is being recorded on the percentage-of-completion method and consists primarily of direct labor and material, subcontracting
and associated overhead costs. Cost of goods sold does not reflect the true cost of any inverter sales, because our inverter inventory was fully written-off during a prior year.

Operations and Maintenance

Operations and maintenance (O&M) expenses are related to manufacturing, materials handling, purchasing, Smart Energy
Matrix operations, and expensed non-fungible costs associated with certain installations. Since our current production levels are still well below our facility's full
capacity, O&M costs for the years ended December 31, 2010 and 2009 include a significant amount of unabsorbed overhead. In addition, non-capitalizable costs associated with
substation upgrades in Stephentown, costs associated with running ISO-NE pilot resources and certain non-fungible costs associated with certain Smart Energy Matrix
installations are also included in O&M. For the year ended December 31, 2008 and prior, Operations and maintenance costs were combined with our Research and development costs. O&M expenses will
increase as we ramp up our production capacity and begin to operate and maintain the Stephentown facility.

Research and Development

Research and development (R&D) represents the cost of compensation and benefits for research and development staff, as well as
materials and supplies used in the engineering design and development process. We expect R&D expenses to decrease slightly in 2011.

In
2008 and prior years, amounts reported as "Research and development" (R&D) included not only the cost of our engineering staff, but also the cost of unabsorbed manufacturing overhead,
since most of our activities related to development of the Smart Energy 25 flywheel and Smart Energy Matrix. In 2008, we substantially completed development of the Smart Energy
Matrix and began limited production of commercial units and building our first frequency regulation installations. As of January 1, 2009, we have split the cost of Operations and
maintenance (O&M) from the cost of our R&D functions.

Selling, General and Administrative Expenses

Our selling expenses consist primarily of compensation and benefits for regulatory affairs, sales and marketing personnel and related
business development expenses and regulatory compliance efforts. General and administrative expenses consist primarily of compensation and benefits related to our corporate staff, professional fees,
insurance and travel. Overall, we expect our selling, general and

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administrative
expenses for fiscal 2011 to be significantly lower than those in 2010, primarily because selling, general and administrative expenses for 2010 included approximately $1.2 million
in direct costs associated with the preferred stock financing that was completed in December 2010.

Loss on Contract Commitments

Our contracts have been primarily for the development of demonstration units of new products and the design of a frequency regulation
plant. As such, the work has supported our core research and development efforts. Most of these contracts have been structured on a cost-share basis, for which the expected
cost-share has been recorded as a contract loss. Each quarter we perform an estimate-to-complete analysis, and any increases to our original estimates are
recognized in the period in which they are determined. Contract loss increased in 2010 over 2009 because we recorded our expected cost share on the ARPA-E contract; this was offset
partially by credits resulting from lower than expected losses on other contracts completed in 2010. We expect our contract loss to be lower in 2011 than in 2010.

Depreciation and Amortization

Our depreciation and amortization is primarily related to depreciation on capital expenditures, the amortization of lease and leasehold
costs related to our facilities and the amortization of deferred loan costs. Depreciation and amortization expense will increase substantially in future periods as we build and deploy our frequency
regulation installations and amortize costs associated with the FFB loan.

Interest Income (Expense)

Interest income is attributable to interest earned from cash deposits.

Interest
expense relates to the MassDev loan, FFB loans, "make whole" dividends paid when investors convert their preferred stock, along with the amortization of warrants issued in
conjunction with the MassDev loan. A substantial portion of our interest expense relating to the MassDev and FFB loans has been capitalized. Interest expense also includes non-cash
interest relating to our mandatorily redeemable convertible preferred stock, preferred stock warrants, and common stock warrant liabilities (see Debt or derivatives recorded at fair value, below).
Interest expense will increase substantially in 2011 as we continue to draw down on the FFB loan. Non-cash interest may be either a charge or a credit, depending on changes in the fair
value of the preferred stock and warrants and the fair value of our common stock when we redeem our preferred stock or investors exercise their warrants.

Other Income/Expense, net

Other income/expense, net, consists primarily of currency exchange losses, gain or losses on the sale or disposition of fixed assets,
and refunds received for the settlement of certain claims.

Gain (Loss) on extinguishment of debt

Gain (loss) on extinguishment of debt is a non-cash item representing the gain or loss recognized when investors
voluntarily convert their mandatorily redeemable convertible preferred stock for common stock. The gain or loss is calculated as the difference between the fair value of the common stock and the fair
value of the preferred stock as of the date of the conversion. The amount of any such gain or loss in 2011 will vary based on the amount of preferred stock that is converted and the fair value of our
common stock at the date of such conversion.

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Critical accounting policies and estimates

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

Debt recorded at par value or stated value

The MassDev and FFB loans are recorded on our balance sheet at par value or stated value adjusted for unamortized discount or premium.
Discounts and premiums for debt recorded at par value or stated value generally are capitalized and amortized over the life of the debt and are recorded in interest expense using the effective
interest method. Such costs are amortized over the life of the debt and are recorded in depreciation and amortization expense.

Debt or derivative liabilities recorded at fair value

Costs related to the issuance of debt for which we have elected the fair value option are recognized in current earnings. We have
elected not to mark our MassDev or FFB loan to market through the income statement. However, we have three instruments that are recorded as debt or derivatives which we have elected to mark to fair
value through earnings: our mandatorily redeemable convertible preferred stock, our preferred stock warrants, and the common stock warrants issued in conjunction with our preferred stock. We determine
fair value for these instruments as of the end of each reporting period, and we reduce the amount outstanding for any redemptions, exercises, or
conversions at the fair value determined at the end of the prior reporting period. The fair value adjustment is charged or credited to Non-cash interest.





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Revenue Recognition

Although we have shipped products and recorded contract and frequency regulation service revenues, our operations have not yet reached
a level that would qualify us to emerge from the development stage. Therefore we continue to be accounted for as a development stage company under Financial Accounting Standards Board's (FASB's)
Accounting Standards Codification (ASC) Topic 915,"Development Stage Entities."



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Loss on Contract Commitments

Our contracts have been primarily for the development of demonstration units of new products, the design of a frequency regulation
facility or alternative uses for our flywheels. As such, the work has supported our core research and development efforts. We establish reserves for anticipated losses on contract commitments if,
based on our cost estimates to complete the commitment, we determine that the cost to complete the contract will exceed the total expected contract revenue. Most of our contracts have been granted on
a cost-share basis, for which the expected cost-share is recorded as a contract loss. Additionally, each quarter
we perform an evaluation of expected costs to complete our in-progress contracts and adjust the contract loss reserve accordingly.

-40-

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Inverter Inventory Valuation

We value our inventory at the lower of actual cost or the current estimated market value. We regularly review inventory quantities on
hand and record a provision for excess and obsolete inventory.

We
have a limited amount of inventory related to our inverter product line, for which reserves were recorded in prior years. These impairment charges were made due to the uncertainty of
realizing any future value from the inventory due to the lack of substantial revenues to date from our inverter product line. Accordingly, for the years ended December 31, 2010 and 2009, the
value of our inverter product line inventory was fully offset by these reserves.

Patent Costs

We capitalize external legal costs incurred in the defense of our patents where we believe it is likely that the patent has a future
economic value to us. We monitor the legal costs incurred and the anticipated outcome of the legal action and, if changes in the anticipated outcome occur, capitalized costs will be adjusted in the
period the change is determined. Patent costs are amortized over the remaining life of the patents. We own intellectual property in the form of various patents, and expect to obtain other patents
during 2011 and beyond. In December 2004, we recorded impairment charges to write down our capitalized patent costs to zero, due to the lack of substantial revenues to date and the uncertainty of
realizing any future value from these patents. Accordingly, all costs incurred from 2004 through 2008 related to the development of intellectual property were expensed as incurred. However, as of
2009, as we began to commercialize our technology, we again began to capitalize legal costs associated with obtaining patents which we expect to have future commercial value, and to amortize these
costs over the life of the patent. We review our intangible assets periodically for impairment, and record impairment reserves as appropriate. Costs for patents that have not yet been issued are
capitalized, but we do not begin to amortize them until such time as the patent is issued. If we determine that a patent will not be issued, any previously capitalized costs are expensed.

Warranty Reserves

The solar inverters we have sold carry warranties that require us to repair or replace defective products returned to us during the
5 year warranty period at no cost to the customer. We record an estimate for warranty-related costs based on actual historical return rates, anticipated return rates and repair costs at the
time of sale.

Should
we sell our Smart Energy Matrix systems in the future, it is likely that the terms of sale will include a warranty. In that event, we will estimate the repair costs
under the terms of the warranty, and record an initial provision for warranty costs that we will adjust periodically based on actual results and anticipated future costs at that time.

Income Taxes

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

Significant
management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred
tax assets. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance or

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reduce
our current valuation allowance which could materially impact our tax provision. We classify interest and penalties relating to uncertain tax positions in income tax expense.

Property and Equipment

Property and equipment in service is stated at cost and depreciated using the straight-line method over the estimated
useful lives of the assets. Property and equipment are defined as tangible items with unit costs exceeding our capitalization threshold that are used in the operation of the business, are not intended
for resale and which have a useful life of one year or more. The cost of fixed assets is defined as the purchase price of the item, as well as all of the costs necessary to bring it to the condition
and location necessary for its intended use. These costs include such items as labor, overhead, capitalized interest and, if applicable, exit costs. Exit costs for which we are obligated are accounted
for in accordance with ASC Topic 410, "Asset Retirement and Environmental Obligations." No overhead is generally applied for internally-constructed
projects not directly related to our core business (e.g., leasehold improvements). Interest costs incurred during the construction of major capital projects (such as the construction of our
frequency regulation plants) are capitalized in accordance with ASC Topic 835, Subtopic 20, "InterestCapitalization of Interest." The
interest is capitalized until the underlying asset is ready for its intended use, and is considered an integral part of the total cost of acquiring a qualifying asset. Thus, the capitalized interest
costs are included in the calculation of depreciation expense once the constructed assets are in service. Repair and maintenance costs are expensed as incurred. Materials used in our development
efforts are considered research and development materials, and are expensed as incurred in accordance with ASC Topic 730, "Research and Development."

Capital
assets are classified as "Construction in Progress" (CIP) when initially acquired, and reclassified to the appropriate asset account when placed into service, with the exception
of land, which is capitalized upon purchase. Depreciation expense is not recorded on assets not yet placed into service.

Materials
purchased to build flywheels, power electronics and other components used in our frequency regulation installations are classified as CIP, along with the related labor and
overhead costs. Some components of the Smart Energy Matrix, such as the flywheels and power electronics, are considered "fungible" in that they can be moved and redeployed at a different
location. Other costs are sunk costs which would not be recovered if we redeployed the system or portions thereof. In some cases, we may elect to deploy a Smart Energy Matrix system at a
location for the purpose of demonstrating our technology or gaining experience operating in that particular market. In these instances, the costs of the fungible components are capitalized, and the
remaining costs, which may include such costs as site preparation, interconnection costs, capitalized interest and estimated exit costs, are expensed.

Impairment of Long-Lived Assets

In accordance with ASC Topic 360, "Property, Plant and Equipment,"
long-lived assets are reviewed to determine whether any events or changes in
circumstances indicate that the carrying value of the asset may not be recoverable. The conditions to be considered include whether or not the asset is in service, has become obsolete, is damaged, or
whether external market circumstances indicate that the carrying amount may not be recoverable. When appropriate, we recognize a loss for the difference between the estimated fair value of the asset
and the carrying amount, or the cost to repair the asset. The fair value of the asset is measured using either available market prices or estimated discounted cash flows.

In
certain instances, we may determine that it is in the best interest of the Company to re-deploy all or part of a Smart Energy Matrix system installed at a
given location. When such a determination has been made, we will determine which costs are associated with the movable (fungible) components, and which costs are non-fungible. We will
record a period expense for the net book value not associated with the fungible components.

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Based on our annual analysis, no asset impairment charges were considered necessary for 2010, 2009 or 2008.

Other assets and deferred financing costs

We will defer our direct costs incurred to raise capital. Direct costs include only "out-of-pocket" or
incremental costs directly related to the effort, such as a finder's fee and fees paid to outside consultants for accounting, legal or engineering investigations or for appraisals. For equity capital,
these costs will be charged to Additional Paid in Capital when the efforts are successful, or expensed when unsuccessful. Indirect costs are expensed as incurred. Deferred financing costs related to
debt are also deferred, and amortized over the term of the debt using the effective interest method.

Advance billings on contracts

We may receive performance-based payments and progress payments from customers which may exceed costs incurred on certain contracts,
including contracts with agencies of the U.S. Government. Such advances are classified as current liabilities.

Recently Issued Accounting Pronouncements

Recently adopted accounting pronouncements and recently issued pronouncements are discussed in Note 2 of Item 8,
"Consolidated Financial Statements and Supplementary Data" of our Annual Report on Form 10-K, and are incorporated herein by reference.

Results of operations

Comparison of Years ended December 31, 2010 and 2009

Year ended December 31,2010

2009

$ Change

% Change(in thousands)Revenue

$
896

$
968

$
(72
)

-7
%Cost of goods sold


539


991


(452
)

-46
%Gross margin


357


(23
)

380


1652
%Operating expenses:Operations and maintenance


3,590


2,931


659


22
%Research and development


6,689


6,796


(107
)

-2
%Selling, general and administrative


9,301


7,116


2,185


31
%Loss on contract commitments


971


239


732


306
%Depreciation and amortization


2,114


1,839


275


15
%Total operating expenses


22,665


18,921


3,744


20
%Loss from operations


(22,308
)

(18,944
)

(3,364
)

18
%Interest and other income (expense), net


(372
)

(116
)

(256
)

221
%Net loss

$
(22,680
)
$
(19,060
)
$
(3,620
)

19
%


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Revenue

The following table provides details of our revenues for the twelve months ended December 31, 2010 and 2009.

Year ended December 31,

Cumulative
Contract Value
Earned as of
December 31,
2010Percent
complete

Total
Contract
Value

Remaining
Value
(Backlog)2010

2009(dollars in thousands)Frequency regulation:



$
373

$
286Contracts:NAVSEA

100.0%





500

$
500

$
500

$
Tehachapi

87.1%


56


152


218


250


32PNNL

100.0%


84


20


104


104


ARPA-E

5.4%


121





121


2,246


2,125ABIOMED

NA


18





18


NA


NANYSERDA

45.0%


180





180


400


220Total Contract and Grant Revenue



$
459

$
672

$
1,141

$
3,500

$
2,377Other (inverters, accessories and APS credits):




64


10Total revenue



$
896

$
968


Revenue
for the year ended December 31, 2010, decreased by approximately $72,000, or 7% over the same period in 2009. Frequency regulation revenue earned in 2010 through our
participation in the ISO-NE pilot program increased by approximately $87,000, or 30%, over 2009 levels. Contract revenue decreased by approximately $213,000, or 32%, in 2010 as compared to
2009. Other revenue increased by approximately $54,000, or 540%.

Frequency regulation revenue

The increase was due primarily to an increase in capacity during 2010, partially offset by lower average pricing for regulation in the
New England Market. 2010 frequency regulation revenue dropped in the fourth quarter of 2010 as compared to the third quarter of the same year by approximately $42,000 because we transferred 2 of our 3
MW of capacity to our plant currently under construction in Stephentown, New York. The increase in regulation revenue was less than would have been expected based on the increases in capacity, due to
average regulation clearing prices which were lower, on average, in 2010 than in 2009.

Revenues
received from this pilot program are less than those we would expect to receive under permanent market rules because under pilot program rules, we are not eligible for
opportunity cost payments. Opportunity cost payments represent approximately one-third of the revenue received by conventional regulating generators. We expect ISO-NE to design
permanent market rules during the first quarter of 2011 for implementation during 2011, if approved, that will have the effect of compensating us for the opportunity cost component that we do not
currently receive under the pilot program. The trend at other ISOs has been to incorporate features in their tariffs that intrinsically compensate all resources, including energy storage providers,
for opportunity costs.

-44-

---



Contract revenue

The decrease in contract revenue in 2010 was primarily because we completed the $500,000 NAVSEA contract in 2009. The NAVSEA contract
represented 74% of our 2009 contract revenue. However, in 2010, we began work on the ARPA-E contract, for which we expect to earn $2.2 million over a two-year period
(and which was only 5.4% complete as of the end of 2010). In 2010, we were awarded a $2 million grant from NYSERDA, $1.5 million of which will be accounted for as a reduction in the
Stephentown project cost; $100,000 which will be used to build a visitor center in Stephentown, New York, and $400,000 which will be earned through the completion of non-SRS related
project milestones, of which $180,000 has been recognized as grant revenue based on percentage of completion as of December 31, 2010. We also earned $18,000 from a new contract, ABIOMED, for
which we are being paid on an hourly basis for engineering work. We do not expect significant revenue from this contract in 2011. In 2010, we completed the PNNL contract. We anticipate completing the
Tehachapi contract in 2011.

Other revenue

Other revenue consists of the sale of APS credits and the sale of inverters and accessories. We earned approximately $39,000 from the
sale of APS credits in 2010, as compared to approximately $3,000 during 2009. We expect APS sale revenue to decrease in 2011, as we have significantly reduced the storage capacity in service in
Tyngsboro, as noted above. We also earned approximately $25,000 from the sale of inverters and other accessories in 2010, as compared to $7,000 in 2009.

Cost of goods sold

Cost of goods sold for the years ended December 31, 2010 and 2009 is as follows:

Year ended December 31, 2010

Year ended December 31, 2009Revenue

Cost of
Sales

Margin

Revenue

Cost of
Sales

Margin(in thousands)Frequency regulation

$
373

$
318

$
55

$
286

$
319

$
(33
)Contract


459


221


238


672


672


Inverters and APS credits


64





64


10





10Total

$
896

$
539

$
357

$
968

$
991

$
(23
)


Cost
of goods sold, inclusive of our frequency regulation services, research and development contracts, and inverter and other sales decreased from approximately $991,000 in 2009 to
approximately $539,000 during 2010, a drop of approximately $452,000, or 46%. Despite an increase in the MW capacity available for frequency regulation in 2010 as compared to 2009, the cost of goods
sold for frequency regulation decreased by approximately $1,000 in 2010 as compared to 2009. Cost of goods sold for contracts decreased by approximately $451,000, or 67%.

Frequency regulation cost of goods sold

On a year to date basis, our average gross margin on frequency regulation was positive 14.7% for 2010, as compared to a negative 11.5%
margin for 2009. This significant improvement resulted from ISO-NE's decision to allow us to net the energy consumption of our regulation resource and pay the wholesale rate for net energy
usage as of late April 2009. During the first six months of the pilot program (which included the first four months of 2009), our electricity costs for operating the Smart Energy Matrix
in Tyngsboro were unusually high. Our connection to the grid for the pilot program was made through National Grid distribution lines, rather than directly to the ISO through transmission

-45-

---



lines,
due to cost and time factors. Consequently, from November 2008 through late April 2009, we paid the retail price for our gross withdrawals from the grid instead of paying the wholesale price
for the net electricity (withdrawals minus injections), plus retail transmission and distribution charges. In late April 2009, ISO-NE and our local distribution company implemented a
change that reduced our cost of electricity by netting the electricity withdrawn and injected into the grid, and billing for that net usage at the wholesale rate. In addition, a new regulation
dispatch signal implemented by ISO-NE in May 2009 reduced the net amount of electricity we needed to purchase. While we are still paying retail transmission and distribution charges, the
reduction in energy costs resulting from the adjustment that allows us to net our energy costs enabled us to begin earning positive gross margins in May 2009. During the third quarter of 2010, we
began to utilize our pilot resource to test flywheels going to Stephentown, and therefore we were not operating these units at maximum efficiency. Due to this, combined with a continuing decrease in
the ISO-NE clearing price for frequency regulation, margins were negative during the last half of 2010.

We
expect the cost of electricity to be significantly lower for our 20 MW facilities than for the ISO-NE pilot resource because we plan to be connected to transmission-level
(rather than to distribution-level) power lines, and thus we will not be subject to transmission and distribution fees and we will be billed for our energy at the wholesale rate. Those fees have
represented approximately 71% of our cost of energy during 2010. Of the $318,000 cost of energy during 2010, approximately $226,000 represented transmission and distribution charges for the period. If
we had been connected to transmission-level (rather than to distribution-level) power lines, our gross margins for each period would have been substantially higher.

Contract cost of goods sold

Since most of our contracts have been on a cost-share basis for which we record our expected cost share as a contract loss
at the inception of the contract, there is typically no gross margin reported for our contracts. However, in 2010, we recorded a credit in cost of sales for contracts in the second quarter of 2010 as
a result of completing the PNNL contract at a substantially lower cost than originally estimated. In addition, we recorded grant revenue of $180,000 for the NYSERDA contract related to tasks for which
there was no direct cost associated. We do anticipate incurring direct costs for the completion of the NYSERDA contract tasks; however, we expect there to be a positive gross margin on the completion
of those tasks.

Operations and maintenance expense

Our operations and maintenance (O&M) costs increased by approximately $659,000, or 22.5%, in 2010 as compared to 2009. See the table
below for explanations of the factors which were responsible for the most significant changes. The net change in O&M costs from 2009 to 2010 is shown below:

Year ended
December 31,

Comment(in thousands)Year ended December 31, 2009

$
2,931Subcontractors and consultants


2,655

Increase due primarily to costs associated with the interconnection and substation at Stephentown. Approximately $1.4 million of these costs and other related project costs (see expense materials below) have been
or will be reimbursed by the NYSERDA grant. The grant reimbursement credit is included with "Allocations and Overhead" below.


-46-

---



Year ended
December 31,

Comment(in thousands)Expense materials


1,326

Approximately $770K related to substation costs in Stephentown. The remainder is due to increased spending for small tools and equipment, tooling and non-recurring expenses, and production supplies.Salaries and benefits


414

Increased staffing as we ramp up manufacturing and construction of our Stephentown facility, along with higher costs for benefits, particularly employee health insurance.Occupancy and repairs


225

Increase year to date due primarily to the cost of repairs to the roof at our Tyngsboro facility, and lease option costs for future plant sites.Legal


55

Increase due to legal costs associated with required monitoring for the DOE loan.Allocations and overhead


(4,400
)
The NYSERDA grant awarded in June 2010 includes various milestones, or tasks, of which $1.5 million relate to non-capital costs associated with the SRS project. This portion of the grant is being recorded as a
reduction of expenses on a percentage-of-completion basis, of which $1.4 million was earned in 2010 and for which we have credited "Allocations out". The remainder represents higher overhead applied based on increasing production
levels.Outside documentation/testing


32

Increase represents cost associated with the grid interconnection in Stephentown.Travel


30

Increase in travel.Software and maintenance


25

Increase in software costs.Hiring expense


22

Increase due to new hires to support increased production for Stephentown.Interconnection and ISO fees


9

Interconnection and ISO fees for the ISO-NE pilot program.Telephone


14

Increase in telephone costs.


-47-

---



Year ended
December 31,

Comment(in thousands)Other


252

Increase includes $114K write-off of "non-fungible costs" related to the construction of the 2MW system in service in Tyngsboro, $75K for loan application costs, $17K bank charges related to the DOE loan-mandated cash
accounts, $41K in safety equipment and $5K miscellaneous costs.Year ended December 31, 2010

$
3,590


Research and development expense

For the year ended December 31, 2010, research and development (R&D) expenses were approximately $107,000, or 1.6%, lower than
for the same period in 2009. The table below details the changes in R&D spending from 2009 to 2010:

Year ended
December 31,

Comment(in thousands)Year ended December 31, 2009

$
6,796Expense materials


(605
)
In 2009, the materials cost included in R&D were primarily the cost of redesigning and replacing motors as part of the motor-stator redesign needed to reduce the operating temperature of the flywheels and
engineering efforts to reduce the cost of the flywheels. In 2010, expense materials for R&D decreased. It now primarily relates to work developing lower cost components for our flywheels.Salaries and benefits


(288
)
Slight increases in staffing levels and benefit costs were more than offset by a lower bonus accrual for 2010 as compared to 2009.Subcontractors and consultants


396

Increased use of contractors.Allocations and overhead


296

Reduction in overhead allocated to contracts, especially the Navy contract which was substantially completed in 2009.Occupancy


105

Increase primarily due to cost to repair the roof at our Tyngsboro facility.Stock Compensation


(78
)
The reduction in stock compensation for 2010 compared to 2009 is due to declining expense amounts for prior year grants based upon the use of the accelerated method of calculating stock compensation
expense.Travel


50

Increase in travel.


-48-

---



Year ended
December 31,

Comment(in thousands)Legal


33

Increase in legal costs related to patents.Other


(16
)Year ended December 31, 2010

$
6,689


Selling, general and administrative expenses

Selling, general and administrative costs (S,G&A) increased by approximately $2,185,000, or 31%, in 2010 from their 2009 levels. The
primary changes to S,G&A expenses from 2009 to 2010 are as follows:

Year ended
December 31,

Comment(in thousands)Period ended December 31, 2009

$
7,116Subcontractors and consultants


856

Approximately $700K represents the underwriter fee for the preferred stock financing in December 2010. The balance represents increased use of consultants, especially in regards to international marketing
efforts.Legal, audit and professional fees


468

Increase represents legal costs associated with the preferred stock financing. These costs are expensed as incurred because we elected the fair value option for this debt.Salaries and benefits


309

Increase due to new hires, primarily to support the administrative cost of managing the Stephentown project and market sale of turnkey systems.Hiring Expense


168

Cost associated with new hires.Travel


93

Increase in travel, especially international travel.Public company / investor relations


82

Increase due to costs associated with the preferred stock financing, as well as higher costs associated with the annual meeting, proxy, and annual report.Conferences and trade shows


48

Increased attendance at conferences and trade shows as part of business development and marketing efforts.Stock Compensation


40

Increase due to option grants to new hires, officers, and a service provider.Taxes


45

Increase in Delaware Franchise tax.


-49-

---



Year ended
December 31,

Comment(in thousands)Small tools and equipment


26

Increase due primarily to cost of computers for new hires and replacement of aging PC for existing employees.Allocations and overhead


(10
)
Represents G&A overhead allocated to the Navy and other contracts. The allocation credit in the third quarter of 2010 was lower than during the prior year because the Navy contract had previously been
completed.Occupancy


19

Occupancy increased year to date due to cost of building repairs.Benefit administration


9

Increase due to new hires, and higher payroll processing fees related to change in payroll cycle to weekly for hourly employees to comply with Davis-Bacon Act requirements.Other


32

Increases in bank fees, $11K; insurance, $10K; advertising, $7K, other $4K.Period ended December 31, 2010

$
9,301


Loss on contract commitments

Our contracts have been primarily for the development of demonstration units of new products, design of a frequency regulation plant,
design of a flywheel for use by the Navy in their electric ships, and other work that supports our core research and development efforts. Most of these contracts have been structured on a
cost-share basis for which the expected cost share has been recorded as a contract loss; however, even contracts awarded on a
"cost-plus-fixed fee basis" determine their allowable "cost" basis on government-allowable overhead rates, which differ from overhead rates required by GAAP. In particular,
most of our stock compensation expense is not an allowable cost for the purposes of calculating government-allowable rates. As a consequence, we may incur losses on our financial statements even for
contracts granted on a cost-plus-fixed fee basis. Each quarter, we perform an estimate-to-complete analysis, and any changes to our original estimates
are recognized in the period in which they are determined.

In
September 2010, we signed a contract with the DOE's Advanced Research Projects AgencyEnergy (ARPA-E) to develop critical components of a highly advanced
"flying ring" flywheel energy storage system over a two year period, for which we expect to receive approximately $2,200,000. In addition, we are expected to contribute an additional 20% of program
costs. Accordingly, we recorded a contract loss during the third quarter of 2010 of $1,070,000, which represents our cost share portion of the contract, plus the difference between our GAAP overhead
rate and the contract bid rate.

-50-

---



In April 2008, we were awarded a subcontract to provide a flywheel energy storage system in support of a wind integration research and development project in Tehachapi, California,
sponsored by the California Energy Commission. We will receive approximately $250,000, in total, to offset R&D expenses and will contribute an additional $87,000 of engineering resources for the
project, bringing the R&D total to approximately $337,000. Accordingly, we recorded a charge of approximately $87,000 to the contract loss reserve during 2008 to reflect the expected "cost share"
portion of the Tehachapi contract. During the first quarter of 2009, we increased the loss reserve for the Tehachapi contract by $132,500, bringing the total contract loss to approximately $219,000.
This increase was based on the difference between the overhead rate that was bid on this fixed price contract and our forecasted overhead rate. No additions were considered necessary to the loss
reserve for the Tehachapi contract during the twelve months ended December 31, 2010.

During
the fourth quarter of 2009, we began work on the PNNL contract. According to the terms of the contract, we expected to incur R&D costs of approximately $210,000, and to receive
approximately $104,000 to offset those costs. Accordingly, during the fourth quarter of 2009, we recorded a charge of approximately $106,000 for our "cost share" portion of this contract. We completed
the contract during the second quarter of 2010, at a lower cost than initially expected, and consequently, we reversed the previously established loss reserve and adjusted the cost of sales to
properly reflect the margin on this contract.

On
February 3, 2009, we announced that we entered into a contract with NAVSEA to evaluate the use of flywheel energy storage for multiple shipboard applications that we expect
will lead to a conceptual design of a flywheel system for future naval surface combatants and possible retrofit into existing navy ships. The value of the initial research and development work is
estimated at $900,000, $500,000 of which had already been appropriated and is was completed as of December 31, 2010. An additional $50,000 was funded in February 2011. Subsequent phases, if
funded, would involve work estimated at up to an additional $2,050,000. This contract was awarded on a "cost plus fixed fee" basis. After final overhead rate adjustments, we increased the costs
charged to the Navy contract by approximately $43,000. We recorded a contract loss reserve of approximately $50,000 in the second quarter of 2010, since the total costs exceed the total appropriated
to date for the contract, and we charged the additional overhead costs, plus an additional $7,000 in unbilled costs against this reserve.

The
organization that originally sponsored our NYSERDA PON 800 contract has undergone a variety of organizational changes, which have resulted in this contract being terminated. Unbilled
allowable charges of approximately $8,000 were charged to the contract loss reserve, and the remaining reserve of approximately $46,000, was reversed in June 2010.

Depreciation and Amortization

Depreciation and amortization expense increased from approximately $1,839,000 during the year ended December 31, 2009, to
approximately $2,114,000 for the same period in 2010, an increase of approximately $275,000, or 15%. The increase in depreciation and amortization resulted primarily from the capitalization of
flywheel and related equipment that was placed into service in July and December of 2009, as well as machinery and equipment purchased in the fourth quarter of 2009 and in 2010. As of
December 31, 2010, we had approximately $41,200,000 in CIP of which approximately $24,200,000 is for flywheels or materials to build flywheels and approximately $16,200,000 are costs related to
the construction of our Stephentown facility.

Interest and Other Income (Expense), net

Average cash balances during 2010 were approximately $5,000,000 higher than during 2009. However, interest rates were significantly
lower in 2010. As a result of the lower interest rates, interest

-51-

---



income
for 2010 was approximately $3,300 lower than during 2009. Interest expense for the years ended December 31, 2010 and 2009 was as follows:

Year ended December 31,2010

2009Cash paid for interest

$
283,397

$
249,620Accrued interest and interest added to FFB loan


104,517


Make-whole dividends paid upon conversion of redeemable preferred stock


67,321


Amortization of MassDev warrants


51,435


47,215Less: Interest Capitalized


(259,654
)

(181,677
)$
247,016

$
115,158


Interest
expense for the year ended December 31, 2010 is approximately $132,000 higher than in the comparable period in 2009 due to interest related to the FFB loan and
make-whole cash dividends paid upon conversion of redeemable preferred stock. Interest on that loan is payable quarterly; however, during the construction period we have the option to
defer the interest payments by adding them to the principal loan balance. We chose to defer the interest payment that was due on December 15, 2010.

Other
income (expense) for the years ended December 31, 2010 and 2009 was as follows:

Year ended December 31,2010

2009Gain (loss) on sale or disposition of assets

$
5,000

$
(16,933
)Claim settlements, various


3,577


3,835Currency exchange gain/(loss)


(90,583
)

(1,736
)Other income (expense), net

$
(82,006
)
$
(14,834
)


Non-cash interest related to preferred stock and associated warrants

Non-cash interest related to preferred stock and associated warrants for the years ended December 31, 2010 and 2009
were as follows:

Year ended December 31,Non-cash interest income (expense):

2010

2009Dividends paid in common stock with conversions

$
(220
)
$
Dividends paid in common stock with redemptions


(78,607
)

Interest expense on redemption of preferred stock


(842,075
)

Fair value adjustment to preferred stock


430,850


Fair value adjustment to preferred stock warrants


276,600


Fair value adjustment to common stock warrants


487,400


Subtotal


273,948


Less: prepaid interest


62,886


Non-cash interest expense as of December 31, 2010

$
336,834

$



-52-

---



Loss on extinguishment of debt

Loss on extinguishment of debt of approximately $390,000 at December 31, 2010 is a non-cash item representing the gain or
loss recognized when investors voluntarily converted their mandatorily redeemable convertible preferred stock for common stock. The gain or loss was calculated as the difference between the fair value
of the common stock and the fair value of the preferred stock as of the date of the conversion. The amount of any such gain or loss in 2011 will vary based on the amount of preferred stock that is
converted and the fair value of our common stock at the date of such conversion. Subsequent to year end, as of March 15, 2011, preferred warrantholders exercised 3,215 preferred warrants, for
which we received proceeds of $3,215,000. Additionally, from January 1, 2011, through March 15, 2011, investors voluntarily converted 7,960 preferred shares into common stock. We expect
to report a non-cash loss on extinguishment of debt related to these conversions of approximately $6.8 million in the first quarter of 2011. The weighted average fair value of the
common stock for the first quarter 2011 conversions was $2.95 per share, as compared to $2.24 per share for the conversions executed prior to December 31, 2010. As of March 15, 2011,
there were 1,440 shares of preferred stock and 1,785 preferred warrants still outstanding.

Net Loss

As a result of the changes discussed above, the net loss for the year ended December 31, 2010 was approximately $22,680,000, an
increase in net loss of approximately $3,620,000, or 19%, as compared to the same period in 2009.

Comparison of Years ended December 31, 2009 and 2008

Year ended December 31,2009

2008

$ Change

% Change(in thousands)Revenue

$
968

$
68

$
900


1324
%Cost of goods sold


991


53


938


1770
%Gross margin


(23
)

15


(38
)

-253
%Operating expenses:Operations and maintenance


2,931





2,931


NAResearch and development


6,796


15,398


(8,602
)

-56
%Selling, general and administrative


7,116


7,074


42


1
%Loss (gain) on contract commitments


239


86


153


178
%Depreciation and amortization


1,839


1,295


544


42
%Total operating expenses


18,921


23,853


(4,932
)

-21
%Loss from operations


(18,944
)

(23,838
)

4,894


-21
%Interest and other income (expense), net


(116
)

270


(386
)

-143
%Net loss

$
(19,060
)
$
(23,568
)
$
4,508


-19
%


-53-

---



Revenue

The following table provides details of our revenues for the twelve months ended December 31, 2009 and 2008.

Year ended December 31,

Cumulative
Contract Value
Earned as of
December 31,
2009Percent complete

Total
Contract
Value

Remaining
Value2009

2008(in thousands)Frequency regulation:



$
286

$
10Contracts:NYSERDA PON 800

86.8%





3

$
55

$
63

$
8NAVSEA

100.0%


500





500


500


Tehachapi

64.4%


152


9


161


250


89PNNL

19.6%


20





20


104


84Total Contract Revenue




672


12

$
736

$
917

$
181Other (inverters, accessories and carbon credits):




10


46Total



$
968

$
68


In
the year ended December 31, 2009, we earned approximately $286,000 from frequency regulation services through our participation in the ISO-NE pilot program that
began in November 2008. Initially, we had 1 MW of capacity operating under this program, but we added a second MW in July and a third MW in December 2009. Revenues we received from this pilot program
were less than those that we expect to receive under permanent market rules. Under the pilot program rules, we are not eligible for opportunity cost payments, which represent approximately
one-third of
the revenue received by conventional regulating generators. Even so, during the latter half of 2009, we ran the Tyngsboro system at positive gross margins, due to reductions in certain operating
costs. In addition, pricing for regulation in the New England market during much of 2009 was lower than in 2008, due in part to lower demand as a result of the overall economy and a reduction in
fossil fuel prices versus those charged in 2008.

In
2009, contract revenue was substantially higher than in 2008, due to increased work on the Tehachapi contract and two new contracts: the NAVSEA contract and the PNNL contract.
Phase I of the NAVSEA contract was for approximately $900,000, of which $500,000 was funded in 2009. Subsequent phases involve work estimated at an additional $2,100,000. We have completed the
funded portion of this contract, and, as of the end of 2009, were in discussion with NAVSEA in regards to funding for the remainder of the contract.

-54-

---



Cost of goods sold

Cost of goods sold for the years ended December 31, 2009 and 2008 were as follows:

Year ended December 31, 2009

Year ended December 31, 2008Revenue

Cost of
Sales

Margin

Revenue

Cost of Sales

Margin(in thousands)Frequency regulation

$
286

$
319

$
(33
)
$
10

$
41

$
(31
)Contract


672


672





12


12


Inverters and other


10





10


46





46Total

$
968

$
991

$
(23
)
$
68

$
53

$
15


Cost
of goods sold increased from approximately $53,000 during 2008 to approximately $991,000 in 2009. During 2009, cost of goods sold includes approximately $319,000 for the cost of
energy associated with the generation of frequency regulation revenue under the ISO-NE pilot program. Cost of energy exceeded frequency regulation revenue because of the manner in which we
are connected to the grid for the pilot program, which resulted in our being paid for energy we provided at wholesale rates, while we were billed for the energy we used at retail rates through the end
of April 2009. In April, ISO-NE and our service provider changed the metering to a "net meter" through ISO-NE, which resulting in a significant drop in our cost of energy for
the remainder of 2009. Our average gross margin on frequency regulation services during the second half of 2009 was 29%. Cost of energy during this period was approximately $121,600, of which
approximately $83,800, or 68%, represents retail transmission and distribution (T&D) charges billed by the local service provider.

In
addition, cost of goods sold for the year ended December 31, 2009 includes approximately $672,000 for R&D contracts calculated using the percentage of completion method. Year
over year, the increase in cost of sales associated with contracts was proportional to our increase in contract revenue.

Operations & Maintenance and Research & Development expenses:

As of January 1, 2009, we classify expenses related to manufacturing, materials handling, purchasing, Smart Energy
Matrix operations, and expensed non-fungible costs associated with certain installations as O&M on our income statement. Prior to 2009, such expenses were included as R&D
costs, as shown below:

Year ended December 31,2009

2008

Net Change(in thousands)Operations and maintenance

$
2,931

$


$
2,931Research and development


6,796


15,398


(8,602
)Total

$
9,727

$
15,398

$
(5,671
)


For
the year ended December 31, 2009, combined O&M and R&D expenses decreased by approximately $5,671,000, or 37%, over the comparable period in 2008. See the table below for
explanations of the factors which were responsible for the most significant changes.

-55-

---



The net change in O&M and R&D costs from 2008 to 2009 is shown below:

Year ended December 31, 2009
as compared to year ended
December 31, 2008:O&M
functions

R&D
functions

Total
change(in thousands)Expense materials

$
(823
)
$
(1,333
)
$
(2,156
)
In 2008, we incurred material costs to complete the initial development of our 25 kWh flywheel, and for tooling and non-recurring costs to develop suppliers capable of producing the components we need to build our
flywheels. In 2009, the materials cost included in R&D are primarily the cost of redesigning and replacing motors as part of the motor-stator redesign needed to reduce the operating temperature of the flywheels and engineering efforts to reduce
the cost of the flywheels. The cost of materials included in O&M includes rework, scrap, and maintenance costs for the flywheels in service.Salaries and benefits


329


467


796

Primarily due to a full year of salary and benefits for employees hired in 2008 in engineering, manufacturing and materials
management associated with the move from development to production activities. 2009 headcount increased slightly over the 2008 level, with two new hires in November 2009. In addition, employee health insurance premiums increased.Subcontractors and consultants


442


(1,041
)

(599
)
Less use of consultants for R&D which was partially offset by an increase in O&M due to contractor costs
associated with completing non-fungible costs of the 3 MW Smart Energy Matrix in Tyngsboro.


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Year ended December 31, 2009
as compared to year ended
December 31, 2008:O&M
functions

R&D
functions

Total
change(in thousands)Legal


108


(2,395
)

(2,287
)
R&D legal expenses in 2008 included costs associated with the Arete lawsuit, which was settled in November 2008. O&M legal and tax advice
represents primarily costs associated with the set up of our frequency regulation operations in New York.Allocations and overhead


(50
)

(699
)

(749
)
The level of production and contract activity increased, resulting in more overhead being capitalized and a larger credit to the
income statement.Stock Compensation


(110
)

(172
)

(282
)
Generally, options and RSUs have been granted to management and employees during the first quarter of the fiscal year, based on
prior year performance, and to new hires. In 2009, such equity grants were made to officers during the second quarter of 2009, and no grants were made to other employees, with the exception of 2 small new hire grants made late in 2009.Occupancy


(164
)

(108
)

(272
)
Occupancy costs in 2008 included the cost of moving to our new facility in Tyngsboro.Outside documentation/testing


(12
)

(37
)

(49
)
Less use of testing services.Travel


(21
)

(15
)

(36
)
Travel reduced.Hiring expense


(1
)

(44
)

(45
)
Reduced due to fewer new hires in 2009.Other


(6
)

14


8Net increase (decrease)

$
(308
)
$
(5,363
)
$
(5,671
)


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Selling, general and administrative expenses

The primary changes to selling, general and administrative (S,G&A) expenses from 2008 to 2009 were as follows:

Year ended
December 31,

Comment(in thousands)Year Ended December 31, 2008

$
7,074Stock Compensation


326

In 2008, we reversed approximately $1 million of stock compensation expense related to a performance-based grant because
management determined that they did not expect to be able to meet the requirements for that grant. Excluding the impact of this adjustment, stock compensation for 2009 was lower than in 2008. Generally, options and RSUs have been granted to
management and employees during the first quarter of the fiscal year, based on prior year performance, and to new hires. In 2009, such equity grants were made to officers during the second quarter of 2009, and no grants have been made to other S,
G&A employees.Legal, audit and professional fees


(507
)
Reduction in use of outside legal services.Public company/investor relations


232

Increase is due to costs associated with the Seaside stock agreement and higher Board of Director fees.Salaries and benefits


244

Three S,G&A employees were hired during early 2008, primarily to support regulatory efforts. The increase represents a full
year's salaries for these individuals, combined with increased health insurance costs. There were no new S,G&A hires in 2009.Expense materials


(62
)
Reduction is due to cost cutting efforts.Subcontractors and consultants


(35
)
Less use of consultants, partially offset with a slight increase during the latter half of the year related to regulatory efforts,
 investigation of potential sites, and applications for grants under the Federal Stimulus Act.Allocations and overhead


(120
)
Represents S,G&A overhead allocated to the Navy and other contracts.Office Supply


(17
)
Reduction due to cost-cutting efforts.Dues and subscriptions


36

Slightly higher spending on dues and subscriptions.


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Year ended
December 31,

Comment(in thousands)Software maintenance


15

Increase due to software used to identify potential new sites.Hiring Expense


(24
)
There have been no new S,G&A hires in 2009, and therefore hiring costs have decreased.Travel


(12
)
Travel reduced.Other


(34
)
Cost cutting efforts given the economic climate during 2009.Year Ended December 31, 2009

$
7,116


Selling,
general and administrative expenses totaled approximately $7,116,000 and $7,074,000 for the years ended December 31, 2009 and 2008, respectively, which represented an
increase of approximately $42,000, or 1%, year over year. Significant fluctuations in spending are explained in the table above.

Loss on contract commitments

In 2008, we recorded a contract loss of approximately $86,000, which represents our expected "cost share" portion of the Tehachapi
contract. During 2009, we recorded an additional contract loss of approximately $133,000 on the Tehachapi contract, which represented the difference between our overhead rate based on "full
production," and the contract bid rate, as well as an additional contract loss of approximately $106,000, which represented our expected cost share on the PNNL contract.

Depreciation and Amortization

Depreciation and amortization increased from approximately $1,295,000 for 2008 to approximately $1,839,000 for 2009, an increase of
approximately $544,000, or 42%. The increase in depreciation and amortization resulted primarily from capital expenditures related to leasehold improvements at our new manufacturing and office
facility in Tyngsboro, the purchase of machinery and equipment required to begin commercial production, and depreciation on the flywheels and other fungible components that are being used to provide
frequency regulation through the ISO-NE pilot program.

Interest and Other Income (Expense), net

Average cash balances during most of 2009 were lower than during the same periods in 2008, as were interest rates, resulting in a
reduction in interest income for 2009 of approximately $328,000. Interest expense for 2009 was approximately $115,000, as compared to approximately $71,000 in 2008 and relates to interest for the
MassDev loan and the amortization of the cost of the warrants as part of that loan agreement. We began to pay interest on the MassDev loan in October 2008. In October 2009, we drew down an additional
$1,043,000 on the MassDev loan. In addition, we capitalized approximately $181,700 in interest costs in 2009. Also, in 2009, we wrote off some assets that were no longer in service, and consequently
recorded a loss of approximately $14,800.

Net Loss

As a result of the changes discussed above, the net loss for the year ended December 31, 2009 was approximately $19,060,000, a
decrease in net loss of approximately $4,508,000, or 19%, as compared to the same period in 2008.

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Liquidity and Capital Resources

Year ended December 31,2010

2009(in thousands)Cash and cash equivalents

$
10,866

$
22,605Working capital


(8,750
)

18,364Cash provided by (used in)Operating activities


(15,613
)

(16,698
)Investing activities


(33,544
)

(7,446
)Financing activities


37,417


32,392Net decrease in cash and cash equivalents

$
(11,740
)
$
8,248Current ratio


0.6


4.3


Working
capital at December 31, 2010 is negative, in large part due to the current portion of the preferred stock, preferred warrant and common stock liabilities. We expect these
liabilities to be settled in common stock, rather than cash. The other factor impacting our working capital relates to the timing of disbursements from the FFB loan. Since we are only able to draw on
the FFB loan once per month, at any given point in time our current liabilities may include a substantial amount that is loan-eligible. As of December 31, 2010, accounts payable and
accrued liabilities included
approximately $4.6 million related to the Stephentown project, a large portion of which we will be able to include in future loan draws.

Our
cash requirements depend on many factors including, but not limited to, cost to build our flywheels and frequency regulation facilities, research and development activities, facility
costs as well as sales, general and administrative expenses. Since we have not yet generated significant revenue from our principal operations, we do not generate sufficient cash from operations to
satisfy our working capital requirements. The terms of the FFB loan require us to escrow a significant amount of the cash generated from SRS operations in 2011 to create required reserves for debt
service, maintenance, and ongoing operations. We expect to make significant expenditures this year and beyond to fund our operations, increase our manufacturing capacity, and build and deploy our
frequency regulation plants. To implement our business plan, we will require additional funding through a combination of equity, debt and/or cash proceeds from the sale of plants. The amount of debt
and equity required will depend on the mix of merchant plants and plants sold on a turnkey basis. We estimate that we will need to raise approximately $15 to $20 million during 2011 in order to
fund operations, $5 million of which is anticipated from the callable preferred stock warrants issued in December 2010.

We
expect to complete the Stephentown plant in the second quarter of 2011. We have sufficient funding in place to do so, with proceeds from the FFB loan and the balance of cash we
contributed as equity that is currently reflected on the balance sheet as Restricted Cash.

Our
second plant will be in Hazle Township, Pennsylvania, and will be funded, in part, with a $24 million DOE Stimulus Grant that was awarded on January 1, 2010. Since that
time, we have been involved with pre-construction preparation under Phase I of the grant agreement. This included filing for interconnection, completion of a system impact study,
and completion of a draft environmental assessment. We expect to start Phase II of the project, which includes flywheel manufacture and site construction of the plant by the middle of 2011. The
exact timing and pace of manufacturing and construction activities will depend on the receipt of additional funding. We are pursuing project financing alternatives to satisfy these requirements, which
may include debt or equity in addition to a potential $5 million grant from the Commonwealth of Pennsylvania, although there is no guarantee that we will receive any such grant. We expect to
raise approximately $29 million to complete this plant.

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We
have also begun preparations for a third merchant plant to be located in either Chicago Heights, Illinois or Glennville, New York. In 2011, we do not anticipate material expenditures
related to either of these locations.

Our
deployment plans are affected by the timing of a number of factors and activities, including but not limited to the following:



Operating activities

Net cash used in operating activities was approximately $15,613,000, $16,698,000 and $18,182,000 for the years ended
December 31, 2010, 2009 and 2008, respectively. The primary component to the negative cash flow from operations is from net losses.

The
net loss for 2010 is approximately $22,680,000. Adjustments to reconcile net loss to cash flows in 2010 include non-cash stock compensation of approximately $858,000;
depreciation and amortization of approximately $2,114,000; interest expense on warrants of approximately $51,000; non-cash interest relating to redemption of mandatorily redeemable
convertible preferred stock of approximately $842,000; non-cash loss relating to conversion of mandatorily redeemable convertible preferred stock of approximately $390,000; fair value
adjustment on mandatorily redeemable convertible preferred stock, preferred warrants and common warrants of approximately ($1,195,000); warrants issued to a service provider of approximately $16,000;
dividends on preferred stock paid in common stock of approximately $16,000; and changes in operating assets and liabilities of approximately $4,119,000. Uses of operating cash resulted from a gain on
the disposition of fixed assets of $5,000 and a net increase in deferred rent of approximately $139,000.

The
net loss for 2009 was approximately $19,060,000. The net operating loss was partially offset by non-cash charges of approximately $902,000 for stock compensation expense,
$1,839,000 for depreciation and amortization, and non-cash interest of approximately $47,000 related to the issuance of warrants issued in conjunction with the MassDev loan, and
disposition of fixed assets of approximately $17,000. Uses of operating cash resulted from changes in operating assets and liabilities of approximately $330,000 and from deferred rent of approximately
$113,000.

The
net loss for 2008 was approximately $23,568,000. The net operating loss was partially offset by non-cash charges of approximately $859,000 for stock compensation expense,
$1,295,000 for depreciation, approximately $518,000 related to the issuance of stock to settle a lawsuit, deferred rent of approximately $85,000, approximately $10,000 interest expense related to the
issuance of warrants in conjunction with the MassDev loan and changes in operating assets and liabilities of approximately $1,189,000. In addition, we received $1,430,000 from our landlord as a credit
for certain building improvements.

Investing Activities

Net cash used in investing activities was approximately $33,544,000, $7,446,000 and $12,727,000 for 2010, 2009 and 2008, respectively.

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The
primary use of cash for investing activities during 2010 was the purchase and construction of property and equipment of approximately $29,805,000 (net of accounts payable and related
accruals). Capital equipment purchased in 2010 relates primarily to costs associated with the Stephentown project.
Restricted cash increased by approximately $3,016,000 (representing the balance of the cash contributed to SRS). Other uses of cash include an increase in other assets (patents) of approximately
$116,000 and an increase in advance payments to suppliers for materials used to manufacture property and equipment of approximately $616,000, partially offset by the sale or disposition of property
and equipment of approximately $9,000.

The
primary use of cash for investing activities for 2009 was the purchase and construction of property and equipment (net of accounts payable and related accruals) of approximately
$7,294,000. Capital equipment purchased in 2009 includes equipment needed to increase manufacturing capacity and materials used to construct flywheels. In addition, we increased restricted cash by
approximately $8,000, as required by the ISO-NE financial assurance policy, increased other assets (patents) by approximately $115,000 and increased advance payments to suppliers by
approximately $29,000.

The
primary use of cash for investing activities for 2008 was the purchase and construction of property and equipment (net of accounts payable and related accruals) of approximately
$12,690,000. The 2008 capital additions include approximately $11,630,000 which is classified as "Construction in Progress" as of the end of December 2008, most of which consisted of completed
flywheels, trailers housing electronic components, along with material, labor and overhead. We also increased our advance payments to suppliers by approximately $206,000. These uses of funds were
partially offset by reductions to restricted cash of approximately $169,000; $174,000 of which was due to the completion of the Wilmington lease, partially offset by the establishment of a required
credit reserve account for ISO-NE of approximately $5,000.

Financing Activities

Net cash generated by financing activities was approximately $37,417,000, $32,392,000 and $14,850,000 2010, 2009 and 2008,
respectively.

In
2010, funds were provided by a loan draw on the FFB loan guaranteed by the DOE of approximately $22,153,000, the sale of stock to Seaside 88, LP and Aspire Capital
Funding LLC of approximately $2,238,000, the exercise of warrants of approximately $5,902,000, the issuance of stock under the employee stock purchase plan of approximately $122,000, the
issuance of mandatorily redeemable convertible preferred stock of approximately $4,120,000, the issuance of preferred stock warrants of approximately $2,150,000, the issuance of common stock warrants
of approximately $3,730,000. These were offset partially by cash paid for financing costs related to both the FFB loan of approximately $2,340,000, and approximately $658,000 in repayment of the
MassDev loan.

During
2009, we raised approximately $32,408,000 from the sale of our stock and warrants, net of expenses, approximately $1,043,000 from the final drawdown on our loan from MassDev for
the purchase of manufacturing equipment, approximately $124,000 from the issuance of stock to our
employees under the employee stock purchase plan and approximately $93,000 from the exercise of warrants from the December 2009 financing, all of which were partially offset by approximately
$1,116,000 paid for financing costs (primarily for the DOE loan) and approximately $160,000 in repayment of the MassDev loan.

During
2008, we raised approximately $11,264,000 from the sale of our stock and warrants, net of expenses, approximately $3,572,000 from a loan from MassDev, approximately $15,000 from
the exercise of employee stock options and approximately $98,000 from the issuance of stock to our employees under the employee stock purchase plan, offset by approximately $99,000 paid for financing
costs and advance payments to suppliers.

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The
following table summarizes our commitments and debt at December 31, 2010, excluding our debt obligations from our mandatorily redeemable convertible preferred stock, preferred
stock warrants and common stock warrants (all issued in December 2010), which we intend to repay with shares of common stock assuming the applicable conditions are met:

Description of CommitmentOperating
leases

Purchase
Obligations

MassDev
Loan

Federal
Financing
Bank Loan

TotalPeriod ending:December 31, 2011

$
753,188

$
9,025,422

$
704,259

$


$
10,482,869December 31, 2012


778,937





751,521


615,358


2,145,816December 31, 2013


804,688





803,151


1,230,717


2,838,556December 31, 2014


618,001





857,709


1,230,717


2,706,427December 31, 2015








680,500


1,230,717


1,911,217Thereafter











17,845,393


17,845,393Total Commitments

$
2,954,814

$
9,025,422

$
3,797,140

$
22,152,902

$
37,930,278Non-cancellable purchase obligations:




$
7,797,151Less advance payments to suppliers





(851,984
)Non-cancellable purchase obligations net of advance payments:




$
6,945,167


As
of December 31, 2010, we had purchase commitments with our suppliers of approximately $9,000,000 of which approximately $7,800,000 are firm, non-cancelable
commitments. Total purchase commitments include approximately $6,400,000 for materials required to build the flywheels and electronic control modules for Stephentown, of which $772,000 are cancelable
as of December 31, 2010. The remaining commitments are for other equipment needed for Stephentown, costs associated with closing the DOE loan, equipment and other operating expenses.

In
July 2007, we signed a seven-year lease on our current corporate headquarters located at 65 Middlesex Road Tyngsboro, Massachusetts. The 103,000 square foot
facility has a capacity of approximately 600 flywheels per year on a multi-shift basis, and with further capital spending for equipment our capacity will increase to approximately 1,000 flywheels per
year. As part of the Tyngsboro lease agreement, we issued to the landlord 15,000 shares of our common stock and a warrant exercisable for 50,000 shares of our common stock, as amended, in return for
lower cash payments payable by us under the lease. We provided our landlord with an irrevocable letter of credit securing our performance under the lease with a balance at December 31, 2010 and
2009 of $200,000 which is reduced periodically during the lease terms. The letter of credit is secured by a cash deposit, which is included in restricted cash in the accompanying consolidated balance
sheets. Rent expense was $588,879 for each of the years ending December 31, 2010 and 2009. In addition, we are responsible for real estate taxes and all operating expenses of the Tyngsboro
facility. Additional capital expenditures will be required in the future to optimize the plant for maximum production. The amount and timing of these expenditures are dependent on requirements of
equipment needed to meet production schedules as well as having sufficient funding.

Financing

FFB Loan Guaranteed by the DOE

Our first 20 MW plant is being financed by a $43 million loan guaranteed by the DOE and provided by the FFB, together with the
$26 million of cash and in-kind assets that we contributed to

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the
project on August 6, 2010, upon closing the loan. We have been and expect to continue receiving monthly disbursements from this loan based upon eligible project spending. Each disbursement
is subject to the satisfaction of certain conditions. In 2010 and 2011, we will continue to have capital needs to fund operations and the ongoing deployment of frequency regulation facilities. We have
$10.9 million cash on hand as of December 31, 2010, and an additional $3 million which belongs to SRS and thus can only be used for eligible project costs for the Stephentown
plant (included in Restricted cash on our balance sheet).

The
last day to receive an advance under the FFB Future Advance Promissory Note for eligible project costs is May 30, 2012, and the loan will mature on June 15, 2030. Each
advance bears interest at a per
annum rate determined by the Secretary of the Treasury as of the date of the advance and will be based on the Treasury yield curve and the scheduled principal installments for such advance, plus a
..375% premium. The weighted average interest rate on the loan draws made in 2010 was 3.352%. Interest on advances under the FFB loan is payable quarterly in arrears. The first interest payment was due
on December 15, 2010; however, we are allowed under the terms of the loan to add interest payments due during the construction phase to the principal balance of the loan, and we elected to do
so with the December 2010 payment. Principal payments are due in 72 equal quarterly installments, beginning on September 15, 2012 through June 15, 2030.

The
FFB loan also contains certain financial covenants. Our subsidiary SRS, as borrower under the loan, must maintain a maximum leverage ratio. Once the project is complete, SRS is
required to maintain a minimum ratio of current assets to current liabilities as of the last day of each fiscal quarter, and commencing the first fiscal quarter to end after the first anniversary of
the project completion date, maintain a specified debt service coverage ratio. In addition, after the project completion date, SRS will be required to maintain an amount equal to the debt service
reserve requirement unless an alternative form of security reasonably satisfactory to the DOE has been provided; provided that, in the event of any withdrawal from the debt service reserve account, we
must restore the amount on deposit in the debt service reserve account within ninety days of such withdrawal. The debt service reserve requirement is an amount equal to the amount of debt service due
on the immediately succeeding two quarterly payment dates. Commencing on the first anniversary of the project completion date, SRS will be required to maintain specified amounts in a maintenance
reserve account and project capital account. If SRS draws from these accounts, it is required to restore the accounts to the required amounts within ninety days of the withdrawal. The required
maintenance reserve is an amount projected to be equal to six months of plant maintenance and fixed operating costs, currently anticipated to be approximately $559,000 for the initial year of project
operation. The amount required to be maintained in the reserve account will be recalculated prior to the beginning of each fiscal year. We have guaranteed, as sole owner of the borrower, to replenish
the debt service reserve account up to a maximum of $2,397,000. The project capital account requirement is $1,000,000.

An
event of default will occur under the FFB loan if, among other events, (i) the borrower fails to pay principal or interest on the loan when due (or to pay certain fees or other
amounts within specified time periods) (ii) any representation or warranty that the loan documentation is found to have been incorrect (iii) we or SRS fail to perform or observe any
covenant in the loan documentation (in some cases, after a cure period) (iv) the maturity of specified amounts of our other indebtedness is accelerated ($500,000 before project completion, or
$5 million after project completion), or we or our subsidiary, SRS, default in the payment of certain amounts of indebtedness, or any other default occurs with respect to such indebtedness if
the effect of the default is to accelerate, or to permit the acceleration of the indebtedness (v) our holding company subsidiary ceases to own and control all of the equity in SRS, or a "change
of control" of the holding company subsidiary occurs (vi) a portion of the project is destroyed or becomes inoperative, or suffers an uninsured loss in a way that would reasonably be expected
to have a material adverse effect (vii) construction is suspended, or after the completion date the project ceases to operate at specified levels for 60 consecutive days (viii) physical

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completion
of the project shall not have occurred by August 6, 2012 (ix) or another event occurs which has or could reasonably be expected to have a material and adverse effect on, among
other things, the
project, or on our or SRS's ability to perform our material obligations in a timely manner under the loan documentation, or on our or SRS's business, financial condition or results of operation.

The
terms of the FFB loan also limit the ability of SRS to pay dividends to Beacon Power Corporation out of cash generated from the Stephentown operations, other than distributions for
reimbursement of eligible project expenses. Among other conditions, such dividends or distributions to us can be made only if (i) the physical completion of the project has been achieved,
(ii) 6 months have passed from the time SRS has made two scheduled principal and interest payments on the loan (which payments are scheduled to begin in September 2012) and SRS has
otherwise achieved "project completion" with respect to the Stephentown project; (iii) SRS has generated cash available for servicing the debt in the previous two fiscal quarters sufficient to
meet the next scheduled payment, and has a 12-month debt service coverage ratio of at least 1.40:1.00; (iv) the debt service reserve account will exceed required amounts after
giving effect to the distribution, and (v) no event of default or potential event of default exists under the loan documents, before or giving effect to the distribution. Cash generated by SRS
from the Stephentown project thus may not be available to Beacon Power Corporation for our general corporate operating purposes as and when it is generated by the Stephentown project.

Series B Mandatorily Redeemable Convertible Preferred Stock and Warrants

On December 23, 2010, we sold 10,000 units of the Company for net proceeds of approximately $8.7 million. Each Unit sold
consisted of (i) one share of our Series B mandatorily redeemable convertible preferred stock, par value $0.01 per share (the "preferred stock"), (ii) a warrant to purchase 0.5 of
a share of preferred stock (the "preferred warrant") and (iii) a warrant to purchase 445.827 shares of common stock, together with any associated rights (the "common warrant", and together with
the preferred warrants, the "warrants"), at a price to the public of $1,000 per unit, less issuance costs. The shares of preferred stock, the preferred warrants and the common warrants were
immediately exercisable and were issued separately.

Each
share of preferred stock has a stated value of $1,000. The preferred stock is entitled to receive dividends on the stated value at a rate of 8% per annum. We may elect to pay the
dividends in cash, or if certain "Equity Conditions" are satisfied, in shares of common stock. Dividends are payable monthly, in arrears, on the first day of each month beginning February 1,
2011, and through the maturity date, which is February 1, 2012. If we elect to pay dividends in shares of our common stock, we must give notice to holders on the
23rd trading day prior to the applicable dividend due date, and we must deliver a number of shares of common stock equal to the dividend amount divided by the "Market Price"
determined as of the date notice is given. We will make a similar determination using the Market Price on the dividend due date and will make an adjustment for the difference (by payment of additional
shares, if positive, or by a deemed redemption of the equivalent amount of preferred stock, if negative) at that time. The "Market Price" is the arithmetic average of the six lowest daily VWAPs during
the 20 consecutive trading day period ending two trading days prior to the relevant date of determination. Subject to certain limitations, a holder of shares of preferred stock may convert its shares
of preferred stock at any time after the initial issuance, plus accrued and unpaid dividends, at a rate equal to the "Conversion Price", which is initially $2.5234 per share, subject to adjustment. As
a result of our
reverse stock split effective February 25, 2011, the conversion price will be adjusted down (but not up) to reflect the relative ratio of the market price of our common stock fifteen trading
days before and after the reverse split. The amount of this adjustment, if any, has not been determined.

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We will redeem 1,154 shares of preferred stock not previously converted on the first business day of each month, beginning February 1, 2011 through the maturity date. If we elect
to make the redemption in shares of common stock, we must give notice to the holder on the 23rd trading day prior to the installment due date, and we must deliver a number of
shares of common stock determined by dividing the stated value of the converted preferred stock by the lower of (i) the then applicable conversion price and (ii) 85% or 90% (depending on
whether our Market Price is below or above $1.00, respectively) of the Market Price as of the installment notice date. On the relevant installment date, we will make a similar determination with
respect to the shares payable, and will make an adjustment for the difference (by payment of additional shares, if positive, or by a deemed redemption of the equivalent amount of preferred stock, if
negative) at that time.

The
preferred warrants have an exercise price of $1,000 per share of preferred stock, and will expire on the maturity date. Subject to certain "Equity Conditions" being satisfied, we can
force the holders of the preferred stock to exercise the preferred warrants for cash (i) in full, if the market price of our common stock exceeds 150% of the initial conversion price for twenty
trading days in any thirty day trading period, (ii) in full, if we consummate an underwritten public offering of our common stock with net proceeds of at least $10 million, or
(iii) in installments, in connection with the last five scheduled monthly installment dates of the preferred stock. If the preferred warrants are exercised in full, we will receive additional
gross proceeds of $5 million. Through March 14, 2011, preferred warrants have been exercised for the purchase of 3,215 shares of preferred stock, representing gross proceeds to us of
$3,215,000.

The
common warrants have an exercise price of $2.5234 per share of common stock, subject to adjustment, cover an aggregate of 4,458,274 shares of common stock and will expire on
December 23, 2015. The exercise price of the common warrants is subject to adjustment, among other circumstances, (i) in connection with a subdivision or combination of our common stock,
(ii) if we sell or issue our common stock, or are deemed to sell or issue our common stock through the sale or issuance of securities convertible or exercisable for our common stock, at a price
less than the exercise price of the warrants then in effect, and (iii) between June 1, 2011 and the date on which the preferred warrants have been exercised in full (or, if they are not
exercised, 91 days after the maturity date of the preferred stock) during which period up to $1 million in aggregate exercise price of the warrants may be exercised at a price equal to
(a) 85% of the arithmetic average of the six lowest daily volume weighted average
prices (VWAP) per share during the twenty consecutive trading days immediately prior to the exercise date, if such arithmetic average is below $1.00 per share, or (b) 90% of the arithmetic
average of the six lowest VWAPs during such period in any other case. The exercise price of the common warrants will be adjusted downward (but not upward) as a result of our reverse stock split
effective February 25, 2011, to reflect the relative ratio of the market prices (adjusted for the split ratio) of our common stock over the fifteen trading days before and after the reverse
split. The final amount of this adjustment, if any, has not yet been determined.

The
units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with registration statements on Form S-3
filed with the Securities and Exchange Commission that became effective on September 15, 2009 and July 29, 2008.

Sale of Stock to Aspire

On July 2, 2010, we entered into a common stock purchase agreement with Aspire Capital Fund LLC (Aspire), an Illinois
limited liability company, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire was committed to purchase up to an aggregate of
$25.0 million of our shares of common stock over the term of the purchase agreement. In consideration for entering into the purchase agreement, we issued 308,642 shares of our common stock to
Aspire. These shares are referred to as the "Commitment Shares." Under this agreement, we sold Aspire 154,321 shares of common stock at a purchase price of $3.24 per share, for an aggregate

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purchase
price of $500,000, on July 6, 2010. Following this initial purchase, from time to time over the 26-month term of the agreement, we had the right, in our sole discretion, to
present Aspire with a purchase notice directing them to purchase up to 40,000 shares of our common stock per trading day (up to an aggregate of $24.5 million of our common stock) at a price per
share calculated by reference to our market price at the time. Under the terms of the agreement, we could not sell shares to Aspire at a purchase price less than $3.40. Following the initial purchase,
through November 30, 2010, we sold 80,000 shares to Aspire for $3.40 per share, for gross proceeds of $272,000.

On
November 30, 2010, we notified Aspire that we were electing to terminate the common stock purchase agreement effective as of December 1, 2010, as permitted by the terms
of that agreement. Consequently, no further sales will be made to Aspire under the agreement.

December 2009 Public Stock Offering

On December 9, 2009, we sold 3,810,000 units of the Company at a purchase price of $5.44 per unit for a total of approximately
$19.0 million, net of expenses. Each unit consisted of one share of our common stock, par value $0.01 per share; a warrant to purchase 0.05 of a share of common stock at an exercise price of
$7.00 per share through December 9, 2014; and an additional investor rights warrant to purchase 0.05 of a share of common stock through August 31, 2010 at a floating exercise price. The
floating exercise price was equal to 85% of the five-day volume weighted average price of our common stock at the time of exercise, but in no event less than $2.72 per share. All the
warrants were exercisable upon issuance. The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with a registration statement on
Form S-3 filed with the Securities and Exchange Commission that became effective on September 15, 2009.

Sale of Stock to Seaside

On February 19, 2009, we entered into a common stock purchase agreement with Seaside 88, LP (Seaside), valued at up to
$18 million. This agreement was amended on June 19, 2009. The original agreement required Seaside to buy $1 million of common stock once each month for up to 18 months,
beginning on February 20, 2009, and on the 20th day of each month thereafter (or the next closest business day,) at a purchase price reflecting 20% discount to the volume
weighted average trading price over the five-day trading period immediately before the purchase. The amended agreement maintained the $18 million aggregate maximum purchase price,
but accelerated the purchase to 150,000 shares twice per month at a 14% discount to the 10-day volume weighted average trading price. The agreement was structured in three tranches, or
segments, of six closings each. In December 2009, we issued additional shares of stock through a public offering. As part of the underwriting conditions for that offering, we exercised our option to
delay the Seaside purchases originally scheduled for December

-67-

---



2009
and January 2010 for a period of 60 days, until February and March 2010. The following details the stock sales to Seaside under this agreement:

Transaction date

Aggregate
Value

Common
Shares SoldFebruary 20, 2009

$
1,000,000


265,618March 20, 2009

$
1,000,000


289,620April 20, 2009

$
1,000,000


191,278May 20, 2009

$
1,000,000


164,777June 22, 2009

$
1,193,895


150,000July 6, 2009

$
1,118,430


150,000July 20, 2009

$
932,670


150,000August 5, 2009

$
939,255


150,000August 20, 2009

$
895,260


150,000September 8, 2009

$
989,295


150,000September 21, 2009

$
940,155


150,000October 5, 2009

$
925,575


150,000October 20, 2009

$
941,955


150,000November 5, 2009

$
864,300


150,000November 20, 2009

$
829,605


150,000February 5, 2010

$
585,150


150,000February 22, 2010

$
541,500


150,000March 5, 2010

$
529,350


150,000Total Investment

$
16,226,395


3,011,293


2008 Stock Offerings

On December 24, 2008, we sold 896,600 units of the Company at a purchase price of $5.00 per unit for a total of approximately
$4.1 million, net of expenses. Each unit consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase one share of common stock at an exercise price of $7.40
per share, for a total of 896,600 warrants. The warrants became exercisable six months and one day after their issuance, and expire five and one half years after their issuance. The units were issued
pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with a registration statement on Form S-3 filed with the Securities and Exchange
Commission that became effective on July 29, 2008.

On
October 15, 2008, we sold 870,000 units of the Company at a purchase price of $9.10 per unit for a total of approximately $7.2 million, net of expenses. Each unit
consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase one share of common stock at an exercise price of $12.00 per share, for a total of 870,000 warrants.
The warrants became exercisable six months and one day after their issuance, and expire five and one half years after their issuance. The units were issued pursuant to a prospectus supplement filed
with the Securities and Exchange Commission in connection with a registration statement on Form S-3 filed with the Securities and Exchange Commission that became effective on
July 29, 2008.

MassDev Loan

On June 30, 2008, we entered into an agreement with Massachusetts Development Finance Agency ("MassDev") pursuant to which
MassDev agreed to lend us up to $5 million. This loan derives from a funding collaboration between the Emerging Technology Fund of MassDev and the Massachusetts Technology Collaborative
Business Expansion Initiative. The MassDev loan is evidenced by a

-68-

---



promissory
note under which we were able to make one or more requests for advances of up to an aggregate of $5 million for the purchase of equipment and installation of certain tenant
improvements at our Tyngsboro, Massachusetts facility. We had one year following the date of the initial advance to draw on the loan. The initial advance on the loan was made on October 1, 2008
for approximately $3.5 million. The second, and final, advance on the loan was made in October 2009 for approximately $1 million. The remainder of the loan commitment is no longer
available. The note will mature 84 months after the initial advance and bears a fixed annual interest rate of 6.5%. As partial consideration for the loan, on June 30, 2008, we issued
MassDev two warrants. Each warrant provides for the purchase of 8,598 shares of our common stock at an exercise price of $18.90 per share, subject
to any adjustments as set forth in the warrants. The warrants are exercisable for seven years commencing on June 30, 2008 and provide for registration rights for the resale of the shares issued
upon their exercise. MassDev assigned one of the warrants to the Massachusetts Technology Park Corporation ("MTPC"), as part of MTPC's participation under the Massachusetts Technology Collaborative
Business Expansion Initiative. The fair value of the warrants is being amortized over the term of the loan.

Inasmuch
as we are not expecting to become cash flow positive until we deploy a sufficient number of merchant plants and/or sell turnkey systems, our ability to continue as a going
concern will depend on our ability to raise additional capital. We may not be able to raise this capital at all, or if we are able to do so, it may be on terms that are adverse to shareholders.

Inflation

Our operations have not been materially affected by inflation.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Our cash equivalents and investments, all of which have maturities of less than ninety days, could expose us to interest rate risk. At
December 31, 2010, we had approximately $3,766,000 of cash equivalents that were held in non-interest bearing checking accounts. Also at December 31, 2010 we had
approximately $7,313,000 of cash equivalents that were held in interest-bearing money market accounts at high-quality financial institutions, some of which are invested in
off-shore securities. The fair value of these investments approximates their cost. A 10% change in interest rates would change the investment income realized on an annual basis by an
immaterial amount. The funds invested in money market accounts may not be covered under FDIC Insurance, and therefore may be at some risk of loss. However, the money market accounts are invested
primarily in government funds, such as Treasury Bills. Approximately $7.1 million
of our cash on hand at December 31, 2010 was invested in mutual funds at a brokerage firm that has purchased supplementary insurance through Lloyd's of London. This insurance coverage provides
protection above the Securities Investor Protection Corporation (SIPC) coverage in the event that the broker becomes insolvent. SIPC protects against the loss of securities up to a total of $500,000
(of which $100,000 may be in cash) per client. The supplemental insurance provided by the broker would cover investments at that brokerage firm up to a maximum of $1 billion, including up to
$1.9 million per client for the cash portion of any remaining shortfall. SIPC and the supplemental insurance do not cover market losses; however, management believes the risk of substantial
market losses is low because our funds are invested primarily in government funds.

-69-

---





Item 8.    Consolidated Financial Statements and Supplementary Data

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



PageReport of Independent Registered Public Accounting Firm


-71-Consolidated Balance Sheets at December 31, 2010 and 2009


-73-Consolidated Statements of Operations for the years ended December 31, 2010, 2009
and 2008 and for the period from May 8, 1997 (date of inception) to December 31, 2010


-74-Consolidated Statements of Stockholders' Equity for the years ended December 31,
2010, 2009 and 2008 and for the period from May 8, 1997 (date of inception) to December 31, 2010


-75-Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009
and 2008and for the period from May 8, 1997 (date of inception) to December 31, 2010


-81-Notes to Consolidated Financial Statements


-83-


-70-

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Stockholders and Board of Directors
Beacon Power Corporation:

We
have audited the accompanying consolidated balance sheets of Beacon Power Corporation and Subsidiaries (the "Company") (a development stage company) as of December 31, 2010 and
2009, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2010 and for the
period from May 8, 1997 (date of inception) through December 31, 2010. We have also audited the Company's internal control over financial reporting as of December 31, 2010 based
on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting appearing under Item 9A, included in the accompanying Management's Report on Internal Controls Over Financial Reporting. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the
Company's internal control over financial reporting based on our integrated audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Beacon Power Corporation and Subsidiaries as
of December 31, 2010, and 2009 and the results of their operations and their cash flows for each of the

-71-

---



years
in the three-year period ended December 31, 2010 and the period from May 8, 1997, (date of inception) through December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, Beacon Power Corporation maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2010, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company's recurring losses from operations and negative operating cash flows raise substantial doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Notes 1 and 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ MILLER WACHMAN LLPBoston, Massachusetts
March 16, 2011


-72-

---







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

December 31,
2010

December 31,
2009AssetsCurrent assets:Cash and cash equivalents

$
10,865,760

$
22,605,147Accounts receivable, net


279,376


46,907Unbilled costs on contracts in progress


66,725


577,356Prepaid expenses and other current assets


725,862


636,887Total current assets


11,937,723


23,866,297Property and equipment, net


56,192,205


24,373,941Restricted cash


3,228,933


212,557Deferred financing costs


3,496,120


1,198,873Advance payments to suppliers


851,984


235,879Other assets


230,270


114,933Total assets

$
75,937,235

$
50,002,480Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable

$
6,172,210

$
1,154,613Accrued compensation and benefits


1,205,071


1,764,053Other accrued expenses


4,260,769


1,543,507Advance billings on contracts


26,409


35,418Accrued contract loss


1,045,545


257,698Deferred rent


164,308


138,558Current portion of long term debt


661,215


608,105Mandatorily redeemable convertible preferred stock


2,900,170


Preferred stock warrant liabilitycurrent


1,009,388


Common stock warrant liability


3,242,600


Total current liabilities


20,687,685


5,501,952Long term liabilities:Deferred rent


582,210


746,518Long term debt, net of unamortized discount


25,169,568


3,676,569Preferred stock warrant liabilitylong term


864,012


Total long term liabilities


26,615,790


4,423,087Commitments and contingencies (Note 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 20,967,529 and 17,164,162 shares issued at December 31,2010 and December 31,
 2009, respectively


209,675


1,716,416Additional paid-in-capital


257,772,383


245,029,557Deficit accumulated during the development stage


(228,635,459
)

(205,955,693
)Treasury stock, 42,169 shares at cost


(712,839
)

(712,839
)Total stockholders' equity


28,633,760


40,077,441Total liabilities and stockholders' equity

$
75,937,235

$
50,002,480


See
notes to consolidated financial statements.

-73-

---







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

Cumulative from
May 8, 1997
(date of inception)
through
December 31,
2010Year ended December 31,2010

2009

2008Revenue

$
895,703

$
968,421

$
68,131

$
6,652,802Cost of goods sold (exclusive of items shown separately below)


539,749


991,481


53,005


6,710,494Gross profit (loss)


355,954


(23,060
)

15,126


(57,692
)Operating expenses:Operations and maintenance


3,589,990


2,931,315





6,521,305Research and development


6,688,609


6,796,025


15,398,374


97,301,496Selling, general and administrative


9,301,008


7,115,905


7,074,211


74,465,519Loss (gain) on contract commitments


970,836


238,562


86,601


4,013,460Depreciation and amortization


2,113,753


1,839,164


1,294,532


9,708,539Restructuring charges











2,159,280Loss on impairment of assets











4,663,916Total operating expenses


22,664,196


18,920,971


23,853,718


198,833,515Loss from operations


(22,308,242
)

(18,944,031
)

(23,838,592
)

(198,891,207
)Other income (expense):Interest income


10,192


13,537


341,479


5,599,216Interest expense


(247,016
)

(115,158
)

(71,452
)

(1,527,329
)Non-cash interest income (expense) related to the preferred stock and associated warrants


336,834








336,834Loss on extinguishment of debt


(389,528
)







(389,528
)Gain on sale of investment











3,562,582Other income (expense)


(82,006
)

(14,834
)

202


(319,833
)Total other income (expense), net


(371,524
)

(116,455
)

270,229


7,261,942Net loss

$
(22,679,766
)
$
(19,060,486
)
$
(23,568,363
)
$
(191,629,265
)Preferred stock dividends











(36,825,680
)Accretion of convertible preferred stock











(113,014
)Loss to common shareholders

$
(22,679,766
)
$
(19,060,486
)
$
(23,568,363
)
$
(228,567,959
)Loss per share, basic and diluted

$
(1.19
)
$
(1.56
)
$
(2.59
)Weighted-average common shares outstanding


19,003,001


12,220,078


9,086,604


See
notes to consolidated financial statements.

-74-

---







BEACON POWER CORPORATION AND SUBSIDIARIES  (A Development Stage Company)  Consolidated Statements of Stockholders' Equity

Class A
Preferred Stock

Class C
Preferred StockCommon StockDeferred Consulting ExpenseDescription

Shares

Amount

Shares

Amount

Shares

AmountBALANCE AT MAY 8, 1997 (DATE OF INCEPTION)




$





$





$


$
Issuance of Founder's Shares














675,000.0


67,500


Issuance of Class A preferred stock


1,390,000


5,662,500














(275,000
)Recapitalization


3,373,313


67,466








(674,662.6
)

(67,466
)

Rounding for fractional shares














(0.2
)




Issuance of Class C preferred and common stock








6


29,866


1,347.6


134


Deferred Consulting




















773,284Series A Issuance for Consulting














13,446.4


1,345


(498,284
)Repayment of subscription receivable




















Issuance of Series A preferred stock for services and interest on loans


4,594


11,485














Dividend on preferred stock




















Accretion of redeemable preferred stock to redemption value




















Deferred Stock Compensation




















Issuance of stock options for consulting services




















Issuance of Stock Options to settle lawsuit




















Issuance of non-employee stock options




















Stock and warrants issued for lease














15,000.0


1,500


Amortize Deferred Stock Compensation and issue RSUs














123,624.0


12,362


Issuance of warrants




















Proceeds from stock offering, net of related expenses














5,134,938.2


513,496


Conversion of Series A preferred stock


(4,767,907
)

(5,741,451
)







953,581.4


95,358


Conversion of Series C preferred stock








(6
)

(29,866
)

1.2





Conversion of convertible preferred stock














1,982,370.4


198,237


Payment of accrued dividend














85,933.0


8,593





See
notes to consolidated financial statements.

-75-

---



BEACON POWER CORPORATION AND SUBSIDIARIES  (A Development Stage Company)  Consolidated Statements of Stockholders' Equity (Continued)

Class A
Preferred Stock

Class C
Preferred StockCommon StockDeferred Consulting ExpenseDescription

Shares

Amount

Shares

Amount

Shares

AmountCashless Warrant exercise














200,709.1


20,071


Exercise of Stock Options














263,805.3


26,379


Shares issued through ESPP














16,926.2


1,694


Option extension for CEO




















Option extension for severed employees




















Purchase of Treasury Stock




















Deferred Stock Compensation revaluation




















Issuance of restricted stock units for bonus














69,616.0


6,961


Stock buyback to pay officer loan




















Issuance of officer restricted stock units














4,260.7


426


Stock-based compensation




















Executive performance-based RSU compensation expense




















Net loss




















Balance, December 31, 2007














8,865,896.7


886,590


Issuance of officer restricted stock units














5,217.8


521


Shares issued through ESPP














11,179.5


1,118


Stock-based compensation




















Executive performance-based RSU compensation expense




















Exercise of stock options














1,925.0


192


Warrants issued in conjunction with MassDev loan




















Stock issued to settle lawsuit














92,500.0


9,250


Issuance of stock for cash, net of issuance costs














1,766,600.0


176,661


Net loss




















Balance, December 31, 2008














10,743,319.0


1,074,332





See
notes to consolidated financial statements.

-76-

---



BEACON POWER CORPORATION AND SUBSIDIARIES  (A Development Stage Company)  Consolidated Statements of Stockholders' Equity (Continued)

Class A
Preferred Stock

Class C
Preferred StockCommon StockDeferred Consulting ExpenseDescription

Shares

Amount

Shares

Amount

Shares

AmountIssuance of officer restricted stock units














6,327.2


631


Shares issued through ESPP














20,010.2


2,001


Stock-based compensation




















Issuance of stock for cash, net of issuance costs














6,371,293.3


637,131


Warrant exercises














23,212.5


2,321


Net loss




















Balance, December 31, 2009














17,164,162.2


1,716,416


Issuance of officer restricted stock units














3,705.2


371


Shares issued through ESPP














43,637.2


4,364


Stock-based compensation




















Executive performance-based RSU compensation expense




















Warrants issued to service provider




















Redeemable preferred stock converted to common stock














301,577.7


30,158


Redeemable preferred stock redeemed for common stock














598,874.1


59,887


Stock issued for dividends on redeemable preferred stock














35,821.9


3,582


Stock issued for contractual obligations




















Issuance of stock for cash, net of issuance costs














992,963.0


99,296


Warrant exercises














1,826,787.5


182,679


Rounding for fractional shares














0.2





Adjust par value for reverse stock split

















(1,887,078
)

Net loss




















Balance, December 31, 2010




$





$



20,967,529.0

$
209,675

$



See
notes to consolidated financial statements.

-77-

---





BEACON POWER CORPORATION AND SUBSIDIARIES  (A Development Stage Company)  Consolidated Statements of Stockholders' Equity (Continued)

Treasury StockDeferred
Stock
Compensation

Additional
Paid-in
Capital

Stock
Subscription
Receivable

Retained
Deficit

Total
Stockholders'
EquityDescription

Shares

AmountBALANCE AT MAY 8, 1997 (DATE OF INCEPTION)

$


$


$


$





$


$
Issuance of Founder's Shares











(67,500
)







Issuance of Class A preferred stock








(5,000,000
)










387,500Recapitalization




















Rounding for fractional shares




















Issuance of Class C preferred and common stock




















30,000Deferred Consulting




















773,284Series A Issuance for Consulting





496,939














Repayment of subscription receivable








5,000,000











5,000,000Issuance of Series A preferred stock for services and interest on loans




















11,485Dividend on preferred stock











(2,245,680
)







(2,245,680
)Accretion of redeemable preferred stock to redemption value











(113,014
)







(113,014
)Deferred Stock Compensation


(1,269,445
)

1,269,445














Issuance of stock options for consulting services


(47,892
)

47,892














Issuance of Stock Options to settle lawsuit





303,160














303,160Issuance of non-employee stock options





16,288














16,288Stock and warrants issued for lease





715,114














716,614Amortize Deferred Stock Compensation and issue RSUs


3,769,072


(73,042
)













3,708,392Issuance of warrants





36,520,366





(34,580,000
)







1,940,366Proceeds from stock offering, net of related expenses





108,486,879














109,000,375Conversion of Series A preferred stock





5,646,093














Conversion of Series C preferred stock





29,866














Conversion of convertible preferred stock





36,496,431














36,694,668Payment of accrued dividend





1,077,714














1,086,307


See notes to consolidated financial statements.

-78-

---



BEACON POWER CORPORATION AND SUBSIDIARIES  (A Development Stage Company)  Consolidated Statements of Stockholders' Equity (Continued)

Treasury StockDeferred
Stock
Compensation

Additional
Paid-in
Capital

Stock
Subscription
Receivable

Retained
Deficit

Total
Stockholders'
EquityDescription

Shares

AmountCashless Warrant exercise





(20,071
)













Exercise of Stock Options





2,262,529














2,288,908Shares issued through ESPP





176,211














177,905Option extension for CEO





315,394














315,394Option extension for severed employees





31,197














31,197Purchase of Treasury Stock














13,200


(99,660
)

(99,660
)Deferred Stock Compensation revaluation


18,412


(18,412
)













Issuance of restricted stock units for bonus


(2,470,147
)

2,463,186








21,294


(455,838
)

(455,838
)Stock buyback to pay officer loan














7,675


(157,341
)

(157,341
)Issuance of officer restricted stock units





(426
)













Stock-based compensation





2,199,582














2,199,582Executive performance-based RSU compensation expense





909,092














909,092Net loss











(126,320,650
)







(126,320,650
)Balance, December 31, 2007





199,351,427





(163,326,844
)

42,169


(712,839
)

36,198,334Issuance of officer restricted stock units





(521
)













Shares issued through ESPP





96,799














97,917Stock-based compensation





1,767,784














1,767,784Executive performance-based RSU compensation expense





(909,090
)













(909,090
)Exercise of stock options





14,990














15,182Warrants issued in conjunction with MassDev loan





227,946














227,946Stock issued to settle lawsuit





508,750














518,000Issuance of stock for cash, net of issuance costs





11,087,169














11,263,830Net loss











(23,568,363
)







(23,568,363
)Balance, December 31, 2008





212,145,254





(186,895,207
)

42,169


(712,839
)

25,611,540


See notes to consolidated financial statements.

-79-

---



BEACON POWER CORPORATION AND SUBSIDIARIES  (A Development Stage Company)  Consolidated Statements of Stockholders' Equity (Continued)

Treasury StockDeferred
Stock
Compensation

Additional
Paid-in
Capital

Stock
Subscription
Receivable

Retained
Deficit

Total
Stockholders'
EquityDescription

Shares

AmountIssuance of officer restricted stock units





(631
)













Shares issued through ESPP





121,768














123,769Stock-based compensation





902,279














902,279Issuance of stock for cash, net of issuance costs





31,770,825














32,407,956Warrant exercises





90,062














92,383Net loss











(19,060,486
)







(19,060,486
)Balance, December 31, 2009





245,029,557





(205,955,693
)

42,169


(712,839
)

40,077,441Issuance of officer restricted stock units





(371
)













Shares issued through ESPP





118,304














122,668Stock-based compensation





857,411














857,411Executive performance-based RSU compensation expense





1,056














1,056Warrants issued to service provider





15,739














15,739Redeemable preferred stock converted to common stock





672,903














703,061Redeemable preferred stock redeemed for common stock





1,257,635














1,317,522Stock issued for dividends on redeemable preferred stock





75,244














78,826Stock issued for contractual obligations




















Issuance of stock for cash, net of issuance costs





2,138,468














2,237,764Warrant exercises





5,719,359














5,902,038Rounding for fractional shares




















Adjust par value for reverse stock split





1,887,078














Net loss











(22,679,766
)







(22,679,766
)Balance, December 31, 2010

$


$
257,772,383

$


$
(228,635,459
)

42,169

$
(712,839
)
$
28,633,760


See notes to consolidated financial statements.

-80-

---





BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)

Consolidated Statement of Cash Flows

Cumulative from
May 8, 1997
(date of inception)
through
December 31,
2010Year ended December 31,2010

2009

2008Cash flows from operating activities:Net loss

$
(22,679,766
)
$
(19,060,486
)
$
(23,568,363
)
$
(191,629,265
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


2,113,753


1,839,164


1,294,533


9,708,541Loss (gain) on sale of disposition of assets


(5,000
)

16,934


132


205,012Impairment of assets, net











4,551,147Interest expense relating to issuance of warrants


51,435


47,215


10,039


479,689Non-cash loss relating to conversion of preferred stock


389,529








389,529Non-cash interest relating to redemption of preferred stock


842,074








842,074Preferred stock dividends paid in common stock


15,940








15,940Fair value adjustment on preferred stock, preferred stock warrants and common stock warrant liabilities


(1,194,850
)







(1,194,850
)Non-cash charge for change in option terms











346,591Non-cash charge for settlement of lawsuit








518,000


821,160Amortization of deferred consulting expense, net











1,160,784Amortization of deferred stock compensation











3,699,721Options and warrants issued to service provider


15,739








1,601,393Services and interest expense paid in preferred stock











11,485Gain on sale of investments











(3,562,582
)Stock-based compensation


858,467


902,280


858,694


5,728,114Deferred rent


(138,560
)

(112,808
)

85,193


(683,485
)Cash received from landlord for build-out credit








1,430,000


1,430,000Changes in operating assets and liabilities:Accounts receivable


(232,469
)

(35,067
)

412,948


(279,376
)Unbilled costs on government contracts


510,631


(560,552
)

65,391


(66,725
)Prepaid expenses and other current assets


(26,089
)

37,504


283,382


(762,637
)Accounts payable


1,312,922


174,328


515,236


2,467,535Accrued compensation and benefits


(558,982
)

354,015


385,164


1,205,071Advance billings on contracts


(9,009
)

24,607


3,589


26,409Accrued interest











275,560Accrued loss on contract commitments


787,847


125,172


65,107


1,045,545Other accrued expenses and current liabilities


2,333,859


(450,571
)

(541,189
)

3,886,036Net cash used in operating activities


(15,612,529
)

(16,698,265
)

(18,182,144
)

(158,281,584
)


See notes to consolidated financial statements.

-81-

---



BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)

Consolidated Statement of Cash Flows (Continued)

Cumulative from
May 8, 1997
(date of inception)
through
December 31,
2010Year ended December 31,2010

2009

2008Cash flows from investing activities:Purchase of investments











(1,190,352
)Sale of investments











4,752,934Restricted cash


(3,016,376
)

(7,537
)

169,326


(3,228,933
)Increase in other assets


(115,337
)

(114,933
)




(642,342
)Purchases and manufacture of property and equipment


(29,805,272
)

(7,293,733
)

(12,690,205
)

(65,856,042
)Sale of property and equipment


9,430








212,104Advance payments to suppliers (net)


(616,105
)

(29,541
)

(206,338
)

(851,984
)Net cash used in investing activities


(33,543,660
)

(7,445,744
)

(12,727,217
)

(66,804,615
)Cash flows from financing activities:Initial public stock offering, net of expenses











49,341,537Stock offerings, net of expenses


2,237,764


32,407,955


11,263,830


105,568,388Payment of dividends











(1,159,373
)Shares issued under employee stock purchase plan


122,668


123,769


97,917


522,258Exercise of employee stock options








15,182


2,304,091Issuance of debt


22,152,903


1,043,162


3,571,993


26,768,058Repayment of debt


(658,227
)

(159,787
)




(818,014
)Warrants issued in relation to lease











716,614Cash paid for financing costs and other assets


(2,340,344
)

(1,115,801
)

(99,181
)

(3,555,326
)Issuance of mandatorily redeemable preferred stock


4,120,000








36,988,028Issuance of preferred stock warrants


2,150,000








2,150,000Issuance of common stock warrants


3,730,000








3,730,000Repayment of subscription receivable











5,000,000Proceeds from capital leases











495,851Repayment of capital leases











(1,031,395
)Warrant exercises


5,902,038


92,383





5,994,421Repurchase company stock











(613,179
)Proceeds from notes payable issued to investors











3,550,000Net cash provided by (used in) financing activities


37,416,802


32,391,681


14,849,741


235,951,959(Decrease) increase in cash and cash equivalents


(11,739,387
)

8,247,672


(16,059,620
)

10,865,760Cash and cash equivalents, beginning of period


22,605,147


14,357,475


30,417,095


Cash and cash equivalents, end of period

$
10,865,760

$
22,605,147

$
14,357,475

$
10,865,760Supplemental disclosure of cash flow information:Cash paid for interest

$
283,397

$
249,620

$
59,294

$
1,080,437Cash paid for taxes

$
3,324

$
5,800

$
6,738

$
32,750Assets acquired through capital lease

$


$


$


$
535,445Warrants issued in relation to loan (non-cash)

$


$


$
227,946

$
227,946Common Stock issued in lieu of dividends or to redeem or convert mandatorily redeemable preferred stock

$
2,099,409

$


$


$
2,099,409


See notes to consolidated financial statements.

-82-

---





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

Note 1. Nature of Business and Operations

Nature of Business

Beacon Power Corporation (collectively the "Company", "Beacon", "we", "our", or "us") (a development stage company) was incorporated on
May 8, 1997 as a wholly owned subsidiary of SatCon Technology Corporation ("SatCon"). Since our inception, we have been primarily engaged in the development of flywheel devices that store and
recycle energy on a highly efficient basis. In 2000, we completed an initial public offering of our common stock and raised approximately $49.3 million, net of offering expenses. Since our
initial public offering, we have raised approximately $123.5 million as of December 31, 2010, through the sale of our stock and warrants. (See Note 13 to these Consolidated
Financial Statements.) Because we have not yet generated a significant amount of revenue from our principal operations, we are accounted for as a development stage company under the Financial
Accounting Standards Board's Accounting Standards Codification (ASC) Topic 915.

In
2009, 30% of our revenue was earned from the provision of frequency regulation through a pilot program operated by the ISO-NE, and 69% from our research and development
contracts. In 2010, 42% of our revenue was derived from the ISO-NE pilot program, 51% from our research and development contracts and grants, and 7% from the sale of APS credits and
inverters. In 2011, we have begun generating revenue from our first merchant 20 MW frequency regulation plant, and we expect our contract revenue to also increase significantly due to work anticipated
on the ARPA-E contract. Although the loss of any single contract may have a material impact on our revenue, it would not have a material impact on our business since we derive most of our
working capital from equity offerings in order to develop our flywheel systems.

We
expect to increase our revenues from the commercialization of our flywheel energy storage systems to supply frequency regulation services to the electricity grid in North America and
from the sale of turnkey systems outright or on a fractional basis, both within the United States and on a global basis. We believe that as we expand our production capabilities and continue to lower
our systems' cost, we will be able to market other cost-effective applications for our flywheel systems that will further expand our revenues.

Key
activities during 2010 include the following:



-83-

---



BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 1. Nature of Business and Operations (Continued)



Operations

We have experienced net losses since our inception and, as of December 31, 2010, had an accumulated deficit of approximately
$229 million. We do not expect to have positive EBITDA (earnings before interest, taxes, depreciation and amortization) or positive cash flow from operations until we have deployed a sufficient
number of merchant plants and/or sold turnkey systems. In the future, as the number of our merchant regulation facilities increases and we develop sustainable cash flows from operations and the sale
of turnkey plants, we expect to fund additional plants from a combination of cash flow from operations, non-recourse project financing and project equity.

To
continue to build merchant plants, fund operations and continue as a going concern, we will require additional funding through a combination of equity, debt and/or cash proceeds from
the sale of plants. Although the Stephentown plant began generating revenue in January 2011, the terms of the FFB loan require us to escrow a significant amount of the cash expected to be generated
from SRS operations in 2011 to create required reserves for debt service, maintenance and ongoing operations.

-84-

---



BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 1. Nature of Business and Operations (Continued)

We
estimate that we will need to raise approximately $15 to $20 million during 2011 to fund operations, $5 million of which is anticipated from the callable preferred stock warrants
issued in 2010. We expect to complete the Stephentown plant in the second quarter of 2011. We have sufficient funds in place to do so, with proceeds from the FFB loan and the balance of cash that we
contributed as equity (currently reflected on the balance sheet as Restricted cash.) This portion of restricted cash can only be used for the Stephentown project.

We
plan to increase our revenues by 1) completing the Stephentown facility, and 2) building additional facilities, including a 20 MW plant in Hazle Township, Pennsylvania,
for which we have been awarded a $24 million DOE Smart Grid stimulus grant; and a 20 MW facility either in Chicago Heights, Illinois or in Glenville, New York, where we have secured site
control, filed for interconnection and completed system impact studies. We are also identifying other locations for future merchant facilities, as well as marketing to domestic and foreign utilities
that lack open-bid markets with the objective of selling our plants on a turnkey basis. In February 2011, we signed a lease agreement with NorthWestern Energy for a 1 MW system to be
installed by us and operated in conjunction with Mill Creek Generating Station, a gas-fired regulating reserve plant recent commissioned in Montana and owned by NorthWest Energy. The
system is expected to be operational by the end of 2011. The initial term of the lease will be 15 months, for which we will be paid $500,000. NorthWest Energy can extend the lease for two
additional 12-month terms or at its option, purchase the system outright at any point for approximately $4 million. In addition, we are exploring other potential flywheel
applications, including the sale of systems for wind/diesel/flywheel energy storage hybrid power systems on islands and remote grids, as well as for the provision of frequency response services as a
secondary function of our 20 MW plant.

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

Basis of Presentation

Going concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As shown in our consolidated financial statements, we had minimal revenues and incurred significant losses of approximately
$22,680,000, $19,060,000 and $23,568,000 and cash decreases from operations of approximately $15,613,000, $16,698,000 and $18,182,000 during the years ended December 31, 2010, 2009 and 2008,
respectively. We have approximately $10,866,000 of cash and cash equivalents on hand at December 31, 2010, which we believe, in combination with proceeds from the DOE loan, $3 million in
cash contributions to SRS held as "Restricted cash" and expected proceeds of approximately $5 million from our callable preferred stock warrants, is adequate to complete the construction of the
Stephentown facility and finance our operations into approximately the third quarter of 2011. The terms of the FFB loan require us to escrow a significant amount of the cash generated from SRS
operations in 2011 to create required reserves for debt service, maintenance and ongoing operations. Since our cash requirements for operation and construction of frequency regulation facilities
beyond that point far exceeds the cash generated from operations, we may be unable to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern.

-85-

---



BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

We
recognize that our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to allow us to satisfy our obligations on a timely basis. The
generation of sufficient cash flow is dependent, in the short term, on our ability to raise additional capital from a combination of equity, debt and/or project financing, continuing advances on the
SRS construction loan; and in the long term, on the successful operation of our merchant plants and on our sales of systems on a turnkey basis. We believe that the successful achievement of
these initiatives should provide us with sufficient resources to meet our long-term cash requirements.

Accounting Principles

The accompanying consolidated financial statements have been prepared using accounting principles generally accepted in the United
States of America.

Reclassification of prior period amounts

The Board of Directors of the Company authorized a reverse split of the Company's common stock at a ratio of
one-for-ten, effective February 25, 2011. The Company filed a Certificate of Amendment to its Sixth Amended and Restated Certificate of Incorporation (the "Amendment")
to implement the reverse stock split and to reduce the number of shares of common stock authorized under the Certificate of Incorporation from 400 million to 200 million. The number of
shares authorized and all previously reported share and per share amounts have been restated in the accompanying consolidated financial statements and related notes to reflect the reverse stock split.

Certain
prior period amounts have also been reclassified to be consistent with current period reporting. In 2008, "Deferred finance fees" of approximately $96,000 were included in
"Prepaid expenses and other current assets." We reclassified these to "Deferred financing costs and other assets." This reclassification resulted in a reduction in Current Assets for 2008 of
approximately $96,000. Deferred financing costs and other current assets have been reclassified such that the individual components (deferred financing costs, advance payments to suppliers, and other
assets) are now shown separately. In addition, on the cash flow statement, purchases and manufacture of property and equipment are now shown net of related payables and accruals.

Consolidation

The accompanying consolidated financial statements include the accounts of Beacon Power Corporation and our subsidiaries, Beacon Power
Securities Corporation, Stephentown Holding LLC and Stephentown Regulation Services, LLC (SRS). In August 2010, as required to close the FFB loan, Beacon's equity and cash contributions
to the Stephentown project were transferred to SRS. The borrowings from the FFB loan are a liability of SRS, and are guaranteed in part by Beacon. All significant inter-company accounts and
transactions have been eliminated in consolidation.

In
September 2008, we established two wholly-owned subsidiaries, Tyngsboro Regulation Services LLC and Tyngsboro Holding LLC, which remain inactive as of
December 31, 2010. The frequency regulation service revenue and costs from the ISO-NE pilot program are accounted for as part of Beacon Power Corporation.

-86-

---



BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Recapitalization

The accompanying financial statements reflect a recapitalization of the Company in 1997 when one shareholder exchanged shares of common
stock for Class A preferred stock.

Loss per ShareBasic and Diluted

Basic and diluted losses per share have been computed using the weighted-average number of shares of common stock outstanding during
each period, as adjusted retroactively for the effect of the reverse stock split that was effective February 25, 2011. Warrants, options and other securities exercisable for common shares are
used in the calculation of fully diluted earnings per share (EPS) only if their conversion to common shares would decrease income or increase loss per share from continuing operations. Since the years
ended December 31, 2010, 2009, and 2008
reflect losses, including the potential conversion of warrants and options in the diluted EPS calculation would decrease loss per share. Accordingly, they are considered anti-dilutive and
are not included in the calculation of loss per share.

Recently Issued Accounting Pronouncements and Regulations

In April 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-17, "Revenue
RecognitionMilestone Method (Topic 605).The objective of this update is to provide guidance on defining a milestone and determining when it may be appropriate to
apply the milestone method of revenue recognition for research or development transactions, in particular for instances whereby a portion or all of the consideration is contingent upon milestone
events such as achieving a specific result from the research or development efforts. Under this guidance, a vendor can recognize consideration that is contingent upon achievement of a milestone in its
entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. Determining whether a milestone is substantive is a matter
of judgment made at the inception of the arrangement. In addition, this update requires specific disclosures. This update is effective on a prospective basis for milestones achieved in fiscal years,
and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. Although we do not currently have any contracts for which the milestone method is being
used for revenue recognition, this update could impact our accounting for future research and development contracts.

Recently Adopted Accounting Pronouncements and Regulations

In January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements." This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value
measurement as set forth in Codification Subtopic 820-10. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically,
ASU 2010-06 amends Codification Subtopic 820-10 to now require:



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BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)



Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are
unobservable inputs for the asset or liability. In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:



We
adopted ASU 2010-06 as of January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application
is permitted. We adopted the additional disclosure requirements of ASU 2010-06 with regards to the preferred stock and warrants that were issued in December 2010.

On
February 24, 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-09 "Subsequent EventsAmendments to
Certain Recognition and Disclosure Requirements" ("ASU 2010-09"),which amends FASB ASC Topic 855, "Subsequent
Events",so that SEC filers no longer are required to disclose the date through which
subsequent events have been evaluated in originally issued and revised financial statements. ASU No. 2010-09 was effective immediately and we adopted this new requirement in the
first quarter of 2010.

In
December 2009, the FASB issued ASU 2009-17, "Consolidations (Topic 810)Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities", which codifies FASB Statement No. 167, "Amendments to FASB Interpretation
No. 46(R)" and changes how a reporting entity determines when an entity that is not controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another entity is based on, among other things:



ASU
2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity's financial statements. ASU
2009-17 is effective at the start of a

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BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

reporting
entity's first fiscal year beginning after November 15, 2009, which for us was January 1, 2010. In the future, should we become fractional owners of certain merchant frequency
regulation plants, this standard may impact our reporting for such entities.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits and highly liquid investments with maturities of three months or less when acquired.
Cash equivalents are stated at cost, which approximates market value.

Accounts Receivable and Allowance for Doubtful Accounts

We evaluate the collectability of our open receivables on an ongoing basis. Specific reserves for bad debt are recorded based on the
age of receivables, and when we are notified of a customer's inability to satisfy its debt obligations, such as in the event of a bankruptcy filing. We provide an allowance for doubtful accounts equal
to the estimated uncollectible amounts due from our customers. Our estimate is based on limited historical collection experience and a review of the current status of trade accounts receivable.

Inverter Inventory

We have a limited amount of inventory related to our inverter product line, which we value at the lower of actual cost or the current
estimated market value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory. Since we have not had substantial revenues from our inverter product
line and we were uncertain of future revenues, we recorded a full reserve for the total value of the inventory in a prior year. Accordingly, for
the years ended December 31, 2010 and 2009, the value of our inverter product line inventory was fully offset by these reserves.

Unbilled costs on contracts in process

Contract costs that we incur in advance of billings to customers, such as material purchases, direct labor and overhead are reflected
as a current asset on our balance sheet as "Unbilled costs on contracts in process."

Lease Obligation and Deferred Rent

In July 2007, we signed a seven-year operating lease with escalating payments on a 103,000 square foot facility in
Tyngsboro, Massachusetts. As part of this lease agreement, we issued to the landlord

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BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

15,000
shares of our common stock and a warrant exercisable for 50,000 shares of our common stock in return for lower cash payments under the lease. (See Note 9: Commitments and Contingencies.)
Additionally, the landlord has reimbursed us for certain leasehold improvements we have made. In accordance with ASC Topic 840, "Leases", these
reimbursements have been credited to "Deferred Rent", and we have recorded rent expense on a straight line basis. The current portion of the deferred rent is included in current liabilities, and the
remainder is shown on the balance sheet as "Deferred rentlong term."

Property and Equipment

Property and equipment in service is stated at cost and depreciated using the straight-line method over the estimated
useful lives of the assets. Property and equipment are defined as tangible items with unit costs exceeding our capitalization threshold that are used in the operation of the business, are not intended
for resale and which have a useful life of one year or more. The cost of fixed assets is defined as the purchase price of the item, as well as all of the costs necessary to bring it to the condition
and location necessary for its intended use. These costs include labor, overhead, capitalized interest and, if applicable, exit costs. Exit costs for which we are
obligated are accounted for in accordance with ASC Topic 410, "Asset Retirement and Environmental Obligations." No overhead is generally applied for
internally-constructed projects not directly related to our core business (e.g., leasehold improvements). Interest costs incurred during the construction of major construction projects (such as
the construction of our frequency regulation plants) are capitalized in accordance with ASC Topic 835, Subtopic 20, "InterestCapitalization of
Interest." The interest is capitalized until the underlying asset is ready for its intended use, and is considered an integral part of the total cost of acquiring a qualifying
asset. Thus, the capitalized interest costs are included in the calculation of depreciation expense once the constructed assets are in service. Repair and maintenance costs are expensed as incurred.
Materials used in our development efforts are considered research and development materials, and are expensed as incurred in accordance with ASC Topic 730, "Research and
Development."

Capital
assets are classified as "Construction in Progress" (CIP) when initially acquired, and reclassified to the appropriate asset account when placed into service, with the exception
of land, which is capitalized upon purchase. Depreciation expense is not recorded on assets not yet placed into service.

Materials
purchased to build flywheels, power electronics and other components used in our frequency regulation installations are classified as CIP, along with the related labor and
overhead costs. Some components of the Smart Energy Matrix, such as the flywheels and power electronics, are considered "fungible" in that they can be moved and redeployed at a different
location. Non-fungible costs are costs which would not be recovered if we redeployed the matrix or portions thereof. In some cases, we may elect to deploy a Smart Energy
Matrix system at a location for the purpose of demonstrating our technology or gaining experience operating in that particular market. In these instances, the costs of the fungible
components are capitalized, and the remaining costs, which may include such costs as site preparation, interconnection costs, capitalized interest and estimated exit costs, are expensed.

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

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Loss on Contract Commitments

Our contracts have been primarily for the development of demonstration units of new products, design of a frequency regulation plant,
design of a flywheel for use by the Navy in their electric ships, and other work that supports our core research and development efforts. Most of these contracts have been structured on a
cost-share basis for which the expected cost share has been recorded as a contract loss. The "cost" basis allowable on these contracts is based on government-allowable overhead rates,
which differ from overhead rates required by GAAP. In particular, most of our stock compensation expense is not an allowable cost for the purposes of calculating government-allowable rates. As a
consequence, we may incur losses on our financial statements even for contracts granted on a cost-plus-fixed fee basis. We establish reserves for anticipated losses on contract
commitments if, based on our cost estimates to complete the commitment, we determine that the cost to complete the contract will exceed the total expected contract revenue. Each quarter, we perform an
estimate-to-complete analysis, and any changes to our original estimates are recognized in the period in which they are determined.

Restructuring and Asset Impairment Charges

In accordance with ASC Topic 360, "Property, Plant and Equipment,"
long-lived assets to be held and used are reviewed to determine whether any events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The
conditions considered include whether or not the asset is in service, has become obsolete, or whether external market circumstances indicate that the carrying amount may not be recoverable. We
recognize a loss for the difference between the estimated fair value of the asset and the carrying amount or the cost to repair the asset. The fair value of the asset is measured using either
available market prices or estimated discounted cash flows. No asset impairment charges were considered necessary for the years ended December 2010, 2009 or 2008.

In
certain instances, we may determine that it is in the best interest of the Company to move and re-deploy all or part of a Smart Energy Matrix System installed
at a given location. When such a determination has been made, we will determine which costs are associated with the movable (fungible) components, and which costs are non-fungible. We will
record a period expense for the net book value not associated with the fungible components. Accordingly, in 2008, 2009, and 2010, we expensed the non-fungible costs associated with the
Smart Energy Matrix installed outside our Tyngsboro facility.

Debt recorded at par value or stated value

The MassDev and FFB loans are recorded on our balance sheet at par value or stated value adjusted for unamortized discount or premium.
Discounts and premiums for debt recorded at par value or stated value generally are capitalized and amortized over the life of the debt and are recorded in interest expense using the effective
interest method. Such costs are amortized over the life of the debt and are recorded in depreciation and amortization expense.

Debt or derivative liabilities recorded at fair value

Costs related to the issuance of debt for which we have elected the fair value option are recognized in current earnings. We have
elected not to mark our MassDev or FFB loan to market through the income statement. However, we have three instruments that are recorded as debt or

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

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

derivatives
which we have elected to mark to fair value through earnings: our mandatorily redeemable convertible preferred stock, our preferred stock warrants, and the common stock warrants issued in
conjunction with our preferred stock. We determine fair value for these instruments as of the end of each reporting period, and we reduce the amount outstanding for any redemptions, exercises, or
conversions at the fair value determined at the end of the prior reporting period. The fair value adjustment is charged or credited to Interest expense.



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

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)



Deferred financing costs

Deferred financing costs represent legal, due diligence and other direct costs incurred to raise capital or obtain debt. Direct costs
include only "out-of-pocket" or incremental costs directly related to the effort, such as a finder's fee and fees paid to outside consultants for accounting, legal or
engineering investigations or for appraisals. These costs will be capitalized if the efforts are successful, or expensed when unsuccessful. Indirect costs are expensed as incurred. Deferred financing
costs related to debt are amortized over the life of the debt. Deferred financing costs related to issuing equity are charged to Paid in Capital. See Debt or derivative liabilities recorded at fair
value for treatment of issuance costs on liability for which we have elected the fair value option.

Advance payments to suppliers

Advance payments to suppliers represent payments made in advance of receipt for services or custom materials used in the manufacture of
our flywheels or frequency regulation facilities. Advance payments are relieved when the materials or services are received. The advance payments are for the construction of our Stephentown plant, and
therefore they are recorded as non-current assets.

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

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Restricted cash

Restricted cash includes as of December 31, 2010 includes $200,000 security deposit on our Tyngsboro building lease,
approximately $12,600 financial assurance account required by ISO-NE, and approximately $3,016,000 which was deposited into SRS's base equity account. This account can only be used for
eligible Stephentown project expenses (see Note 11Long term debt.)

Patent Costs

In December 2004, we recorded impairment charges to write down our capitalized patent costs to zero, due to the lack of substantial
revenues to date and the uncertainty of realizing any future value from these patents. Accordingly, all costs incurred from 2004 through 2008 related to the development of intellectual property were
expensed as incurred. However, in 2009, as we began to build our first commercial frequency regulation plant, we began again to capitalize legal costs associated with obtaining patents which we expect
to have future commercial value. We monitor the legal costs incurred and the anticipated outcome of the legal action and, if changes in the anticipated outcome occur, capitalized costs are adjusted in
the period the change is determined. Patent costs are amortized over the remaining life of the patents. Costs for patents that have not yet been issued are capitalized, but we do not begin to amortize
them until such time as the patent is issued. If we determine that a patent will not be issued, any previously capitalized costs are expensed. We review our intangible assets periodically for
impairment, and record impairment reserves as appropriate.

Advance billings on contracts

We may receive performance-based payments and progress payments from customers which may exceed costs incurred on certain contracts,
including contracts with agencies of the U.S. Government. Such advances are classified as current liabilities.

Revenue Recognition

Although we have recorded revenues for our research and development contracts and frequency regulation service from the
ISO-NE pilot program, and sold photovoltaic inverters, our operations have not yet reached a level that would qualify us to emerge from the development stage. Therefore we continue to be
accounted for as a development stage company under ASC Topic 915, "Development Stage Entities."



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

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)



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

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Cost of Goods Sold

For frequency regulation revenue, cost of goods sold represents the cost of energy. Cost of goods sold for our research and development
contracts is calculated on a percentage-of-completion basis, using the same percentage of contract costs (up to the total contract revenue amount) as is used to calculate
revenue. In the event that expected costs exceed the total contract revenue amount, the excess costs are charged to contract loss. We value our products at the lower of cost or market. Costs in excess
of this measurement are expensed in the period in which they are incurred.

Stock-Based Compensation

We account for stock-based compensation for employees in accordance with ASC Topic 718, "Stock Based
Compensation." Under the fair value recognition provision of ASC Topic 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and
is recognized as an expense as it is earned over the requisite service period, which is the vesting period. The fair value of the options on their grant date is measured using the Black-Scholes
option-pricing model, which we believe yields a reasonable estimate of the fair value of the grants made. The valuation provisions of ASC Topic 718 apply to grants issued since January 1, 2006
(the effective date) and to grants that were outstanding as of that date that are subsequently modified. Estimated compensation expense for grants that were outstanding as of the effective date will
be recognized over the remaining vesting period.

Non-employee
stock-based compensation is accounted for in accordance with ASC Topic 505, "Equity-based payments to
Non-Employees." In accordance with this topic, cost recognized for non-employee share-based payment transactions is determined by the fair value of
whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued.

In
addition, our officers were granted restricted stock units as part of their compensation agreements in 2010, 2009 and 2008. Our Restricted Stock Unit Deferred Compensation Plan is
described in more detail in Note 16.

Income Taxes

Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of
assets and liabilities and tax loss and credit carry forwards using the currently enacted tax rates and laws. A valuation allowance has been provided because realization of deferred tax assets is
uncertain (see Note 18).

401(k) Plan Contributions

We match 50% of the amount our plan participants contribute to our qualified defined contribution (401(k)) plan. The maximum company
contribution is 3% of salary. We contributed approximately $147,000, $144,000 and $137,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

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

Note 2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)

Advertising

Advertising expense was approximately $7,000, $200 and $8,000 in 2010, 2009 and 2008, respectively, and is expensed as incurred.

Research and Development

Research and development costs are expensed as incurred. Costs related to our government contracts may be capitalized as "Unbilled
costs on contracts in progress" and charged to Cost of Goods Sold once the revenue is recognized under the percentage of completion method, or charged against the Contract Loss Reserve as incurred if
the costs are not recoverable
under the terms of the contract agreement or if the costs exceed the total revenue expected for the contract.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash
equivalents. We keep our cash investments with high-credit-quality financial institutions or Treasury funds. At December 31, 2010 substantially all of our cash and cash equivalents
were held in interest bearing accounts at financial institutions earning interest at varying rates from 0.01% to 0.25%. At December 31, 2010, we had approximately $3.8 million of cash
equivalents that were held in a non-interest bearing checking account. SRS had restricted cash of approximately $3.0 million held in an interest-bearing checking account. Also at
December 31, 2010 we had approximately $7.3 million of cash equivalents that were held in interest-bearing money market accounts at high-quality financial institutions. The
fair value of these investments approximates their cost. The funds invested in money market accounts may not be covered under FDIC Insurance, and therefore may be at some risk of loss. However, the
money market accounts are invested primarily in U.S. obligations. Approximately $7.1 million of our cash on hand at December 31, 2010 was invested in mutual funds at a brokerage firm
that has purchased supplementary insurance through Lloyd's of London. This insurance coverage provides protection above the Securities Investor Protection Corporation (SIPC) coverage in the event that
the broker becomes insolvent. SIPC protects against the loss of securities up to a total of $500,000 (of which $100,000 may be in cash) per client. The supplemental insurance provided by the broker
would cover investments at that brokerage firm up to a maximum of $1 billion, including up to $1.9 million per client for the cash portion of any remaining shortfall. SIPC and the
supplemental insurance do not cover market losses; however, management believes the risk of substantial market losses is low because our funds are invested primarily in government funds.

As
of December 31, 2010, two of our vendors represent approximately 21% of the outstanding balance of our accounts payable and accrued liabilities.

Comprehensive Loss

Comprehensive loss is the same as net loss for all periods presented.

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

Note 3. Fair Value of Financial Instruments

Accounting for fair value measurements involves a single definition of fair value, along with a conceptual framework to measure fair value, with a fair value defined as "the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The fair value measurement hierarchy consists of
three levels:



We
apply valuation techniques that (1) place greater reliance on observable inputs and less reliance on unobservable inputs and (2) are consistent with the market approach,
the income approach and/or the cost approach, and include enhanced disclosures of fair value measurements in our financial statements.

The
carrying values of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, and other current liabilities approximate their fair
values due to the short maturity of these instruments. See Note 11 for debt fair value, which also approximates carrying value. See Note 12 for preferred stock and preferred stock
warrants, and Note 14 for common stock warrants.

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---



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

Note 3. Fair Value of Financial Instruments (Continued)

The
following tables show information regarding assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009:

Fair Value Measurements at Reporting Date UsingBalance as of
December 31,
2010

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

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Current AssetsCash and cash equivalents

$
10,865,760

$
10,865,760

$


$
Long Term AssetsRestricted cash


3,228,933


3,228,933





Total Assets

$
14,094,693

$
14,094,693

$


$
Current LiabilitiesMandatorily redeemable convertible preferred stock

$
2,900,170

$


$


$
2,900,170Preferred stock warrant liabilitycurrent


1,009,388








1,009,388Common stock warrant liability


3,242,600








3,242,600Total Current Liabilities


7,152,158








7,152,158Long Term LiabilitiesPreferred stock warrant liabilitylong term


864,012








864,012Total Liabilities

$
8,016,170

$


$


$
8,016,170


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---



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

Note 3. Fair Value of Financial Instruments (Continued)



Fair Value Measurements at Reporting Date UsingBalance as of
December 31,
2009

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

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Current AssetsCash and Cash Equivalents

$
22,605,147

$
22,605,147

$


$
Long Term AssetsRestricted cash


212,557


212,557





Total Assets

$
22,817,704

$
22,817,704

$


$
LiabilitiesMandatorily Redeemable Convertible Preferred Stock

$


$


$


$
Preferred Stock Warrant Liabilitycurrent











Common Stock Warrant Liability











Total Current Liabilities











Long Term LiabilitiesPreferred stock warrant liabilitylong term











Total Liabilities

$


$


$


$



There
were no significant transfers between levels in the year ended December 31, 2010.

Financial
assets or liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model
assumption or input is unobservable. The following table provides a summary of the changes in fair value of our financial liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the year ended December 31, 2010:

Mandatorily
Redeemable
Convertible
Preferred
Stock

Preferred
Stock
Warrant
Liability

Common
Stock
Warrant
Liability

TotalIssued on December 23, 2010:

$
4,120,000

$
2,150,000

$
3,730,000

$
10,000,000Conversions to Common Stock


(313,532
)







(313,532
)Redemptions


(475,448
)







(475,448
)Exercises











Adjustment to fair value at December 31, 2010


(430,850
)

(276,600
)

(487,400
)

(1,194,850
)Transfers in and/or out of Level 3











Balance as of December 31, 2010

$
2,900,170

$
1,873,400

$
3,242,600

$
8,016,170


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

Note 3. Fair Value of Financial Instruments (Continued)

The
warrant liabilities are marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Non-cash interest
in our consolidated statement of operations until they are exercised, expire or other facts and circumstances lead the liability to be reclassified as an equity instrument. The fair value of the
warrant liabilities are determined each reporting period by utilizing a third-party valuation completed using a Black-Scholes option pricing model that takes into account volatility as well as
estimated probabilities of possible outcomes provided by us and the valuation analyst (unobservable inputs).

The
preferred stock is recorded at fair value with changes in fair value recorded as gains or losses within Non-cash-interest. The fair value of the preferred
stock is determined at each reporting period by utilizing a third-party valuation completed using a Black-Scholes option pricing model that takes into account volatility as well as estimated
probabilities of possible outcomes provided by us and the valuation analyst (unobservable inputs.)

ValuationMethodology and Significant Assumptions

The estimate of the fair value of the securities noted above, as of the valuation date, is based on the rights and privileges afforded
to each class of equity. The valuation of derivative instruments utilized certain estimates and judgments that affect the fair value of the instruments. Fair values for our derivatives are estimated
by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are
subject to significant estimates which may changes in the future.

In
estimating the fair value of the preferred stock and warrants, the following methods and significant input assumptions were applied:

Methods

A Black-Scholes option pricing model was utilized to estimate the fair value of the mandatorily redeemable convertible preferred stock,
preferred stock warrants and common stock warrants on December 31, 2010. The option pricing model relies on financial theory to allocate value among different classes of stock based upon a
future "claim" on value. The equity claim of the securities is equivalent to a series of call options at various breakpoints, which are determined by the necessary equity required for the diluted
common stock price to reach the exercise price of the different equity instruments. The change in option values represents the equity that is to be allocated among the different classes of stocks. In
estimating the fair value of the preferred stock, preferred stock warrants and common stock warrants, the following significant inputs and assumptions were applied:

Inputs

December 31, 2010Equity value based on stock closing price at December 31, 2010

$46,035,791Exercise price

$1,000Time to maturity

35 yearsStock volatility

89%92%Risk-free rate

1.02%2.01%Dividend rate

0%Non-exercise period

NA


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

Note 3. Fair Value of Financial Instruments (Continued)

Significant Assumptions



Note 4. Accounts Receivable

Our accounts receivable include amounts due from customers and are reported net of a reserve for uncollectible accounts as follows:

December 31,
2010

December 31,
2009Accounts receivable, trade

$
279,376

$
46,907Allowance for doubtful accounts





Accounts receivable, net

$
279,376

$
46,907


There
was no allowance for doubtful accounts as of December 31, 2010 or 2009. All accounts are expected to be collected.

Some
of our research and development contracts contain holdback provisions that allow our customers to withhold 10% from each invoice payment. Our accounts receivable balance includes
holdbacks of approximately $19,000 and $17,000, as of December 31, 2010 and 2009, respectively. These holdbacks are payable once work has been satisfactorily completed and the final reports
have been delivered and approved. We believe the remaining holdbacks will be collected upon completion of the contracts and collected within one year, and therefore have not recorded any reserve
against this amount.

Note 5. Prepaid Expenses and Other Current Assets

Prepaid expenses at December 31, 2010 consist primarily of prepaid insurance premiums (primarily related to directors' and officers' liability insurance) of approximately
$395,000, prepaid interest of

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

Note 5. Prepaid Expenses and Other Current Assets (Continued)

approximately
$63,000, miscellaneous receivables of approximately $36,000 and other prepaid expenses of approximately $232,000. Other prepaid expenses consist primarily of prepaid maintenance
agreements and dues (including ISO membership dues). Prepaid expenses at December 31, 2009 consist primarily of prepaid insurance premiums (primarily related to directors' and officers'
liability insurance) of approximately $329,000, other prepaid expenses of approximately $304,000, which consist primarily of prepaid maintenance agreements and dues, and other prepaid expenses of
approximately $4,000.

Note 6. Property and Equipment

Property and equipment consisted of the following:

As of:Estimated
Useful Lives

December 31,
2010

December 31,
2009Construction in Progress

Varied

$
41,227,183

$
7,941,125Land




192,487


192,487Smart Energy 25 flywheels

20 years


6,241,732


6,241,732Smart Energy Matrix installationsfungible

20 years


2,526,337


1,686,038Machinery and equipment

510 years


2,696,752


3,096,175Service vehicles

5 years


16,763


16,763Furniture and fixtures

7 years


798,263


700,624Office equipment and software

3 years


1,084,720


1,025,936Leasehold improvements

Lease term


7,804,606


7,804,607Equipment under capital lease obligations

Lease term


563,783


563,783Total



$
63,152,626

$
29,269,270Less accumulated depreciation and amortization




(6,960,421
)

(4,895,329
)Property and equipment, net



$
56,192,205

$
24,373,941


Depreciation
and amortization expense was approximately $2,114,000 and $1,839,000 for the years ended December 31, 2010 and 2009, respectively.

In
November 2008, we deployed 1 MW of capacity under the ISO-NE Alternative Technologies pilot program ("pilot program") with a system installed inside our Tyngsboro
facility. We
deployed a second MW of capacity under the pilot program in July 2009, and a third MW in December 2009. Both of these additional MWs were installed outside and adjacent to our facility in Tyngsboro.
In August 2010, we moved a portion of the 2 MW installed outside our facility to the Stephentown site as part of our equity contribution to that project.

The
"Smart Energy 25 flywheels" represent the cost of the flywheels and electronic control modules. The "Smart Energy Matrix installationsfungible" represents
the cost of ancillary equipment required to operate our systems, such as chillers, which is considered fungible because it can be relocated to other sites. The non-fungible portions of the
Smart Energy Matrix ancillary equipment installed in Tyngsboro were expensed.

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

Note 6. Property and Equipment (Continued)

Under the terms of our Tyngsboro facility lease, we will incur certain exit costs at termination of our
lease. Estimated exit costs of approximately $267,000 relating to certain non-fungible equipment included in the Smart Energy Matrix system operating outside of our facility
were previously expensed and carried in accrued expenses. In addition, Machinery and equipment and Leasehold improvements include approximately $54,000 in estimated exit costs as of
December 31, 2010 and 2009 that are being depreciated over the remaining life of the lease. In addition, we have paid the Town of Stephentown, New York, $75,000 to be held in escrow to cover
any land clearing or exit costs at that site. This amount has been included in "Deferred financing costs and other assets" on our balance sheet as of December 31, 2010.

The
"Land" shown in the schedule above represents the cost of land we purchased in 2008 in Stephentown, New York, where we are building our first merchant frequency regulation plant.

In
April 2010, we entered a two-year option that provides the right to purchase a property in Chicago Heights, Illinois, for $1 million. The property is zoned
industrial, and contains certain improvements relevant to our planned use, including equipment required for physical interconnection to 138 KVA transmission lines. In consideration for this option, we
are paying the owner $2,000 per month. If we elect to purchase the land, the option payments will be applied to the purchase price. We have filed for interconnection and have completed a system impact
study and an environmental assessment for this site.

In
2009, we entered into an option to lease land in Glenville, New York. This option was amended and extended until December 31, 2011, at a cost of $1,500 per month. We have filed
for interconnection and completed a system impact study for this site.

The
components of "Construction in progress" (CIP), which represents costs related to assets that have not yet been placed into service and for which no depreciation expense has been
taken, were as follows:

As of:December 31,
2010

December 31,
2009Materials to build production flywheels

$
757,913

$
5,665,670Smart Energy 25 flywheels


23,481,822


Smart Energy Matrix in progress


16,455,318


1,955,481Deposits and other costs related to the acquisition of land for frequency regulation systems


48,587


43,002Machinery and equipment


103,590


260,840Software


121,620


Leasehold improvements


258,333


16,132Construction in progress

$
41,227,183

$
7,941,125


As
of December 31, 2010 and, 2009, approximately $40,744,000 and $7,664,000, respectively, of the total shown as CIP represent completed flywheels not yet in service, materials to
build flywheels and other
costs related to the Smart Energy Matrix installations under construction for our Stephentown site and other potential sites.

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

Note 7. Deferred Financing

Details of our deferred financing costs are as follows:

December 31,
2010

December 31,
2009Deferred financing costs associated with:FFB loan guaranteed by the DOE

$
3,434,516

$
1,124,300MassDev loan


61,604


74,573Total

$
3,496,120

$
1,198,873


Deferred
finance charges are amortized over the life of the debt using the effective interest method.

Note 8. Other Assets

Other assets represent deferred costs for patents, and are as follows:

December 31,
2010

December 31,
2009Patents

$
238,296

$
115,097Less accumulated amortization


(8,026
)

(164
)Net other assets

$
230,270

$
114,933


As
of December 31, 2010, Patents totaled approximately $230,000, of which approximately $132,000 represents deferred costs for patents that have not yet been issued and which are
not yet being amortized. Amortization expense for the years ended December 31, 2010 and 2009 was $7,862 and $164, respectively.

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

Note 9. Commitments and Contingencies

The following table summarizes our purchase obligations and the aggregate maturities and payments due for our contractual obligations as of December 31, 2010 and for the
subsequent five years:

Description of CommitmentOperating
leases

Purchase
Obligations

TotalPeriod ending:December 31, 2011

$
753,188

$
9,025,422

$
9,778,610December 31, 2012


778,937





778,937December 31, 2013


804,688





804,688December 31, 2014


618,001





618,001December 31, 2015








Total Commitments

$
2,954,814

$
9,025,422

$
11,980,236Non-cancellable purchase obligations:

$
7,797,151Less advance payments to suppliers


(851,984
)Non-cancellable purchase obligations net of advance payments:

$
6,945,167


As
of December 31, 2010, we had purchase commitments with our suppliers of approximately $9.0 million. Of this amount, approximately $7.8 million are firm,
non-cancelable commitments against which we have made advance payments totaling approximately $852,000, leaving a net non-cancelable obligation of approximately
$6.9 million as of December 31, 2010. Total purchase commitments include approximately $7.5 million for materials required to build the flywheels, electronic control modules and
other ancillary equipment needed for Stephentown, of which $6.7 million are non-cancelable as of December 31, 2010. The remaining commitments are for equipment and other
operating expenses.

In
July 2007, we signed a seven-year lease on our current corporate headquarters located at 65 Middlesex Road Tyngsboro, Massachusetts. The 103,000 square foot has a capacity
of approximately 600 flywheels per year on a multi-shift basis, and with further capital spending for equipment our capacity will increase to approximately 1,000 flywheels per year.

We
provided our landlord with an irrevocable letter of credit securing our performance under the lease with a balance at December 31, 2010 and 2009 of $200,000, which is reduced
periodically over the lease term. This letter of credit is secured by a cash deposit, which is included in restricted cash in the accompanying consolidated balance sheets. In addition to our rent
payments, we are responsible for real estate taxes and all operating expenses of the Tyngsboro facility. Rent expense was $589,000, $589,000 and $585,000 during 2010, 2009 and 2008.

In
November 2009, the DOE announced that it had awarded us a Smart Grid Stimulus Grant valued at $24 million for use in construction of a 20 MW flywheel energy storage plant. We
currently expect that this facility will be built on a property situated in Hazle Township, Pennsylvania, for which we have entered into an option agreement executed with an economic development
agency of the State of Pennsylvania. Under the terms of this two-year option, we are paying $2,500 for each of four six-month option periods, or until the option is converted
to a lease. The option allows us to lease the property for 21 years at the rate of $3,250 per month. The site covered by this option is located in an

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---



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

Note 9. Commitments and Contingencies (Continued)

economic
development zone, which provides an exemption from the payment of state sales tax on equipment used to build the plant and an exemption from property taxes through 2017. We have filed for
interconnection, and PJM has completed the system impact study for this site.

In
2009, we entered into an option to lease land in Glenville, New York. This option was amended and extended until December 31, 2011, at a cost of $1,500 per month. In April
2010, we entered a two-year option that provides the right to purchase a property in Chicago Heights, Illinois, for $1 million. In consideration for this option, we are paying the
owner $2,000 per month. If we elect to purchase the land, the option payments will be applied to the purchase price. We are currently expensing these option payments.

Additional
capital expenditures will be required in the future to optimize the plant for maximum capacity. The amount and timing of these expenditures are dependent on requirements of
equipment needed to meet production schedules as well as having sufficient funding.

Legal Proceedings

We may from time to time be subject to legal proceedings, often likely to involve routine litigation incidental to our business. The
outcome of any legal proceeding is not within our complete control, may often be difficult to predict and may be resolved over a very long period of time. Estimating probable losses associated with
any legal proceedings or other loss contingency is very complex and requires the analysis of many factors, including assumptions about potential actions by third parties. A loss contingency is
recorded as a liability in the consolidated financial statements when it is both (i) probable and known that a liability has been incurred and (ii) the amount of the loss is reasonably
estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. If a loss contingency is
not probable or not reasonably estimable, a liability is not recorded in the consolidated financial statements.

Note 10. Accrued contract loss

Our contract loss reserves are as follows:

Year ended December 31,2010

2009Beginning balance

$
257,698

$
132,526Charges for the period


970,836


238,562Reductions


(182,989
)

(113,390
)Ending balance

$
1,045,545

$
257,698


In
September 2010, we signed a contract with the DOE's Advanced Research Projects AgencyEnergy (ARPA-E) to develop critical components of a highly advanced
"flying ring" flywheel energy storage system over a two-year period, for which we expect to receive approximately $2,250,000. In addition, we are expected to contribute an additional 20%
of program costs. Accordingly, we recorded

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---



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

Note 10. Accrued contract loss (Continued)

a
contract loss during the third quarter of 2010 of $1,070,000, which represents our cost share portion of the contract, plus the difference between our GAAP overhead rate and the contract bid rate.

In
April 2008, we were awarded a subcontract to provide a flywheel energy storage system in support of a wind integration research and development project in Tehachapi, California,
sponsored by the California Energy Commission. We will receive approximately $250,000, in total, to offset R&D expenses and will contribute an additional $87,000 of engineering resources for the
project, bringing the R&D total to approximately $337,000. Accordingly, we recorded a charge of approximately $87,000 to the contract loss reserve during 2008 to reflect the expected "cost share"
portion of the Tehachapi contract. During the first quarter of 2009, we increased the loss reserve for the Tehachapi contract by $132,500, bringing the total contract loss to approximately $219,000.
This increase was based on the
difference between the overhead rate that was bid on this fixed price contract and our forecasted overhead rate. No additions were considered necessary to the loss reserve for the Tehachapi contract
during the year ended December 31, 2010.

On
February 3, 2009, we announced that we entered into a contract with NAVSEA to evaluate the use of flywheel energy storage for multiple shipboard applications that we expect
will lead to a conceptual design of a flywheel system for future naval surface combatants and possible retrofit into existing navy ships. The value of the initial research and development work is
estimated at $900,000, $500,000 of which has already been appropriated and is complete. Subsequent phases, if funded, would involve work estimated at up to an additional $2,100,000. This contract was
awarded on a "cost plus fixed fee" basis. After final overhead rate adjustments, we increased the costs charged to the Navy contract by approximately $43,000. We recorded a contract loss reserve of
approximately $50,000 in the second quarter of 2010, since the total costs exceeded the total appropriated to date for the contract, and we charged the additional overhead costs, plus an additional
$7,000 in unbilled costs, against this reserve.

During
the fourth quarter of 2009, we began work on the PNNL contract. According to the terms of the contract, we expected to incur R&D costs of approximately $210,000, and to receive
approximately $104,000 to offset those costs. Accordingly, during the fourth quarter of 2009, we recorded a charge of approximately $106,000 for our "cost share" portion of this contract. We completed
the contract during the second quarter of 2010, at a lower cost than initially expected and, consequently, we reversed the previously established loss reserve and adjusted the cost of sales to
properly reflect the margin on this contract.

As
of the end of December 31, 2010, no other adjustments were considered necessary to our contract loss reserve.

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

Note 11. Long term debt

Long-term debt was as follows, which approximates fair value:

As of:December 31,
2010

December 31,
20093.04% - 3.97% Note Payable to Federal Financing Bank, due June 2030

$
22,152,902

$
6.5% Note Payable to MassDev, due September 2015


3,797,140


4,455,368Subtotal


25,950,042


4,455,368Less unamortized discount (warrants)


(119,259
)

(170,694
)Total


25,830,783


4,284,674Less current portion of long term debt


(661,215
)

(608,105
)Net long-term debt

$
25,169,568

$
3,676,569


Based
on the amounts outstanding as of December 31, 2010, principal payments required under the DOE and MassDev loan over the next five years, excluding discount due to warrants,
are as follows:

MassDev Loan

Federal
Financing Bank
Loan

TotalPeriod ending:December 31, 2011

$
704,259

$


$
704,259December 31, 2012


751,521


615,358


1,366,879December 31, 2013


803,151


1,230,717


2,033,868December 31, 2014


857,709


1,230,717


2,088,426December 31, 2015


680,500


1,230,717


1,911,217Thereafter





17,845,393


17,845,393Total payments remaining

$
3,797,140

$
22,152,902

$
25,950,042


Note Payable to the Federal Financing Bank (DOE loan)

On August 6, 2010, SRS entered into a future advance promissory note with the Federal Financing Bank (FFB), and guaranteed by
the DOE (FFB loan). The FFB is an instrument of the U.S. government that is under the general supervision of the U.S. Secretary of the Treasury. Under the DOE loan guarantee, the FFB has made
available to us a multi-draw term loan facility in an aggregate principal amount of up to $43.1 million to finance up to 62.5% of the eligible costs of the Stephentown project. At
the closing of the loan, Beacon contributed the remaining 37.5% of the expected project costs in the form of $18.9 million in inventory, assets, and eligible project costs and $7 million
in cash. The cash was deposited into an SRS cash account (known as the "Base Equity Account") and is controlled by the collateral agent. We expect to receive 100% reimbursement from the FFB for
ongoing budgeted project costs until such time as 62.5% of the aggregate of all eligible project costs have been funded. After 62.5% of the aggregate of all eligible project costs have been funded
with loan proceeds,

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---



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

Note 11. Long term debt (Continued)

(a) 62.5%
of each request for funding will be funded with loan proceeds from the FFB, and (b) 37.5% of each request for funding will be funded with the proceeds taken from the Base
Equity Account. However, we are responsible for any cost overruns for the project. As of December 31, 2010, we have drawn down $4 million of the cash that was initially contributed to
the Base Equity Account, and have received advances of $22.2 million from the FFB for eligible project expenditures. The project is proceeding on budget, and we do not currently anticipate any
cost overruns. Going forward, each monthly disbursement from the loan will be subject to the satisfaction of certain conditions.

The
last day to receive an advance under the FFB Future Advance Promissory Note for eligible project costs is May 30, 2012, and the loan will mature on June 15, 2030. Each
advance bears interest at a per annum rate determined by the Secretary of the Treasury as of the date of the advance and will be based on the Treasury yield curve and the scheduled principal
installments for such advance, plus a .375% premium. Interest on advances under the FFB loan is payable quarterly in arrears. The weighted average interest rate on advances received as of
December 31, 2010 was 3.352%. Principal payments are due in 72 equal quarterly installments, beginning on September 15, 2012 through June 15, 2030.

Advances
on the loan facilities may be voluntarily prepaid at any time at a price determined based on interest rates at the time of prepayment for loans made from the Secretary of the
Treasury to FFB for
obligations with an identical payment schedule to the advance being prepaid, which could result in the advance being prepaid at a discount, at par or at a premium. The loan facilities are subject to
mandatory prepayments of differing amounts with net cash proceeds received from certain dispositions, loss events with respect to property and other extraordinary receipts. All obligations under the
FFB loan are secured by substantially all property owned by SRS, which was approximately $46.6 million as of December 31, 2010.

The
FFB loan documents contain customary covenants that include, among others, requirements that the project be conducted in accordance with the business plan for the project, property
and assets be maintained in good working order, and that the borrower stay in compliance with all applicable environmental laws and other governmental rules, including Federal Energy Regulatory
Committee (FERC) rules. It places limitations on SRS's ability to use any loss proceeds, incur indebtedness, incur liens, make investments or loans, enter into mergers and acquisitions, dispose of
assets or purchase capital items except for expenditures contemplated by the project budget or operating plan or from the proceeds of insurance, pay dividends or make distribution on capital stock,
pay indebtedness, limitations on payments of management, advisory or similar fees to affiliates, enter into certain affiliate transactions, enter into new lines of business and enter into certain
restrictive agreements, in each case subject to customary exceptions.

The
FFB loan also contains certain financial covenants. As of the last day of each fiscal quarter, SRS is required to:



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---





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

Note 11. Long term debt (Continued)



The
FFB loan facility documents also contain customary events of default, subject in some cases to customary cure periods for certain defaults. It shall not be considered a breach of any
of the financial covenants so long as within thirty days of the delivery of quarterly or annual financial statements showing the breach of any such covenants, SRS causes Beacon to contribute cash
through Stephentown Holding LLC to SRS in an amount necessary to cure such breach.

The
FFB loan requires SRS to establish and maintain collateral cash accounts with a collateral agent. The collateral agent has sole dominion and control over, and the exclusive right of
withdrawal from all project accounts, other than the operating disbursement account and the maintenance reserve account. All revenue must be deposited in the collateral cash account for subsequent
flow to the remaining project accounts, as mandated.

Although
SRS is the borrower under the FFB loan, Beacon Power Corporation has committed to pay all costs and expenses incurred to complete the project in excess of amounts funded under
the loan facility. Beacon has executed an Engineering, Procurement and Construction agreement with SRS, and as such has provided certain facility and flywheel system warranties. In addition, as sole
equity owner of the borrower, Beacon has guaranteed all payment and performance obligations of the borrower through the project completion date. Beacon will provide administrative services and
operation and maintenance services to SRS, and will be paid for those services, according to the terms of agreements between those parties.

Note Payable to MassDev

On June 30, 2008, we entered into an agreement with Massachusetts Development Finance Agency ("MassDev") pursuant to which
MassDev agreed to lend to the Company up to $5 million. This loan derives from a funding collaboration between the Emerging Technology Fund of MassDev and the Massachusetts Technology
Collaborative Business Expansion Initiative. The loan proceeds were used to help fund the expansion of our production facility.

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---



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

Note 11. Long term debt (Continued)

The
MassDev loan is evidenced by a promissory note under which we were able to request advances of up to $5 million for the purchase of equipment and installation of certain
building improvements at our Tyngsboro, Massachusetts facility. The initial advance on the loan was made in October 2008 for approximately $3.6 million. The final advance was made in October
2009 for approximately $1.0 million. The approximately $0.4 million balance of the loan commitment has expired. The note will mature 84 months after the initial advance and bears
a fixed annual interest rate of 6.5%.

Payments
to MassDev began in November 2008. The payments were interest only during the first twelve months. Since October 2009, the balance of the principal outstanding under the note is
being amortized in equal monthly installments of principal and interest over the remaining term of the note.

Pursuant
to the note, we entered into a security agreement which grants to MassDev an exclusive first priority security interest in all equipment and tenant improvements funded with the
proceeds of the loan with an approximate carrying value of $3,978,000 and $5,126,000 at December 31, 2010 and 2009, respectively. We also entered into a collateral assignment of lease agreement
as additional security for the repayment of borrowings. This agreement grants MassDev all rights, title and interest in and to our lease for the Tyngsboro facility in the event that we default on our
obligations. In addition, the MassDev loan requires us to maintain a minimum cash balance of $1,500,000 at all times during the term of the loan.

As
partial consideration for the loan, on June 30, 2008, we issued MassDev two warrants. Each warrant provides for the purchase of 8,598 shares of our common stock at an exercise
price of $18.90 per share, subject to any adjustments as set forth in the warrants. The warrants are exercisable for seven years commencing on June 30, 2008 and provide for registration rights
for the resale of the shares issued upon their exercise. MassDev assigned one of the warrants to the Massachusetts Technology Park Corporation ("MTPC"), as part of MTPC's participation under the
Massachusetts Technology Collaborative Business Expansion Initiative. The Black-Scholes fair value of the warrants is shown as a
discount against the loan, and is being amortized over the life of the loan using the effective interest method at an imputed interest rate of 1.124%. The amortization of this discount resulted in
approximately $51,000 and $47,000 charged to interest expense during 2010 and 2009, respectively. The effective interest rate of the loan, including the cost of the warrants and other deferred loan
costs, is approximately 8.55%.

Note 12. Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants

As a result of the initial public offering of our common stock and the conversion of all outstanding shares of all classes of the preferred stock, we amended our charter and cancelled
all our classes of preferred stock. We then added a new class of preferred stock that can be issued in the future by filing a Certificate of Designations with the specific terms as set by our Board of
Directors. At December 31, 2009, there were 10 million shares of $.01 par value preferred stock authorized with none outstanding.

Series B Convertible Preferred Stock

On December 23, 2010, we sold 10,000 units for net proceeds of approximately $8.7 million. Each unit sold consisted of
(i) one share of our Series B mandatorily redeemable convertible preferred stock, par value $0.01 per share (the "preferred stock"), (ii) a warrant to purchase 0.5 of a share of
preferred

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---



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

Note 12. Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants (Continued)

stock
(the "preferred warrant") and (iii) a warrant to purchase 445.827 shares of common stock, together with any associated rights (the "common warrant", and together with the preferred
warrants, the "warrants"), at a price to the public of $1,000 per unit, less issuance costs. The shares of preferred
stock, the preferred warrants and the common warrants were immediately exercisable and were issued separately.

Each
share of preferred stock has stated value of $1,000. The preferred stock is entitled to receive dividends on the stated value at a rate of 8% per annum. We may elect to pay the
dividends in cash, or if certain "Equity Conditions" are satisfied, in shares of common stock. Dividends are payable monthly, in arrears, on the first day of each month beginning February 1,
2011, and through the maturity date, which is February 1, 2012. If we elect to pay dividends in shares of our common stock, we must give notice to holder on the
23rd trading day prior to the applicable dividend due date, and we must deliver a number of shares of common stock equal to the dividend amount divided by the "Market Price"
determined as of the date notice is given. We will make a similar determination using the Market Price on the dividend due date, and will make an adjustment for the difference (by payment of
additional shares, if positive, or by deemed redemption of the equivalent amount of preferred stock, if negative) at that time. The "Market Price" is the arithmetic average of the six lowest daily
VWAPs during the 20 consecutive trading day period ending two trading days prior to the relevant date of determination. Subject to certain limitations, a holder of shares of preferred stock may
convert its shares of preferred stock at any time after the initial issuance, plus accrued and unpaid dividends, at a rate equal to the "Conversion Price", which is initially $2.5234 per share,
subject to adjustment. As a result of our reverse stock split effective February 25, 2011, the conversion price may be adjusted down (but not up) to reflect the relative ratio of the market
price of our common stock over fifteen trading days before and after the reverse split, as described in more detail below. The amount of this adjustment, if any, has not yet been determined.

We
will redeem 1,154 shares of preferred stock not previously converted on the first business day of each month, beginning February 1, 2011 through the maturity date (each an
"installment date"). If we elect to make the redemption in shares of common stock, we must give notice to the holder on the 23rd trading day prior to the installment due date, and
we must deliver a number of shares of common stock determined by dividing the stated value of the converted preferred stock by the lower of (i) the then applicable conversion price and
(ii) 85% or 90% (depending on whether our Market Price is below or above $1.00, respectively) of the Market Price as of the installment notice date. On the relevant installment date, we will
make a similar determination with respect to the shares payable, and will make an adjustment for the difference (by payment of additional shares, if positive, or by a deemed redemption of the
equivalent amount of preferred stock, if negative) at that time.

We
can redeem any or all of the preferred stock at any time, so long as the Equity Conditions have been satisfied on the date we deliver a redemption notice to the holders and the
redemption date. The redemption price in connection with any such optional redemption will be an amount in cash equal to 125% of the sum of the stated value of the preferred stock being redeemed, with
accrued and unpaid dividends, and an amount reflecting the dividends that would have been payable through the maturity date if the preferred stock had remained outstanding.

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

Note 12. Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants (Continued)

The
"Equity Conditions" will be satisfied on any date if (a) on each day during the 30 trading days prior to such measurement date, all shares of common stock issued and issuable
upon conversion of the preferred stock (including the preferred stock issuable upon exercise of the preferred warrants) or payable as dividend shares and upon exercise of the common warrants will be
eligible for sale without restriction and without the need for registration under the securities laws; (b) on each such day, the common stock is listed on The NASDAQ Capital Market, on one of
several named alternative markets and, if subject to certain delisting proceedings or a failure to meet the maintenance standards of such an exchange, we must meet the minimum listing conditions of
one of the other permitted markets (including the OTC Bulletin Board), (c) on each such day, we have delivered common stock upon conversion by holders of preferred stock on a timely basis, as
and if required; (d) any applicable shares to be issued in connection with the determination may be issued in full without violating the ownership limitations described below or the rules of
our principal market (except that the ownership limitations will not prevent us from delivering common stock in amounts up to such limits); (e) during such period, we shall have made timely
payments as required; (f) there has been no "triggering event" or potential triggering event under the certificate of designations; (g) we have no knowledge of any fact that would cause
the shares of common stock issuable in connection with the preferred stock or warrants not to be eligible for sale without restriction; (h) we meet certain minimum average trading volume
qualifications on our principal market (i.e., a $200,000 daily dollar volume, averaged over the applicable 30 trading days); and (i) we are otherwise in material compliance with our
covenants and representations in the related transaction documents, including the certificate of designations.

The
preferred stock is subject to mandatory redemption at the election of holders upon the occurrence of certain triggering events. The redemption price in these circumstances would be
the greater of (a) 125% of the stated value plus accrued dividends, and (b) the number of shares into which the holder's preferred stock may be converted multiplied by the highest
closing sale price our common stock during the period immediately prior to the triggering event and the date the holder delivers a notice of redemption, plus in each case an amount reflecting the
dividends that would have been payable through the maturity date if the preferred stock had remained outstanding. "Triggering events" include, among other events, certain breaches by the Company of
its agreements, failures to pay amounts when due, failures to maintain any registration statement as required, our the failure to keep our common stock listed on any of the specified eligible markets
(excluding the OTC Bulletin Board), and failure to keep a sufficient number of authorized shares reserved for issuance on conversion of the preferred stock or exercise of the warrants.

The
conversion price of the preferred stock will be adjusted to reflect any stock splits and similar capital events proportionately. In the event of a consolidation of our common stock,
such as a reverse stock split, the conversion price of the preferred stock will also be adjusted proportionately, and then further adjusted (but not increased) to equal the product of (x) the
quotient determined by dividing the conversion price in effect prior to the stock combination by the average of the daily VWAPs for the 15 trading days prior to such combination, and (y) the
average of the daily VWAPs for the 15 trading days following the combination. This adjustment will be triggered by our February 25, 2011 reverse stock split, but the amount of the adjustment
has not yet been determined. In addition, if we issue (or are deemed to issue through the issuance or sale of convertible securities) shares of common stock at a price (as determined under the
certificate of designations) less than the conversion price at the time,

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

Note 12. Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants (Continued)

the
conversion price of the preferred stock will be reduced to the price at which such common stock is issued or deemed to be issued. Adjustments will not be required upon the issuance of certain
"excluded securities", including shares issued or deemed to be issued under our existing employee stock plans, or upon the issuance of shares of common stock as dividend payments or conversions under
the preferred stock; provided, however, that if we issue or are deemed to issue common stock on the dividend date or installment date in June 2011, such issuance will not be excluded from these
adjustment provisions so that the conversion price of the preferred stock may be adjusted upon such issuance to the lower of (i) the conversion price at that time or (ii) the Market
Price as of the relevant dividend date or installment date.

We
will not affect any conversion of the preferred stock, nor shall a holder convert its shares of preferred stock, to the extent that such conversion would cause the holder to have
acquired, through conversion of the preferred stock or otherwise, beneficial ownership of a number shares of our common stock in excess of 4.99% of the common stock immediately preceding the
conversion. This limitation may from time to time be increased or decreased as it applies to any holder, but not above 9.99% or below 4.99%, by such holder, effective upon the sixty-first (61st) day
after it gives us written notice of the adjustment.

In
the event of a liquidation event, before any amounts are made available to the holders of our common stock, the holders of the preferred stock will be entitled to receive in cash, out
of our the assets, an amount per share of preferred stock equal to the stated value, with accrued and unpaid dividends, plus an amount representing the dividends that would have accrued but for such
event through the maturity date. After such a distribution, the holders of the preferred stock will be entitled to participate in any distribution to the holders of our common stock on an
as-converted basis.

While
the preferred stock is outstanding, neither we nor our subsidiaries may incur any additional indebtedness, with the exception of certain project-level indebtedness at the
subsidiary level, our guaranty of such project-level indebtedness, and ordinary course equipment leases, obligations to vendors and similar exceptions. We are also prohibited from issuing additional
or other capital stock that is senior to, or on par with, the preferred stock, or from issuing variable rate securities, without the consent of holders of 90% of the preferred stock then outstanding.

The
units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with registration statements on Form S-3
filed with the Securities and Exchange Commission that became effective on September 15, 2009 and July 29, 2008.

Because
the preferred stock has mandatorily redeemable installments with the remainder outstanding at maturity also subject to mandatory redemption, it meets the definition of a
"mandatorily redeemable financial instrument" under ASC 480, and thus is recorded as a liability at fair value. The embedded features are required to be considered for bifurcation. However, we have
elected the Fair Value Option under ASC 825-10-15, and as such, will value the host preferred stock agreement and the five embedded features together. The election has been
made at the initial recording of the transaction, in accordance with ASC 825-10-25-4. Thus, the host preferred stock certificate of designations and the embedded
features are eligible to be accounted for at fair value. We have elected to do so; consequently, the preferred stock will be recorded as a liability at fair value and subsequently maintained at fair
value, with changes in fair value being recorded in the income statement.

-115-

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

Note 12. Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants (Continued)

Preferred Stock Warrant

The preferred warrants have an exercise price of $1,000 per share of preferred stock, and will expire on the maturity date. Subject to
the Equity Conditions (as described above) being satisfied, we can force the holders of the preferred stock to exercise the preferred warrants for cash (i) in full, if the market price of our
common stock exceeds 150% of the initial conversion price for twenty trading days in any thirty day trading period, (ii) in full, if we consummate an underwritten public offering of our common
stock with net proceeds of at least $10 million, or (iii) in installments, in connection with the last five scheduled installment dates of the preferred stock. If the preferred warrants
are exercised in full, we will receive additional gross proceeds of $5 million.

The
preferred warrant meets the definition of "Obligations to Repurchase Issuer's Equity Shares by Transferring Assets". As the warrant is for shares of preferred stock that are both
puttable and mandatorily redeemable, the warrant is accounted for as a liability, and will be marked to fair value each reporting period, with the change in fair value recorded through the income
statement.

None
of the preferred or common warrants had been exercised as of December 31, 2010.

As
of December 31, 2010, the following is a summary of the non-cash interest related to the preferred stock, preferred warrants and common warrants:

Non-cash interest:

AmountDividends paid in common stock with conversions

$
(220
)Dividends paid in common stock with redemptions


(78,607
)Interest expense on redemption of preferred stock


(842,075
)Fair value adjustment to preferred stock


430,850Fair value adjustment to preferred stock warrants


276,600Fair value adjustment to common stock warrants


487,400Subtotal


273,948Less: prepaid dividends


62,886Non-cash interest expense as of December 31, 2010

$
336,834


Under
the terms of the preferred stock, if we want to redeem the preferred stock and pay dividends with common stock rather than cash, we must give notice to the holders
on the 23rd trading day prior to the applicable redemption or dividend date, and we must deliver a number of shares of common stock based upon the "Market Price" determined as of
the date notice is given. On the scheduled redemption or dividend date, we recalculate the shares payable based upon the Market Price on that date, and make an adjustment for the difference (by
payment of additional shares, if positive, or by a deemed redemption of the equivalent amount of preferred stock, if negative). On December 29, 2010, we elected to make the schedule
February 1, 2011 installment and dividend payment in shares of our
common stock and on that date issued 598,874 shares of our common stock under these prepayment procedures. On February 1, 2011, we issued an additional 12,128 shares based upon the difference
between the Market Price on December 29, 2010 and the Market Price on February 1, 2011. We expect to make subsequent scheduled payments in shares of our common stock also; to the extent
the preferred stock has not been voluntarily converted by the holders.

-116-

---



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

Note 12. Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants (Continued)

Common Stock WarrantseeNote 14, "Common Stock Warrants," below.

The
scheduled redemptions and actual activity for the Preferred Stock and Preferred Warrants as of December 31, 2010 is as follows:

Conversion
Date

Pre-delivery
Date

Number
Preferred
Shares
Redeemed

Total
Preferred
Warrants
Redeemed

Less:
Preferred
Shares
Converted
or
Redeemed
at 12/31/10

Balance of
Preferred
Stock at
12/31/10

Balance of
Preferred
Warrants at
12/31/10

Fair Value of
Preferred
Stock at
12/31/10

Fair Value of
Preferred
Warrants at
12/31/102/1/2011


12/29/2010


1,154





(1,154
)






$


$
3/1/2011


1/26/2011


1,154








1,154





413,951.3


4/1/2011


3/1/2011


1,154








1,154





413,951.3


5/1/2011


3/29/2011


1,154








1,154





413,951.3


6/1/2011


4/28/2011


1,154








1,154





413,951.3


7/1/2011


5/31/2011


1,154








1,154





413,951.3


8/1/2011


6/28/2011


1,154








1,154





413,951.3


9/1/2011


8/1/2011


1,154





(317
)

837





300,240.3


10/1/2011


8/30/2011


768





(444
)

324





116,222.0


10/1/2011


8/30/2011





386








386





144,62611/1/2011


9/29/2011





1,154








1,154





432,38112/1/2011


10/28/2011





1,154








1,154





432,3811/1/2012


11/29/2011





1,154








1,154





432,3812/1/2012


12/29/2011





1,152








1,152





431,63110,000


5,000


(1,915
)

8,085


5,000

$
2,900,170

$
1,873,400Current liability
















$
2,900,170

$
1,009,388Long-term liability
















$


$
864,012


As shown above, 761 shares of preferred stock were converted by their holders into common stock as of December 31, 2010. We recorded a loss
on extinguishment of debt of approximately $390,000 related to these conversions. The loss was calculated as the difference between the fair value of the preferred shares and the fair value of the
common stock as of the date of the conversion. The weighted average fair value of our common stock for the December conversions was $2.24 per share. Subsequent to year end, as of March 15,
2011, preferred warrantholders exercised 3,215 preferred warrants, for which we received proceeds of $3,215,000. Additionally, between January 1, 2011 and March 15, 2011, 7,960 preferred
shares were converted into common stock. We expect to report a non-cash loss on extinguishment of debt related to these conversions of approximately $6.8 million in the first
quarter of 2011. The weighted average fair value of the common stock for the first quarter 2011 conversions was $2.95 per share. As of March 15, 2011, there were 1,440 shares of preferred stock
and 1,785 preferred warrants still outstanding.

-117-

---



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

Note 13. Common Stock

On July 2, 2010, we entered into a common stock purchase agreement with Aspire Capital Fund LLC (Aspire), an Illinois limited liability company, which provided that, upon
the terms and subject to the conditions and limitations set forth therein, Aspire was committed to purchase up to an aggregate of $25 million of our shares of common stock over the term of the
purchase agreement. In consideration for entering into the purchase agreement, we issued 308,642 shares of our common stock to Aspire. Under this agreement, we sold Aspire 154,321 shares of common
stock at a purchase price of $3.24 per share, for an aggregate purchase price of $500,000 on July 6, 2010. Following this initial purchase, from time to time over the 26-month term
of the agreement, we had the right, in our sole discretion, to present Aspire with a purchase notice directing them to purchase up to 40,000 shares of our common stock per trading day (up to an
aggregate of $24.5 million of our common stock) at a price per share calculated by reference to our market price at the time. Under the terms of the agreement, we could not sell shares to
Aspire at a purchase price less than $3.40. These sales were being made under our two available shelf registration statements on Form S-3. Following the initial purchase, and
through November 30, 2010, we sold 80,000 shares to Aspire for gross proceeds of $272,000.

On
November 30, 2010, we notified Aspire that we were electing to terminate the common stock purchase agreement effective as of December 1, 2010, as permitted by the terms
of that agreement. Consequently, no further sales will be made to Aspire under the agreement.

On
December 9, 2009, we sold 3,810,000 units of the Company at a purchase price of $5.44 per unit for a total of approximately $19 million, net of expenses. Each unit
consisted of one share of our common stock, par value $0.01 per share; a warrant to purchase 0.05 of a share of common stock at an exercise price of $7.00 per share through December 9, 2014;
and an additional investor rights warrant to
purchase 0.05 of a share of common stock through August 31, 2010 at a floating exercise price. The floating exercise price was equal to 85% of the five-day volume weighted average
price of our common stock at the time of exercise, but in no event less than $2.72 per share. All the warrants were exercisable upon issuance. The units were issued pursuant to a prospectus supplement
filed with the Securities and Exchange Commission in connection with a registration statement on Form S-3 filed with the Securities and Exchange Commission that became effective on
September 15, 2009.

On
February 19, 2009, we entered into a common stock purchase agreement with Seaside 88, LP, valued at up to $18 million. This agreement was amended on
June 19, 2009. The original agreement required Seaside to buy $1 million of common stock once each month for up to 18 months, beginning on February 20, 2009, and on the
20th day of each month thereafter (or the next closest business day), at a purchase price reflecting a 20% discount to the volume weighted average trading price over the five-day
trading period immediately before the purchase. The amended agreement maintained the $18 million aggregate maximum purchase price, but accelerated the purchase to 150,000 shares twice per month
at a 14% discount to the 10-day volume weighted average trading price. The agreement was structured in three tranches, or segments, of six closings each. We exercised our options on both
additional tranches, meaning that there were 18 closings over the term of the agreement. Separately, in December 2009, we issued additional shares of stock through a public offering. As part of the
underwriting conditions for that offering, we exercised our option to delay the Seaside purchases originally scheduled for December and January for a period of 60 days. The Seaside purchases
resumed on February 5, 2010, and the final purchase under this agreement was completed on March 5, 2010.

-118-

---



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

Note 13. Common Stock (Continued)

The
following is a schedule of the stock sold to Seaside under this agreement:

Transaction date

Aggregate
Value

Common
Shares Sold

Sale Price
per Share

Net ProceedsFebruary 20, 2009

$
1,000,000


265,618

$
3.7648

$
889,767March 20, 2009

$
1,000,000


289,620

$
3.4528

$
931,072April 20, 2009

$
1,000,000


191,278

$
5.2280

$
914,855May 20, 2009

$
1,000,000


164,777

$
6.0688

$
946,098June 22, 2009

$
1,193,895


150,000

$
7.9593

$
1,094,839July 6, 2009

$
1,118,430


150,000

$
7.4562

$
1,059,504July 20, 2009

$
932,670


150,000

$
6.2178

$
860,444August 5, 2009

$
939,255


150,000

$
6.2617

$
873,826August 20, 2009

$
895,260


150,000

$
5.9684

$
833,089September 8, 2009

$
989,295


150,000

$
6.5953

$
923,819September 21, 2009

$
940,155


150,000

$
6.2677

$
874,043October 5, 2009

$
925,575


150,000

$
6.1705

$
864,430October 20, 2009

$
941,955


150,000

$
6.2797

$
880,144November 5, 2009

$
864,300


150,000

$
5.7620

$
802,239November 20, 2009

$
829,605


150,000

$
5.5307

$
673,590February 5, 2010

$
585,150


150,000

$
3.9010

$
549,498February 22, 2010

$
541,500


150,000

$
3.6100

$
506,813March 5, 2010

$
529,350


150,000

$
3.5290

$
495,545Total Investment

$
16,226,395


3,011,293




$
14,973,615


On
December 24, 2008, we sold 896,600 units of the Company at a purchase price of $5.00 per unit, for a total of approximately $4.1 million, net of expenses. Each unit
consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase one share of common stock at an exercise price of $7.40 per share, for a total of 896,000 warrants. The
units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with a shelf takedown from our registration statement that became effective on
July 29, 2008.

On
October 15, 2008, we sold 870,000 units of the Company at a purchase price of $9.10 per unit, for a total of approximately $7.2 million, net of expenses. Each unit
consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase one share of common stock at an exercise price of $12.00 per share, for a total of 870,000 warrants.
The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with a shelf takedown from our registration statement that became effective on
July 29, 2008.

On
October 31, 2007, we sold 1,191,185 units of the Company at a purchase price of $21.00 per unit, for a total of approximately $23.7 million, net of expenses. Each unit
consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase 0.95 shares of common stock at an exercise price of $29.70 per share, for a total of 1,131,628
warrants. The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with our registration statement on Form S-3 filed
on August 6, 2007, which became effective on August 15, 2007.

-119-

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

Note 13. Common Stock (Continued)

On
September 10, 2007, we sold 510,204 units of the Company at a purchase price of $19.60 per unit for a total of approximately $9.2 million, net of expenses. Each unit
consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase 1.2 shares of common stock at an exercise price of $19.90 per share, for a total of 612,245 warrants.
In addition, 15,307 warrants were issued to the placement agents at the same price per share. The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange
Commission in connection with our registration statement on Form S-3 filed on August 6, 2007, which became effective on August 15, 2007.

On
July 23, 2007 we entered into a lease for a new facility in Tyngsboro, MA. We agreed under the terms of the lease to issue to the landlord in a private placement, a warrant
exercisable for 50,000 shares of our common stock at an exercise price of $17.70 per share. In addition, we issued the landlord 15,000 shares of common stock.

On
February 15, 2007, we issued 1,181,469 units for $9.00 per unit, each of which consists of one share of our common stock, par value $0.01 per share, and a warrant to purchase
0.5 shares of our common stock at an exercise price of $13.30 per share for a total of 590,738 warrants. In addition, 35,445 warrants were issued to the placement agents at the same price per share.
We received net proceeds of approximately $9.7 million after deducting placement agency fees and estimated offering expenses.

On
November 8, 2005 we completed the private placement of 986,842 shares of our common stock at a price of $15.20 per share, for an aggregate offering price of approximately
$15 million to certain institutional investors. We also offered these investors and placement agents warrants to purchase 296,053 and 45,000 shares, respectively, of our common stock at an
exercise price of $22.10 per share. In connection with this transaction we paid placement agent fees and expenses of approximately $1 million. We agreed to register for resale under the
Securities Act all the shares issued in this offering as well as the shares issuable upon exercise of the warrants. On March 2, 2006, we filed a registration statement on
Form S-3 with the Securities and Exchange Commission (File No. 333-130207) that was declared effective on March 7, 2006. These proceeds were used for
working capital purposes. We have, at various times, issued stock at a price that triggered the warrants' anti-dilution provisions, resulting in the exercise price of the warrants issued
to the investors being adjusted and additional warrants being issued to the investors. See Note 14Common Stock Warrants.

On
May 24, 2005 and July 26, 2005 we issued 166,667 and 178,571 shares of common stock, respectively pursuant to an investment agreement dated April 22, 2005. In
exchange, we received $3 million in the aggregate from Perseus 2000 Expansion, L.L.C. We also issued a warrant for the purchase of 80,000 shares of our common stock at an exercise price of
$10.08, which expired in May 2010 and an extension for two years of an existing warrant already owned by Perseus which expired on May 23, 2007. These proceeds were used for working capital
purposes.

Initial Public Offering

In 2000, we sold 920,000 shares of our common stock, inclusive of the underwriters' overallotment, at an initial public offering price
of $60.00 per share. Net proceeds as a result of the stock offering totaled approximately $49.3 million reflecting gross proceeds of $55.2 million net of underwriter commissions of
approximately $3.9 million and other estimated offering costs of approximately $2.0 million.

-120-

---



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

Note 13. Common Stock (Continued)

Shareholder Rights Agreement

In September 2002, and amended as of December 27, 2002, our Board of Directors approved a Rights Agreement, under which each
holder of common stock on October 7, 2002
automatically received a distribution of one preferred share purchase right for each share of common stock held. Each preferred share purchase right initially entitles the holder to purchase
1/10th of a share of our newly issued preferred stock for $22.50 in the event that any person not approved by the board of directors acquires more than 15% of our outstanding
common stock, If the rights become exercisable, each right will entitle the holder to purchase $22.50 worth of our common stock, or in the event of an acquisition by another company, $22.50 worth of
the common stock of the other company, at half its market value. In each case, any rights held by the acquiring person are not exercisable and become void.

Reserved Shares

At December 31, 2010, 20,830,370 shares of our common stock were reserved for issuance under our stock option plan, employee
stock purchase plan, and outstanding preferred stock, preferred warrants and common warrants.

Note 14. Common Stock Warrants

We have outstanding various series of warrants to purchase our common stock. Holders of the warrants are not entitled to receive dividends, vote, receive notice of any meetings of
stockholders or otherwise have any right as stockholders with respect to their warrant shares. The following schedule shows warrants outstanding as of December 31, 2010:

Description

Grant
Date

Expiration
Date

Strike Price

Issued and
Outstanding As
of December 31,
2010November 8, 2005 Financing (Investors)


11/8/2005


5/9/2011

$
10.20


641,454February 15, 2007 Shelf Issue


2/15/2007


2/15/2012

$
13.30


626,183GFI Tyngsboro Lease


7/23/2007


7/22/2014

$
17.70


50,000September 10, 2007 Shelf Issue (Investors)


9/10/2007


3/11/2013

$
19.90


612,245September 10, 2007 Shelf Issue (Placemen Agents)


9/10/2007


3/11/2013

$
19.90


15,307October 31, 2007 Shelf Issue


10/31/2007


5/1/2013

$
29.70


543,182June 30, 2007 Massachusetts Development Loan


6/30/2008


6/30/2015

$
18.90


17,196October 15, 2008 Shelf Issue


10/15/2008


4/16/2014

$
12.00


870,000December 24, 2008 Shelf Issue


12/24/2008


6/25/2014

$
7.40


896,600Series WDecember 9, 2009 Public Offering


12/9/2009


12/9/2014

$
7.00


1,905,000Series YSupplier Warrants August 19, 2010


8/19/2010


6/15/2015

$
7.20


11,667December 23, 2010 Common Stock Warrants


12/23/2010


12/23/2015

$
2.52


4,458,274Total warrants outstanding











10,647,108


-121-

---



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

Note 14. Common Stock Warrants (Continued)

The
following shows changes to the warrants outstanding from December 31, 2009 through December 31, 2010:

# WarrantsWarrants outstanding as of December 31, 2009


8,108,966.40Adjustments to 11/8/05 warrants due to Seaside pricing for 2010 stock sales


17,638.80Adjustments to 11/8/05 warrants due to Aspire pricing for 2010 stock sales


12,335.50Perseus warrants expired


(80,000.00
)Series X warrants expired


(55,000.00
)Warrants issued to service provider


11,666.60Series X warrants exercised


(1,826,787.50
)Warrants issued 12/23/10 with convertible preferred stock


4,458,270.70Fractional warrants issued for rounding purposes with reverse stock split


17.50Warrants outstanding as of December 31, 2010


10,647,108.00


May 2005 Financing Warrant

In connection with the investment by Perseus 2000 Expansion, L.L.C., we issued a warrant for 80,000 shares of our common stock at an
exercise price of $10.08. These warrants were not exercised and expired on May 25, 2010.

November 2005 Financing Warrants

As part of a financing transaction in November 2005, we issued warrants to purchase an aggregate of 296,053 shares of our common stock
to ten accredited investors. The per-share exercise price for the warrant shares was $22.10. Each investor warrant is exercisable at any time until May 9, 2011. The terms of the
warrants include anti-dilution provisions which require us to adjust the exercise price and the number of shares of our common stock to be issued upon exercise of the warrants under
certain circumstances, which include, among other things, the issuance of additional shares of our common stock, or securities convertible into our common stock, at a price per share lower than the
closing stock price on the date of the investment, which was $18.50. The warrant also contains language that limits the total number of shares we can issue in the financing transaction (including upon
exercise of the warrants) at an effective price less than the closing price at the time of the investment to 19.99% of the number of shares of common stock outstanding prior to the investment.

-122-

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

Note 14. Common Stock Warrants (Continued)

Based
on the warrants' anti-dilution provisions, the exercise price of the investor warrants were adjusted as shown below.

# Warrants

Exercise PriceOriginal Warrant


296,052.70

$
22.10Adjustments based on anti-dilution provision:Cumulative adjustments through December 31, 2009


315,420.30

$
10.70Seaside 2/05/10 purchase


5,768.60

$
10.60Seaside 2/22/10 purchase


5,878.60

$
10.50Seaside 3/5/10 purchase


5,991.60

$
10.40Aspire 7/2/10 purchase


12,335.50

$
10.20Fractional warrants resulting from reverse split adjustments


6.70Adjusted Warrant


641,454.00

$
10.20


February 2007 Shelf Warrants

In February 2007, we sold 1,181,469 units of the Company at a purchase price of $9.00 per unit. Each unit consisted of one share of our
common stock, par value $0.01 per share, and a warrant to purchase 0.5 shares of common stock at an exercise price of $13.30 per share, for a total of 590,738 warrants. In addition, we issued 35,445
warrants to the placement agents at the same price per share. These warrants became exercisable as of August 16, 2007, and expire five years from date of issue. The units were issued pursuant
to a prospectus supplement filed with the Securities and Exchange Commission in connection with our registration statement on Form S-3 filed on September 1, 2006, which
became effective on December 14, 2006. On February 18, 2011, we entered into a warrant exercise agreement with one of our warrantholders in order to induce the warrantholder to exercise
its out of the money warrants. The agreement called for the exercise of 83,333 warrants at an exercise price of $13.30 per share, providing total gross proceeds to the company of $1,083,334. We agreed
to pay to the holder $898,051 in consideration for its early exercise, resulting in net proceeds to us of $185,283.

July 2007 Warrants

In July 2007, we entered into a lease for a new facility in Tyngsboro, MA. We agreed under the terms of the lease to issue to the
landlord pursuant to an exemption from registration under the Securities Act of 1933, as amended, a warrant exercisable for 50,000 shares of our common stock at an exercise price of $17.70 per share.
This warrant became exercisable as of July 23, 2007, may be exercised at any time over the term of the lease and expires on July 22, 2014. The warrant and the shares issuable upon
exercise of the warrant are restricted securities and may not be sold without registration under the Securities Act of 1933, as amended, and applicable state securities laws or an exemption therefrom.

-123-

---



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

Note 14. Common Stock Warrants (Continued)

September 2007 Shelf Warrants

In September 2007, we sold 510,204 units of the Company at a purchase price of $19.60 per unit. Each unit consisted of one share of our
common stock, par value $0.01 per share, and a warrant to purchase 1.2 shares of common stock at an exercise price of $19.90 per share, for a total of 612,245 warrants. In addition, 15,307 warrants
were issued to the placement agents at the same price per share. The warrants become exercisable as of March 10, 2008, and expire on March 11, 2013. The units were issued pursuant to a
prospectus supplement filed with the Securities and Exchange Commission in connection with our registration statement on Form S-3 filed on August 6, 2007, which became
effective on August 15, 2007. On February 16, 2011 we entered into a warrant exercise agreement with one of our warrantholders in order to induce the warrantholder to exercise its out of
the money warrants. The agreement called for the exercise of 170,000 warrants at an exercise price of $19.90 per share, providing total gross proceeds to the company of $3,383,000. We agreed to pay to
the holder $2,954,022 in consideration for its early exercise, which resulted in net proceeds to us of $428,978.

October 2007 Shelf Warrants

In October 2007, we sold 1,191,185 units of the Company at a purchase price of $21.00 per unit. Each unit consisted of one share of our
common stock, par value $0.01 per share, and a warrant to purchase 0.95 shares of common stock at an exercise price of $29.70 per share, for a total of 1,131,628 warrants. The warrants became
exercisable six months and one day after their issuance, and expire May 1, 2013. The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in
connection with a registration statement on Form S-3 which became effective on August 15, 2007. On January 9, 2009, one of the investors surrendered its 588,446
warrants. There were 543,182 warrants of this class outstanding as of December 31, 2009.

June 2007 MassDev Warrants

On June 30, 2008, as partial consideration for a Massachusetts Development loan, we issued MassDev two warrants. Each warrant
provides for the purchase of 8,598 shares of our common stock at an exercise price of $18.90 per share, subject to any adjustments as set forth in the warrants. The warrants are exercisable for seven
years commencing on June 30, 2008 and provide for registration rights for the resale of the shares issued upon their exercise. MassDev assigned one of the warrants to the Massachusetts
Technology Park Corporation ("MTPC"), as part of MTPC's participation under the Massachusetts Technology Collaborative Business Expansion Initiative.

October 2008 Shelf Warrants

On October 15, 2008, we sold 870,000 units of the Company at a purchase price of $9.10 per unit, for a total of approximately
$7.2 million, net of expenses. Each unit consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase one share of common stock at an exercise price of
$12.00 per share, for a total of 870,000 warrants. The warrants became exercisable six months and one day after t heir issuance, and expire April 16, 2014. The units were issued pursuant to a
prospectus supplement filed with the Securities and Exchange Commission in connection with a shelf takedown from our registration statement that became effective on July 29, 2008.

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---



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

Note 14. Common Stock Warrants (Continued)

December 2008 Shelf Warrants

On December 24, 2008, we sold 896,600 units of the Company at a purchase price of $5.00 per unit, for a total of approximately
$4.1 million, net of expenses. Each unit consisted of one share of our common stock, par value $0.01 per share, and a warrant to purchase one share of common stock at an exercise price of $7.40
per share, for a total of 896,000 warrants. The warrants became exercisable six months and one day after t heir issuance, and expire June 25, 2014.The units were issued pursuant to a prospectus
supplement filed with the Securities and Exchange Commission in connection with a shelf takedown from our registration statement that became effective on July 29, 2008.

December 2009 Series W and Series X Warrants

In December 2009, we sold 3,810,000 units of the Company at a purchase price of $5.44 per unit. Each unit consisted of one share of our
common stock, par value $0.01 per share; a Series W warrant to purchase 0.5 of a share of common stock at an exercise price of $7.00 per share exercisable through December 9, 2014; and
an additional investor rights warrant (Series X) to purchase 0.5 of a share of common stock exercisable through August 31, 2010 at a floating exercise price. The floating exercise price
was equal to 85% of the five-day volume weighted
average price of our common stock at the time of exercise, but in no event less than $2.72 per share. All of the warrants were exercisable upon issuance. The units were issued pursuant to a prospectus
supplement filed with the Securities and Exchange Commission in connection with a registration statement on Form S-3 which became effective on September 15, 2009.

Through
August 31, 2010, Series X warrants to purchase 1,850,000 shares of common stock were exercised at exercise prices ranging from $2.72 to $4.122, for total net
proceeds of $5,902,038. The remaining 55,000 warrants were not exercised and expired as of August 31, 2010.

December 2010 Common Stock Warrant Liability (Issued in Conjunction with Redeemable Preferred Stock)

On December 23, 2010, we sold 10,000 units of the Company at a purchase price of $1,000 per unit. Each unit consisted of
(i) one share of the Company's Series B mandatorily redeemable convertible preferred stock, par value $0.01 per share (the "preferred stock"), (ii) a warrant to purchase 0.5 of a
share of preferred stock (the "preferred warrant") and (iii) a warrant to purchase 445.827 shares of common stock, together with any associated rights (the "common warrant"), at a price to the
public of $1,000 per unit, less issuance costs. The shares of preferred stock, the preferred warrants and the common warrants were immediately exercisable and were issued separately.

The
common warrants have an exercise price of $2.5234 per share of common stock, subject to adjustment, and will expire on December 23, 2015. The common warrants cover an
aggregate of 4,458,271 of common stock. The exercise price of the common warrants is subject to adjustment, among other circumstances, (i) in connection with a subdivision or combination of our
common stock, (ii) if we sell or issue our common stock, or are deemed to sell or issue our common stock through the sale or issuance of securities convertible or exercisable for our common
stock, at a price less than the exercise price of the warrants then in effect, and (iii) between June 1, 2011 and the date on which the preferred warrants have been exercised in full
(or, if they are not exercised, 91 days after the maturity date of the preferred stock) during which period up to $1 million in aggregate exercise price of the warrants may be exercised
at a price equal to (a) 85% of the arithmetic average of the six lowest daily

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---



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

Note 14. Common Stock Warrants (Continued)

volume
weighted average prices (VWAP) per share during the twenty consecutive trading days immediately prior to the exercise date, if such arithmetic average is below $1.00 per share, or
(b) 90% of the arithmetic average of the six lowest VWAPs during such period in any other case. The exercise price of the common warrants will be adjusted downward (but not upward) as a result
of our reverse stock split effective February 25, 2011, to reflect the relative market prices (adjusted for the split ratio) of our common stock over the fifteen trading days before and after
the reverse split. The final amount of this adjustment, if any, has yet been determined.

15. Revenue and Cost of Goods Sold

A breakdown of our sales and the related cost of sales for the years ended December 31, 2010, 2009 and 2008, respectively, is as follows:

Year ended December 31, 2010

Year ended December 31, 2009Revenue

Cost of
Sales

Margin

Revenue

Cost of
Sales

Margin(in thousands)Frequency regulation

$
373

$
318

$
55

$
286

$
319

$
(33
)Contract and grant


459


221


238


672


672


Inverters and APS credits


64





64


10





10Total

$
896

$
539

$
357

$
968

$
991

$
(23
)




Year ended December 31, 2008Revenue

Cost of
Sales

MarginFrequency regulation

$
10

$
41

$
(31
)Contract and grant


12


12


Inverters and APS credits


46





46Total

$
68

$
53

$
15


Revenue
for year ended December 31, 2010 included approximately $373,000 of frequency regulation revenue, as compared to approximately $286,000 and $10,000 in 2009 and 2008,
respectively.

In
November 2008, we began operating our first 1 MW Smart Energy Matrix on the electricity grid in Tyngsboro, Massachusetts. The 1 MW system was installed under
ISO-NE's Alternative Technologies Regulation pilot program. This pilot program allowed us to generate revenue for regulation services while ISO-NE develops permanent market
rules that will govern application of the technology. We added a second megawatt of capacity in Tyngsboro in July 2009, and a third megawatt in December 2009, resulting in progressive increases in our
regulation revenue. We redeployed approximately 2 of these 3 MW of capacity to our Stephentown site in August 2010.

From
November 2008 until late April 2009, we were billed for all of the energy stored on our flywheels, rather than for our net energy usage. Further, we were billed at a retail rate.
However, since late April 2009, our energy costs have decreased substantially as we have been billed the wholesale rate

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---



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

15. Revenue and Cost of Goods Sold (Continued)

for
our net energy used, plus retail transmission and distribution charges. Gross margin in 2010 was $55,000, or 15%, as compared to a gross margin loss of approximately ($33,000), or (12%) in 2009;
and ($31,000) or (310%) in 2008. The gross margin percentage was lower during 2010 than during the last half of 2009 due to a reduction in the average clearing price for frequency regulation in the
ISO-NE market. The cost of energy during 2010 was approximately $318,000, of which approximately $226,000, or 71%, represents retail transmission and distribution (T&D) charges billed by
the local service provider. Because our Stephentown facility will be connected to the grid at transmission level, we will not incur T&D charges at that facility.

Our
contract revenue in 2010 includes $180,000 grant revenue. In 2010, we were awarded a $2 million grant from NYSERDA, $1.5 million of which will be accounted for as a
reduction in the Stephentown project cost; $100,000 which will be used to build a visitor center in Stephentown, New York, and $400,000 which will be earned through the completion of
non-SRS related project milestones, of which $180,000 has been recognized as grant revenue based on percentage of completion as of December 31, 2010. There were no direct costs
associated with the 2010 grant revenue, which, combined with the completion of one of our R&D contracts at a lower cost than initially expected, resulted in a positive gross margin in 2010 for
contract and grant revenue.

We
provide a five-year limited product warranty for our Smart Power M-series inverter product line and accrue for estimated future warranty costs in the period in
which the revenue is recognized. In 2004, we established a reserve for our Smart Power M-series inventory as a result of lower than anticipated sales volumes. During 2010, 2009 and 2008,
we continue to have very limited sales of our inverter products, which we are no longer manufacturing. The costs related to these sales are not fully reflected in the cost of goods sold as a result of
the inventory having been reserved in a prior year. Therefore, our cost of goods sold does not fully reflect the costs associated with these revenues.

Note 16. Stock-Based Compensation

Description of Plans

Stock Option Plan

On July 21, 2010, our stockholders approved our 2010 Stock Incentive Plan (our "2010 Plan"), which constituted an amendment,
restatement and renaming of our Third Amended and Restated 1998 Plan and which increased the shares available for issuance under the Stock Incentive Plan by an additional 1,500,000 shares. Our 2010
Plan allows for the granting of stock options, restricted stock, restricted stock units and other equity awards with respect to up to 3,800,000 shares of our common stock. At December 31, 2010,
we had 1,720,145 shares reserved for future issuance under this plan.

Options
may be granted to our employees, officers, directors, consultants and advisors. Under the terms of the option plan, incentive stock options are to be granted at the fair market
value of our common stock at the date of grant, and nonqualified stock options are to be granted at a price determined by our Board of Directors. In general, our Board has authorized vesting periods
of one to three years and terms of varying length but in no case more than 10 years. Our stock option program is a long-term retention program that is intended 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.

-127-

---



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

Note 16. Stock-Based Compensation (Continued)

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (the "ESPP") allows substantially all of our employees to purchase shares of our common stock at a
discount through payroll deductions. All regular, full-time employees employed by us for at least three months on the dates the exercise periods begin (each May 1 and
November 1) are eligible to participate in this plan. Participating employees may purchase our common stock at a purchase price equal to 85% of the lower of the fair market value of our common
stock at the beginning of an offering period or on the exercise date. Employees may designate up to 10% of their base compensation for the purchase of common stock under this plan. The ESPP provides
for the purchase of up to 200,000 shares of our common stock. Shares purchased under the Plan in 2010, 2009 and 2008 totaled 43,637, 20,010 and 11,180, respectively, and the weighted average purchase
price of the shares purchased was $2.82 in 2010, $6.17 in 2009 and $8.94 in 2008.

At
December 31, 2010, we had 108,247 shares reserved for issuance under this plan.

Restricted Stock Unit Arrangements

Our 2010 Plan 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' interests with those of the Company, (ii) motivate our employees to achieve key product development milestones and thus create stockholder value,
(iii) retain key employees by providing equity to such employees and (iv) conserve cash by paying bonuses in the form of RSUs rather than in cash, but with the number of such RSUs
calculated on a discounted basis to compensate for the reduced liquidity as compared to cash. With respect to the RSUs that are granted in lieu of cash bonuses, the number of RSUs granted are based on
performance, and are automatically converted into shares of common stock in four equal tranches in the fiscal year following the year of performance. Certain other RSUs are granted to our officers as
a form of equity incentive, are not tied to performance, and vest over three-year periods in equal quarterly installments. There are also other performance-based RSUs granted to our
officers that cliff-vest upon the achievement of certain company-specific milestones including earnings levels and revenue goals such that we would no longer be treated as a development
stage company for accounting purposes. Both such vesting events require the recipient officer to be employed by us during the period ending with the milestones. The
unvested portion of any RSU or PSU grant is subject to forfeiture upon the holder's resignation or termination for cause. As of December 31, 2010 and 2009, certain RSUs granted under the
officer employment agreements were vested but stock could not be issued under the terms of the RSU agreements because the trading window was closed to insiders as of the respective vesting dates.

-128-

---



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

Note 16. Stock-Based Compensation (Continued)

Restricted
stock unit activity related to the RSU agreements is as follows:

Year ended December 31,2010

2009

2008(number of shares)Shares issued related to vested RSUs:Based on prior year grants


3,705.2


4,635.2


3,808.4Based upon current year executive officer agreement





1,692.0


1,409.4Vested RSUs not yet converted to stock


2,069.4


1,637.6


1,422.8RSU's granted but not vested:Related to 2007 executive officer agreement








2,406.8Related to 2008 executive officer agreement





1,881.0


3,760.2Related to 2009 executive officer agreement


2,255.3


4,511.3


Related to performance-based executive plan(ii)


55,029.0


126,582.3


126,582.3


i.RSUs
vesting December 31, 2009, were issued on April 8, 2010.ii.Vesting
of the performance-based RSUs (PSUs) is subject to the achievement of performance requirements and the continued employment of the officer as of the
determination date. The 2010 grant is based upon the achievement of certain Adjusted EBITDA goals for the 2011 or 2012 fiscal years, with the minimum payout at $8.5 million Adjusted EBITDA, and
the target award paid out if we achieve an adjusted EBITDA of $46 million. Vesting of RSUs for Adjusted EBITDA between $8.5 million and $46 million will be interpolated on a
straight line basis. Adjusted EBITDA is defined as net income before the effect of interest expenses, income taxes, depreciation, amortization, and equity compensation expenses


-129-

---



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

Note 16. Stock-Based Compensation (Continued)




Stock Option Plan Schedules

Stock option activity since inception is as follows:

Number of
Shares

Weighted-Average
Exercise Price

Weighted-Average
Fair ValueOutstanding at inception


Granted


1,906,584

$
16.13

$
8.60Exercised


(261,412
)
$
8.56Canceled, forfeited or expired


(773,917
)
$
23.56Outstanding, December 31, 2007


871,255

$
11.80Granted


265,991

$
11.71

$
7.20Exercised


(1,925
)
$
7.89Canceled, forfeited or expired


(1,466
)
$
11.93Outstanding, December 31, 2008


1,133,855

$
11.79Granted


91,066

$
5.47

$
2.80Exercised




$
Canceled, forfeited or expired


(27,572
)
$
8.90Outstanding, December 31, 2009


1,197,349

$
11.37Granted


538,559

$
3.90

$
2.10Exercised




$
Canceled, forfeited or expired


(75,117
)
$
30.44Outstanding, December 31, 2010


1,660,791

$
8.09


The
following table summarizes information about stock options outstanding at December 31, 2010:

Exercise Price

Number of
Options
Outstanding

Weighted-Average
Remaining
Contractual Life
(Years)

Weighted Average
Exercise Price

Number
of Options
Vested

Vested
Weighted-Average
Exercise Price$2.30$4.90


629,774


8.95

$
3.99


203,551

$
4.30$5.60$7.40


341,371


4.53

$
7.10


339,939

$
7.10$8.00$11.90


315,601


4.64

$
9.19


314,993

$
9.19$12.00$14.60


237,247


7.07

$
12.65


222,752

$
12.65$15.10$21.90


133,573


5.62

$
17.81


133,122

$
17.81$52.70$93.10


3,225


0.50

$
65.23


3,225

$
65.23Total


1,660,791


6.67

$
8.09


1,217,582

$
9.51


Included
in the schedules above are grants of options to purchase 7,000, 6,000 and 2,500 shares made to non-employee consultants in 2010, 2007 and 2004, respectively. The
non-employee consultant to whom the options were granted in 2007 was subsequently hired as an employee in January 2008. There were no grants made to non-employee consultants in
2008, 2006 or 2005. In 2009, 20,000 options

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---



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

Note 16. Stock-Based Compensation (Continued)

were
granted to a consultant, none of which were outstanding as of December 31, 2010 (see Stock Compensation below.)

Stock Compensation

We account for our stock compensation in accordance with ASC Topic 718. We use the Black-Scholes option pricing model to determine the
fair value of stock options and employee stock purchase plan shares. The valuations determined using such model are affected by our stock price as well as assumptions regarding a number of complex and
subjective variables, including our stock price volatility, expected life of the option, risk-free interest rate and expected dividends, if any.

We
estimate the volatility of our common stock by using historical volatility. We estimate the expected term of the share or option grant, and determine a risk-free interest
rate based on U.S. Treasury issues with remaining terms similar to the expected term of the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an
expected dividend yield of zero in our valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods. All stock-based payment awards
are amortized 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 stock price at date of grant, net of expected forfeitures, and expensed ratably over the performance period or vesting period, as
appropriate. The number of performance-based RSUs (PSUs) for which stock compensation expense is calculated is based upon management's assessment of the likelihood of achieving the performance
targets.

During
the first quarter of 2009, 2,000 options were granted to a consultant. Half of these options vested on May 5, 2009, and the remainder were scheduled to vest on
November 5, 2009, subject to the consultant's continued service to the Company. In accordance with ASC Topic 505-50, "Equity-Based Payments to
Non-Employees," the measurement dates for these options was determined to be the vesting dates. The consultant's services were terminated as of the end of June
2009. The non-vested options were forfeited as of the termination date. Under the terms of the option agreement, the consultant had three months from the termination date to exercise his
vested options. They were not exercised within that time, and consequently the options were forfeited. The options vesting in May 2009 were valued with a life of .75 years (9 months),
using an effective interest rate that corresponds to U.S. Treasury instruments with a similar maturity.

During
2010, an employee terminated his employment with the Company to pursue an advanced degree. The former employee voluntarily forfeited his employee stock options upon his
resignation from the company. Based on this employee's unique skills, we have retained his services as a consultant, and have granted him 7,000 options with various vesting dates and exercise prices
that are consistent with those he had previously been granted as an employee. These options are accounted for under ASC Topic 505-50, "Equity-Based Payments to
Non-Employees," and the measurement dates for these options was determined to be the vesting dates. At the end of each reporting period, these options are revalued
at their current fair value until a measurement date has been established by virtue of the option vesting, and a pro-rata portion of the
resulting expense is recognized. The useful lives of the options granted to this consultant range from .75 years to 3.5 years.

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---



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

Note 16. Stock-Based Compensation (Continued)

The
assumptions used to value stock option grants for the year ended December 31, 2010, 2009 and 2008, respectively, are as follows:

Year ended December 31,2010

2009

2008Risk-free interest rate

.62%1.67%

0.34%1.40%

1.16%3.33%Expected life of option

.753.5 years

.753.5 years

3.5 yearsExpected dividend payment rate

0%

0%

0%Assumed volatility

64%91%

77%93%

78%98%Expected forfeitures

8.3%

8.3%

8.3%


Stock-based
compensation expense recognized on our consolidated statement of operations for the years ended December 31, 2010, 2009 and 2008, respectively, is as follows:

Year Ended December 31,2010

2009

2008Operations and maintenance

$
104,548

$
110,652

$
Research and development


263,369


341,210


734,732Selling, general and administrative


490,550


450,417


123,962Total stock compensation expense

$
858,467

$
902,279

$
858,694Components of stock compensation expense:Compensation expense related to other RSUs

$
14,744

$
44,880

$
(840,565
)Compensation expense related to stock options


843,723


857,399


1,699,259Total stock compensation expense

$
858,467

$
902,279

$
858,694


As
of December 31, 2010, there was approximately $522,000 of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock-based payments granted
to our employees, directors and consultants. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and recognized over the remaining vesting periods of the
stock grants.

Note 17. Other Accrued Expenses

Other accrued expenses were as follows:

As of December 31,2010

2009Accrued expenses

$
(2,107,845
)
$
(785,523
)Accrued interest payable


(28,297
)

Accrued legal, audit and public company expenses


(447,872
)

(632,786
)Accrued warranty


(28,488
)

(31,043
)Accrued sales and other taxes


(1,536,801
)

(56,297
)Accrued insurance payable


(62,251
)

Deferred revenue


(49,214
)

(37,857
)$
(4,260,768
)
$
(1,543,506
)


-132-

---



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

Note 17. Other Accrued Expenses (Continued)

Accrued expenses increased as of December 31, 2010 as compared December 31, 2009 largely due to
purchases related to the Stephentown project. The increased in Accrued taxes for the same period is due to accrued sales and use taxes on the Stephentown plant.

Note 18. Interest Expense

Interest expense, cash paid for interest, and capitalized interest were as follows for the years ended December 31, 2010, 2009 and 2008. We capitalize interest on frequency
regulation plant construction projects.

Year ended December 31,2010

2009

2008Cash paid for interest

$
283,397

$
249,620

$
59,294Accrued interest and interest added to FFB loan


104,517





Make-whole dividends paid upon conversion of redeemable preferred stock


67,321





Amortization of MassDev warrants


51,435


47,215


10,037Less: Interest capitalized


(259,654
)

(181,677
)

2,121Net interest expense

$
247,016

$
115,158

$
71,452


Note 19. Income Taxes

The components of the provision (benefit) for income taxes consisted of the following:

Cumulative from
May 8, 1997
(Date of Inception)
to December 31
2010Year ended December 31,2010

2009

2008Statecurrent

$
2,537

$
4,316

$
3,804

$
36,912U.S. Federaldeferred


25,586,517


(6,246,252
)

(8,287,246
)

(34,403,381
)Statedeferred


1,860,494


(960,673
)

184,112


(4,802,328
)(Decrease)/Increase in valuation allowance


(27,447,011
)

7,206,925


8,103,134


39,205,709Provision (benefit) for income taxes

$
2,537

$
4,316

$
3,804

$
36,912


A
reconciliation of the statutory federal rate to the effective rate for all periods is as follows:

Statutory federal rate benefit


(34
)%State, net of federal effect


(6
)Valuation allowance provided


40Effective rate



%


Under
ASC Topic 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a

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

Note 19. Income Taxes (Continued)

50%
likelihood of being sustained. Additionally, ASC Topic 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition. At December 31, 2010 and 2009, we had no unrecognized tax positions that would have an impact on our effective tax rate. We adopted the provisions of ASC Topic 740 on
January 1, 2007.

The
significant components of our deferred tax assets and liabilities consisted of the following at December 31:

2010

2009Long-term assets:Net operating loss carryforwards

$
31,525,849

$
59,215,066Research and development credits


4,684,236


3,988,463Restructuring reserves


390,121


390,121Tax depreciation more than book


(1,971,672
)

(1,132,234
)Other


1,298,306


912,43535,926,840


63,373,851Less valuation allowance


(35,926,840
)

(63,373,851
)Net deferred tax assets

$


$



The
valuation allowance decreased by $27,447,011 in 2010, primarily due to net operating losses that became limited as a result of ongoing ownership changes. The valuation allowance
increased by $7,206,925 in 2009 and $8,103,134 in 2008 primarily due to the generation of net operating loss carry forwards and research and development credits for which realization is not reasonably
assured.

The
following approximates the net operating loss carry forwards and business credits we have available in the future for federal and state tax purposes:

2010

2009Net operating loss carry forwards available in the future:Federal

$
85,312,225

$
160,499,688State


41,994,866


77,419,534Total net operating loss carry forwards available

$
127,307,091

$
237,919,222Business credits available in the future:Federal

$
2,998,400

$
2,635,648State


1,685,836


1,352,815Total business credits available

$
4,684,236

$
3,988,463Beginning expiration date for net operating loss carry forwards


2017Federal research and development credits beginning expiration date


2017Income tax paid from inception

$
36,912

$
34,374


Since
the Company's formation, we have raised capital through the issuance of capital stock on multiple occasions, and experienced transfers of common stock between 5% owners, which
resulted in changes of control as defined by Section 382 of the Internal Revenue Code. As of December 31, 2009,

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---



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

Note 19. Income Taxes (Continued)

the
Company had federal and state net operating loss carryforwards of approximately $160,500,000 and $77,420,000, respectively, available to reduce future taxable income and which expire at various
dates beginning in 2010 through 2029. Our state net operating losses are primarily allocable to Masachusetts.

Utilization
of the net operating loss and research and development credit carryforwards may be subject to an annual limitation under Internal Revenue Code Section 382 due to
ownership change limitations that have occurred previously or that could occur in the future. We conduct an analysis in accordance with the provisions of Section 382 in order to determine
whether the amount of net operating losses and research and development tax credits are subject to annual limitations for federal and state income tax purposes. Based on this analysis, we concluded
that the federal and state net operating losses are limited, and the remaining losses available to reduce future taxable income are approximately $85,312,000 and $41,995,000, respectively, as of
December 31, 2010. The Company also has federal and state research and development and ITC credits of approximately $2,998,000 and $1,686,000, respectively, available to reduce future tax
liabilities. Subsequent ownership changes could further limit the amount of net operating loss carryforwards and research and development credits that we can utilize annually to offset future taxable
income.

We
have excess tax deductions related to equity compensation of approximately $0.9 million and $0.9 million in 2010 and 2009, respectively, of which the benefit will be
realized when it results in a reduction of taxable income in accordance with ASC Topic 718.

We
file tax returns in the federal as well as several state tax jurisdictions. As of December 31, 2010, tax years subject to examination by taxing authorities in the federal
jurisdiction are 1997 and forward. The most significant state tax jurisdiction for the Company is Massachusetts, and tax years subject to examination by taxing authorities in that jurisdiction are
2005 and forward. These tax years are still open to audit as our net operating losses incurred in those years may be subject to examination. We are currently not under any income tax examinations.

Note 20. Related Party Transactions

There were no related party transactions during 2010 or 2009.

Note 21. Quarterly Results (Unaudited)

In management's opinion, this unaudited information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for
the quarters

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---



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

Note 21. Quarterly Results (Unaudited) (Continued)

presented.
The operating results for any quarter are not necessarily indicative of results for any future quarters.

2010First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total
YearRevenue

$
235,480

$
165,540

$
124,355

$
370,328

$
895,703Gross profit (loss)

$
52,388

$
93,491

$
5,822

$
204,253

$
355,954Loss from operations

$
(5,462,404
)
$
(5,495,128
)
$
(5,470,131
)
$
(5,880,579
)
$
(22,308,242
)Net (loss) income

$
(5,539,906
)
$
(5,551,069
)
$
(5,538,747
)
$
(6,050,044
)
$
(22,679,766
)Loss per sharebasic and diluted

$
(0.32
)
$
(0.30
)
$
(0.28
)
$
(0.29
)
$
(1.19
)Weighted-average common shares outstanding


17,552,729


18,531,901


19,822,934


20,067,791


19,003,001




2009First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total
YearRevenue

$
110,936

$
281,705

$
273,095

$
302,685

$
968,421Gross profit (loss)

$
(61,097
)
$
(3,938
)
$
26,251

$
15,724

$
(23,060
)Loss from operations

$
(5,483,139
)
$
(4,696,424
)
$
(4,163,431
)
$
(4,601,037
)
$
(18,944,031
)Net (loss) income

$
(5,539,918
)
$
(4,766,709
)
$
(4,092,082
)
$
(4,661,777
)
$
(19,060,486
)Loss per sharebasic and diluted

$
(0.51
)
$
(0.41
)
$
(0.33
)
$
(0.31
)
$
(1.56
)Weighted-average common shares outstanding


10,900,314


11,548,652


12,293,000


14,102,353


12,220,078


Note 22. Subsequent Events

Reverse Stock Split

On February 24, 2011, we announced that our Board of Directors had approved the implementation of a
1-for-10 reverse stock split of our common stock, $0.01 par value per share. We filed a Certificate of Amendment to our Sixth Amended and Restated Certificate of Incorporation
(the "Amendment") to implement the reverse stock split effective at 12:01 a.m. on February 25, 2011. In addition, the Amendment reduced the number of shares of common stock authorized
under the Certificate of Incorporation from 400 million to 200 million. Our
Shareholders approved the proposal authorizing the Board of Directors, in its discretion, to implement the reverse split and reduce the number of authorized shares of common stock at the Annual
Meeting of Stockholders held on July 21, 2010. The reverse split was implemented to enable the market price per share of our common stock to close above $1.00, which is a continued listing
requirement of the Nasdaq Capital Market.

At
the effective time and without further action by our stockholders, every ten (10) shares of our pre-split common stock, par value $0.01 per share, automatically was
converted into one (1) share of post-split common stock, par value $0.01 per share. The reverse stock split affected all issued and outstanding shares of our common stock
immediately prior to the effective date of the reverse stock

-136-

---



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

Note 22. Subsequent Events (Continued)

split.
The split-adjusted shares of our common stock began trading on the NASDAQ on February 25, 2011. Our shares will trade under the symbol "BCOND," with "D" added for 20 trading days to
signify that the reverse stock split has occurred. A new CUSIP number has been assigned to our stock as a result of the reverse split. Beginning on March 24, 2011, our stock will trade under
the ticker symbol BCON.

We
have retroactively restated historical earnings per share and share information as it pertains to the reverse stock split, and have reclassified the excess par value from "Common
Stock" to "Additional Paid in Capital" as of December 31, 2010.

Compliance with Nasdaq Listing Requirements

On March 11, 2011, NASDAQ confirmed that we had satisfied the terms of the Nasdaq Listing Qualification Panel decision of
December 3, 2010, by complying with the minimum bid price requirement of $1.00 per share and all other criteria for continued listing on The Nasdaq Stock Market.

Contract With NorthWestern Corporation to Lease 1 MW System

On February 28, 2011, we announced we had signed a lease agreement with NorthWestern Corporation d/b/a NorthWestern Energy for a
one-megawatt (1MW) Beacon Smart Energy Matrix flywheel energy storage system. The system will be installed by us and
operated in conjunction with Mill Creek Generating Station (MCGS), a gas-fired regulating reserve plant recently commissioned in Montana and owned by NorthWestern Energy. The system is
expected to be operational by the end of 2011.

The
initial term of the lease will be 15 months, which at NorthWestern Energy's option, can be extended up to two additional 12-month terms. NorthWestern Energy will
pay us $500,000 for the first 15-month term and $500,000 for each subsequent term should it choose to extend the lease to a second or third term. At any point NorthWestern Energy can opt
to purchase the 1 MW system outright for approximately $4 million. A portion of the lease payments already made under the agreement would be applied to the purchase, depending on when the
purchase was made.

Note 23. Schedule II Valuation and Qualifying Accounts

2010Description

Balance at
1/1/2010

Charged
to costs
and expenses

Charged
to other
accounts

Deductions

Balance at
12/31/2010Product warranty

$
31,043

$


$


$
(2,555
)
$
28,488Inventory reserve


866,276


341,310





(41,594
)

1,165,992Asset impairment reserve


975,302











975,302Contract loss reserves


257,698


970,836





(182,989
)

1,045,545


-137-

---



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

Note 23. Schedule II Valuation and Qualifying Accounts (Continued)



2009Description

Balance at
1/1/2009

Charged
to costs
and expenses

Charged
to other
accounts

Deductions

Balance at
12/31/2009Product warranty

$
35,212

$


$


$
(4,169
)
$
31,043Inverter Inventory reserve


894,594








(28,318
)

866,276Asset impairment reserve


1,062,313








(87,011
)

975,302Contract loss reserves


132,526


238,562





(113,390
)

257,698


Product warrantyDeductions include amounts paid for materials, consultants, travel and freight costs to repair/replace our inverter systems under our
five-year warranty.

Inverter Inventory reserveOur inverter inventory is fully reserved.

Asset impairment reserveIn 2002, we recorded an asset impairment reserve for underutilized plant and equipment. In 2009, we sold or disposed of
certain assets and reduced the associated reserve.

Contract loss reserveWe record a contract loss for anticipated losses on contract commitments based upon the difference between the total expected
cost to complete the contracts and the revenue we expect to earn. The contract loss reserve is reduced as we incur expenses that will not be reimbursed under the terms of the contracts. See
Note 10 for details of contract activity.

-138-

---





Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation,
both the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, were effective as of December 31, 2010.

Management's Report on Internal Control over Financial Reporting

Our Management is responsible for establishing adequate internal control over financial reporting, as that term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting
was effective as of December 31, 2010, and that there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, such
internal control during the quarter ended on that date.

Management's
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by Miller Wachman LLP, an independent
registered public accounting firm, as stated in their report which is included elsewhere herein.

Item 9B.    Other Information

None

-139-

---





PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year.

Item 11.    Executive Compensation

Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year.

Item 13.    Certain Relationships and Related Transactions and Director Independence

Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year.

Item 14.    Principal Accounting Fees and Services

Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year.

-140-

---





PART IV

Item 15.    Exhibits, Financial Statement Schedules



Schedules
for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated
Financial Statements or because such schedules are not required or not applicable.



The
exhibits are listed below under Part IV, Item 15(c) of this report.



Exhibit
Number

Ref

Description of Document3.1

(18)

Sixth Amended and Restated Certificate of Incorporation.3.2

(18)

Certificate of Amendment of the Sixth Amended and Restated Certificate of Incorporation, dated June 25, 2007.3.3

(18)

Certificate of Amendment of the Sixth Amended and Restated Certificate of Incorporation, dated June 26, 2007.3.4

(21)

Certificate of Amendment of the Sixth Amended and Restated Certificate of Incorporation, dated June 11, 20093.5

(14)

Amended and Restated Bylaws, as amended.3.6

(12)

Certificate of Designation of Series A Junior Participating Preferred Stock, filed with the Secretary of State of Delaware on October 4, 2002.3.7

(32)

Certificate of Designation of Series B Convertible Preferred Stock, filed with the Secretary of State of Delaware on December 22, 2010.4.1

(2)

Rights Agreement dated as of September 25, 2002 between Beacon and Equiserve Trust Company, NA.4.2

(3)

Amendment No. 1 to Rights Agreement dated as of December 27, 2002.4.3

(15)

Amendment No. 2 to Rights Agreement dated as of August 8, 2007.4.4

(16)

Amendment No. 3 to Rights Agreement dated as of October 24, 2007.4.5

(20)

Amendment No. 4 to Rights Agreement dated as of February 18, 2009.4.6

(35)

Amendment No. 5 to Rights Agreement dated as of June 19, 2009.4.7

(4)

Form of specimen stock certificate.10.1

(1)

Securities Purchase Agreement dated May 23, 2000 among the Company, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro-Generation Technology Fund, L.L.C., Mechanical Technology Incorporated, GE Capital Equity
Investments, Inc., The Beacon Group Energy Investment Fund II, L.P. and Penske Corporation.10.2

(31)

2010 Stock Incentive Plan of the Company.10.3

(12)

Form of Incentive Stock Option Agreement of the Company.10.4

(12)

Form of Non-Qualified Stock Option Agreement of the Company.


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---



Exhibit
Number

Ref

Description of Document10.5

(1)

Form of Non-Qualified Stock Option Agreement of the Company issued to certain consultants on July 24, 2000 and list of holders thereof.10.6

(11)

Employee Stock Purchase Plan of the Company.10.7

(1)

Amended and Restated License Agreement dated October 23, 1998 between the Company and SatCon Technology Corporation10.8

(18)

Lease dated as of July 23, 2007 between the Company and GFI Tyngsboro, LLC.10.9

(34)

Form of Warrant of the Company issued to GFI Tyngsboro, LLC on July 23, 2007. Filed herewith.10.10

(5)

Form of Director and Officer Indemnification Agreement of the Company.10.11

(12)

Form of Restricted Stock Unit Agreement of the Company.10.12

(8)

Form of Warrant of the Company issued pursuant to the November 2005 financing.10.13

(6)

Form of Warrant of the Company issued pursuant to the April 2005 financing.10.14

(25)

Form of Warrant of the Company issued pursuant to the February 2007 financing.10.15

(26)

Form of Warrant of the Company issued pursuant to the September 2007 financing.10.16

(16)

Form of Warrant of the Company issued pursuant to the October 2007 financing.10.17

(27)

Form of Warrant of the Company issued pursuant to the October 2008 financing.10.18

(28)

Form of Warrant of the Company issued pursuant to the December 2008 financing.10.19

(10)

Form of Warrant of the Company issued pursuant to the December 2009 financing10.20

(32)

Form of Preferred Warrant of the Company issued pursuant to the December 2010 financing.10.21

(32)

Form of Common Warrant of the Company issued pursuant to the December 2010 financing10.22

(10)

Form of Additional Investor Rights Warrant issued pursuant to the December 2009 financing.10.23

(6)

Investment Agreement dated April 22, 2005 among the Company, Perseus 2000 Expansion, L.L.C. and Perseus Capital, L.L.C.10.24

(30)

Registration Rights Agreement dated July 2, 2010 among the Company and Aspire Capital Fund, LLC.10.25

(30)

Common Stock Purchase Agreement dated July 2, 2010 among the Company and Aspire Capital Fund, LLC.10.26

(7)

Option Agreement dated July 25, 2005 between the Company and Lisa Zappala.10.27

(8)

Securities Purchase Agreement dated November 4, 2005 among the Company and Iroquois Master Fund Ltd., Gryphon Master Fund, LP, GSSF Master Fund, LP, Nite Capital LP, Enable Growth Partners, LP, Enable
Opportunity Partners, LP, Truk Opportunity Fund, LLC, Truk International Fund, LP, Capital Ventures International and UBS O'Connor LLC FBO O'Connor PIPES Corporate Strategies Master Limited.


-142-

---



Exhibit
Number

Ref

Description of Document10.28

(29)

Amended and Restated Employment Agreement dated April 26, 2010 between the Company and F. William Capp.10.29

(29)

Amended and Restated Employment Agreement dated April 26, 2010 between the Company and James M. Spiezio.10.30

(29)

Amended and Restated Employment Agreement dated April 26, 2010 between the Company and Matthew L. Lazarewicz.10.31

(29)

Employment Agreement dated April 26, 2010 between the Company and Judith Judson.10.32

(13)

Restricted Stock Unit and Option Agreement dated March 2, 2007 between the Company and F. William Capp.10.33

(13)

Restricted Stock Unit and Option Agreement dated March 2, 2007 between the Company and James M. Spiezio.10.34

(13)

Restricted Stock Unit and Option Agreement dated March 2, 2007 between the Company and Matthew L. Lazarewicz.10.35

(13)

Restricted Stock Unit and Option Agreement dated February 14, 2008 between the Company and F. William Capp.10.36

(13)

Restricted Stock Unit and Option Agreement dated February 14, 2008 between the Company and James M. Spiezio.10.37

(13)

Restricted Stock Unit and Option Agreement dated February 14, 2008 between the Company and Matthew L. Lazarewicz.10.38

(22)

Restricted Stock Unit and Option Agreement dated April 3, 2009 between the Company and F. William Capp.10.39

(22)

Restricted Stock Unit and Option Agreement dated April 3, 2009 between the Company and James M. Spiezio.10.40

(22)

Restricted Stock Unit and Option Agreement dated April 3, 2009 between the Company and Matthew L. Lazarewicz.10.41

(29)

Form of Restricted Stock Unit Agreement dated April 26, 2010 between the Company and each of F. William Capp, James M. Spiezio, Matthew L. Lazarewicz and Judith Judson.10.42

(29)

Form of Option Agreement dated April 26, 2010 between the Company and each of F. William Capp, James M. Spiezio, Matthew L. Lazarewicz and Judith Judson.10.43

(29)

Letter Agreement dated April 26, 2010 between the Company and F. William Capp.10.44

(29)

Letter Agreement dated April 26, 2010 between the Company and James M. Spiezio.10.45

(29)

Letter Agreement dated April 26, 2010 between the Company and Matthew L. Lazarewicz.10.46

(23)

Contract, dated January 28, 2009, between the Company and the U.S. Naval Sea Systems Command.10.47

(24)

Contract, effective as of February 18, 2009 between the Company and American Electric Power, as agent for Columbus Southern Power Company.


-143-

---



Exhibit
Number

Ref

Description of Document10.48

(19)

Promissory Note dated June 30, 2008 issued by Beacon Power Corporation to Massachusetts Development Finance Agency.10.49

(19)

Security Agreement dated June 30, 2008 between Beacon Power Corporation and Massachusetts Development Finance Agency.10.50

(19)

Collateral Assignment of Lease Agreement dated June 30, 2008 between Beacon Power Corporation and Massachusetts Development Finance Agency.10.51

(19)

Form of Warrants issued on June 30, 2008 to Massachusetts Development Finance Agency.10.52*

(36)

Common Agreement by and among Stephentown Regulation Services LLC, U.S. Department of Energy and Midland Loan Services, Inc. dated August 6, 2010.10.53

(33)

Corporate Guaranty from Beacon Power Corporation to the U.S. Department of Energy and Midland Loan Services, Inc. dated August 6, 2010.10.54

(33)

Completion Guaranty from Beacon Power Corporation to the U.S. Department of Energy and Midland Loan Services, Inc. dated August 6, 2010.10.55

(33)

Note Purchase Agreement by and among the Federal Financing Bank, Stephentown Regulation Services, LLC and the Secretary of Energy dated August 6, 2010.10.56

(33)

Future Advance Promissory Note dated August 6, 2010 issued by Stephentown Regulation Services LLC to the Federal Financing Bank.21.1

+

Subsidiaries of the Company.23.1

+

Consent of Miller Wachman LLP.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 200232.1

+

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)Incorporated
by reference from the Form S-1 filed on November 16, 2000 (File No. 333-43386).(2)Incorporated
by reference from the Form 8-K filed on October 4, 2002 (File No. 001-16171).(3)Incorporated
by reference from the Form 10-K filed on March 31, 2003 (File No. 001-16171).(4)Incorporated
by reference from the Form S-3/A filed on January 23, 2006 (File No. 333-130207).(5)Incorporated
by reference from the Form 8-K filed on May 10, 2005 (File No. 001-16171).(6)Incorporated
by reference from the Form 8-K filed on April 25, 2005 (File No. 001-16171).(7)Incorporated
by reference from the Form 8-K filed on July 29, 2005 (File No. 001-16171).(8)Incorporated
by reference from the Form 8-K filed on November 7, 2005 (File No. 001-16171).(9)Incorporated
by reference from the Form 10-Q filed on May 9, 2006 (File No. 000-31973).


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(10)Incorporated
by reference from the Form 8-K filed on December 4, 2009 (File No. 000-31973).(11)Incorporated
by reference from the Form S-8 filed on March 22, 2006 (File No. 333-132638).(12)Incorporated
by reference from the Form 10-K filed on March 30, 2006 (File No. 000-31973).(13)Incorporated
by reference from the Form 8-K filed on February 21, 2008 (File No. 000-31973).(14)Incorporated
by reference from the Form 8-K filed on October 1, 2007 (File No. 000-31973)(15)Incorporated
by reference from the Form S-3 filed on August 17, 2007 (Fine No. 333-145165).(16)Incorporated
by reference from the Form 8-K filed on October 26, 2007 (File No. 000-31973).(17)Incorporated
by reference from the Form 8-K filed on July 23, 2007 (File No. 000-31973.)(18)Incorporated
by reference from Form 10-K filed on March 17, 2008 (File No. 000-31973).(19)Incorporated
by reference from the Form 8-K filed on July 7, 2008 (File No. 000-31973).(20)Incorporated
by reference from the Form 8-K filed on February 20, 2009 (File No. 000-31973).(21)Incorporated
by reference from the Form 10-Q filed on August 6, 2009 (File No. 000-31973).(22)Incorporated
by reference from the Form 8-K filed on April 9, 2009 (File No. 000-31973).(23)Incorporated
by reference from the Form 10-Q filed on May 11, 2009 (File No. 000-31973).(24)Incorporated
by reference from the Form 8-K filed on February 26, 2009 (File No. 000-31973).(25)Incorporated
by reference from the Form 8-K filed on February 13, 2007 (File No. 000-31973).(26)Incorporated
by reference from the Form 8-K filed on September 10, 2007 (File No. 000-31973).(27)Incorporated
by reference from the Form 8-K filed on October 10, 2008 (File No. 000-31973).(28)Incorporated
by reference from the Form 8-K filed on December 22, 2008 (File No. 000-31973).(29)Incorporated
by reference from the Form 8-K filed on April 30, 2010 (File No. 000-31973).(30)Incorporated
by reference from the Form 8-K filed on July 6, 2010 (File No. 000-31973).(31)Incorporated
by reference from the Form 8-K filed on July 26, 2010 (File No. 000-31973).(32)Incorporated
by reference from the Form 8-K filed on December 22, 2010 (File No. 000-31973).(33)Incorporated
by reference from the Form 10-Q filed on November 9, 2010 (File No. 000-31973).(34)Incorporated
by reference from Form 10-K filed on March 15, 2010 (File No. 000-31973).(35)Incorporated
by reference from the Form 10-Q filed on June 22, 2009 (File No. 000-31973).(36)Incorporated
by reference from the Form 10-Q/A filed on March 4, 2011 (File No. 000-31973).(*)Confidential
treatment has been requested as to certain portions of this Exhibit, which portions have been filed separately with the Commission pursuant to
an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk.+Filed
herewith.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.

BEACON POWER CORPORATIONBy:

/s/ F. WILLIAM CAPP F. William Capp President and Chief Executive OfficerDate: March 16, 2011


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

Signature

Title

Date/s/ F. WILLIAM CAPP F. William Capp

President and Chief Executive Officer, and Director (Principal Executive Officer)

March 16, 2011/s/ JAMES M. SPIEZIO James M. Spiezio

Vice President of Finance, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)

March 16, 2011/s/ VIRGIL G. ROSE Virgil G. Rose

Chairman of the Board

March 16, 2011/s/ DANIEL E. KLETTER Daniel E. Kletter

Director

March 16, 2011/s/ JACK P. SMITH Jack P. Smith

Director

March 16, 2011/s/ EDWARD A. WEIHMAN Edward A. Weihman

Director

March 16, 2011


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