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



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

---

FORM 10-K

|(Mark One)                                       |                                                                                         
|------------------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2007     
|Or                                              
|o                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                to

Commission file number 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 LLC
(NASDAQ Capital Market)Preferred Share Purchase Rights

The NASDAQ Stock Market LLC
(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 o    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 o    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 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 (Do not check if a smaller reporting company) |  | 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, 2007 the market value of the voting and non-voting common stock of the registrant held by non-affiliates of the
registrant was $88,070,031. 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 7, 2008 was 88,668,488.

DOCUMENTS INCORPORATED BY REFERENCE

The Exhibit Index (Item No. 15) located on pages 120 through 122 incorporates several documents by reference as indicated therein.



---





Table of Contents



|         |            |  |                                                                                                              | Page
|-------- | ---------- |  | ------------------------------------------------------------------------------------------------------------ | ----
|PART I   |            |  |                                                                                                              |     
|         | Item 1.    |  | Business                                                                                                     |     
|         | Item 1A.   |  | Risk Factors Relating to Our Business                                                                        |     
|         | Item 1B.   |  | Unresolved Staff Comments                                                                                    |     
|         | Item 2.    |  | Properties                                                                                                   |     
|         | Item 3.    |  | Legal Proceedings                                                                                            |     
|         | Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |     
|PART II  |            |  |                                                                                                              |     
|         | Item 5.    |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |     
|         | Item 6.    |  | Selected Consolidated Financial Data                                                                         |     
|         | Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |     
|         | Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |     
|         | Item 8.    |  | Financial Statements and Supplementary Data                                                                  |     
|         | Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |     
|         | Item 9A.   |  | Controls and Procedures                                                                                      |     
|         | Item 9B    |  | Other Information                                                                                            |     
|PART III |            |  |                                                                                                              |     
|         | Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |     
|         | Item 11.   |  | Director and Executive Officer Compensation                                                                  |     
|         | Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                                               |     
|         | Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |     
|         | Item 14.   |  | Principal Accountant Fees and Services                                                                       |     
|PART IV  |            |  |                                                                                                              |     
|         | Item 15.   |  | Exhibits, Financial Statement Schedules                                                                      |     
|         | Signatures |  | 123                                                                                                         

i

---



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 "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 Beacon Power
Corporation's expectation. These factors include: a short operating history; a history of losses and anticipated continued losses from operations; a need to raise additional capital combined with a
questionable ability to do so; 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 successful in obtaining DOE loan guarantee support for our New York facility; conditions in target markets, including the fact that some ISOs have been slow to comply with the FERC's
requirement to update market rules to include new technology such as ours; our ability to obtain site interconnection or other zoning and construction approvals in a timely manner; no experience
manufacturing any product or supplying frequency regulation services on a commercial basis; limited commercial contracts for sales to date; the dependence of sales on the achievement of product
optimization, manufacturing and commercialization milestones; the uncertainty of the political and economic climate, and the different electrical grid characteristics and requirements of any foreign
countries into which we hope to sell or operate, including the uncertainty of enforcing contracts, the different market structures, and the potential substantial fluctuation in currency exchange rates
in those countries; dependence on third-party suppliers; intense competition from companies with greater financial resources, especially from companies that are already in the frequency regulation
market; possible government regulation that would impede the ability to market products or services or affect market size; possible product liability claims and the negative publicity which could
result; any failure to protect intellectual property, including the effect of the patent litigation recently initiated against us; retaining key executives and the possible need in the future to hire
and retain key executives; the historical volatility of our stock price, as well as the volatility of the stock price of other companies in the energy sector. Such statements made by us fall within
the meaning of 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 a number of factors as discussed in the section entitled
"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.

---





PART I

Item 1.    Business

Overview

Beacon Power Corporation and our subsidiary, Beacon Power Securities Corporation, (collectively "Beacon," "the Company," "we," "our" or "us") design, develop,
configure and expect to begin offering for sale, services and advanced products to support more reliable and cost-effective electricity grid operation. We believe that our sustainable
energy storage and power conversion solutions can help provide reliable electric power for the utility, renewable energy, and distributed generation markets. We are a development-stage company that
was incorporated in Delaware on May 8, 1997. Because we have not yet generated commercial revenue from our expected principal operations which will be to provide frequency regulation services,
we are accounted for as a development stage company under Statement of Financial Accounting Standards No. 7. We maintain our principal offices, research and development laboratory and
manufacturing facility at 65 Middlesex Road, Tyngsboro, MA 01879. Our telephone number is 978-694-9121.

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 Web site at www.sec.gov.

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

The
focus of our research and development has been to establish commercially viable flywheel-based energy storage technologies that can provide highly reliable energy solutions for the
worldwide electricity grid at competitive costs. Initially, we expect to generate revenues from the commercialization of our flywheel energy storage systems to supply frequency regulation services to
the electricity grid in North America. We believe that as we expand our production capabilities we can become a provider of frequency regulation services to grid operators on a global basis. In
addition we believe that as the commercialization of our technologies continues, we will develop other cost-effective applications for our flywheel systems that will provide additional
revenue opportunities.

Our
market focus is on the geographic regions of the domestic grid that provide open bid markets for regulation services. These regions and their Independent System Operator (ISO) or
Regional Transmission Operator (RTO) designations are: New England (ISO New England or ISONE); California (California ISO or CAISO); New York (New York ISO or NYISO); Mid-Atlantic (PJM
Interconnect) and Texas (ERCOT). In addition, during 2008 Midwest Independent Transmission System Operator, Inc. (Midwest ISO or MISO) is expected to begin operating its open-bid
ancillary services market for frequency regulation. We have been proactive in this emerging market and have added it to our initial target markets.

These
regional ISOs/RTOs or grid operators purchase frequency regulation services from independent providers in open bid markets that they manage and maintain. We are seeking to become
one such provider. We believe our technology will offer grid operators the benefits of greater reliability; faster response time; cleaner operation, including zero direct emissions of carbon dioxide
(CO2),

1

---



nitrogen
oxide, sulfur dioxide and mercury; and lower maintenance costs compared to conventional power generation facilities that also provide frequency regulation services. We believe that we will
have lower operating costs and faster response time than the majority of other entities that provide frequency regulation services, which we believe will allow us to have sufficient margins to make
the company economically viable.

The Frequency Regulation Market

Levels of power supply and demand on the power 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 called frequency regulation. Deviations from nominal grid frequency can have a negative impact on the operability of 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 provided by the North American
Energy Reliability Council (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.

In
North America, the frequency regulation market in areas that were accessible via open-bid auction mechanisms was valued at approximately $800 million in 2007.
Before the end of 2008 (by which time Midwest ISO's regulation market is expected to be in operation) the addressable open-bid regulation market on an annualized basis is expected to
exceed $1 billion per year. Based on global electrical production, we believe that the worldwide frequency regulation market is several times this amount. Significant growth in the US
open-bid market is expected due to a combination of factors, including:



Under
the open-bid market, grid operators forecast the need for frequency regulation as a percentage of expected power demand, and approved suppliers 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 what every bidder
is paid.

To
fully exploit this regulatory-driven open-bid market, we are finalizing our design and expect to build, own and operate a number of frequency regulation facilities. Our
business model, which is a sale-of-services model, is similar to that of independent power producers who also design, build, own and operate their own power plants. Each Smart
Energy Matrix frequency regulation facility will be up to 20 megawatts (MW) in size. A Smart Energy Matrix is a multi-flywheel energy storage system designed to provide
reliable and sustainable frequency regulation services for utility grids. A Smart Energy Matrix can be scaled to any size to provide one or more megawatts of frequency regulation
capacity. Smart Energy Matrix frequency regulation plants that are 20 MW or less in size offer the advantage of being eligible to use fast-track interconnection regulations
that allow plants of this capacity or smaller to be approved more quickly in accordance with streamlined regulatory rules. A key aspect of our business model is that we are not dependant on the
lengthy procurement cycles typically associated with the marketing and sale of capital equipment to the utility sector. Instead, our business model is to become a merchant provider of frequency
regulation services to the deregulated open bid

2

---



markets.
We will be bidding the output of our plants into multiple open-bid markets for regulation services on a daily basis.

A
key qualification for our participation in these markets is the ability to demonstrate that our technology can deliver the regulation services required by each grid operator. To attain
this qualification and accelerate market entry we installed two scale-power 100-kilowatt (kWh) demonstration models of our Smart Energy Matrix for evaluation by two large grid
operators. Both of our scale-power systems were comprised of multiple flywheels. In 2005, we were awarded contracts for these systems by the California Energy Commission (CEC) and the New York State
Energy Research and Development Authority (NYSERDA), in cooperation with the U.S. Department of Energy (DOE), to test the viability of our flywheel technologies for frequency regulation by these grid
operators. The demonstration systems were scale-power prototypes of the Smart Energy Matrix multi-flywheel system. As a result of the success of the pilot programs, we have focused on the
design of the full scale Smart Energy Matrix systems.

Both
the California and New York systems were installed and evaluated in formal field trials. The demonstration units contained fully-functional control, communication and
interconnection elements similar or identical to the elements of our design for 20 MW frequency regulation facilities. The purpose of these pilot systems was twofold: 1) to demonstrate the
ability of our flywheel technology to provide frequency regulation services consistent with the technical requirements of the grid operators, including the California ISO and New York ISO, and
2) to obtain certification or other approval from these system operators that, from a technical perspective, our technology is approved to provide commercial frequency regulation services in
their respective states and territories.

The
California system completed its field trial on January 31, 2007, earning a positive evaluation from both the CEC and the CAISO. On December 26, 2006, the California ISO
certified our flywheel technology for use as a frequency regulation resource in California.

The
New York demonstration unit incorporated technology improvements as a result of field testing in California and the system contained additional voltage support and power quality
capabilities. The added capabilities were designed to demonstrate the technical efficacy of two entirely new applications for our core technology.

On
March 22, 2007, the New York State Energy Research and Development Authority (NYSERDA) and the U.S. DOE confirmed the successful outcome of field trial testing of our
scale-power flywheel frequency regulation system in New York. At the same time, the New York ISO determined that our technology is a viable technology for frequency regulation on its grid and is
acceptable for provision of commercial frequency regulation in the State of New York. Our New York-based flywheel system field trial reached this significant milestone after the U.S. DOE
(through Sandia National Laboratories, which co-monitored the demonstration with NYSERDA) concluded that the unit's performance had been successfully demonstrated and that additional
testing was not required. During the next several months the New York demonstration unit will be retrieved for potential future use in supporting other demonstration programs and/or R&D activities.

We
believe the performance characteristics of the Smart Energy Matrix will match the requirements of the frequency regulation market quite well. The Smart Energy
Matrix recycles excess energy when generated power exceeds load and delivers it when load increases. We will be able to provide a response time that is up to 100 times faster than
incumbent generators providing this service.

We
believe that our operating cost structure will be significantly lower than most incumbent frequency regulation service providers. Our Smart Energy 25 flywheel is being designed to
operate with low energy losses, minimal mechanical maintenance for 20 or more years and without significant degradation in energy conversion efficiency. In particular, our technology is different from
incumbent frequency regulation providers in that it does not use fossil fuel. Fossil fuel is the largest variable cost

3

---



for
most competing frequency regulation providers. Because our Smart Energy Matrix does not burn fossil fuel, we believe our cost structure is largely insulated from the negative impact
of price increases for coal, oil and natural gas. Historically, wholesale energy prices have a strong correlation with market prices for frequency regulation. Consequently, as the price of energy
rises, we believe that the pricing per megawatt service hour for frequency regulation can generally be expected to rise, but without a proportional increase in our operating cost.

Since
it does not burn fuel, the environmental benefits of our technology are significant. Our technology's ability to reduce carbon dioxide (CO2) emissions was studied by
KEMA, Inc., an international energy industry consulting firm that was commissioned to evaluate the potential of our technology to reduce greenhouse gas and other emissions. The KEMA study
indicated that compared to conventional fossil-fuel based frequency regulation providers our technology is estimated to produce up to 89% less CO2. The study indicates that the
dramatically cleaner performance of our flywheel systems (as contrasted to frequency regulation services supplied by fossil fuel companies) can be expected to offer significant value to regulators,
grid operators, and utilities facing increasing demands to lower CO2 emissions.

The
location of our regulation plants and the sequence in which they will be constructed depend on a number of factors, including but not limited to the availability and cost of land,
the cost of power plant construction, technical grid interconnection requirements, comparative market pricing available for frequency regulation in the various regional markets, and our ability to
receive appropriate revenues and payments within the Market Rules of each regional market.

Pending
the expected approval of a land-use permit we have requested from the town of Stephentown, New York, and approval of our active interconnection request to NYISO, the
location of our first 20 megawatt frequency regulation plant will likely be in Stephentown. We are aggressively pursuing completion of the required interconnection processes for Stephentown. There
have been hearings in the local community regarding the necessary building and environmental permits, and the process is progressing as we expected.

We
have an option to purchase approximately seven acres of land at the Stephentown site. This site is served by two transmission companies: National Grid and New York State Electric and
Gas (NYSEG). National Grid owns a 115 KVA transmission line that abuts the site, and NYSEG owns a substation that also abuts the site. Our interconnection request for a 20 MW plant includes National
Grid as the transmission provider.

We
have changed our implementation schedule that had anticipated revenues from one megawatt of service in one location beginning in April 2008. We expect to have a maximum of five
megawatts of capacity in place in New York by the end of 2008, and the plant would reach its full 20-megawatt capacity during 2009. We have also initiated the permit process to establish up to five
megawatts of frequency regulation capacity at our Tyngsboro site, and we have identified and are pursuing two potential locations in the PJM region.

There
are two primary reasons for the revised deployment schedule:



4

---







We
completed the move to our new facility in January 2008, and we have completed the first phase build-out of our manufacturing facility. We now have a facility capable of
producing up to 600 flywheels per year, which will be ramped up to commence all aspects of production once the development of all components is complete. We have a second phase manufacturing
build-out planned which will increase annual manufacturing capacity to more than 1,000 flywheels.

Because
our business model is based on being a service provider that owns and operates plants and equipment as opposed to selling equipment, we will need to obtain significant additional
funding to further expand our manufacturing capacity, procure flywheel components for manufacture as well as ancillary equipment and construct frequency regulation facilities. We expect to raise
additional capital in 2008 through the sale of stock in the Company. In the future, as the number of our regulation facilities increases and we develop a history of sustained cash flows, we expect to
fund additional plants from a combination of non-recourse project finance, debt, project equity and available cash flow from existing regulation facilities.

Regulatory and Market Affairs

Within each ISO there is a market tariff and set of market rules that determine who is allowed to bid into regulation markets, how much regulation providers are
paid for their services, and what costs providers must pay to participate in markets. While three ISO's have certified or otherwise approved our flywheel technology for commercial deployment, each ISO
has its own market rules that will govern the pace at which markets are opened and the degree to which our technology is allowed to participate. Historically, the market rules for regulation were
written to conform to traditional generators' abilities

5

---



to
provide regulation. This is understandable, because until the advent of our technology, the capabilities and limitations of traditional generators defined how regulation could be technically
implemented. In the markets in which we intend to compete, most of the ISO market rules still contain legacy terms, performance characteristics and other requirements that do not match our new
technology. The impact of this mismatch varies from market to market, and our ability to foster beneficial changes to ISO market rules will determine our timing for entering these markets and building
regulation facilities, as well as the revenues and costs associated with each market.

Of
considerable importance and benefit to us, on February 16, 2007, the Federal Energy Regulation Commission (FERC) issued a landmark ruling, Order 890, Preventing Undue Discrimination and Preference in Transmission
Service. This FERC ruling seeks to promote greater competition in electricity markets and
strengthen the reliability of the grid. Included in Order 890 was a mandate by FERC that all ISOs must change their market tariffs to allow non-generation resources (such as ours) capable
of providing frequency regulation the ability to bid and sell into these markets. The ruling also stated that market rule changes must be implemented in a completely non-discriminatory
manner.

We
believe that FERC Order 890 will accelerate the pace of market rule changes and we have already made progress with several of the ISOs by working with them directly to implement
changes to market rules. We are already experiencing positive effects of Order 890 in the form of heightened commitments by ISOs to work collaboratively with us to integrate our technology to their
grids. To insure that we have the right resources to properly address the timely opportunity represented by FERC Order 890, we obtained expert regulatory and legal counsel and have put a vigorous
regulatory affairs program in place.

In
January 2008, our principal regulatory affairs consultant, Judith Judson, joined us as Director of Regulatory Affairs and Markets. Ms. Judson brings with her a wealth of
experience in electric utility regulation, market development, policymaking and business management. Prior to joining us, Ms. Judson worked in Massachusetts state government from 2003 through
early 2007, where she rose to become the state's head energy and telecom regulator and worked with stakeholders across government and private industry to create new wholesale electricity markets in
New England and develop a comprehensive state energy policy focused on conservation and renewable technologies. In addition, she
served as Chairman of the state's Energy Facilities Siting Board, overseeing the siting of new energy transmission, distribution and generation.

As
a result of FERC Order 890, all ISO's were required to submit a compliance filing with the FERC in October 2007 to define their degree of compliance with this mandate. Once the ISO
compliance filings were published, we became an active participant in reviewing these ISO filings and providing input to FERC. We determined that most of the ISOs were deficient in some way with
respect to full Order 890 compliance. In November 2007 we intervened with FERC and submitted comments on each of the ISOs' Order 890 compliance filings in an effort to ensure that our technology is
allowed to fairly participate in each of the markets, earn revenues in proportion to the true value of services provided and incur no more than a fair share of costs for market participation.

These
FERC regulatory proceedings are ongoing. The current status of each ISO market is as follows:



6

---





7

---





Defense applications

We are in the design phase for a flywheel energy storage system for satellites capable of achieving maximum theoretical specific energy density. The program is
jointly funded by the Air Force Research Lab (AFRL) and the Defense Advanced Research Projects Agency (DARPA). We believe that our high-energy flywheel technology is increasingly
attractive as a platform for power regulation of micro-distribution systems typical of space platforms, navy vessels and other military hardware. We are actively pursuing defense and military-related
projects that, in addition to generating revenue to help cover operating costs, effectively provide non-dilutive R&D funding for key technology innovations and advancements that can be
transferred to commercial markets.

Other Flywheel-based Market Opportunities

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



We
are evaluating these additional applications to determine whether they represent commercially attractive market opportunities; however, our focus in the near term will be to deploy
company-owned flywheel facilities for the frequency regulation market.

Competition

In the frequency regulation market, we believe our Smart Energy Matrix will offer superior performance and cost benefits over incumbent fossil fuel
and hydro-powered generators. These incumbent generators can supply frequency regulation if they are willing and able, on short notice, to increase or decrease generation of a specified amount during
a specified period. Participating generators both sell electricity in their role as generators, and sell frequency regulation services using some of their reserve generating capacity. Providing
regulation services is qualitatively different than generating electricity because the generator's output varies constantly in response to continually changing signals from the grid operator, it is
priced differently, it carries a different cost structure, and therefore it is sold through a different market within the ISO.

Not
all generators provide frequency regulation services. Some, such as nuclear power plants, are unable to vary their output in the manner needed to participate in this market. Others
may be capable of providing such services, but choose not to do so. Many generators prefer to sell electricity and not provide frequency regulation services, due to the higher operating and
maintenance costs that arise from providing frequency regulation as compared to the steady generation of electricity. The constant up and down of supplying frequency regulation services is hard on
their equipment. Fossil fuel generators suffer more wear and tear from this process than do hydro-powered generators.

8

---



Most
bidders in the frequency regulation auctions are fossil fuel generators. Fossil fuel generators are subject to increasing fuel prices and high operating and maintenance costs
arising from ramping equipment up and down to supply frequency regulation services. They are also affected by opportunity costs that arise from using generating capacity to provide frequency
regulation services rather than to produce the maximum amount of electricity for the grid. Although hydro-powered generators have lower operating and maintenance costs than fossil fuel producers, they
are geographically limited. Compared to the fossil fuel generators, our Smart Energy Matrix will have much lower
operating and maintenance costs and minimal fuel costs. Consequently, we believe that we will be a successful bidder to provide frequency regulation services to regional grid operators that utilize
auction markets.

We
also believe that, given the demands of providing frequency regulation, other forms of energy storage such as batteries, lower energy flywheels, fuel cells and electrochemical
capacitors will not be able to cost-effectively compete with the Smart Energy Matrix. For example, batteries have a short economic life and are generally not environmentally
attractive. Metal flywheels cannot store as much energy as can our composite flywheels, because they cannot spin as fast without incurring a significant weight, size and cost penalty. Composite
flywheels of other companies known to us have only a fraction of the energy required to provide the service, as compared to our flywheels.

Discussion of Operations

We have experienced net losses since our inception and, as of December 31, 2007, had an accumulated deficit of approximately $163 million. We are
focused on the development and commercialization of our Smart Energy Matrix flywheel system for frequency regulation and completion of our research and development contracts. We do not
expect to have positive EBITDA (earnings before interest, taxes, depreciation and amortization) or positive cash flow until at least 2010 and must raise additional equity and debt to execute our
business plan and continue as a going concern. To achieve our objectives on EBITDA and cash flow we will need to obtain sufficient funding through a combination of equity and debt to commercially
install the number of frequency regulation plants included in our business plan. In the event that we are not able to deploy plants as planned due to capital constraints, positive EBITDA and cash flow
would be delayed.

In
2008 and beyond we will need additional funding to expand our manufacturing capabilities and to build and install frequency regulation facilities in accordance with our business plan.
We expect to raise the required capital in 2008 through the sale of stock in the Company. In the future, as the number of our regulation facilities increases and we develop a history of sustained cash
flows, we expect to fund additional plants from a combination of non-recourse project finance, debt, project equity and available cash flow from existing regulation facilities.

In
October, 2007, we were notified by the U.S. Department of Energy (DOE) that we were selected to submit a full application for a DOE program that would provide loan guarantees for up
to 80% of the project debt needed to finance the construction of our first 20-megawatt flywheel frequency regulation plant. We were one of only 16 companies similarly invited to apply,
from a total of 143 that filed "pre-applications" for loan guarantees, and the only company whose project was chosen in the Electricity Delivery and Energy Reliability category. Although
the DOE program permits the grant of guarantees of up to 80% of project costs, we do not expect to achieve as high a percentage. We are hopeful, however, that we will be able to finance the majority
of our first 20MW facility from debt guaranteed by the DOE. However, the application process is not complete, and we have not been provided with any loan guarantees from the DOE. There is no assurance
that we will be successful in obtaining a loan guarantee under the DOE program, or if awarded, that it will be for as high a percentage of the project costs as we would have liked or that the loan
will be offered with terms and conditions that are acceptable to us. The timing of any such guarantee-backed loans is also uncertain, and even if granted, it is conceivable that the timing for
processing any such guaranteed loan may preclude its practical use in financing our capital projects. If we are not successful in obtaining such

9

---



DOE
support on a timely basis for the 20MW facility at Stephentown, we may need to seek additional capital through the sale of common stock or delay our deployment schedule.

Since
our inception in 1997 we have funded our development through private equity and the sale of common stock. In November 2000, we completed our initial public offering, raising
approximately $49.3 million net of offering expenses. In 2005, we raised approximately $17.1 million via private placements of common stock. During 2007, we raised approximately
$42.6 million, net of offering expenses, as a result of three financings. In the first quarter of 2007, we raised approximately $9.6 million through the sale of common stock in a private
placement. In the third and fourth quarters, we raised approximately $9.2 million and $23.8 million, respectively, through the sale of common stock and warrants pursuant to a shelf
registration statement. We believe that the capital raised in 2007 will provide sufficient funding for us to continue to implement our business plan into the fourth quarter of 2008.

Our
profit and losses as well as uses of cash may fluctuate significantly from quarter to quarter due to fluctuations in revenues (if any), costs of development, inventories,
receivables, and the market price for regulation services. In addition, cash may fluctuate by period due to the timing of capital expenditures for expanding manufacturing capabilities 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.

Approvals and Certifications

In 2007 both PJM Interconnection and the New York ISO (NYISO) certified or otherwise approved our technology for commercial use in providing frequency regulation
within their respective regions. As previously noted, on December 26, 2006, the California ISO certified our flywheel systems for use as a frequency regulation resource in California.

In
prior years, we have obtained Underwriters Laboratory approval for our existing 2-kWh and 6-kWh Smart Energy flywheel products and we have received
certification that our smaller Smart Energy flywheel systems meet Telcordia standards, which are the baseline for performance and safety standards established by the telecommunications industry. Our
2-kWh and 6-kWh Smart Energy products are, to our knowledge, the only flywheel products that have passed a Zone 4 earthquake test while operating, making them suitable for use
anywhere in the United States. We also expect to test our commercial frequency regulation system with the Zone 4 earthquake test. Our Smart Energy flywheel systems have been successfully tested for
compliance with the Institute of Electrical and Electronics Engineers (IEEE) 587 standards, which is the required standard for all Uninterruptible Power Supply systems.

In
prior years we have also obtained Underwriters Laboratory approval for our Smart Power M5, M5 Plus, M4 and M4 Plus solar inverter systems. The California Energy Commission and New
York's Public Service Commission have also approved these products for on-grid applications.

Our Technology

Flywheel-based products

Our patented composite flywheels offer superior reliability and performance at competitive costs compared to other energy storage devices. Our composite flywheel
is a rotating wheel on hybrid magnetic bearings and operates in a near-frictionless vacuum-sealed environment. The flywheel is powered up to its operational speed using a permanent magnet
motor and electricity from an external power source (typically the grid). When the composite rim spins, it stores energy kinetically. The

10

---



flywheel
is able to spin for extended periods with great efficiency because friction and drag are virtually eliminated by the use of hybrid magnetic bearings and a vacuum-sealed environment. Because
it has very low friction, little power is required to maintain the flywheel's operating speed. When electrical power is needed, the momentum of the spinning flywheel drives a generator and its
bi-directional inverter converts the kinetic energy into electrical energy.

Our
products employ enabling materials such as high-strength fiber, efficient electric drives, and low-loss, long-life bearings to create new
generations of flywheel products. Our composite flywheels are fabricated from a proprietary mixture of high-strength, lightweight fiber composites, such as graphite and fiberglass combined
with resins, which allow the flywheel to rotate at high speeds and store large amounts of energy relative to similar size and weight flywheels made from metals.

Our
products employ an internal rather than external vacuum system and its bearing systems have been designed and developed to need low scheduled replacement or maintenance. In contrast,
many competing flywheel products rely on bearings and external vacuum systems that require periodic maintenance and replacement. Our Smart Energy flywheel systems have dramatically longer discharge
times than any other flywheel energy storage systems known to us; this is possible because our technologies result in higher amounts of stored energy and minimal energy losses during operation.

Research and Development

Our research and development efforts are essential to our ability to successfully design and deliver commercial products, 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 potential customers to define product features and performance
requirements to address specific needs for both flywheel-based solutions and renewable energy applications. Research and development expenses, including engineering expenses, were approximately
$8,387,000 in 2007, $4,748,000 in 2006 and $1,408,000 in 2005. We expect research and development expenses in 2008 to be higher than those in 2007 due primarily to the costs of improving the
performance of the Smart Energy 25 flywheel, cost
reduction design work and design of the facility for deploying our systems. Our headcount on December 31, 2007 was 44 which included 20 engineers and technicians and six manufacturing
employees. In addition, we utilized the services of a number of independent contractors primarily engaged in research and development and design work on manufacturing and frequency regulation
facilities, as well as market rules and evaluation of competitive features of each ISO.

Renewable Generation Integration Project

Before the end of April 2008, we expect to begin 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. 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 will include the application of "intelligent agent" controls
and Beacon's flywheel energy storage in an effort to find ways to deliver as much wind energy 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
will support the project's prime contractor, Alternative Energy Systems Consulting, Inc., with the design, development and demonstration of an agent-based system that:



11

---





Project
partners include Southern California Edison and the California ISO. The project will re-use the existing flywheel scale-power demonstration system owned by the CEC
and
tested for regulation on PG&E's grid in 2006/7. Our share of the scope of work is valued at $312,676, of which we will receive $250,000 from the CEC and provide matching funding of $62,676.

Another
goal of the project is to identify ways to commercialize any new application that may be developed. This project R&D 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, which in this case is wind power.

Manufacturing

We moved from our Wilmington, Massachusetts facility to our new corporate headquarters in Tyngsboro, Massachusetts. The Tyngsboro facility, for which we signed a
seven-year lease in July 2007, significantly expands our manufacturing capacity and provides sufficient space to continue our research and development activities. Our new facility is
located at 65 Middlesex Road, Tyngsboro, MA. The 103,000 square foot facility, which was fully renovated and built-out to our specifications, has a manufacturing capacity of more than 600
flywheels per year, although such commercial scale manufacturing will await completion of the development work now underway, targeted at ensuring highly durable operation of the flywheels at
commercial speeds. The manufacturing capacity of the facility can be further expanded to over 1,000 flywheels per year when necessary.

We
expect to continue to expand staffing for the assembly and testing of our flywheel systems during 2008 and beyond. In addition to assembly work at our Tyngsboro facility, we rely on
outside suppliers to provide components for our systems. For our mechanical flywheel systems and the related electronics, we are working to establish a minimum of two suppliers for each component to
reduce any adverse impact of a loss or interruption by a supplier.

In
2006 and 2007 we also assembled and tested a small quantity of Smart Power M-series inverters at our facility. We believe we have adequate vendor sources for all the
components of the Smart Power M-series inverter systems. Although we are continuing to support our inverter products, we do not believe that inverters will be a significant portion of our
business going forward and we are uncertain as to when or at what price we will be able to sell our inventories, which are carried on our balance sheet at no value.

Sales and Marketing

In 2007, sales and marketing activities for our flywheel-based frequency regulation services were focused on obtaining additional certifications to operate our
technology in deregulated open bid markets on a commercial basis. The California ISO provided its certification in December 2006, and further validation of our technology and market acceptance
followed with certifications or acceptances from New York ISO in March 2007 and PJM Interconnection in June 2007. PJM Interconnection is the world's largest competitive electricity market.

12

---





We expect that sales and marketing activities will expand in 2008 as we seek other certifications or approvals to operate in open bid markets in addition to the three regions noted
above. In particular, the Midwest ISO's open bid regulation market is expected to start before the end of 2008. Simultaneously, we are assessing the comparative value of all the open bid markets in
order to determine in which markets and in what sequence our merchant facilities should be built and brought on-line.

Consistent
with our focus on participating in multiple deregulated open bid markets in the near-term, we have increased our level of involvement in regulatory affairs on both
a national and regional level. As noted elsewhere, we have added a Director of Regulatory Affairs and Markets to lead those efforts. We joined the North American Electric Reliability Council (NERC) at
the beginning of 2007, and we increased participation in regional ISO events related to becoming a market participant in various ISOs. We have continued our membership in the PJM Interconnection,
joined ISO New England as members and applied for "customer" member status in New York ISO. We also plan to seek membership in the Midwest ISO and CAISO before the end of 2008.

During
2008 we expect to expand resources dedicated to identifying and perfecting plant sites in multiple ISOs to provide the option to build plants in those ISOs as market pricing and
other factors present the right opportunities. We plan to further refine our assessment of the European market for regulation, and we will look for opportunities to demonstrate our frequency
regulation technology on a live grid in Europe, and we will also be evaluating the market potential for our systems on islands around the world, for example, Hawaii and New Zealand.

Backlog

At December 31, 2007, we did not have any firm commercial sales commitments for our products and services. We have one ongoing research and development
contract from which we expect to derive final revenue in 2008 of approximately $11,000.

Customer Service

We expect to provide maintenance and support for our products by utilizing our own customer service personnel as well as support as needed from our engineering
organization. In the future, we may elect to contract all or part of the customer service activities to outside sources if we deem it effective from both a customer satisfaction and an overall cost
perspective.

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 which are pending, but in addition include flywheel technologies and
patents that we are licensed to use in perpetuity. We hold 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 and bearing cooling device. In February 2007, we received our first foreign patent, in

13

---



Australia,
on our vacuum system, and an additional U.S. patent, on a bearing damper. Our patents, including our Australian patent, expire on various dates between 2020 and 2021. We also have 20
pending U.S. and foreign patent applications, and several other applications being prepared for filing. We hold a perpetual, exclusive, royalty-free, worldwide license by SatCon Technology
Corporation to use its flywheel technologies and patents for stationary terrestrial flywheel applications. This license includes 11 issued U.S. patents and 11 U.S. and foreign patent 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 properties and trade secrets as
we continue developing additional Smart Energy and Smart Power systems. We own all technology improvements that we have developed that are based on the technology licensed from SatCon.

See
also Item 3, "Legal Proceedings",below, regarding a lawsuit brought against us, alleging patent infringement.

Government Regulation

We expect to be a substantial beneficiary of any government deregulation of North American and other electricity markets. In the U.S., in particular, the
open-bid market for frequency regulation services reflects a set of market rules that define how suppliers of regulation are able to access these revenue-producing markets without the need
to sell equipment to traditional end-use customers. These open market environments have the potential to provide us a rapid growth in revenue using our high-energy carbon
composite flywheel technology and our merchant plant business model. See also "Regulatory and Market Affairs" for further discussion of how government regulation affects our business.

Employees

At December 31, 2007, our headcount was 44 full-time employees, three part-time employees and a number of independent contractors.
Our staff included 26 technical employees made up of engineers, technicians, and production workers involved in research and development and low rate initial production (LRIP). We also had two
employees in sales, marketing, business development and customer service. The remaining sixteen people were involved in administrative tasks. None of our employees is represented by a union and we
consider our relations with employees to be satisfactory.

Item 1A.    Risk Factors Relating to Our Business

We face significant technical challenges in completing the development of the Smart Energy Matrix. We may fail to develop our 25kWh
generation flywheel system to a commercial production design, which is a critical requirement for the development of the Smart Energy Matrix and, even if we are able to develop the 25kWh
system, we may fail to develop the Smart Energy Matrix.

Although we have successfully developed three high-energy flywheel systems (the 2kWh and 6kWh for telecom and the 6kWh for the grid) that had similar
technical challenges, there can be no assurance that we will be able to successfully complete development of the 25kWh system. The successful development of our Smart Energy 25 flywheel system, which
will be used in the Smart Energy Matrix, involves significant technological and cost challenges, including:



14

---





There
can be no assurance that we will be successful in meeting these challenges. In addition, even if we are able to complete development of the new Smart Energy 25 flywheel system, we
plan to integrate multiple Smart Energy 25 flywheels into a common facility to produce the Smart Energy Matrix. This effort will pose significant technological and cost challenges such
as:



Although the market for frequency regulation services is large and growing, we have not demonstrated an ability to sell into that market.

We intend to provide frequency regulation services using our Smart Energy Matrix in the open-bid auction markets of regional grid
operators, such as PJM Interconnection. In order to bid in these markets, one must be qualified to do so. Although our technology has been qualified in three of the five ISOs that we are targeting,
and we expect to receive the necessary approvals in the remaining markets, there is no assurance we will be successful.

In
addition, if regulatory modifications change the structure of the markets, such modifications could adversely affect our business plan. Also, for us to be successful in most of these
markets there must be market rule changes made to allow non-generator companies such as ours to compete with current market participants. If the auction market rules change in the future
or current modifications being developed as a result of FERC Rule 890 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.

Although the Federal Energy Regulatory Commission has mandated that ISOs allow non-generation resources (such as ours) to provide regulation
services, each of several ISOs must modify their separate market rules for us to be able to sell our frequency regulation services in each such market.

On February 16, 2007 the Federal Energy Regulatory Commission issued Order 890 which, among other things, directed each ISO/RTO to amend its tariff to
allow non-generation resources (such as ours) to bid into its frequency regulation market. Currently only PJM is in full compliance with Order 890, with market tariffs in place that will
allow us to participate in their markets. NYISO, ISONE, MISO and CAISO still must modify their market rules to allow us to participate and earn revenue in these markets.

15

---



We
are actively engaged both at the FERC and with each ISO on the development of new market rules that would allow our participation. However, the timing of when market rules for each
ISO/RTO will be amended to allow our participation is uncertain. There can be no assurance that the amendments to the various tariff structure will occur in a timeframe that will allow us to achieve
our business plan or that the revised tariff structure for a particular ISO will result in a market for that ISO that we can participate in on a profitable basis.

Although the NYISO has stated that we are able to participate in its market as a non-generator resource, its payment rules may pose
financial risks for us that will make participation in that market unlikely.

Our technology is fundamentally different than a traditional generator. First and foremost, generators are assumed to be able to provide energy for an unlimited
period of time, whereas we can only provide energy to the grid for a limited period of time. In NYISO, generators providing regulation service are also required to bid into the energy market. In order
to avoid being called on to provide energy, we must bid in a high energy price. This strategy poses financial risks to us in two ways. First, during times
of high energy prices, if we do not bid a high enough energy price, we may become committed to provide more energy than we have stored, and then may have to procure such extra energy on the market, so
as to be able to meet our commitment. Second, if we do bid a high enough energy price to insure that we are not selected to provide energy, the NYISO may view our overall bids less favorably, which
could limit the number of hours we are selected by NYISO to provide regulation.

There
can be no assurance that the rules in NYISO will be modified in a timeframe that will allow us to achieve our business plan or that the rules will allow us to have sufficient
success in the NYISO bid-market to operate on a profitable basis.

Reductions in energy prices may have a material impact on the pricing of frequency regulation services and therefore the profitability of our flywheel
systems.

The market pricing for frequency regulation services tends to follow the pricing for energy, hence if the price of energy drops, frequency regulation prices could
be adversely affected.

Our ability to complete commercialization of our Smart Energy Matrix will require substantial funds. Our stockholders may be adversely
affected if we issue debt securities or additional equity securities to obtain financing.

We will require substantial funds to complete research and development activities, market our products and services, deploy our systems, and increase our
revenues. We anticipate that such funds will be obtained from external sources and intend to seek additional equity or debt to fund future operations. Although approximately $42.6 million was
raised in 2007, we estimate that we will need to raise an additional $20 million during 2008 through the issuance of equity securities in order to complete development of the Smart Energy
Matrix flywheel system, and to build, operate and receive fees for frequency regulation services and yet have sufficient working capital to continue to execute our business plan. Our
business plan includes manufacturing the flywheel systems and building the facilities for a multiple megawatt site in New York and a one to five megawatt facility at either NE ISO or PJM. Beyond 2008
we will continue to have capital needs that will require additional equity or debt, for example, to fund the complete build-out of the NY facility to 20 megawatts.

Our
actual capital requirements will depend on many factors. The additional funding we require may not be available on favorable terms, if at all. Such additional funding may only be
available on terms that may, for example, cause substantial dilution to common stockholders, and/or have liquidation preferences and/or pre-emptive rights. If we raise additional funds by
issuing debt securities or additional equity securities, existing stockholders may be adversely affected because new investors may have rights superior to current stockholders and current stockholders
may be diluted.

16

---



If
we do not succeed in raising additional funds, we will be unable to complete planned development of our products and services. In addition, we could be forced to take unattractive
steps, such as slowing or discontinuing product development, slowing our cost reduction program, limiting the services offered, reducing or foregoing sales and marketing efforts and attractive
business opportunities, or discontinuing operations entirely.

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

We intend to bring our frequency regulation services to market through participation in the energy open-bid auction markets, where on a
national basis the amount of frequency regulation required is typically one percent of all power produced. If changes in this percentage occur due to regulatory modifications and are not offset by a
proportionate increase in pricing for frequency regulation, our business plan could be adversely affected.

The regulatory landscape is in constant flux, and we are aware that a North American Electric Reliability Council (NERC) subcommittee is in the process of
developing a new NERC standard that may reduce the amount of frequency regulation required by lowering the ratio of frequency regulation to power generated. There is not yet a consensus on the
potential changes to the standard. The new NERC standard may not be adopted as currently proposed, and even if adopted, regional grid operators have the unilateral option under FERC rules to adhere to
regional frequency regulation standards that are not less rigorous, and may in fact be more rigorous, than the proposed new standard. Even if a new standard is passed, the belief by such ISOs and
other powerful utility stakeholders that such changes could create possible negative impacts on overall grid reliability make it likely that more rigorous standards will continue to be the rule in at
least some areas, including California and New England. However, if adopted, the proposed changes potentially could be harmful to us by: a) reducing the amount of frequency regulation required
by Independent System Operators in such a way as to reduce the total size of the US frequency regulation market, b) lowering the price of frequency regulation as a consequence of any potential
lower demand that might result from a change in regulatory standards, and c) increasing our cost of providing the service. Any combination of these things could adversely impact our ability to
access the markets for frequency regulation or to do so in a profitable or sustainable basis.

There
are market-expanding developments that may partially counterbalance some or all of the above possible changes in the NERC standard. For example, efforts by some states to increase
the amount of renewable energy that is produced for the grid from wind and solar power may expand the market for frequency regulation services. From our conversations with grid operators, we believe
that the variable changes in energy output caused by natural and constant changes in wind speed and cloud cover will require increased frequency regulation to balance this variability. However, there
can be no assurance that these anticipated expansions will occur in a timeframe that will allow us to achieve our business plan or participate in the expanded market on a profitable basis.

17

---



Our revenue and sales depend upon the achievement of the product development and commercialization milestones set forth in our contracts with third
parties. Our future revenues will result from similar milestones related to government contracts and from our commercial applications. These revenues will depend on our ability to deliver flywheel
systems with certain performance and dependability attributes.

The majority of our revenue is currently derived from contracts with governmental entities in which payments to us are based primarily on achieving certain
product development and commercialization milestones as set forth in those contracts. We expect that our future revenue from government sources will similarly be milestone-driven and not of sufficient
volume to be a profitable business.

On
commercial applications for our flywheel systems, our ability to achieve revenues will be dependent on our ability to complete development of our systems, expand our manufacturing
capabilities, achieve cost reduction goals, obtain sufficient funds to deploy these systems and participate profitably within the market rules of the open-bid auction markets mentioned
above. It is uncertain whether and to what degree we will be able to meet these goals in the future. To the extent we do not meet such goals we expect our revenue to be negatively affected.

Our business plan includes the design, development, construction, financing and operation of several frequency regulation power facilities that
incorporate our Smart Energy Matrix technology in order to provide frequency regulation services. We have no prior experience doing this. Should we fail in any material aspect of these
tasks, it is unlikely that we will recognize significant revenue under our current business model.

Our business plan calls for the design, development, construction, financing and operation of one or more commercial-level frequency regulation power plants that
incorporate our Smart Energy Matrix technology. However, we have no experience with such projects at a commercial level, although we have designed, developed, constructed and installed
two one-tenth
scale demonstration units at existing utility sites on the grid and have operated or are now operating them in demonstration and testing mode. However, we have never done these things commercially,
nor ever obtained project financing (although we have experience in equity transactions). We expect that executing these tasks on a commercial level will be complex and challenging and we may not be
successful. If we are not successful, then we will not achieve the revenues planned in our business model.

We have a history of losses and anticipate future losses and we will have limited revenues in the near term. Unless we raise additional capital to
operate our business, we may not be able to continue as a going concern. Even with the cash raised in 2007, our cash balances are sufficient to fund operations only into approximately the fourth
quarter of 2008.

We have incurred significant losses from operations since our inception. As shown in our consolidated financial statements, we incurred significant losses from
operations of approximately $13,620,000, $12,682,000 and $9,448,000 and operating cash decreases of approximately $11,282,000, $8,441,000 and $8,923,000 during the years ended December 31,
2007, 2006 and 2005, respectively. We expect to have positive EBITDA and be cash flow positive by 2010; however, to be successful we will need to raise additional capital in 2008 and 2009. In the
event that we are not successful in raising equity or the timing of bringing in additional cash is delayed, we may not be successful.

We
had approximately $30.4 million in cash and cash equivalents on hand at December 31, 2007. Based on our current cash usage rates and additional expenditures expected in
support of our business plan, we estimate that we have adequate cash to fund operations only into the fourth quarter of 2008.

We
are focused on further development of the Smart Energy Matrix to provide frequency regulation services, but this product will not generate significant revenues in the
near term. We expect future revenues to come primarily from the sale of services related to the Smart Energy Matrix and from possible sales of Smart Energy 25 flywheel units in the
future. Other than revenue related to our

18

---



research
and development contracts in the amount of $3.4 million, we have had no revenues to date from our Smart Energy Matrix. The timing of future revenues is uncertain.

Miller
Wachman, LLP, our independent auditors, have included an explanatory paragraph related to a going concern uncertainty in their audit report on our consolidated financial
statements for the fiscal year ended December 31, 2007, which identifies our recurring losses and negative cash flows and raises substantial 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.

Increases or decreases in purchase prices or availability of carbon fiber or other materials and commodities may affect our ability to achieve
profitability.

We use carbon fiber in the manufacture of our flywheel systems. Other applications that require carbon fiber have substantially increased in the last few years.
In response to this increased demand, suppliers are adding capacity but shortages and/or price fluctuations may affect our ability to manufacture our flywheel systems in a timely way and at a
reasonable cost.

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. We could incur
substantial costs in prosecuting or defending patent infringement suits, and such suits would divert funds and resources that could be used in our business. We do not know whether we have been or will
be completely successful in safeguarding and maintaining our proprietary rights.

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. Failure to obtain needed licenses could delay or prevent the
development, manufacture or sale of our systems. See Item 3, "Legal Proceedings", regarding litigation commenced against the Company by a third
party, alleging patent infringement.

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.

19

---



Government regulation may impair our ability to market our products.

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

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, 2007, there were outstanding options to purchase an aggregate of 8,712,488 shares of our common stock at prices ranging from $0.255 per
share to $9.31 per share, of which options to purchase 6,766,700 shares were exercisable as of such date. As of December 31, 2007, there were outstanding warrants to purchase 28,891,377 shares
of our common stock, of which 11,299,607 were exercisable as of December 31, 2007.

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 capital stock in connection with collaborations or manufacturing arrangements or in connection with other financing efforts.

Our financial performance could be adversely affected if we are unable to retain or attract key technical 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. Competition
for skilled technical professionals is intense and we may not be successful in attracting and retaining the talent necessary to design, develop and manufacture our flywheel products.

Competitors in the frequency regulation market include established utilities and independent service providers with far 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.
We will be competing with established generators that have far greater 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 our board of directors to issue preferred stock without stockholder approval upon such terms as the board of directors may determine. The rights
of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the

20

---



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 any additional preferred stock, an issuance of a substantial number of preferred shares could adversely affect the price of our common stock.

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 and approve transactions they may deem to be in their best interests that
are not approved by the board of directors.

Pursuant
to a Rights Agreement, we issued rights as a dividend on common stock on October 7, 2002, each of which entitles the holder to purchase 1/100th of a
share of newly issued preferred stock for $22.50 in the event that any person not approved by the board of directors acquires more than 15% of our outstanding common stock, or in the event of an
acquisition by another company, $22.50 worth of the common stock of the other company at half its market value (in each case the rights held by the acquiring person are not exercisable and become
void). On October 24, 2007, we entered into Amendment No. 3 (the "Amendment") to the 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 previously amended by Amendment No. 1 dated as of December 27, 2002 and Amendment No. 2 dated as of
August 8, 2007 (as amended, the "Rights Agreement"). The Amendment allows The Quercus Trust and persons who are beneficial owners through it to have a beneficial ownership percentage of up to
20% of the Company's Common Stock without triggering the rights under the Rights Agreement. The Amendment also excludes from the beneficial ownership computations used to determine whether a person
has become an Acquiring Person (as defined in the Rights Agreement) those securities that might otherwise be acquired by exercising a warrant but for a limitation in such warrant or elsewhere that
prevents such exercise to the extent it would cause such person to become an Acquiring Person.

Item 1B.    Unresolved Staff Comments

None

Item 2.    Properties

In January 2008, we relocated our principal executive offices, laboratory and manufacturing facilities from Wilmington, Massachusetts to our new corporate
headquarters located at 65 Middlesex Road, Tyngsboro, MA. This 103,000 square foot facility, which has been renovated to meet our needs, operates under a lease that expires in September 2014, with
options to renew for two additional seven-year periods. Our new facility significantly expands our manufacturing capacity and provides us with sufficient space to continue our research and
development activities. Our new facility has a potential manufacturing capacity for the production of more than 1,000 flywheels per year, although based on the manufacturing build-out that
we have completed the facility has a capacity for the production of 600 flywheels per year. We have purchased an option to buy land in Stephentown, NY in

21

---



anticipation
of building our first 20 megawatt frequency regulation facility on that site, upon approval of the NY interconnection application filed in late 2007. In addition, we are evaluating
several other possible locations for future service providing facilities.

Item 3.    Legal Proceedings

On October 9, 2007, Arete Power, Inc. filed a complaint against the Company, claiming damages from alleged willful infringement of U.S. Patent
No. 6,710,489, entitled "Axially Free Flywheel System." On November 30, 2007, Beacon filed an Answer denying infringement and a Counterclaim seeking a declaratory judgment that the '489
patent is invalid. At the same time, Beacon filed a motion to transfer the lawsuit from the Northern District of California to the District of Massachusetts. On February 22, 2008, the Court
granted Beacon's motion to transfer the lawsuit to the District of Massachusetts. We believe that this lawsuit is without merit and we plan to vigorously defend the Company against the lawsuit.

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

None

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 sales price of the common stock
for the periods indicated.

High

LowYear ended December 31, 2007Fourth quarter

$
2.32

$
1.42Third quarter

$
2.29

$
1.35Second quarter

$
1.26

$
0.77First quarter

$
1.21

$
0.76Year ended December 31, 2006Fourth quarter

$
1.24

$
0.99Third quarter

$
1.54

$
1.12Second quarter

$
1.82

$
1.02First quarter

$
2.15

$
1.42


On
March 7, 2008 the last reported sale price of our common stock on the NASDAQ Capital Market was $1.08 per share, and there were 291 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 any 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.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There was no stock repurchase activity in 2007.

22

---





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, 2007, 2006, 2005, 2004 and 2003 and for the period from May 8, 1997, the date of Beacon's inception, through December 31, 2007.

|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       | Period from
Date of Inception
May 8, 1997
through December 31,
2007 |      
|--------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ----- | ------ | ------- | ----- | ------ | ------ | ----- | ----- | ------------------------------------------------------------------- | -----
|
|
|
|Consolidated Statements of Operations Data:                     |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|Revenue                                                         |                                     | $                        | 1,389   |       | $      | 969     |       | $      | 1,487  |       | $     | 325                                                                 |      
|Cost of goods sold                                              |                                     |                          | 1,248   |       |        | 845     |       |        | 1,575  |       |       | 1,458                                                               |      
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|Gross profit                                                    |                                     |                          | 141     |       |        | 124     |       |        | (88    | )     |       | (1,133                                                              | )    
|Operating expenses:                                             |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|                                                                | Selling, general and administrative |                          |         | 5,876 |        |         | 6,508 |        |        | 6,334 |       |                                                                     | 4,197
|                                                                | Research and development            |                          |         | 8,387 |        |         | 4,748 |        |        | 1,408 |       |                                                                     | 3,532
|                                                                | Loss on contract commitments        |                          |         | (578  | )      |         | 1,385 |        |        | 1,535 |       |                                                                     |     
|                                                                | Depreciation and amortization       |                          |         | 145   |        |         | 96    |        |        | 83    |       |                                                                     | 187  
|                                                                | Casualty loss (recovery)            |                          |         | (69   | )      |         | 69    |        |        |      |       |                                                                     |     
|                                                                | Restructuring charges               |                          |         |      |        |         |      |        |        |      |       |                                                                     |     
|                                                                | Loss on impairment of assets        |                          |         |      |        |         |      |        |        |      |       |                                                                     |     
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|                                                                |                                     | Total operating expenses |         |       | 13,761 |         |       | 12,806 |        |       | 9,360 |                                                                     |      
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|Loss from operations                                            |                                     |                          | (13,620 | )     |        | (12,682 | )     |        | (9,448 | )     |       | (9,049                                                              | )    
|Interest and other income (expense), net                        |                                     |                          | 702     |       |        | 519     |       |        | 136    |       |       | 3,719                                                               |      
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|Net loss                                                        |                                     |                          | (12,918 | )     |        | (12,163 | )     |        | (9,312 | )     |       | (5,330                                                              | )    
|Preferred stock dividends                                       |                                     |                          |        |       |        |        |       |        |       |       |       |                                                                    |      
|Accretion of redeemable convertible preferred stock             |                                     |                          |        |       |        |        |       |        |       |       |       |                                                                    |      
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|Loss to common shareholders                                     |                                     | $                        | (12,918 | )     | $      | (12,163 | )     | $      | (9,312 | )     | $     | (5,330                                                              | )    
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|Loss per share, basic and diluted                               |                                     | $                        | (0.18   | )     | $      | (0.21   | )     | $      | (0.20  | )     | $     | (0.12                                                               | )    
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      
|Shares used in computing net loss per shares, basic and diluted |                                     |                          | 73,604  |       |        | 59,080  |       |        | 47,666 |       |       | 43,453                                                              |      
|                                                                |                                     |                          |         |       |        |         |       |        |        |       |       |                                                                     |      

23

---



|
|

|                                        |  | As of December 31,
|--------------------------------------- |  | ------------------
|
|
|Balance Sheet Data:                     |  |                   
|Cash and cash equivalents               |  | $                 
|Working capital                         |  |                   
|Total assets                            |  |                   
|Total stockholders' equity (deficiency) |  |                   

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.

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.

Revenue Recognition

Although we have shipped products and recorded contract 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 Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by
Development Stage Enterprises."

Product Sales

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

Government Contract Revenue Recognized on the Percentage-of-Completion Method

We recognize contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with
total estimated contract costs. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenues recognized in excess of amounts billed
are classified as current assets, and included in "Prepaid expenses and other current assets" in our balance sheets. Amounts billed to clients in excess of

24

---



revenues
recognized to date are classified as current liabilities under "Advance billings on contracts." Changes in project performance and conditions, estimated profitability, and final contract
settlements may result in future revisions to construction contract costs and revenue.

All
of our research and development contracts are subject to cost review by the respective agencies. Our reported results from these contracts could change adversely as a result of these
reviews.

Loss on Contract Commitments

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

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. For the years ended December 31, 2007, 2006 and 2005, reserves were recorded to fully offset the value of our inventory. 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. Materials used in the development of the Smart
Energy 25 flywheel and our other development efforts are considered research and development materials, and are expensed as incurred in accordance with Statement of Financial Accounting Standards
No. 2, "Accounting for Research and Development Costs." Materials purchased for the production of flywheels are expected to be capitalized as
part of our planned frequency regulation facilities and have been classified as "Construction in Progress" and are included in Property and equipment on our balance sheet.

Patent Costs

We capitalize external legal costs incurred in the defense of our patents where we believe that the future economic benefit of the patent will be increased. 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 patents on our flywheel vacuum system, our heat pipe cooling systems, DC
output paralleling, metal hub, low-loss motor, co-mingled rims and earthquake-tolerant bearings on our flywheel products, and anti-islanding software, drawings,
source code, and production know-how on our inverter products, and expect to obtain other patents during 2008 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 during 2007, 2006
and 2005 related to the development of intellectual property have been expensed as incurred.

Warranty Reserves

The solar inverters we have sold carry warranties that require us to repair or replace defective products returned to us during the applicable 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.

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

25

---



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 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.

Fixed Assets

Fixed assets 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. Repair and maintenance costs are expensed as incurred. Capital assets are classified as "Construction in Progress" (CIP) when initially acquired, and
reclassified to the appropriate asset account when placed into service. Depreciation expense is not recorded on assets not yet placed into service. Materials purchased to build flywheels for use in
company-owned frequency regulation facilities are classified as CIP, along with the related labor and overhead costs. No overhead is generally applied for other internally-constructed projects not
directly related to our core business (e.g., leasehold improvements.)

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" long-lived assets 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. The fair value of the asset
is measured using either available market prices or estimated discounted cash flows. Our analyses indicate that there was an impairment of certain long-lived assets as a result of the
December prototype malfunction, and we recognized an asset impairment charge of approximately $18,000 in 2006. This represented the estimated cost to repair certain damaged items. Based on our annual
analysis, no asset impairment charges were considered necessary for 2007. In 2002, we incurred a restructuring and impairment charge of $6.5 million of which $4.3 million represented
impaired capital equipment and leasehold improvements. Many of the assets for which a reserve had previously been recorded were disposed of during the move to the Tyngsboro facility, and therefore the
assets and the related accumulated depreciation and reserves were written off as of the end of fiscal 2007.

Overview

Our initial product strategy was to develop high energy, composite flywheels for back-up powering of telecommunications applications. Our product was
in low-rate initial production when the collapse of the telecommunications market began in 2001. We recognized that our Smart Energy flywheel products as alternative backup solutions to
the telecommunications industry were not a means to produce meaningful revenues. With that recognition, we initiated a series of cost cutting measures throughout 2002 and 2003. The focus of these
efforts were to reduce cash usage while preserving our intellectual properties and maintaining the integrity of our public company requirements while evaluating all

26

---



potential
product markets for our technologies and considering acquisitions or mergers that could lead to increased shareholder value. We have:



We
must raise additional funds to execute our business plan. Although funding of approximately $42.6 million was raised in 2007, based on our rate of expenditure of cash and the
additional expenditures expected to support our business plan, we estimate that we have sufficient cash to fund operations into approximately the fourth quarter of 2008. We need to obtain additional
investments in 2008 to fund:



In
order to complete development of the Smart Energy Matrix flywheel system, build, operate and receive fees for frequency regulation services of at least one megawatt from
a commercial sized flywheel-based frequency regulation system and have sufficient working capital to continue to execute our business plan through 2008, we will need to raise approximately
$20 million of funding. Also, we will need to raise additional amounts through equity and debt beyond the foregoing $20 million to finance the additional frequency regulation facilities
that are contemplated by our business plan.

As
part of our new business development, we may evaluate possible acquisitions of enterprises or technologies that we would consider synergistic from a market, technology or product
perspective.

From
inception through December 31, 2007, we have incurred losses of approximately $163 million. We expect to continue to incur losses as we expand our product development
and begin to increase our manufacturing capacity.

Revenues

We were awarded fixed price research and development contracts from government agencies and are pursuing similar contracts from other government agencies. We have
determined that we will recognize revenues using the percentage of completion method for such contracts. We are continuing to evaluate markets for our flywheel systems but we have not recognized
revenues from these products. We have placed development prototype flywheels with potential customers and shipped pre-production units. These flywheel products were provided to potential
customers without charge or on a

27

---



demonstration
basis to allow us access to field test information and to demonstrate the application of our technologies.

Cost of Goods Sold

Cost of goods sold on fixed price research and development contracts are predominantly being recorded on the percentage of completion method and consist primarily
of direct labor and material, subcontracting and associated overhead costs.

Selling, General and Administrative Expenses

Our sales and marketing expenses consist primarily of compensation and benefits for sales and marketing personnel and related business development expenses. We
expect sales and marketing expenses to continue to increase as we expand efforts to define new markets for our products. General and administrative expenses consist primarily of compensation and
benefits related to our corporate staff, professional fees, insurance and travel. In 2006, our selling, general and administrative expenses increased, primarily due to compensation costs associated
with equity based compensation. Our selling, general and administrative expenses for 2007 are approximately 10% lower than during the same period during 2006, due primarily to a reduction in public
company expenses, reduced use of subcontractors and consultants, lower stock compensation expense as a result of fewer new hire option grants and a lower Black Scholes fair value for options issued
during the early portions of the fiscal year and allocation of a portion of our general and administrative expenses to our Government contracts. These reductions in cost were partially offset by
slight increases in salaries and benefits resulting from new hires. We expect our selling, general and administrative expenses to increase in 2008 over 2007 due primarily to additional staffing to
support expanding our marketing efforts for Government sales and Government backed loans for new facilities as well as increased regulatory efforts to modify market rules to insure our ability to
compete in these markets.

Research and Development

Our cost of research and development consists primarily of 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. In 2005, we began development efforts on our Smart Energy 25 flywheel system, and research and development costs have increased
considerably from 2005 to 2006, and again from 2006 to 2007. Our research and development costs during 2007 were approximately 77% higher than during the same period in 2006, due to higher engineering
salary and benefit costs related to headcount increases late in 2006 to support development and testing, higher facility costs and moving expenses, increased use of consultants and contractors, as
well as more expense material used to develop and test our Smart Energy 25 flywheel system. We expect research and development expenses to increase during 2008 as we finalize our designs and focus on
our cost reduction objectives.

Loss on Contract Commitments

We will establish reserves for anticipated losses on contract commitments if, based on cost estimates to complete the commitment, we determine that a loss will be
incurred. We recorded a $1.4 million charge during 2006 and $1.5 million in 2005 for anticipated losses on our research and development contracts. In 2007, we completed all but one of
our existing contracts. These contracts were completed at costs that were lower than previously anticipated, and we recorded a reduction of approximately $0.6 million to the contract loss
reserve. We are most likely to recognize probable losses on contract commitments early in a product's introduction prior to being able to realize expected decreases in cost per unit through
engineering design changes, operating efficiencies, and volume purchasing discounts. On government contracts, we will, on a quarterly basis, evaluate our estimated costs to complete and establish
reserves when appropriate.

28

---



Restructuring and asset impairment charges

We did not recognize any material restructuring charges in 2007, 2006 or 2005. Asset impairment charges of approximately $18,000 were recorded in 2006 related to
damages resulting from a prototype malfunction in December 2006.

Depreciation and Amortization

Our depreciation and amortization is primarily related to depreciation on capital expenditures and the amortization of lease and leasehold costs related to our
facilities. We have intellectual property in the form of patents on our flywheel vacuum system, heat pipe cooling systems, DC output paralleling, metal hub, low-loss motor,
co-mingled rims and earthquake-tolerant bearings on our flywheel products, anti-islanding software, drawings, source code and production know-how on our Smart Power
M5 inverter system, and expect to obtain other patents during 2008 and beyond. These costs were being amortized during 2004, but we recorded impairment charges to write down these assets to zero on
the balance sheet at December 31, 2004. These impairment charges were made due to the uncertainty of realizing any future value from this property mainly due the lack of substantial revenues to
date. Accordingly, all costs incurred during 2007, 2006 and 2005 related to the development of intellectual property were expensed as incurred.

Interest and Other Income/Expense, net

In 2007 and 2006, non-operating income consisted primarily of interest income resulting from cash on hand. Approximately $10,000 and $18,000 were
received in 2007 and 2006, respectively, in settlement of a class action suit relating to unfair practices engaged in by certain insurance brokerage firms, and a gain related to the sale of a fixed
asset of approximately $3,000 was recognized in 2007. In 2005, our non-operating income and expenses were primarily attributable to realized gains on the sale of our
available-for-sale securities and a warrant, a write-back resulting from loan payments on a reserved loan to a former officer of the Company, a cash settlement
relating to our failed attempt to acquire NxtPhase T&D Corporation, interest income resulting from cash on hand, accrued dividends receivable and the 7% conversion
premium from the conversion of our holdings of Series A Preferred Stock of Evergreen Solar, Inc., partially offset by interest expense associated with our capital leases.

Accounting Pronouncements

Recently Adopted Accounting Pronouncements



During the first quarter of 2006, we adopted the provisions of, and accounted for, stock-based compensation in accordance with the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment." In conjunction with the adoption of
SFAS 123R, we also adopted SEC Staff Accounting Bulletin 107 ("SAB 107"), which provides additional guidance on disclosure topics related to share-based payments.

Under
the fair value recognition requirement of SFAS 123R, 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. To implement this standard, we elected the modified-prospective transition method, under which prior periods are
not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.
Estimated compensation expense for grants that were outstanding as of the effective date will be recognized over the remaining vesting period using the compensation cost estimated for the
SFAS 123R pro forma disclosures.

29

---



The
adoption of SFAS 123R had a material impact on our consolidated financial position and results of operations. See Note 8 of our Consolidated Financial Statements for
further information regarding our
stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if we had recorded stock-based compensation expense during such periods.



During the first quarter of 2006, we also adopted SFAS No. 154, "Accounting Changes and Error Correctionsa Replacement
of APB Opinion No. 20 and FASB Statement No. 3," which became effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. This Statement applies to all voluntary changes in accounting principle. When a pronouncement includes specific transition guidance, those provisions should be followed. This
statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. There have been no accounting changes or error corrections required since our adoption of this pronouncement that required retroactive restatements.



In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, "Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements," which became effective for fiscal years ending after November 15, 2006. SAB No. 108 requires
that companies utilize a "dual-approach" to assessing the quantitative effects of financial statements misstatements. The dual approach includes both an income statement-focused and
balance sheet-focused assessment. To date, implementation of this guidance has not had any significant impact on our financial position or results of operations.



In July 2006, the FASB issued Interpretation No. 48,"Accounting for Uncertainty in Income Taxes,"to
create a single model to address accounting for uncertainty in tax positions. We adopted Interpretation No. 48 as of the first quarter of 2007. Interpretation No. 48 requires the use of
a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return, as well as enhanced disclosures regarding uncertainties in income tax
positions, including a roll forward of tax benefits taken that do not qualify for financial statement recognition. Refer to Note 9Income Taxes to our 2007 consolidated financial
statements included in Item 8 of this Form 10-K for more information regarding our application of Interpretation No. 48 and its impact on our consolidated financial
statements.

Recently Issued Accounting Pronouncements and Regulations

None

30

---



Results of operations

Comparison of Year ended December 31, 2007 and 2006

|                                         |  | Year ended December 31, |        
|---------------------------------------- |  | ----------------------- | -------
|
|
|Revenue                                  |  | $                       | 1,389  
|Cost of goods sold                       |  |                         | 1,248  
|                                         |  |                         |        
|Gross margin                             |  |                         | 141    
|Selling, general and administrative      |  |                         | 5,876  
|Research and development                 |  |                         | 8,387  
|Loss on contract commitments             |  |                         | (578   
|Depreciation and amortization            |  |                         | 145    
|Casualty loss (recovery)                 |  |                         | (69    
|Interest and other income (expense), net |  |                         | 702    
|                                         |  |                         |        
|Net loss                                 |  | $                       | (12,918
|                                         |  |                         |        

Revenue

The following table provides details of our revenues for the twelve months ended December 31, 2007 and 2006.

|                              |                        |     |   | Year ended
December 31, |       | Cumulative
Contract
Value
Earned as
of 2007 |   |    
|----------------------------- | ---------------------- | --- | - | ----------------------- | ----- | ------------------------------------------- | - | ---
|
|
|
|CEC                           |                        | 100 | % | $                       | 78    |                                             | $ | 226
|NYSERDA PON 846               |                        | 100 | % |                         | 81    |                                             |   | 235
|NYSERDA PON 800               |                        | 82  | % |                         | (1    | )                                           |   | 32 
|Air Force Research Laboratory |                        | 100 | % |                         | 488   |                                             |   | 263
|Sandia DOE Earmark            |                        | 100 | % |                         | 677   |                                             |   | 75 
|                              |                        |     |   |                         |       |                                             |   |    
|                              | Total Contract Revenue |     |   |                         |       | 1,323                                       |   |    
|Inverters and accessories     |                        |     |   |                         | 66    |                                             |   | 138
|                              |                        |     |   |                         |       |                                             |   |    
|Total                         |                        |     |   | $                       | 1,389 |                                             | $ | 969
|                              |                        |     |   |                         |       |                                             |   |    

In
the year ended December 31, 2007, we completed all but one of our research and development contracts, and recorded revenue using the percentage of completion method of
approximately $1,323,000. In addition, we recorded revenue of approximately $66,000 from the sale of Smart Power M5 inverter systems and related products. In 2006 we recorded revenue from
flywheel-related government contracts of approximately $831,000 and approximately $138,000 from the sale of Smart Power M5 inverter systems and related products. Contract revenue was higher in 2007
compared to 2006 by approximately $492,000, or 59%, primarily the result of the completion of our contracts with the Air Force Research Laboratory and with the U.S. Department of Energy (DOE),
(administered by Sandia National Laboratories). The purpose of the Sandia DOE contract was to design a 20-megawatt Smart Energy Matrix frequency regulation facility. This
project directly supported our plan to develop a commercial-scale flywheel-based frequency regulation facility in 2008.

31

---



Cost of Goods Sold

Cost of goods sold in 2007 includes costs incurred in performance of government contracts calculated on the percentage of completion method in the amount of
approximately $1,247,000 and the cost of materials, labor, overheads and warranty accruals for inverter products sold in the amount of approximately $1,000.

Selling, general and administrative expenses

Year ended December 31,(in thousands)Period Ended December 31, 2006

$
6,508Increases (decreases):Salaries and benefits


216Facility costs


90Hiring expenses


23Travel


20Telephone


16Reduction of bad debt reserve


(22
)Audit fees


(26
)Trade shows


(27
)Other


(23
)Office upgrades and equipment repairs


(45
)Subcontractors and consultants


(122
)Public company expenses


(142
)Allocation of overhead to contracts


(160
)Stock compensation expense


(430
)Period Ended December 31, 2007

$
5,876


Selling,
general and administrative expenses totaled approximately $5,876,000 and $6,508,000 for the years ended December 31, 2007, and 2006, respectively. The reduction of
approximately $632,000 or 9.7% was primarily the result of lower stock compensation of approximately $430,000 mainly due to a decrease in the Black Scholes value of options issued in 2007 compared to
the valuation for options issued during the prior year, a reduction in public company expenses of approximately $142,000, a reduction in the usage of subcontractors and consultants of approximately
$122,000, allocation of G&A overhead to our Sandia contract of approximately $160,000, a reduction in audit fees of approximately $26,000, upgrades to office equipment expense during 2006 of
approximately $33,000 and reductions of other various items of approximately $84,000. These decreases were partially offset by increases in the following: headcount-related expense of approximately
$216,000, facility costs of approximately $90,000, hiring expenses of approximately $23,000, telephone expense of approximately $16,000 and travel expense of $20,000. Overall, we expect our selling,
general and administrative expenses for fiscal 2008 to be higher than in 2007 due to increased marketing and sales expenses associated with flywheel products, fund-raising efforts, and
hiring of administrative staff to support our move to production.

32

---



Research and Development Expenses

Year ended December 31,(in thousands)Period Ended December 31, 2006

$
4,748Increases (decreases):Salaries and benefits


1,214Facility costs


681Consultants and subcontractors


414Allocation of overhead to contracts


326Costs related to facility move


299Expense materials


419Legal


239Hiring expenses


41Outside testing


41Travel


20Other


10Stock compensation expense


(65
)Period Ended December 31, 2007

$
8,387


For
the year ended December 31, 2007, research and development expenses increased by approximately $3.6 million or 77%, in comparison to the equivalent period in 2006. This
increase is primarily due to increased expenses of approximately $1,214,000 for headcount-related expenses resulting from the hiring of engineering personnel during the latter half of 2006 to support
our flywheel development and testing, increased facility costs of approximately $681,000 related to the cost of operating facilities in both Tyngsboro and Wilmington during the transition period,
increased usage of consultants of approximately $414,000, allocation of overhead to contracts of approximately $326,000 less than during the equivalent period in 2006, costs related to the facility
move of approximately $299,000, increases in expense materials used in the development of our Smart Energy 25 flywheel of approximately $419,000, legal costs of approximately $239,000 related
primarily to the defense of our patents, hiring expense of
$41,000, outside testing of $41,000, travel of $20,000, other expenses of approximately $10,000. These increases were partially offset by decreased stock compensation expense of approximately $65,000
based on lower Black Scholes valuations for options issued during the early portion of 2007. In December 2006, we experienced a flywheel malfunction during testing in one of our test cells which
resulted in damage to some research and development materials, test equipment, facility and the prototype flywheel being tested. During 2007 we recovered essentially all of the costs associated with
the malfunction from our insurance carriers. The insurance proceeds were used to offset previously recorded casualty losses and to offset the costs of expensed materials used to build the prototype
flywheel. In addition to costs associated with the malfunction, we spent approximately $61,000 to investigate the cause of the malfunction and to insure that the necessary modifications were
implemented to prevent similar malfunctions in the future. These costs are included in the increased cost shown for consultants and subcontractors, above.

We
expect research and development costs during 2008 to be higher than in 2007. Although critical testing of the Smart Energy 25 flywheel is complete, we continue to perform various
operational tests and other development work aimed at achieving manufacturing cost reductions. Additionally, we expect occupancy costs in our new, larger facility in Tyngsboro to be higher than those
at our Wilmington facility.

33

---



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. We
recorded contract commitment losses on our research and development contracts in 2005 of $1,535,000 based on expected cost overruns related to material, labor and overhead required to complete the
contracts. During 2006, we recorded additional charges totaling approximately $1,385,000 to the contract loss reserve. This amount consisted of net increases in estimated material, labor, overhead and
travel costs expected to complete existing contracts along with our expected cost share portion of the Sandia contract. By the end of 2007, all but one smaller government contract was complete. We
recorded a reduction to the losses on contract commitments of approximately $578,000, based on the actual cost to complete these contracts, which was less than previously estimated. This amount
consisted of net decreases in material, labor, overhead and travel costs required to complete existing contracts of approximately $465,000. In addition, since our actual overhead rate was lower than
forecasted at the beginning of the fiscal year, we reduced the overhead applied to the contracts and our contract loss reserve by an additional $113,000.

Depreciation and Amortization

The increase in depreciation expense for the year ended December 31, 2007 as compared to the same period in 2006 of approximately $49,000, or 51%, is
primarily attributable to depreciation on new assets acquired during 2007 and the latter half of 2006. We expect depreciation for 2008 to be substantially higher than during 2007 primarily due to
capital expenditures relating to leasehold improvements at our new manufacturing and office facility in Tyngsboro as well as the purchase of machinery and equipment required to begin commercial
production. In addition, we will begin to depreciate assets associated with our frequency regulation facilities that we expect to begin commercial operation in the fourth quarter of 2008.

Interest and Other Income / (Expense), net

Interest income for the year ended December 31, 2007, was approximately $188,000 greater than for the equivalent period in 2006. The primary reason for
this difference is that cash balances available for investing were on average higher than during the same period in the prior year, primarily as a result of the cash obtained through the sale of stock
and warrants at various times during 2007. The increased interest income was offset by decreases in other income of approximately $5,000.

Net Loss

As a result of the changes discussed above, the net loss for the year ended December 31, 2007, was approximately $12,918,000, as compared to a net loss
during the same period in 2006 of approximately $12,163,000. This represents an increase in net loss of approximately $755,000, or 6%. The increase in the loss for the year is due primarily to the
factors discussed above, particularly increased spending on Research and Development activities, facility costs related to the move to the Tyngsboro facility and the temporary maintenance of two
facilities, partially offset by decreases in Selling, General and Administrative expenses and the reduction in Contract Loss recorded during 2007.

34

---



Comparison of Year ended December 31, 2006 and 2005

|                                         |  | Year ended December 31, |        
|---------------------------------------- |  | ----------------------- | -------
|
|
|Revenue                                  |  | $                       | 969    
|Cost of goods sold                       |  |                         | 845    
|                                         |  |                         |        
|Gross margin                             |  |                         | 124    
|Selling, general and administrative      |  |                         | 6,508  
|Research and development                 |  |                         | 4,748  
|Loss on contract commitments             |  |                         | 1,385  
|Depreciation and amortization            |  |                         | 96     
|Casualty Loss                            |  |                         | 69     
|Interest and other income (expense), net |  |                         | 519    
|                                         |  |                         |        
|Net loss                                 |  | $                       | (12,163
|                                         |  |                         |        

Revenue

The following table provides details of our revenues for the twelve months ended December 31, 2006 and 2005.

|                              |                        |     |   | Year ended December 31, |     |     |   |      
|----------------------------- | ---------------------- | --- | - | ----------------------- | --- | --- | - | -----
|
|
|
|
|CEC                           |                        | 94  | % | $                       | 226 |     | $ | 929  
|NYSERDA PON 846               |                        | 88  | % |                         | 235 |     |   | 330  
|Bechtel Bettis                |                        | 100 | % |                         |    |     |   | 71   
|NYSERDA PON 800               |                        | 84  | % |                         | 32  |     |   | 21   
|Air Force Research Laboratory |                        | 35  | % |                         | 263 |     |   |     
|Sandia DOE Earmark            |                        | 10  | % |                         | 75  |     |   |     
|                              |                        |     |   |                         |     |     |   |      
|                              | Total Contract Revenue |     |   |                         |     | 831 |   |      
|Inverter and accessories      |                        |     |   |                         | 138 |     |   | 136  
|                              |                        |     |   |                         |     |     |   |      
|Total                         |                        |     |   | $                       | 969 |     | $ | 1,487
|                              |                        |     |   |                         |     |     |   |      

In
the year ended December 31, 2006, we recorded revenue from flywheel-related research and development contracts using the percentage of completion method of approximately
$831,000 and approximately $138,000 from the sale of Smart Power M5 inverter systems and related products. In 2005 we recorded revenue from flywheel-related government contracts of
approximately $1,351,000 and recorded approximately $136,000 from the sale of Smart Power M5 inverter systems and related products. Contract revenue was lower in 2006 compared to 2005 by approximately
$520,000, or 38%, primarily the result of the completion of the majority of the milestones on our demonstration contracts with CEC and NYSERDA in 2005. This decrease was partially offset by revenue on
a contract awarded in September 2006 from the U.S. Department of Energy (DOE), to be administered by Sandia National Laboratories. The purpose of this contract is to design a 20-megawatt
Smart Energy Matrix frequency regulation facility. This project directly supports our plan to develop a commercial-scale flywheel-based frequency regulation facility in 2008. The Sandia
contract, valued at $752,500 over a 12-month period, will provide funding for a portion of our expected development cost.

35

---





Cost of Goods Sold

Cost of goods sold in 2006 includes costs incurred in performance of government contracts calculated on the percentage of completion method in the amount of
approximately $831,000 and the cost of materials, labor, overheads and warranty accruals for inverter products sold in the amount of approximately $14,000.

Selling, General and Administrative Expenses

Amount(in thousands)Year ended December 31, 2005

$
6,334Increases (Decreases):Subcontractors and consultants


(748
)Legal and professional fees


(700
)Public company expenses


(149
)Audit fees


(37
)Stock compensation expense


1,609Salaries and benefits


70Office equipment upgrades


36Other


93Year ended December 31, 2006

$
6,508


In
total, selling, general and administrative costs increased 2.7%, or approximately $174,000 from 2005 to 2006. Increases were primarily related to the following: non-cash
stock compensation of approximately $1,609,000 due to the implementation of FAS123R; salaries and benefits of additional staff of approximately $70,000; computer upgrades of approximately $36,000; and
other expenses which were primarily related to our preparations for the requirements of Section 404 of the Sarbanes Oxley Act of 2002. These increases were partially offset by
non-recurring costs that were incurred in 2005 related to a possible acquisition that ultimately was not completed. Costs associated with the potential acquisition were legal and
professional fees of approximately $700,000; subcontractor and consultant costs of approximately $748,000, public company expenses of approximately $149,000, and audit fees of approximately $37,000.

Research and Development Expenses

Amount(in thousands)Year ended December 31, 2005

$
1,408Increases:Expense materials


1,172Salaries and benefits


851Stock compensation expense


724Engineering and manufacturing overheads applied


157Consultants and subcontractors


81Facility costs


165Software maintenance


78Travel


58Other


54Year ended December 31, 2006

$
4,748


36

---



The
increase from 2005 to 2006 of approximately $3.3 million or 237% is primarily due to increased expenses for development materials of approximately $1,172,000, increased
headcount-related expenses resulting from hiring engineering personnel to support our flywheel development of approximately $851,000, FAS123 non-cash stock compensation expense of
approximately $724,000, lower overheads allocated to contracts of approximately $157,000, increased use of consultants of approximately $81,000, higher facility charges of approximately $165,000,
higher software maintenance charges of approximately $78,000, increased travel charges of approximately $58,000, and other miscellaneous expenses of approximately $54,000.

Loss on contract commitments

We recorded contract commitment losses on our research and development contracts in 2005 of $1,535,000 based on expected cost overruns related to material, labor
and overhead, as well as unplanned overruns in the amount of labor required to complete the contracts. During 2006, we recorded additional charges totaling approximately $1,385,000 to the contract
loss reserve. This amount consists of our expected cost share for the Sandia contract of approximately $240,000; increases in estimated material, labor, and travel costs expected to be needed to
complete existing contracts of approximately $314,000; increases in the labor and overhead rates applied to the contracts based on actual costs of approximately $786,000, and other costs of $45,000.

Depreciation and Amortization

Depreciation expense in 2006 was approximately $13,000, or 16% higher in 2006 than in 2005, due primarily to depreciation on new assets acquired during the latter
half of 2005, upgrades to our office equipment, and capital expenditures in 2006 to develop our production capability for the Smart Energy 25.

Casualty loss

On December 28, 2006, a malfunction occurred during the testing of a Smart Energy 25 flywheel which resulted in the loss of the flywheel and other
inventory in the area (which had previously been expensed), as well as minor damage to the building improvements and other equipment. A casualty loss of approximately $69,000 was recorded for the
estimated cost of repairs to the building improvements of approximately $34,000, repair fixed assets of approximately $18,000, replace damaged supplier equipment of $6,000 and perform necessary clean
up of approximately $11,000.

Interest and Other Income/(Expense), net

Interest and other income increased by approximately $383,000, or 282% from 2005 to 2006, primarily due to the increase in interest income due to higher cash
balances. This increase was offset by the write-back of an officer loan reserve in 2005 of approximately $102,000, and lower gains on the sale of equipment.

Net Loss

As a result of the changes discussed above, the net loss for 2006 was approximately $12,163,000 which compares to a net loss in 2005 of approximately $9,312,000,
an increase in net loss of approximately $2,851,000 or 31%.

37

---



Liquidity and Capital Resources

Year ended December 31,2007

2006(in thousands)Cash and cash equivalents

$
30,417

$
5,251Working capital


28,820


3,310Cash provided by (used in)Operating activities


(11,282
)

(8,442
)Investing activities


(6,930
)

(272
)Financing activities


43,378


75Net decrease in cash and cash equivalents

$
25,166

$
(8,639
)Current ratio


9.1


2.0


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 general and administrative expenses. Since we are still in the development stage and have not yet
begun our principal operations, we do not generate enough cash from operations to satisfy our working capital requirements. We expect to make significant expenditures to fund our operations, develop
technologies and explore opportunities to find and develop additional markets to sell our products. In previous years, we took significant actions to reduce our cash expenditures for product
development, infrastructure and production readiness by significantly reducing headcount, development spending and capital expenditures. However, as we near completion of development of the Smart
Energy Matrix and prepare to begin commercial activity aimed at revenue generation in 2008, we have begun to increase our headcount, and have spent additional funds on expense materials,
capital equipment and market analyses to understand the size of markets, competitive aspects and advantages that our products could provide. We expect to use more cash resources during 2008 as we work
to develop the capacity to manufacture our Smart Energy 25 flywheels in anticipation of having a frequency regulation facility in service at two ISOs during the fourth quarter of 2008.

We
must raise additional equity to execute our business plan. Based on our rate of expenditure of cash and the additional expenditures expected to support our business plan, we have
sufficient cash to fund operations into approximately the fourth quarter of 2008. We need to obtain additional cash during 2008 to fund:



We
are continuing to develop the Smart Energy 25 flywheel, which is the core component of the Smart Energy Matrix flywheel system. In order to complete development of the
Smart Energy Matrix flywheel system, build, operate and receive fees for frequency regulation services of at least one megawatt from our flywheel-based commercial frequency regulation
system and have sufficient working capital to continue to execute our business plan through 2008, in addition to the $42.6 million raised in 2007, we will need to raise approximately
$20 million of funding during the remainder of

38

---



2008.
Also, to achieve our out-year deployment plan for additional frequency regulation facilities, we will need to raise additional capital either from project finance or additional
equity transactions.

Operating activities

Net cash used in operating activities was approximately $11,282,000, $8,441,000 and $8,923,000 for the twelve months ended December 31, 2007, 2006 and
2005, respectively. The primary component to the negative cash flow from operations is from net losses. Net loss for 2007 was approximately $12,918,000. Cash used by operations was partially reduced
by an insurance recovery of approximately $336,000 relating to a malfunction that occurred in December 2006 during testing of a prototype flywheel. In addition, the net operating loss was partially
offset by non-cash charges of approximately $1,838,000 and $144,000 for stock compensation expense and depreciation, respectively. Changes in operating assets and liabilities generated
approximately $521,000 in cash which were more than offset by deferred rent of approximately $517,000 expenses paid against a previously-recorded restructuring reserve of approximately $347,000, and a
gain on sales of fixed assets of approximately $3,000.

Net
loss for 2006 was approximately $12,163,000. This loss was offset by non-cash charges of approximately $2,333,000, $96,000 and $18,000 for stock compensation expense,
depreciation and an increase in the asset impairment reserve, respectively. Changes in operating assets and liabilities generated approximately $1,641,000 of cash, which was partially offset by
expenses paid against a previously-recorded restructuring reserve of approximately $366,000.

For
2005, we had a net loss of approximately $9,312,000. This included facility-related cash payments charged against restructuring reserves of approximately $349,000, reductions to the
asset impairment reserve for disposed fixed assets of approximately $122,000, a reversal of a portion of the reserved note to our former CEO of approximately $102,000, offset by non-cash
employee stock compensation of approximately $645,000 and depreciation and amortization of approximately $83,000. Changes in operating assets and liabilities generated approximately $234,000 of cash
during 2005.

Investing Activities

Net cash generated by (used) in investing activities was approximately ($6,930,000), ($272,000) and $176,000 for 2007, 2006 and 2005, respectively. The primary
use of cash for both 2007 and 2006 was the purchase of property and equipment of approximately $6,734,000 and $317,000, respectively. The 2007 capital additions include approximately $5,782,000 which
is classified as "Construction in Progress" as of the end of December 2007, most of which relates to the build-out of the Tyngsboro facility. Approximately $453,000 of the additions relate
to production material which has been purchased to build flywheels for commercial use in our frequency regulation facilities. In 2007, we increased restricted cash by $200,000 (related to the
Tyngsboro lease.) Proceeds from the sale of equipment provided approximately $4,000 in cash in 2007.

In
2006, the capital additions were partially offset by reductions of restricted cash of approximately $45,000.

The
principal source of cash during 2005 was proceeds from the sale of property and equipment of approximately $127,000 and a reduction of restricted cash of approximately $90,000,
partially offset by the purchase of capital equipment of approximately ($41,000).

Financing Activities

Net cash generated by financing activities was approximately $43,378,000, $75,000 and $17,540,000 for 2007, 2006 and 2005, respectively. During 2007, we raised
approximately $42,550,000 from the sale of our stock, approximately $717,000 for stock and warrants issued to the landlord, approximately

39

---



$85,000
for the exercise of employee stock options and approximately $26,000 for the issuance of stock to our employees under the employee stock purchase plan.

For
2006, approximately $54,000 in cash was provided by the exercise of employee stock options, along with approximately $21,000 received for shares issued under the employee stock
purchase plan.

For
2005 the primary source of cash was proceeds from the issuance of our common stock in two separate PIPE transactions in the amount of approximately $17,108,000, exercise of stock
options of approximately $713,000, the expensing of capitalized deferred financing costs for a failed business
combination of approximately $328,000 and approximately $4,000 for shares issued under our employee stock purchase plan, offset by purchases of our common stock to treasury of ($613,000).

As
part of our new business development, we may evaluate possible acquisitions of enterprises or technologies that we consider synergistic from a market, technology or product
perspective. We may make investments in companies for strategic business reasons. Because our primary motivation in making these investments may not be to realize a profit on the investment itself,
but rather to expand our business prospects, these investments may lack any financial return to the Company and may result in a loss of principal and may impair our liquidity.

The
following table summarizes our commitments at December 31, 2007:

Description of CommitmentOperating
leases

Purchase
Obligations

TotalYear ending:December 31, 2007

$


$
4,971,921

$
4,971,921December 31, 2008


503,687





503,687December 31, 2009


701,687





701,687December 31, 2010


727,437





727,437December 31, 2011


753,188





753,188December 31, 2012


778,937





778,937Thereafter


1,422,689





1,422,689Total Commitments

$
4,887,625

$
4,971,921

$
9,859,546


At
December 31, 2007, we had firm commitments with our suppliers of approximately $5.0 million. These commitments are for components for our commercial flywheel systems,
completion of the build-out of the Tyngsboro facility, and to satisfy contractual obligations for our research and development programs.

In
July 2007, we signed a seven-year lease on a new corporate headquarters that significantly expanded our manufacturing capacity and provides sufficient space to continue
our research and development activities. The amounts listed for operating leases represent payments for the occupancy of our principal executive offices, laboratory and manufacturing facilities
located at 65 Middlesex Road Tyngsboro, Massachusetts. This 103,000 square foot facility has manufacturing capacity for the production of up to 600 flywheels per year. We have a second phase
manufacturing build-out planned that will increase annual manufacturing capacity to more than 1,000 flywheels. The lease on our previous facility in Wilmington, MA expired at the end of
November 2007.

As
part of the Tyngsboro lease agreement, we issued to the landlord 150,000 shares of our common stock pursuant to our registration statement on Form S-3 filed on
August 17, 2007, which we amended on August 27, 2007 and became effective on August 28, 2007, and a warrant exercisable for 500,000 shares of our common stock pursuant to an
exemption from registration under the Securities Act of 1933, as amended, in return for lower cash payments payable by us under the lease. We have provided the Wilmington and Tyngsboro lessors with
irrevocable letters of credit securing our

40

---



performance
under these leases with a balance at December 31, 2007 of $374,346, which are reduced periodically during the lease terms. These letters of credit are secured by a cash deposit,
which is included in restricted cash in the accompanying consolidated balance sheets. In addition, we are responsible for real estate taxes and all operating expenses of the Tyngsboro facility.

In
the future, additional capital expenditures will be required for a phase two build-out of manufacturing 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.

By
the end of 2007, we had substantially completed all critical performance tests on the Smart Energy 25 flywheel, and as a result we have placed orders for materials required to build
our first 10 commercial flywheel units.

Financing

In February 2007, we sold 11,814,687 units of the Company at a purchase price of $0.90 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 $1.33 per share, for a total of 6,261,786 warrants. As part of the transaction, 354,441 warrants were
issued to the placement agent. 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. We filed a request with the Securities and Exchange Commission on August 1,
2007 that this registration statement on Form S-3 be withdrawn and the unsold securities deregistered, and filed a new shelf registration statement on Form S-3
for $50 million on August 6, 2007, which we amended on August 14, 2007 and became effective on August 15, 2007.

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 500,000 shares of our common stock at an exercise price of $1.77 per share. 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 there from. In addition,
we issued the landlord 150,000 shares of common stock.

In
September 2007, we sold 5,102,041 units of the Company at a purchase price of $1.96 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 $1.99 per share, for a total of 6,122,449 warrants. In addition, 153,061 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 for $50 million filed on August 6, 2007, which we amended on August 14, 2007 and became effective on August 15, 2007.

In
October 2007, we sold 11,911,852 units of the Company at a purchase price of $2.10 per unit, for a total of approximately $23.8 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 $2.97 per share, for a total of 11,316,260 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 for $50 million
filed on August 6, 2007, which we amended on August 14, 2007 and became effective on August 15, 2007.

There
were no significant financing activities during 2006.

Inasmuch
as we are not expecting to become cash flow positive until at least 2010, 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 it we are able to do so, it may be on terms that are adverse to

41

---



shareholders.
We believe that project debt financing may be available to us to meet some portion of our cash requirements for 2008.

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, 2007,
we had approximately $109,000 of cash equivalents that were held in a non-interest bearing checking account. Also at December 31, 2007 we had approximately $30.3 million 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 approximately $114,500, which we do not believe is
material. The funds invested in money market accounts may not be covered under FDIC Insurance, and therefore may be at some risk of loss.

42

---





Item 8.    Financial Statements and Supplementary Data

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



|                                                                                                                                                                                  |  | Page
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                                                                           |  | 44  
|Consolidated Balance Sheets at December 31, 2007 and 2006                                                                                                                         |  | 46  
|Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 and for the period from May 8, 1997 (date of inception) to December 31, 2007           |  | 47  
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005 and for the period from May 8, 1997 (date of inception) to December 31, 2007 |  | 48  
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 and for the period from May 8, 1997 (date of inception) to December 31, 2007           |  | 52  
|Notes to Consolidated Financial Statements                                                                                                                                        |  | 53  

43

---





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 Subsidiary (the "Company") (a development stage company) as of December 31, 2007 and
2006, 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, 2007 and for the
period from May 8, 1997 (date of inception) through December 31, 2007. We have also audited the Company's internal control over financial reporting as of December 31, 2007 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 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 opinions.

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.

44

---



In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Beacon Power Corporation and Subsidiary as of
December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 and the period from
May 8, 1997 (date of inception) through December 31, 2007 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, 2007, 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 1 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 Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

|/s/ MILLER WACHMAN LLP |  | 
|---------------------- |  | 

Boston,
Massachusetts
March 13, 2008

45

---





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

|                                           |                                                                                                                                                                               | December 31,
2007          |            | December 31,
2006 |           
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ----------------- | ----------
|Assets                                     |                                                                                                                                                                               |                            |            |                   |           
|Current assets:                            |                                                                                                                                                                               |                            |            |                   |           
|                                           | Cash and cash equivalents                                                                                                                                                     |                            | $          | 30,417,095        |           
|                                           | Accounts receivable, trade, net                                                                                                                                               |                            |            | 424,788           |           
|                                           | Unbilled costs on contracts in progress                                                                                                                                       |                            |            | 82,195            |           
|                                           | Prepaid expenses and other current assets                                                                                                                                     |                            |            | 1,475,084         |           
|                                           |                                                                                                                                                                               |                            |            |                   |           
|                                           |                                                                                                                                                                               | Total current assets       |            |                   | 32,399,162
|Property and equipment, net                |                                                                                                                                                                               |                            | 7,004,021  |                   |           
|Restricted cash                            |                                                                                                                                                                               |                            | 374,346    |                   |           
|                                           |                                                                                                                                                                               |                            |            |                   |           
|Total assets                               |                                                                                                                                                                               | $                          | 39,777,529 |                   | $         
|                                           |                                                                                                                                                                               |                            |            |                   |           
|Liabilities and Stockholders' Equity       |                                                                                                                                                                               |                            |            |                   |           
|Current liabilities:                       |                                                                                                                                                                               |                            |            |                   |           
|                                           | Accounts payable                                                                                                                                                              |                            | $          | 296,463           |           
|                                           | Accrued compensation and benefits                                                                                                                                             |                            |            | 1,024,874         |           
|                                           | Other accrued expenses                                                                                                                                                        |                            |            | 2,183,217         |           
|                                           | Advance billings on contracts                                                                                                                                                 |                            |            | 7,222             |           
|                                           | Accrued contract loss                                                                                                                                                         |                            |            | 67,419            |           
|                                           | Restructuring reserve                                                                                                                                                         |                            |            |                  |           
|                                           |                                                                                                                                                                               |                            |            |                   |           
|                                           |                                                                                                                                                                               | Total current liabilities  |            |                   | 3,579,195 
|                                           |                                                                                                                                                                               |                            |            |                   |           
|Commitments and contingencies (Note 5)     |                                                                                                                                                                               |                            |            |                   |           
|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; 88,658,967 and 59,524,687 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively |                            |            | 886,590           |           
|                                           | Additional paid-in-capital                                                                                                                                                    |                            |            | 199,351,427       |           
|                                           | Deficit accumulated during the development stage                                                                                                                              |                            |            | (163,326,844      | )         
|                                           | Treasury stock, 421,692 shares at cost                                                                                                                                        |                            |            | (712,839          | )         
|                                           |                                                                                                                                                                               |                            |            |                   |           
|                                           |                                                                                                                                                                               | Total stockholders' equity |            |                   | 36,198,334
|                                           |                                                                                                                                                                               |                            |            |                   |           
|Total liabilities and stockholders' equity |                                                                                                                                                                               | $                          | 39,777,529 |                   | $         
|                                           |                                                                                                                                                                               |                            |            |                   |           

See
notes to consolidated financial statements.

46

---





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

|                                           |                                     | 2007                              |             | 2006      |            | 2005        |           | Cumulative from
May 8, 1997
(date of inception)
through
December 31,
2007 |           
|------------------------------------------ | ----------------------------------- | --------------------------------- | ----------- | --------- | ---------- | ----------- | --------- | ------------------------------------------------------------------------- | ----------
|Revenue                                    |                                     | $                                 | 1,388,834   |           | $          | 968,577     |           | $                                                                         | 1,487,258 
|Cost of goods sold                         |                                     |                                   | 1,248,048   |           |            | 845,102     |           |                                                                           | 1,575,240 
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|Gross profit (loss)                        |                                     |                                   | 140,786     |           |            | 123,475     |           |                                                                           | (87,982   
|Operating expenses:                        |                                     |                                   |             |           |            |             |           |                                                                           |           
|                                           | Selling, general and administrative |                                   |             | 5,875,827 |            |             | 6,508,375 |                                                                           |           
|                                           | Research and development            |                                   |             | 8,387,025 |            |             | 4,747,685 |                                                                           |           
|                                           | Loss on contract commitments        |                                   |             | (577,789  | )          |             | 1,384,978 |                                                                           |           
|                                           | Depreciation and amortization       |                                   |             | 144,424   |            |             | 95,669    |                                                                           |           
|                                           | Casualty loss (recovery)            |                                   |             | (69,084   | )          |             | 69,084    |                                                                           |           
|                                           | Restructuring charges               |                                   |             |          |            |             |          |                                                                           |           
|                                           | Loss on impairment of assets        |                                   |             |          |            |             |          |                                                                           |           
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|                                           |                                     | Total operating expenses          |             |           | 13,760,403 |             |           | 12,805,791                                                                |           
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|Loss from operations                       |                                     |                                   | (13,619,617 | )         |            | (12,682,316 | )         |                                                                           | (9,447,763
|Other income (expense):                    |                                     |                                   |             |           |            |             |           |                                                                           |           
|                                           | Interest income                     |                                   |             | 688,621   |            |             | 500,468   |                                                                           |           
|                                           | Interest expense                    |                                   |             |          |            |             |          |                                                                           |           
|                                           | Gain on sale of investment          |                                   |             |          |            |             |          |                                                                           |           
|                                           | Other income (expense)              |                                   |             | 13,091    |            |             | 18,410    |                                                                           |           
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|                                           |                                     | Total other income (expense), net |             |           | 701,712    |             |           | 518,878                                                                   |           
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|Net loss                                   |                                     |                                   | (12,917,905 | )         |            | (12,163,438 | )         |                                                                           | (9,312,104
|Preferred stock dividends                  |                                     |                                   |            |           |            |            |           |                                                                           |          
|Accretion of convertible preferred stock   |                                     |                                   |            |           |            |            |           |                                                                           |          
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|Loss to common shareholders                |                                     | $                                 | (12,917,905 | )         | $          | (12,163,438 | )         | $                                                                         | (9,312,104
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|Loss per share, basic and diluted          |                                     | $                                 | (0.18       | )         | $          | (0.21       | )         | $                                                                         | (0.20     
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           
|Weighted-average common shares outstanding |                                     |                                   | 73,604,198  |           |            | 59,080,224  |           |                                                                           | 47,665,868
|                                           |                                     |                                   |             |           |            |             |           |                                                                           |           

See
notes to consolidated financial statements.

47

---





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

|                                                                        |  | Class A
Preferred Stock |   | Class C
Preferred Stock |            |   |    |   |   |         |   |            |  
|----------------------------------------------------------------------- |  | ----------------------- | - | ----------------------- | ---------- | - | -- | - | - | ------- | - | ---------- | -
|
|
|
|BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)                              |  |                        |   | $                       |           |   |   |   | $ |        |   |           |  
|Issuance of Founder's Shares                                            |  |                        |   |                         |           |   |   |   |   |        |   | 6,750,000  |  
|Issuance of Class A preferred stock                                     |  | 1,390,000               |   |                         | 5,662,500  |   |   |   |   |        |   |           |  
|Recapitalization                                                        |  | 3,373,313               |   |                         | 67,466     |   |   |   |   |        |   | (6,746,626 | )
|Rounding for fractional shares                                          |  |                        |   |                         |           |   |   |   |   |        |   | (2         | )
|Issuance of Class C preferred and common stock                          |  |                        |   |                         |           |   | 6  |   |   | 29,866  |   | 13,476     |  
|Deferred Consulting                                                     |  |                        |   |                         |           |   |   |   |   |        |   |           |  
|Series A Issuance for Consulting                                        |  |                        |   |                         |           |   |   |   |   |        |   | 134,464    |  
|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                                  |  |                        |   |                         |           |   |   |   |   |        |   |           |  
|Amortize Deferred Stock Compensation and issue RSUs                     |  |                        |   |                         |           |   |   |   |   |        |   | 643,160    |  
|Issuance of warrants                                                    |  |                        |   |                         |           |   |   |   |   |        |   |           |  
|Proceeds from stock offering, net of related expenses                   |  |                        |   |                         |           |   |   |   |   |        |   | 9,200,000  |  
|Conversion of Series A preferred stock                                  |  | (4,767,907              | ) |                         | (5,741,451 | ) |   |   |   |        |   | 9,535,814  |  
|Conversion of Series C preferred stock                                  |  |                        |   |                         |           |   | (6 | ) |   | (29,866 | ) | 12         |  
|Conversion of convertible preferred stock                               |  |                        |   |                         |           |   |   |   |   |        |   | 19,823,704 |  
|Payment of accrued dividend                                             |  |                        |   |                         |           |   |   |   |   |        |   | 859,330    |  
|Cashless Warrant exercise                                               |  |                        |   |                         |           |   |   |   |   |        |   | 1,982,876  |  
|Exercise of Stock Options                                               |  |                        |   |                         |           |   |   |   |   |        |   | 1,481,987  |  
|Shares issued through ESPP                                              |  |                        |   |                         |           |   |   |   |   |        |   | 110,615    |  
|Option extension for CEO                                                |  |                        |   |                         |           |   |   |   |   |        |   |           |  
|Option extension for severed employees                                  |  |                        |   |                         |           |   |   |   |   |        |   |           |  
|Purchase of Treasury Stock                                              |  |                        |   |                         |           |   |   |   |   |        |   |           |  
|Deferred Stock Compensation revaluation                                 |  |                        |   |                         |           |   |   |   |   |        |   |           |  
|Issuance of restricted stock units for bonus                            |  |                        |   |                         |           |   |   |   |   |        |   |           |  

See notes to consolidated financial statements.

48

---



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

|                                                     |                            | Class A
Preferred Stock |   | Class C
Preferred Stock |   |   |   |   |   |   |   |            |           
|---------------------------------------------------- | -------------------------- | ----------------------- | - | ----------------------- | - | - | - | - | - | - | - | ---------- | ----------
|
|
|
|Net loss                                             |                            |                        |   | $                       |  |   |  |   | $ |  |   |           |           
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           
|                                                     | Balance, December 31, 2004 |                         |  |                         |   |  |   |  |   |   |  |            | 43,788,810
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           
|Deferred stock compensation revaluation              |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Issuance of restricted stock units for bonus         |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Amortize deferred stock compensation and issue RSUs  |                            |                        |   |                         |  |   |  |   |   |  |   | 593,080    |           
|Shares issued through ESPP                           |                            |                        |   |                         |  |   |  |   |   |  |   | 7,273      |           
|Issuance of non-employee stock options               |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Cashless exercise of stock warrants                  |                            |                        |   |                         |  |   |  |   |   |  |   | 24,215     |           
|Exercise of stock options                            |                            |                        |   |                         |  |   |  |   |   |  |   | 965,856    |           
|Issuance of stock for cash                           |                            |                        |   |                         |  |   |  |   |   |  |   | 13,320,802 |           
|Stock buyback to pay officer loan                    |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Net loss                                             |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           
|                                                     | Balance, December 31, 2005 |                         |  |                         |   |  |   |  |   |   |  |            | 58,700,036
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           
|Issuance of restricted stock units for bonus         |                            |                        |   |                         |  |   |  |   |   |  |   | 696,160    |           
|Issuance of officer restricted stock units           |                            |                        |   |                         |  |   |  |   |   |  |   | 10,533     |           
|Amortize deferred stock compensation and issue RSUs  |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Shares issued through ESPP                           |                            |                        |   |                         |  |   |  |   |   |  |   | 17,958     |           
|Stock-based compensation                             |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Executive performance-based RSU compensation expense |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Exercise of stock options                            |                            |                        |   |                         |  |   |  |   |   |  |   | 100,000    |           
|Net loss                                             |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           
|                                                     | Balance, December 31, 2006 |                         |  |                         |   |  |   |  |   |   |  |            | 59,524,687
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           
|Issuance of officer restricted stock units           |                            |                        |   |                         |  |   |  |   |   |  |   | 32,074     |           
|Shares issued through ESPP                           |                            |                        |   |                         |  |   |  |   |   |  |   | 33,416     |           
|Stock-based compensation                             |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Executive performance-based RSU compensation expense |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|Exercise of stock options                            |                            |                        |   |                         |  |   |  |   |   |  |   | 90,210     |           
|Stock and warrants issued for lease                  |                            |                        |   |                         |  |   |  |   |   |  |   | 150,000    |           
|Issuance of stock for cash, net of issuance costs    |                            |                        |   |                         |  |   |  |   |   |  |   | 28,828,580 |           
|Net loss                                             |                            |                        |   |                         |  |   |  |   |   |  |   |           |           
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           
|                                                     | Balance, December 31, 2007 |                         |  |                         | $ |  |   |  |   | $ |  |            | 88,658,967
|                                                     |                            |                         |   |                         |   |   |   |   |   |   |   |            |           

See notes to consolidated financial statements.

49

---





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

|                                                                        |  |   |            |   |   |            |   | Treasury Stock |             | Total
Stockholders'
(Deficiency)
Equity |        
|----------------------------------------------------------------------- |  | - | ---------- | - | - | ---------- | - | -------------- | ----------- | --------------------------------------- | -------
|
|
|BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)                              |  | $ |           |   | $ |           |   | $              |            |                                         |       
|Issuance of Founder's Shares                                            |  |   |           |   |   |           |   |                | (67,500     | )                                       |       
|Issuance of Class A preferred stock                                     |  |   |           |   |   | (5,000,000 | ) |                |            |                                         |       
|Recapitalization                                                        |  |   |           |   |   |           |   |                |            |                                         |       
|Rounding for fractional shares                                          |  |   |           |   |   |           |   |                |            |                                         |       
|Issuance of Class C preferred and common stock                          |  |   |           |   |   |           |   |                |            |                                         |       
|Deferred Consulting                                                     |  |   |           |   |   |           |   |                |            |                                         |       
|Series A Issuance for Consulting                                        |  |   | 496,939    |   |   |           |   |                |            |                                         |       
|Repayment of subscription receivable                                    |  |   |           |   |   | 5,000,000  |   |                |            |                                         |       
|Issuance of Series A preferred stock for services and interest on loans |  |   |           |   |   |           |   |                |            |                                         |       
|Dividend on preferred stock                                             |  |   |           |   |   |           |   |                | (2,245,680  | )                                       |       
|Accretion of redeemable preferred stock to redemption value             |  |   |           |   |   |           |   |                | (113,014    | )                                       |       
|Deferred Stock Compensation                                             |  |   | 1,269,445  |   |   |           |   |                |            |                                         |       
|Issuance of stock options for consulting services                       |  |   | 47,892     |   |   |           |   |                |            |                                         |       
|Issuance of Stock Options to settle lawsuit                             |  |   | 303,160    |   |   |           |   |                |            |                                         |       
|Issuance of non-employee stock options                                  |  |   | 16,288     |   |   |           |   |                |            |                                         |       
|Amortize Deferred Stock Compensation and issue RSUs                     |  |   | (33,022    | ) |   |           |   |                |            |                                         |       
|Issuance of warrants                                                    |  |   | 36,520,366 |   |   |           |   |                | (34,580,000 | )                                       |       
|Proceeds from stock offering, net of related expenses                   |  |   | 49,249,537 |   |   |           |   |                |            |                                         |       
|Conversion of Series A preferred stock                                  |  |   | 5,646,093  |   |   |           |   |                |            |                                         |       
|Conversion of Series C preferred stock                                  |  |   | 29,866     |   |   |           |   |                |            |                                         |       
|Conversion of convertible preferred stock                               |  |   | 36,496,431 |   |   |           |   |                |            |                                         |       
|Payment of accrued dividend                                             |  |   | 1,077,714  |   |   |           |   |                |            |                                         |       
|Cashless Warrant exercise                                               |  |   | (19,829    | ) |   |           |   |                |            |                                         |       
|Exercise of Stock Options                                               |  |   | 1,421,446  |   |   |           |   |                |            |                                         |       
|Shares issued through ESPP                                              |  |   | 127,044    |   |   |           |   |                |            |                                         |       
|Option extension for CEO                                                |  |   | 315,394    |   |   |           |   |                |            |                                         |       
|Option extension for severed employees                                  |  |   | 31,197     |   |   |           |   |                |            |                                         |       
|Purchase of Treasury Stock                                              |  |   |           |   |   |           |   |                |            |                                         | 132,000
|Deferred Stock Compensation revaluation                                 |  |   | 8,948      |   |   |           |   |                |            |                                         |       
|Issuance of restricted stock units for bonus                            |  |   | 1,407,002  |   |   |           |   |                |            |                                         |       

See notes to consolidated financial statements.

50

---



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

|                                                     |                            |  |            |             |   |   |   | Treasury Stock |             | Total
Stockholders'
(Deficiency)
Equity |        
|---------------------------------------------------- | -------------------------- |  | ---------- | ----------- | - | - | - | -------------- | ----------- | --------------------------------------- | -------
|
|
|Net loss                                             |                            |  |           |             | $ |  |   | $              | (91,927,203 | )                                       |       
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        
|                                                     | Balance, December 31, 2004 |  |            | 134,411,911 |   |   |  |                |             | (128,933,397                            | )      
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        
|Deferred stock compensation revaluation              |                            |  | (27,360    | )           |   |  |   |                |            |                                         |       
|Issuance of restricted stock units for bonus         |                            |  | 1,063,145  |             |   |  |   |                |            |                                         | 212,940
|Amortize deferred stock compensation and issue RSUs  |                            |  | (40,020    | )           |   |  |   |                |            |                                         |       
|Shares issued through ESPP                           |                            |  | 3,842      |             |   |  |   |                |            |                                         |       
|Issuance of non-employee stock options               |                            |  |           |             |   |  |   |                |            |                                         |       
|Cashless exercise of stock warrants                  |                            |  | (242       | )           |   |  |   |                |            |                                         |       
|Exercise of stock options                            |                            |  | 703,297    |             |   |  |   |                |            |                                         |       
|Issuance of stock for cash                           |                            |  | 16,975,269 |             |   |  |   |                |            |                                         |       
|Stock buyback to pay officer loan                    |                            |  |           |             |   |  |   |                |            |                                         | 76,752 
|Net loss                                             |                            |  |           |             |   |  |   |                | (9,312,104  | )                                       |       
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        
|                                                     | Balance, December 31, 2005 |  |            | 153,089,842 |   |   |  |                |             | (138,245,501                            | )      
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        
|Issuance of restricted stock units for bonus         |                            |  | (6,961     | )           |   |  |   |                |            |                                         |       
|Issuance of officer restricted stock units           |                            |  | (106       | )           |   |  |   |                |            |                                         |       
|Amortize deferred stock compensation and issue RSUs  |                            |  |           |             |   |  |   |                |            |                                         |       
|Shares issued through ESPP                           |                            |  | 20,096     |             |   |  |   |                |            |                                         |       
|Stock-based compensation                             |                            |  | 906,488    |             |   |  |   |                |            |                                         |       
|Executive performance-based RSU compensation expense |                            |  | 363,636    |             |   |  |   |                |            |                                         |       
|Exercise of stock options                            |                            |  | 53,400     |             |   |  |   |                |            |                                         |       
|Net loss                                             |                            |  |           |             |   |  |   |                | (12,163,438 | )                                       |       
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        
|                                                     | Balance, December 31, 2006 |  |            | 154,426,395 |   |   |  |                |             | (150,408,939                            | )      
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        
|Issuance of officer restricted stock units           |                            |  | (320       | )           |   |  |   |                |            |                                         |       
|Shares issued through ESPP                           |                            |  | 25,229     |             |   |  |   |                |            |                                         |       
|Stock-based compensation                             |                            |  | 1,293,094  |             |   |  |   |                |            |                                         |       
|Executive performance-based RSU compensation expense |                            |  | 545,456    |             |   |  |   |                |            |                                         |       
|Exercise of stock options                            |                            |  | 84,386     |             |   |  |   |                |            |                                         |       
|Stock and warrants issued for lease                  |                            |  | 715,114    |             |   |  |   |                |            |                                         |       
|Issuance of stock for cash, net of issuance costs    |                            |  | 42,262,073 |             |   |  |   |                |            |                                         |       
|Net loss                                             |                            |  |           |             |   |  |   |                | (12,917,905 | )                                       |       
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        
|                                                     | Balance, December 31, 2007 |  | $          | 199,351,427 |   | $ |  |                | $           | (163,326,844                            | )      
|                                                     |                            |  |            |             |   |   |   |                |             |                                         |        

See notes to consolidated financial statements.

51

---





BEACON POWER CORPORATION AND SUBSIDIARY  (A Development Stage Company)  Consolidated Statement of Cash Flows

|                                                  |                                                       |                                                       |                                                     |             |           |             |             | Cumulative from
May 8, 1997
(date of inception)
through
December 31,
2007 |           
|------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------------------- | --------------------------------------------------- | ----------- | --------- | ----------- | ----------- | ------------------------------------------------------------------------- | ----------
|
|
|Cash flows from operating activities:             |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  | Net loss                                              |                                                       | $                                                   | (12,917,905 | )         | $           | (12,163,438 | )                                                                         | $         
|                                                  | Adjustments to reconcile net loss to net cash used in |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  | operating activities:                                 |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  |                                                       | Depreciation and amortization                         |                                                     |             | 144,424   |             |             | 95,669                                                                    |           
|                                                  |                                                       | Loss (gain) on sale of fixed assets                   |                                                     |             | (3,223    | )           |             |                                                                          |           
|                                                  |                                                       | Impairment of assets, net                             |                                                     |             | 553       |             |             | 18,567                                                                    |           
|                                                  |                                                       | (Expenses paid) restructuring charge                  |                                                     |             | (347,408  | )           |             | (366,061                                                                  | )         
|                                                  |                                                       | Reserve for officer's note                            |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Interest expense relating to issuance of warrants     |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Non-cash charge for change in option terms            |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Non-cash charge for settlement of lawsuit             |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Amortization of deferred consulting expense, net      |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Amortization of deferred stock compensation           |                                                     |             |          |             |             | 1,063,145                                                                 |           
|                                                  |                                                       | Options and warrants issued for consulting services   |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Services and interest expense paid in preferred stock |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Gain on sale of investments                           |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Stock-based compensation                              |                                                     |             | 1,838,550 |             |             | 1,270,124                                                                 |           
|                                                  |                                                       | Deferred rent                                         |                                                     |             | (517,310  | )           |             |                                                                          |           
|                                                  | Changes in operating assets and liabilities:          |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  |                                                       | Accounts receivable                                   |                                                     |             | 81,614    |             |             | 82,038                                                                    |           
|                                                  |                                                       | Inventory                                             |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Unbilled costs on government contracts                |                                                     |             | 51,045    |             |             | 304,519                                                                   |           
|                                                  |                                                       | Prepaid expenses and other current assets             |                                                     |             | (180,498  | )           |             | 109                                                                       |           
|                                                  |                                                       | Accounts payable                                      |                                                     |             | (156,614  | )           |             | 315,787                                                                   |           
|                                                  |                                                       | Accrued compensation and benefits                     |                                                     |             | 568,799   |             |             | 304,757                                                                   |           
|                                                  |                                                       | Advance billings on contracts                         |                                                     |             | (438,497  | )           |             | 370,899                                                                   |           
|                                                  |                                                       | Accrued interest                                      |                                                     |             |          |             |             |                                                                          |           
|                                                  |                                                       | Accrued loss on contract commitments                  |                                                     |             | (753,613  | )           |             | 272,418                                                                   |           
|                                                  |                                                       | Other accrued expenses and current liabilities        |                                                     |             | 1,348,385 |             |             | (9,910                                                                    | )         
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  |                                                       |                                                       | Net cash used in operating activities               |             |           | (11,281,698 | )           |                                                                           | (8,441,377
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|Cash flows from investing activities:             |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  | Purchase of investments                               |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Sale of investments                                   |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Restricted cash                                       |                                                       |                                                     | (200,000    | )         |             | 45,222      |                                                                           |           
|                                                  | Increase in other assets                              |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Purchases of property and equipment                   |                                                       |                                                     | (6,734,446  | )         |             | (317,346    | )                                                                         |           
|                                                  | Sale of property and equipment                        |                                                       |                                                     | 4,077       |           |             |            |                                                                           |           
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  |                                                       |                                                       | Net cash used in investing activities               |             |           | (6,930,369  | )           |                                                                           | (272,124  
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|Cash flows from financing activities:             |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  | Initial public stock offering, net of expenses        |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Stock offerings, net of expenses                      |                                                       |                                                     | 42,550,361  |           |             |            |                                                                           |           
|                                                  | Payment of dividends                                  |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Shares issued under employee stock purchase plan      |                                                       |                                                     | 25,563      |           |             | 20,276      |                                                                           |           
|                                                  | Exercise of employee stock options                    |                                                       |                                                     | 85,287      |           |             | 54,400      |                                                                           |           
|                                                  | Cash paid for financing costs                         |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Stock and warrants issued to landlord                 |                                                       |                                                     | 716,614     |           |             |            |                                                                           |           
|                                                  | Issuance of preferred stock                           |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Repayment of subscription receivable                  |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Proceeds from capital leases                          |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Repayment of capital leases                           |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Repurchase company stock                              |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  | Proceeds from notes payable issued to investors       |                                                       |                                                     |            |           |             |            |                                                                           |           
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  |                                                       |                                                       | Net cash provided by (used in) financing activities |             |           | 43,377,825  |             |                                                                           | 74,676    
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|(Decrease) increase in cash and cash equivalents  |                                                       |                                                       | 25,165,758                                          |             |           | (8,638,825  | )           |                                                                           | 8,792,974 
|Cash and cash equivalents, beginning of period    |                                                       |                                                       | 5,251,337                                           |             |           | 13,890,162  |             |                                                                           | 5,097,188 
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|Cash and cash equivalents, end of period          |                                                       | $                                                     | 30,417,095                                          |             | $         | 5,251,337   |             | $                                                                         | 13,890,162
|                                                  |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|Supplemental disclosure of cash flow information: |                                                       |                                                       |                                                     |             |           |             |             |                                                                           |           
|                                                  | Cash paid for interest                                |                                                       | $                                                   |            |           | $           |            |                                                                           | $         
|                                                  | Cash paid for taxes                                   |                                                       | $                                                   |            |           | $           |            |                                                                           | $         
|                                                  | Assets acquired through capital lease                 |                                                       | $                                                   |            |           | $           |            |                                                                           | $         

See notes to consolidated financial statements.

52

---





BEACON POWER CORPORATION AND SUBSIDIARY        (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 for storing and transmitting kinetic
energy. As discussed in Note 6, during the fourth quarter of 2000, we completed an initial public offering of our common stock and raised approximately $49.3 million, net of offering
expenses. Since 2000, we have raised additional funds through the sale of our stock and warrants, as follows:



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 Statement of Financial
Accounting Standards No. 7.

We
have a single operating segment, developing alternative power sources. Our organizational structure has no divisions or subsidiaries dictated by product lines, geography or customer
type. In 2007 we derived approximately 95% of our revenue from our research and development contracts; two of those contracts accounted for 84% of our total revenue. Although the loss of any single
contract may have a material impact on our financial statements, 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.

53

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 1. Nature of Business and Operations (Continued)

We
do not expect to become profitable or cash flow positive until at least 2010 and must raise additional equity to execute our business plan and continue as a going concern.

Based
on our current cash usage rates and additional expenditures expected in support of our business plan, and including the approximately $42.3 million equity we raised in 2007,
net of expenses, we have enough cash to fund operations into approximately the fourth quarter of 2008. We will require substantial funds to complete research and development activities, market our
products and services, deploy our systems, and increase our revenues. We anticipate that such funds will be obtained from external sources and intend to seek additional equity or debt to fund future
operations. We estimate that we will need to raise an additional $20 million during 2008 through the issuance of equity securities in order to complete development of the Smart Energy
Matrix flywheel system, and to build, operate and receive fees for frequency regulation services and yet have sufficient working capital
to continue to execute our business plan. Our business plan includes manufacturing the flywheel systems and building the facilities for a multiple megawatt site in New York and a one to five megawatt
facility at either NE ISO or PJM. Beyond 2008 we will continue to have capital needs that will require additional equity or debt, for example, to fund the complete build-out of the NY
facility to 20 megawatts.

Operations

We have experienced net losses since our inception and, as of December 31, 2007, had an accumulated deficit of approximately $163 million. We are
focused on the commercialization of our Smart Energy Matrix flywheel system for frequency regulation and completion of our government research and development contracts. This
commercialization will require substantial additional outlays of capital. We took significant actions over the three years ended 2005 to reduce our cash expenditures for product development,
infrastructure and production readiness. However, our efforts in 2007 and 2006 were expanded as we ramped up efforts to develop our Smart Energy 25 flywheel, for which we have identified a sizeable
market. Additionally, we completed our Sandia DOE contract to design and develop a 20 megawatt frequency regulation facility. We have also continued, at a reduced level, to assemble and sell our
inverter product for solar energy applications. Although we are continuing to support the product, we do not believe that inverters will be a significant portion of our business going forward.

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 $12,918,000, $12,163,000
and $9,312,000 and cash decreases from operations of approximately $11,282,000, $8,441,000 and $8,923,000 during the years ended December 31, 2007, 2006 and 2005, respectively. We have
approximately $30,417,000 of cash and cash equivalents on hand at December 31, 2007, which is adequate to finance our business plan into

54

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

approximately
the fourth quarter of 2008. Since our cash requirements for operation and construction of frequency regulation facilities 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.

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 obtain adequate equity investments, and in the long term, on the successful development of our Smart Energy
flywheel product and our ability to provide frequency regulation services to the electricity grid. We believe that the successful achievement of these initiatives should provide us with sufficient
resources to meet our long-term cash requirements. In addition we are also considering a number of other strategic financing alternatives and have incurred substantial costs in these
efforts; however, no assurance can be made with respect to the success of these efforts or the viability of our company.

Accounting Principles

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

Consolidation

The accompanying consolidated financial statements include the accounts of Beacon Power Corporation and our subsidiary Beacon Power Securities Corporation. Our
other subsidiary, Beacon Acquisition Co.
was inactive in 2005 and was dissolved in 2006. All significant inter-company accounts and transactions have been eliminated in consolidation.

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.

Recently Adopted Accounting Pronouncements and Recent Pronouncements

Recently adopted accounting pronouncements and recent pronouncements are discussed in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation" of our Annual Report on Form 10-K, and are incorporated in these financial statements by reference.

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

55

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

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. Accounts receivable are
presented in our balance sheets net of an allowance for doubtful accounts of $2,568 and $18,868 at December 31, 2007 and 2006, respectively.

Two
of our research and development contracts contain holdback provisions that allow our customers to withhold 10% from each invoice payment. As of December 31, 2007,
approximately $68,000 of our accounts receivable balance represented holdbacks. These holdbacks are payable once the final reports have been received and approved. As the related contracts were
recently completed, we believe these holdbacks will be collected during 2008, and therefore have not recorded any reserve against these amounts.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in process and
finished goods held for resale. For years ended December 31, 2007, 2006 and 2005, reserves were recorded to fully offset the value of our inventory. 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. Materials purchased to support our research and
development efforts are expensed as incurred, in accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development
Costs." Materials purchased to produce Smart Energy 25 flywheels to be used in our frequency regulation facilities have been classified as Property and Equipment on our balance
sheet. As of December 31, 2007, approximately $453,000 of production material was included in Property and Equipment.

Unbilled costs on contracts in process

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

56

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

Prepaid Expenses and Other Current Assets

Prepaid expenses at December 31, 2007 consist primarily of deferred lease payments of approximately $517,000, prepaid insurance premiums (primarily related
to directors and officers liability insurance of approximately $368,000, and other prepaid expenses of approximately $590,000, which consist primarily of advances to vendors for long-lead
orders and prepaid maintenance agreements. Prepaid expenses at December 31, 2006 consist of approximately $472,000 of prepaid insurance premiums (primarily related to directors and officers
liability insurance), $148,000 related to advances to vendors for long-lead orders, $110,000 in deferred financing costs related to our equity raising activities, and other miscellaneous
prepaid items such as patent retainers and software and other maintenance agreements.

Lease Obligation and Deferred Rent

During July 2007, we signed a seven-year operating lease with escalating payments on a new facility in Tyngsboro, Massachusetts. As part of this lease
agreement, we issued to the landlord 150,000 shares of our common stock and a warrant exercisable for 500,000 shares of our common stock in return for lower cash payments under the lease. (See
Note 4: Commitments and Contingencies.) Additionally, the landlord has agreed to reimburse the Company for certain leasehold improvements. We have recorded rent expense on a straight line basis
in accordance with SFAS No. 13, "Accounting for Leases." The deferred rent included in Prepaid expenses and other current assets as of
December 31, 2007 is approximately $517,000.

Property and Equipment

Property and equipment, including leasehold improvements, are stated at cost and depreciated using the straight-line method over the estimated useful
lives of the assets. The cost of the item 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.
Repair and maintenance costs are expensed as incurred. Capital assets are classified as "Construction in Progress" (CIP) when initially acquired, and reclassified to the appropriate asset account
after being placed into service. Depreciation expense is not recorded on assets not yet placed into service. Materials purchased to build flywheels for use in our frequency regulation facilities is
classified as CIP, along with related labor and overhead costs. No overhead is generally applied for other internally-constructed projects not directly related to our core business
(e.g., leasehold improvements.)

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. 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. We recorded charges of approximately $1,385,000 and $1,534,000

57

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

during
2006 and 2005, respectively, for anticipated losses on our research and development contracts. Approximately $240,000 of this charge in 2006 relates to the cost share portion of a contract
awarded to us during the third quarter of 2006 from the U.S. Department of Energy (DOE) (to be administered by Sandia National Laboratories) to design a 20-megawatt Smart Energy
Matrix frequency regulation power plant. The remainder of the 2006 charge relates to a revision of our labor and overhead rates and other estimated costs to complete our remaining
contracts based upon current forecasts. During 2007, we completed all but one contract. Our actual costs to complete these contracts were less than previously estimated; accordingly we reduced our
contract loss reserve by approximately $578,000.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets to be held and used 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. The fair value of the asset is measured
using either available market prices or estimated discounted cash flows.

Other assets and deferred financing costs

We will defer our direct costs incurred to raise capital or to acquire an entity in a business combination. 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.

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.

Restructuring and asset impairment charges

We periodically evaluate all of our property and equipment as required by Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In 2002, we incurred a restructuring and impairment charge of
$6.5 million, of which $4.3 million represents impaired capital equipment and leasehold improvements, $.3 million relates to severance costs and $1.9 million relates to a
reserve against future lease payments and related facility costs. The reserve against future lease payments is classified as "Restructuring reserve" in the current liabilities section of the balance
sheet.

58

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

The
restructuring reserves are as follows:

Year ended December 31,2007

2006Beginning balance

$
347,408

$
713,469Charges for the period





Reductions


(347,408
)

(366,061
)Ending balance

$


$
347,408


Revenue Recognition

Although we have shipped products and recorded contract 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 Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by
Development Stage Enterprises."

Product Sales

We recognize revenues on product sales in accordance with accounting principles generally accepted in the United States of America. Generally, revenue on inverter
sales is recognized on transfer of title, typically when products are shipped and all related costs are estimable. For sales to distributors, we make an adjustment to defer revenue until the products
are subsequently sold by distributors to their customers. We have determined that this treatment will ensure that the recognition of revenue cannot be impacted by any disputes between us and our
distributors on product or possible issues resulting from technology risk as new products are introduced that may have enhanced functionality compared to product in distributor inventory.

Government Contract Revenue Recognized on the Percentage-of-Completion Method

We recognize contract revenues using the percentage-of-completion method. Pursuant to American Institute of Certified Public Accountants'
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1), the efforts-expended method, which is based on a measure of the work performed, is an acceptable methodology for determining the
amount of revenue to recognize in a given period. We use labor hours as the basis for the percentage of completion calculation, which is measured principally by the percentage of labor hours incurred
to date for each contract to the estimated total labor hours for each contract at completion.

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.
Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to construction contract costs and revenue. During 2006 we
recorded contract losses of approximately

59

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

$1,385,000.
In 2007, we reversed approximately $578,000 of these losses, as we completed the contracts at a lower cost than previously estimated. Our contract loss reserves are as follows:

Year ended December 31,2007

2006Beginning balance

$
821,032

$
548,614Charges (credits) for the period


(577,789
)

1,384,978Reductions


(175,824
)

(1,112,560
)Ending balance

$
67,419

$
821,032


Cost of Goods Sold

We cost 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. We provide a
five-year limited product warranty for our Smart Power M-series 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 2007, 2006 and 2005 we continue to have very limited sales
of our inverter products. 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. For government contracts, cost of sales is calculated on the same percentage of contract costs (up to the total contract
revenue amount) as is used to calculate revenue. Costs in excess of the total contract revenue amount are charged to contract loss.

Stock-Based Compensation

During the first quarter of 2006, we adopted the provisions of, and accounted for, stock-based compensation in accordance with the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment." Under the fair value recognition provisions of SFAS 123R, 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. To implement this standard, we elected the
modified-prospective transition method, under which prior periods are not revised for comparative purposes. The fair value of the options on their grant date was 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 SFAS 123R apply to new grants and to grants that were
outstanding as of the effective date and are subsequently modified. Estimated compensation expense for grants that were outstanding as of the effective date will be recognized over the remaining
vesting period using the compensation cost estimated for the SFAS 123R pro forma disclosures.

The
adoption of SFAS 123R had a material impact on our consolidated financial position and results of operations. See Note 8 for further information regarding our
stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if we had recorded stock-based compensation expense during such periods.

60

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

We
granted Restricted Stock Units to employees for services performed in 2005, 2004 and 2003 that vested quarterly during the subsequent year. In addition, our officers were granted
restricted stock units as part of their compensation agreements in 2006 and 2007. Our Restricted Stock Unit Deferred Compensation Plan is described in more detail in Note 8.

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 unlikely in the near future (see
Note 9).

Advertising

Advertising expense was approximately $1,000, $10,000 and $14,000 in 2007, 2006 and 2005 respectively, and is expensed as incurred.

Research and Development

Research and development costs are expensed as incurred, except costs that relate to our government contracts. Those expenses are 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.

Casualty loss

On December 28, 2006, a malfunction occurred during the testing of a Smart Energy 25 flywheel which resulted in the loss of the flywheel and other
inventory (which had previously been expensed), as well as minor damage to the building improvements and other equipment. A casualty loss of approximately $69,000 was recorded in 2006 for the
estimated cost of repairs to the building improvements, repair fixed assets, replace damaged supplier equipment and perform necessary clean up. Additional costs to complete the building clean up,
assess the cause of the failure, repair damaged equipment and replace previously-expensed inventory and materials that were damaged or destroyed were approximately $345,000. During 2007, we recovered
approximately $336,000 of these costs from insurance.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, inventory, accounts payable, accrued expenses, and other current assets and liabilities
approximate their fair values.

61

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

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

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, 2007 substantially all of our cash and cash equivalents were held in interest bearing
accounts at financial institutions earning interest at varying rates from 3.30% to 7.65%. At December 31, 2007 and 2006, we had cash balances at a financial institution in excess of federally
insured limits. However, we do not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Comprehensive Loss

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

Loss per ShareBasic and Diluted

Basic loss per share has been computed using the weighted-average number of shares of common stock outstanding during each period. Warrants, options and other
securities exercisable for common shares are used in the calculation of fully-diluted 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, 2007, 2006 and 2005 reflect losses, including the potential conversion of warrants and options in the diluted EPS calculation would decrease loss
per share. Thus, they are considered anti-dilutive and are not included in the calculation of earnings per share.

Note 3. Property and Equipment

Property and equipment consisted of the following:

|                                               |                             |            |  | As of December 31, |           
|---------------------------------------------- | --------------------------- | ---------- |  | ------------------ | ----------
|
|
|Construction in Progress                       |                             | Varied     |  | $                  | 5,782,127 
|Machinery and equipment                        |                             | 510 years |  |                    | 1,137,946 
|Service vehicles                               |                             | 5 years    |  |                    | 16,763    
|Furniture and fixtures                         |                             | 7 years    |  |                    | 603,382   
|Office equipment                               |                             | 3 years    |  |                    | 828,918   
|Leasehold improvements                         |                             | Lease term |  |                    |          
|Equipment under capital lease obligations      |                             | Lease term |  |                    | 700,516   
|                                               |                             |            |  |                    |           
|                                               | Total                       |            |  |                    | $         
|Less accumulated depreciation and amortization |                             |            |  |                    | (2,065,631
|                                               |                             |            |  |                    |           
|                                               | Property and equipment, net |            |  |                    | $         
|                                               |                             |            |  |                    |           

As
of December 31, 2007, "Construction in Progress" (CIP) included approximately $5,101,000 in leasehold improvements related to the build-out of the Tyngsboro
facility (most of which was placed into service during January, 2008), approximately $453,000 in materials purchased to build production flywheels to be used in our frequency regulation facility, and
approximately $17,000 for an option to

62

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 3. Property and Equipment (Continued)

purchase
land in New York to be used as a site for our frequency regulation facility. The remaining costs in CIP, approximately $211,000 relate to various machinery, equipment, tooling, software and
computer equipment which were not in service as of December 31, 2007.

Note 4. Commitments and Contingencies

The following table summarizes our cash commitments at December 31, 2007:

|             |                   | Description of Commitment
|------------ | ----------------- | -------------------------
|
|Year ending: |                   |                          
|             | December 31, 2007 |                          
|             | December 31, 2008 |                          
|             | December 31, 2009 |                          
|             | December 31, 2010 |                          
|             | December 31, 2011 |                          
|             | December 31, 2012 |                          
|             | Thereafter        |                          
|             |                   |                          
|             | Total Commitments |                          
|             |                   |                          

At
December 31, 2007, we had firm purchase commitments with our suppliers to acquire components for these commercial flywheel units, complete the build-out of the
Tyngsboro facility, and to satisfy contractual obligations for our research and development programs in the amount of approximately $5.0 million.

In
July 2007, we signed a seven-year lease on a new corporate headquarters that significantly expands our manufacturing capacity and provides sufficient space to continue our
research and development activities. Our new facility is located at 65 Middlesex Road, Tyngsboro, MA. The 103,000 square foot facility, which has manufacturing capacity for the production of more than
1,000 flywheels per year, has been renovated and built out to our specifications, and we relocated all
operations to our new corporate headquarters in January 2008. The lease on our previous facility in Wilmington, MA expired at the end of November 2007.

We
have provided the Wilmington and Tyngsboro lessors with irrevocable letters of credit securing our performance under these leases with a balance at December 31, 2007 of
$374,346, which are reduced periodically during the lease terms. These letters of credit are secured by a cash deposit, which is included in restricted cash in the accompanying consolidated balance
sheets. 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 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.

63

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 4. Commitments and Contingencies (Continued)

Rent
expense was $732,534, $237,695 and $231,188 during 2007, 2006 and 2005, respectively net of restructuring reserves applied of $253,491 $337,988 and $321,103, respectively. Rent
expense in 2007 included rent on both the Tyngsboro and Wilmington facilities between July and November.

By
the end of 2007, we had substantially completed all critical performance tests on the Smart Energy 25 flywheel, and as a result we have placed orders for materials required to build
our first 10 commercial flywheel units.

Legal Proceedings

We may be subject to various legal proceedings, many involving routine litigation incidental to our business. The outcome of any legal proceeding is not within
our complete control, is often difficult to predict and may be resolved over very long periods of time. Estimating probable losses associated with any legal proceedings or other loss contingencies are
very complex and require the analysis of many factors including assumptions about potential actions by third parties. Loss contingencies are recorded as liabilities in the consolidated financial
statements when it is both, (i) probable or 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.

On
October 9, 2007, Arete Power, Inc. filed a complaint against us claiming damages from alleged willful infringement of U.S. Patent No. 6,710,489, entitled "Axially
Free Flywheel System." On November 30, 2007, we filed an Answer denying infringement and a Counterclaim seeking a declaratory judgment that the '489 patent is invalid. At the same time, we
filed a motion to transfer the lawsuit from the Northern District of California to the District of Massachusetts. On February 22, 2008, the Court granted our motion to transfer the lawsuit to
the District of Massachusetts. We believe that this lawsuit is without merit and we plan to vigorously defend the Company against the lawsuit.

Note 5. Preferred Stock

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, 2007 and 2006, there are 10 million shares of $.01 par value preferred stock authorized with none outstanding.

Note 6. Common Stock

On October 31, 2007, we sold 11,911,852 units of the Company at a purchase price of $2.10 per unit, for a total of approximately $23.8 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 $2.97 per share, for a total
of 11,316,260 warrants. The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection

64

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 6. Common Stock (Continued)

with
our registration statement on Form S-3 for $50 million filed on August 6, 2007, which we amended on August 14, 2007 and became effective on
August 15, 2007.

On
September 10, 2007, we sold 5,102,041 units of the Company at a purchase price of $1.96 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 $1.99 per share, for a total of 6,122,449 warrants.
In addition, 153,061 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 for $50 million filed on August 6, 2007, which we amended on August 14, 2007 and 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 pursuant to an exemption from
registration under the Securities Act of 1933, as amended, a warrant exercisable for 500,000 shares of our common stock at an exercise price of $1.77 per share. In addition, we issued the landlord
150,000 shares of common stock.

On
February 15, 2007, we issued 11,814,687 units for $0.90 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 $1.33 per share for a total of 5,907,345 warrants. In addition, 354,441 warrants were issued to the placement agents at the same price per share.
We received net proceeds of approximately $9.8 million after deducting placement agency fees and estimated offering expenses.

On
November 8, 2005 we completed the private placement of 9,868,421 shares of our common stock at a price of $1.52 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 2,960,527 and 450,000 shares, respectively, of our common stock at an
exercise price of $2.21 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 have been and will
continue to be used for working capital purposes. In February 2007, we 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 from $2.21 to $1.99 and 327,294 additional warrants being issued to the investors.

On
May 24, 2005 and July 26, 2005 we issued 1,666,667 and 1,785,714 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 800,000 shares of our common stock at an exercise price of
$1.008 and an extension for two years of an existing warrant already owned by Perseus which expired on May 23, 2007. 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

65

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 6. Common Stock (Continued)

Form S-3
with the Securities and Exchange Commission (File No. 333-130208) that was declared effective on March 7, 2006. These proceeds have been and will
be used for working capital purposes.

Initial Public Offering

During the fourth quarter of 2000, we sold 9,200,000 shares of our common stock, inclusive of the underwriters' overallotment, at an initial public offering price
of $6 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.

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 Right for each share of common stock held. Each Right entitles the holder to
purchase 1/100th 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% (35% in the
case of one large shareholder that already owned more than 15%) of our outstanding common stock, or in the event that we are acquired by another company, $22.50 worth of the common stock of the other
company at half its market value (in each case any rights held by the acquiring person are not exercisable and become void).

On
October 24, 2007, the Company entered into Amendment No. 3 (the "Amendment") to the 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 previously amended by Amendment No. 1 dated as of December 27, 2002 and Amendment No. 2
dated as of August 8, 2007 (as amended, the "Rights Agreement"). The Amendment allows The Quercus Trust and persons who are beneficial owners through it to have a beneficial ownership
percentage of up to 20% of the Company's Common Stock without triggering the rights under the Rights Agreement. The Amendment also excludes from the beneficial ownership computations used to determine
whether a person has become an Acquiring Person (as defined in the Rights Agreement) those securities that might otherwise be acquired by exercising a warrant but for a limitation in such warrant or
elsewhere that prevents such exercise to the extent it would cause such person to become an Acquiring Person.

Reserved Shares

At December 31, 2007, 49,233,055 shares of our common stock were reserved for issuance under our stock option plan, employee stock purchase plan and
outstanding warrants.

66

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 7. Stock Warrants

Warrants outstanding as of December 31, 2007:

|Description                                       |  | Grant
Date |  | Expiration
Date |  | Strike
Price |       | Issued and
Outstanding
|------------------------------------------------- |  | ---------- |  | --------------- |  | ------------ | ----- | ----------------------
|May 24, 2005 Financing                            |  | 5/24/2005  |  | 5/24/2010       |  | $            | 1.008 |                       
|November 8, 2005 Financing (Investors)            |  | 11/8/2005  |  | 11/8/2010       |  | $            | 1.99  |                       
|November 8, 2005 Financing (Placement Agents)     |  | 11/8/2005  |  | 11/8/2010       |  | $            | 2.21  |                       
|February 15, 2007 Shelf Issue                     |  | 2/15/2007  |  | 2/15/0012       |  | $            | 1.33  |                       
|GFI Tyngsboro Lease                               |  | 7/23/2007  |  | 7/22/2014       |  | $            | 1.77  |                       
|September 10, 2007 Shelf Issue (Investors)        |  | 9/10/2007  |  | 3/10/2013       |  | $            | 1.99  |                       
|September 10, 2007 Shelf Issue (Placement Agents) |  | 9/10/2007  |  | 3/10/2013       |  | $            | 1.99  |                       
|October 31, 2007 Shelf Issue                      |  | 10/31/2007 |  | 5/1/2013        |  | $            | 2.97  |                       
|                                                  |  |            |  |                 |  |              |       |                       
|Total warrants outstanding                        |  |            |  |                 |  |              |       |                       
|                                                  |  |            |  |                 |  |              |       |                       

We
have outstanding several 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.

May 2005 Financing Warrant

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

November 2005 Financing Warrants

As part of a financing transaction in November 2005, we issued warrants to purchase an aggregate of 2,960,527 shares of our common stock to ten "accredited
investors." In addition, 450,000 warrants were issued to the placement agents. Each warrant was exercisable for a period of five years and the per-share exercise price for the warrant
shares was $2.21. The terms of the investor warrants included anti-dilution provisions which required 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:



In
February 2007, we issued stock at a price per share below the $1.85 threshold noted above. Based on the warrants' anti-dilution provisions, the exercise price of these
warrants was adjusted from $2.21 to $1.99 and 327,294 additional warrants were issued to the investors. Warrants issued to the placement agent were not subject to adjustment.

67

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 7. Stock Warrants (Continued)

February 2007 Shelf Warrants

In February 2007, we sold 11,814,687 units of the Company at a purchase price of $0.90 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 $1.33 per share, for a total of 5,907,345 warrants. In addition, we issued 354,441 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. We filed a request with the Securities and Exchange Commission on August 1, 2007 that this registration statement on Form S-3 be withdrawn and the
unsold securities deregistered, and filed a new shelf registration statement on Form S-3 for $50 million on August 6, 2007, which we amended on August 14, 2007
and became effective on August 15, 2007.

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 500,000 shares of our common stock at an exercise
price of $1.77 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.

September 2007 Shelf Warrants

In September 2007, we sold 5,102,041 units of the Company at a purchase price of $1.96 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 $1.99 per share, for a total of 6,122,449 warrants. In addition, 153,061 warrants were issued to the
placement agents at the same price per share. The warrants become exercisable as of March 11, 2008, and expire on March 10, 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 for $50 million filed on August 6, 2007, which
we amended on August 14, 2007 and became effective on August 15, 2007.

October 2007 Shelf Warrants

In October 2007, we sold 11,911,852 units of the Company at a purchase price of $2.10 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 $2.97 per share, for a total of 11,316,260 warrants. The warrants become 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 our registration statement on Form S-3 for $50 million filed on August 6, 2007, which we amended on August 14, 2007 and became effective on
August 15, 2007.

68

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 8. Stock-Based Compensation

Description of Plans

Stock Option Plan

Our Third Amended and Restated 1998 Stock Incentive Plan allows for the granting of stock options to purchase up to 23,000,000 shares of our common stock. 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. At December 31, 2007 we had 10,049,993 shares reserved for issuance under this plan, net of outstanding options and RSUs.

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. 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 15% of their base compensation for the purchase of common stock under this plan. The ESPP provides for the purchase of up to 2,000,000 shares of our
common stock. Shares purchased
under the Plan in 2007, 2006, and 2005 totaled 33,416, 17,958 and 7,273, respectively and the weighted average purchase price of the shares purchased was $0.765 in 2007, $1.13 in 2006 and $1.03, in
2005. At December 31, 2007, we had 1,830,738 shares reserved for issuance under this plan.

Restricted Stock Unit Arrangements

Our Third Amended and Restated 1998 Stock Incentive Plan permits the grant of restricted stock units ("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 RSU's granted to our officers that cliff-vest upon the achievement of
certain Company-specific milestones including earnings levels and revenue goals such that our company is no longer 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 grant is subject to forfeiture upon the holder's resignation or
termination for cause. As of December 31, 2007, certain RSUs granted

69

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 8. Stock-Based Compensation (Continued)

under
the officer employment agreements were vested but stock was not issued because the vesting date, December 31, fell during our holiday shut-down period.

Activity
related to the RSU agreements is as follows:

|                                       |                                                     | Year ended December 31,
|-------------------------------------- | --------------------------------------------------- | -----------------------
|
|
|Shares issued related to vested RSUs:  |                                                     |                        
|                                       | Current year grant based upon prior year bonus plan |                        
|                                       | Based on prior year grants                          |                        
|                                       | Based upon current year executive officer agreement |                        
|Vested RSUs not yet converted to stock |                                                     | 9,521                  
|RSU's granted but not vested:          |                                                     |                        
|                                       | Related to 2006 executive officer agreement         |                        
|                                       | Related to 2007 executive officer agreement         |                        
|                                       | Related to performance-based executive plan*        |                        

---

70

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 8. Stock-Based Compensation (Continued)

Stock
option activity since inception is as follows:

|                               |                                | Number of
Shares |            | Weighted-Average
Exercise Price |      | Weighted-Average
Fair Value
|------------------------------ | ------------------------------ | ---------------- | ---------- | ------------------------------- | ---- | ---------------------------
|Outstanding at inception       |                                |                 |            |                                 |      |                            
|                               | Granted                        |                  | 11,248,860 |                                 | $    | 2.03                       
|                               | Exercised                      |                  | (1,427,987 | )                               | $    | 0.95                       
|                               | Canceled, forfeited or expired |                  | (7,044,944 | )                               | $    | 2.42                       
|                               |                                |                  |            |                                 |      |                            
|Outstanding, December 31, 2003 |                                | 2,775,929        |            | $                               | 1.59 |                            
|                               | Granted                        |                  | 3,847,639  |                                 | $    | 0.74                       
|                               | Exercised                      |                  | (30,000    | )                               | $    | 0.89                       
|                               | Canceled, forfeited or expired |                  | (395,993   | )                               | $    | 1.72                       
|                               |                                |                  |            |                                 |      |                            
|Outstanding, December 31, 2004 |                                | 6,197,575        |            | $                               | 1.06 |                            
|                               | Granted                        |                  | 429,168    |                                 | $    | 1.88                       
|                               | Exercised                      |                  | (965,856   | )                               | $    | 0.74                       
|                               | Canceled, forfeited or expired |                  | (79,084    | )                               | $    | 1.74                       
|                               |                                |                  |            |                                 |      |                            
|Outstanding, December 31, 2005 |                                | 5,581,803        |            | $                               | 1.18 |                            
|                               | Granted                        |                  | 1,104,671  |                                 | $    | 1.48                       
|                               | Exercised                      |                  | (100,000   | )                               | $    | 0.54                       
|                               | Canceled, forfeited or expired |                  | (39,588    | )                               | $    | 2.08                       
|                               |                                |                  |            |                                 |      |                            
|Outstanding, December 31, 2006 |                                | 6,546,886        |            | $                               | 1.23 |                            
|                               | Granted                        |                  | 2,434,343  |                                 | $    | 1.05                       
|                               | Exercised                      |                  | (90,210    | )                               | $    | 0.95                       
|                               | Canceled, forfeited or expired |                  | (178,531   | )                               | $    | 1.46                       
|                               |                                |                  |            |                                 |      |                            
|Outstanding, December 31, 2007 |                                | 8,712,488        |            | $                               | 1.18 |                            
|                               |                                |                  |            |                                 |      |                            

The
following table summarizes information about stock options outstanding at December 31, 2007:

|Exercise Price |  | Number
of Options
Outstanding |  | Weighted-Average
Remaining
Contractual
Life (Years) |  | Weighted-Average
Exercise Price |      | Vested
Number
of Options |           | Vested
Weighted-Average
Exercise Price
|-------------- |  | ----------------------------- |  | --------------------------------------------------- |  | ------------------------------- | ---- | ------------------------ | --------- | --------------------------------------
|$0.26$0.74    |  | 3,194,138                     |  | 6.53                                                |  | $                               | 0.70 |                          | 3,194,138 |                                       
|$0.82$1.26    |  | 3,552,630                     |  | 7.19                                                |  | $                               | 0.93 |                          | 2,108,425 |                                       
|$1.51$2.19    |  | 1,508,470                     |  | 7.73                                                |  | $                               | 1.82 |                          | 1,006,887 |                                       
|$2.50$3.10    |  | 130,000                       |  | 2.35                                                |  | $                               | 2.64 |                          | 130,000   |                                       
|$4.10$5.27    |  | 222,250                       |  | 3.16                                                |  | $                               | 4.40 |                          | 222,250   |                                       
|$6.00$9.31    |  | 105,000                       |  | 2.81                                                |  | $                               | 6.40 |                          | 105,000   |                                       
|               |  |                               |  |                                                     |  |                                 |      |                          |           |                                       
|Total          |  | 8,712,488                     |  |                                                     |  |                                 |      |                          | 6,766,700 |                                       
|               |  |                               |  |                                                     |  |                                 |      |                          |           |                                       

71

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 8. Stock-Based Compensation (Continued)

Included
in the schedules above are grants of options to purchase 60,000 and 25,000 shares made to non-employee consultants in 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 2006 or 2005.

Stock Compensation

Beginning on January 1, 2006, we adopted SFAS 123R. See Note 2 for a description of our adoption of SFAS 123R. We currently use 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.

Prior
to the adoption of SFAS 123R, we recognized the estimated compensation cost of restricted stock units (RSUs) over the vesting term, based on the fair value of our common
stock using the closing stock price on the last day of the fiscal year in which the compensation was earned.

Since
the adoption of SFAS 123R, the compensation cost of RSUs is based on the fair value of the stock as of the date of grant, net of expected forfeitures. This cost is expensed
ratably over the performance period (for performance-based RSUs) or vesting period (for all other RSUs). The number of performance-based RSUs for which stock compensation expense is calculated is
based upon management's assessment of the likelihood of achieving the performance targets.

The
assumptions used to value stock option grants for the year ended December 31, 2007, 2006 and 2005, respectively, are as follows:

|                                                                                        |  | Year ended December 31,
|--------------------------------------------------------------------------------------- |  | -----------------------
|
|Risk-free interest rate                                                                 |  | 3.22%5.05%            
|Expected life of option                                                                 |  | 33.5 years            
|Expected dividend payment rate, as a percentage of the stock price on the date of grant |  | 0%                     
|Assumed volatility                                                                      |  | 90%101%               
|Expected forfeitures                                                                    |  | 10%                    

72

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 8. Stock-Based Compensation (Continued)

Stock-based
compensation expense recognized on our consolidated statement of operations for the years ended December 31, 2007, 2006 and 2005, respectively, is as follows:

|                                          |                                                                          | Year ended December 31,
|----------------------------------------- | ------------------------------------------------------------------------ | -----------------------
|
|Selling, general and administrative       |                                                                          | $                      
|Research and development                  |                                                                          |                        
|                                          |                                                                          |                        
|Total stock compensation expense          |                                                                          | $                      
|                                          |                                                                          |                        
|Components of stock compensation expense: |                                                                          |                        
|                                          | Amortization of deferred compensation from restricted stock units (RSUs) |                        
|                                          | Compensation expense related to other RSUs                               |                        
|                                          | Compensation expense related to stock options                            |                        
|                                          |                                                                          |                        
|Total stock compensation expense          |                                                                          | $                      
|                                          |                                                                          |                        

For
comparison purposes, the following table sets forth the pro forma amounts of net income and net income per share for the year ended December 31, 2005 that would have resulted
if we had accounted for our employee stock plans under the fair value recognition provisions of SFAS 123R for those years:

Year ended
December 31, 2005Net loss to common shareholders as reported

$
(9,312,104
)Pro forma compensation expense


249,890Net losspro forma

$
(9,561,994
)Loss per shareas reported

$
(0.20
)Loss per sharepro forma

$
(0.20
)


As
of December 31, 2007, there was approximately $1,477,000 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based
payments granted to our employees and directors. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and recognized over the remaining vesting periods of
the stock grants.

73

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 9. 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,
2007 |           
|------------------------------------ |  | - | ---------- | - | - | ---------- | - | -------------------------------------------------------------------- | ----------
|
|
|Statecurrent                        |  | $ | 3,506      |   | $ | 2,137      |   | $                                                                    | 750       
|Federaldeferred                     |  |   | (3,972,977 | ) |   | (2,759,406 | ) |                                                                      | (3,901,616
|Statedeferred                       |  |   | 1,032,833  |   |   | (1,074,671 | ) |                                                                      | (35,387   
|Increase in valuation allowance      |  |   | 2,940,144  |   |   | 3,834,077  |   |                                                                      | 3,937,003 
|                                     |  |   |            |   |   |            |   |                                                                      |           
|Provision (benefit) for income taxes |  | $ | 3,506      |   | $ | 2,137      |   | $                                                                    | 750       
|                                     |  |   |            |   |   |            |   |                                                                      |           

State
minimum taxes are included with selling, general and administrative expenses.

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


%


We
adopted the provisions of FIN48 on January 1, 2007. The implementation of FIN 48 did not result in a change to the estimated liability for unrecognized tax benefits at
January 1, 2007. At December 31, 2007, we had no unrecognized tax benefits that would have an impact on our effective tax rate.

The
significant components of our deferred tax assets and liabilities consisted of the following at December 31:

|                                                   |  | 2007 |             | 2006 |  
|-------------------------------------------------- |  | ---- | ----------- | ---- | -
|Long-term assets:                                  |  |      |             |      |  
|Net operating loss carryforwards                   |  | $    | 43,799,785  |      | $
|Research and development credits                   |  |      | 3,717,311   |      |  
|Restructuring reserves                             |  |      | 426,499     |      |  
|Other                                              |  |      | 120,197     |      |  
|                                                   |  |      |             |      |  
|Net deferred tax assets before valuation allowance |  |      | 48,063,792  |      |  
|Less valuation allowance                           |  |      | (48,063,792 | )    |  
|                                                   |  |      |             |      |  
|Net deferred tax assets                            |  | $    |            |      | $
|                                                   |  |      |             |      |  

The
valuation allowance increased by $2,940,144 in 2007, $3,834,077 in 2006 and $3,937,003 in 2005, primarily due to the generation of net operating loss carry forwards and credits for
which realization is not reasonably assured.

74

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 9. Income Taxes (Continued)

The
following approximates the net operating loss carry forwards and business credits we have available in the future for federal and state tax purposes:

|                                                           |                                                   | As of December 31,
|---------------------------------------------------------- | ------------------------------------------------- | ------------------
|
|Net operating loss carry forwards available in the future: |                                                   |                   
|                                                           | Federal                                           |                   
|                                                           | State                                             |                   
|                                                           |                                                   |                   
|                                                           | Total net operating loss carry forwards available |                   
|                                                           |                                                   |                   
|Business credits available in the future:                  |                                                   |                   
|                                                           | Federal                                           |                   
|                                                           | State                                             |                   
|                                                           |                                                   |                   
|                                                           | Total business credits available                  |                   
|                                                           |                                                   |                   

The
net operating loss carry forwards will begin to expire in 2017 for federal tax purposes and began to expire in 2002 for state tax purposes. The federal research and development
credits begin to expire in 2017.

We
have excess tax deductions related to equity compensation of approximately $1.7 million and $1.5 million in 2007 and 2006, respectively, of which the benefit will be
realized when it results in a reduction of taxable income in accordance with SFAS 123R.

Since
the Company's formation, we have raised capital through the issuance of capital stock on several occasions, as well as transfers of common stock, which resulted in changes of
control as defined by Section 382 of the Internal Revenue Code. As a result of the ownership changes, portions of our net operating loss carryforward are subject to annual limitations under
Section 382. Subsequent ownership changes, as defined in Section 382, could further limit the amount of net operating loss carryforwards and research and development credits that can be
utilized annually to offset future taxable income.

We
file tax returns in the federal as well as several state tax jurisdictions. As of December 31, 2007, tax years subject to examination by taxing authorities in the federal
jurisdiction are 2004 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
2004 and forward.

Note 10. Related Party Transactions

There were no related party transactions during 2006 or 2007.

Note 11. 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

75

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 11. Quarterly Results (Unaudited) (Continued)

presented.
The operating results for any quarter are not necessarily indicative of results for any future quarters.

|                                           |  | 2007 |           
|------------------------------------------ |  | ---- | ----------
|
|Revenue                                    |  | $    | 392,706   
|Gross profit (loss)                        |  | $    | 460       
|Loss from operations                       |  | $    | (3,207,368
|Net (loss) income                          |  | $    | (3,089,618
|Loss per sharebasic and diluted           |  | $    | (0.05     
|Weighted-average common shares outstanding |  |      | 65,432,694

|
|

|                                           |  | 2006 |           
|------------------------------------------ |  | ---- | ----------
|
|Revenue                                    |  | $    | 288,595   
|Gross profit (loss)                        |  | $    | 43,670    
|Loss from operations                       |  | $    | (2,968,536
|Net (loss) income                          |  | $    | (2,821,650
|Loss per sharebasic and diluted           |  | $    | (0.05     
|Weighted-average common shares outstanding |  |      | 58,700,036

Note 12. Subsequent Event

None

Note 13. Schedule II Valuation and Qualifying Accounts

|                            |  | 2007
|--------------------------- |  | ----
|
|Product warranty            |  | $   
|Accounts receivable reserve |  |     
|Inventory reserve           |  |     
|Asset impairment reserve    |  |     

76

---



BEACON POWER CORPORATION AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements (Continued)

Note 13. Schedule II Valuation and Qualifying Accounts (Continued)

|
|

|                            |  | 2006
|--------------------------- |  | ----
|
|Product warranty            |  | $   
|Accounts receivable reserve |  |     
|Inventory reserve           |  |     
|Asset impairment reserve    |  |     

Product warrantyDeductions include amounts paid for consultants, travel and freight costs to repair/replace our inverter
systems under our five-year warranty.

Accounts receivable reserveIn 2006 we recorded a reserve for certain accounts which we deemed to be doubtful. In 2007, we
received payments against previously reserved accounts.

Inventory reserveOur inventory is fully reserved. We disposed of inventory that no longer had value to us and we utilized
components from our inventory in our research and development contracts during 2006 and 2007. Certain materials purchased during 2006 and 2007 to be used for our research and development works flowed
through our inventory system and so are included in the column titled "Charged to costs and expenses".

Asset impairment reserveIn 2002, we recorded an asset impairment reserve for underutilized plant and equipment. In 2007 and
2006, we sold or disposed of certain assets and reduced the associated reserve. We increased this reserve by approximately $18,000 included in casualty loss based upon damage to certain assets during
the prototype malfunction that occurred in December 2006.

77

---





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 on December 31, 2007.

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, 2007 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, 2007, 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, 2007 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

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The
names, ages, current positions and committee memberships and principal occupations during the last five years of our current Directors are described below:

F. William Capp, age 59 (director since 2001)

Mr. Capp has served as our President, Chief Executive Officer and Board member since December 1, 2001 when he joined the Company. Mr. Capp
received his Bachelor of Science in Aeronautical Engineering from Purdue University, a Master of Business Administration and a Masters Degree in Mechanical Engineering from the University of Michigan.

78

---



Stephen P. Adik, age 65 (director since 2004)
        Audit Committee
        Compensation Committee
        Finance Committee
        Nominating and Governance Committee

Mr. Adik
served as Vice Chairman at NiSource Inc. (NYSE: NI), a Fortune 500 electric, natural gas and pipeline company, from December 2000 until his retirement in December
2003. He served on the Board of NiSource from December 2000 to May 2005. He is a member of the Board of Directors and Chairman of the Audit Committee of NorthWestern Corporation, an electric and
natural gas company. He is also a member of the Board of Directors of the Chicago South Shore and South Bend Railroad, a regional railroad company and the Dearborn Mid-West Conveyor
Company, a supplier of material handling equipment to the automotive and bulk materials industry. Mr. Adik received his Bachelor of Science degree in Mechanical Engineering from the Stevens
Institute of Technology, and an MBA degree in Finance from Northwestern University.

Daniel E. Kletter, age 69 (director since October 2006)
        Audit Committee
        Finance Committee
        Nominating and Governance Committee

Mr. Kletter is an independent consultant with more than 28 years of operating management, acquisition and director experience. From 1999 to 2001 he
was with ING-BARINGS/ABN-AMRO, where he was Managing Director in the Industrial Manufacturing and Technology Group. Mr. Kletter serves on the Board of Directors of Power
Curbers, Inc. and Bil-Jax, Inc. Mr. Kletter received a Bachelor of Science in Mechanical Engineering from the University of Notre Dame, and a Masters Degree in
Business Administration from Northwestern University.

Virgil G. Rose, age 62 (director since January 2007)
        Compensation Committee
        Nominating and Governance Committee

Mr. Rose
has been an independent consultant providing advisory services that include working with the United States Department of Energy, California Energy Commission, California
ISO, Bonneville Power Authority, National Labs, and numerous west coast utilities since 2004. From 2001 to 2004, Mr. Rose was Senior Vice President and Director of Energy Delivery and
Management at Nexant, an international energy industry consulting company. Mr. Rose has 38 years of experience in the electric utility industry in various consulting, engineering, system
operation, and management capacities, including 27 years with Pacific Gas & Electric (PG&E), where he served as Senior Vice President of Electric Supply. Mr. Rose received a
Bachelor of Science in Electrical Engineering from Fresno State University, a Master of Science in Electrical Engineering from Santa Clara University, and has completed the Advanced Management Program
at Harvard University.

Jack P. Smith, age 59 (director since 2001)
        Compensation Committee
        Nominating and Governance Committee

Mr. Smith
is Chairman, Director and co-owner of Silversmith Inc., a producer of natural gas well metering and automated data reporting systems. Mr. Smith
co-founded Silversmith Inc. in 2003. Prior to his current engagement with Silversmith, Mr. Smith was President and CEO of Holland Neway International, a leading producer of
commercial vehicle suspensions and brake systems. Mr. Smith also serves on the Board of Directors of Bissell Corporation in Grand Rapids, Michigan, SRAM Corporation in Chicago and Weasler
Engineering in Wisconsin. He is a Trustee of Grand Valley State

79

---



University
Foundation. Mr. Smith received his Bachelor of Science and Masters Degree in Mechanical Engineering and a Masters Degree in Business Administration from the University of Michigan.

Edward A. Weihman, age 59 (director since 2007)
        Audit Committee
        Finance Committee
        Nominating and Governance Committee

Mr. Weihman
is currently President of Kirkwood, Weihman & Co., LLC, a consulting firm serving the oil and gas industry. He was a Managing Director at Dresdner Kleinwort and
a predecessor firm, Wasserstein Perella, from 1995 to 2006, where he was engaged in the mergers and acquisitions business for the firm's natural Resources and Utility clients. Mr. Weihman
received his Bachelor of Arts degree from Williams College and a Masters Degree in Business Administration from Columbia University.

The
names, ages, current positions and principal occupations during the last five years of our current Executive Officers are described below.

|Name                  |  | Age |  | Position                                                                   
|--------------------- |  | --- |  | ---------------------------------------------------------------------------
|F. William Capp       |  | 59  |  | President and Chief Executive Officer, Director                            
|Matthew L. Lazarewicz |  | 57  |  | Vice President of Engineering and Chief Technical Officer                  
|James M. Spiezio      |  | 60  |  | Vice President of Finance, Chief Financial Officer, Treasurer and Secretary

F. William Capp

Mr. Capp has served as our President, Chief Executive Officer and member of the Board since December 1, 2001 when he joined the Company.
Mr. Capp received his Bachelor of Science in Aeronautical Engineering from Purdue University, a Master of Business Administration and a Master's Degree in Mechanical Engineering from the
University of Michigan.

Matthew L. Lazarewicz

Mr. Lazarewicz has served as our Vice President of Engineering since February 1999, and was named our Chief Technical Officer in September of 2001.
Mr. Lazarewicz is a Registered Professional Engineer in the Commonwealth of Massachusetts and received both Bachelor's and Master's Degrees in Mechanical Engineering from the Massachusetts
Institute of Technology. Mr. Lazarewicz also completed his Master's Degree in Management at the Massachusetts Institute of Technology Sloan School of Management.

James M. Spiezio

Mr. Spiezio joined our Company in May 2000. He has served as Vice President of Finance, Chief Financial Officer and Treasurer since July 2000, Secretary
since March 2001, and was our Corporate Controller from May 2000 to July 2000. He has over twenty-six years of diversified manufacturing and financial management experience.
Mr. Spiezio is a graduate of the Indiana University School of Business.

80

---



Meetings

During the fiscal year ended December 31, 2007, our Board of Directors held 16 meetings. Each director attended more than 75% of the aggregate of
(i) the total number of meetings of our Board of Directors held during the period for which he has been a director and (ii) the total number of meetings held by all committees of our
Board of Directors on which he served during period.

Committees

Our Board of Directors has established four standing committees: the Audit Committee, the Compensation Committee, Finance Committee and the Nominating and
Governance Committee. No member of any of these committees is an employee of Beacon. The membership of each committee is listed below.

|Audit                 |  | Compensation        |  | Nominating and
Governance |  | Finance Committee      
|--------------------- |  | ------------------- |  | ------------------------- |  | -----------------------
|Stephen P. Adik,Chair |  | Jack P. Smith,Chair |  | Virgil G. Rose,Chair      |  | Daniel E. Kletter,Chair
|Edward A. Weihman     |  | Stephen P. Adik     |  | Stephen P. Adik           |  | Stephen P. Adik        
|Daniel E. Kletter     |  | Virgil G. Rose      |  | Daniel E. Kletter         |  | Edward A. Weihman      
|                      |  |                     |  | Jack P. Smith             |  |                        
|                      |  |                     |  | Edward A. Weihman         |  |                        

Audit Committee

Under rules of the Nasdaq Stock Market, our Audit Committee must have at least three members, all of whom must be "independent." All members of our Audit
Committee qualify as "independent" as defined in the Nasdaq Stock Market and SEC standards. Mr. Adik and Mr. Kletter are qualified as an Audit Committee Financial Expert, as defined by
the SEC. The Audit Committee is appointed by and reports to our Board of Directors. Its responsibilities include, but are not limited to, the appointment, compensation and dismissal of our independent
auditors, review of the scope and results of our independent auditors' audit activities, evaluation of the independence of our independent auditors and review of our accounting controls and policies,
financial reporting practices and internal audit control procedures and related reports. During the last fiscal year, the Audit Committee held 5 meetings. The Audit Committee's charter can be found on
our website atwww.beaconpower.com.

Compensation Committee

Our Compensation Committee has the authority to set the compensation of our Chief Executive Officer and all other executive officers and has the responsibility to
review the design, administration
and effectiveness of all programs and policies concerning executive compensation and establishing and reviewing general policies relating to compensation and benefits of employees. The Compensation
Committee administers our Third Amended and Restated 1998 Stock Incentive Plan and Employee Stock Purchase Plan. Messrs. Adik, Smith and Rose are non-employee directors who have no
interlocking relationships as defined by the SEC, and are all independent pursuant to the Nasdaq Stock Market Rules applicable to members of this committee. The Compensation Committee held 7 meetings
during the last fiscal year. The Compensation Committee's charter can be found on our website atwww.beaconpower.com.

81

---



Nominating and Governance Committee

The Nominating and Governance Committee recommends to the Board corporate governance guidelines applicable to the Board and to the Company and oversees the
effectiveness of our corporate governance in accordance with those guidelines. The committee also identifies individuals qualified to become Board members, reviews the qualifications of nominee
directors and recommends to the Board the director nominees for annual meetings of stockholders and candidates to fill vacancies on the Board. Additionally, the committee recommends to the Board the
directors to be appointed to Board committees. A stockholder may nominate a person for election as a director by complying with Section 2.2 of our By-Laws, which provides that
advance notice of a nomination must be delivered to us and must contain the name and certain information concerning the nominee and the stockholders who support the nominee's election. A copy of this
By-Law provision may be obtained by writing to Beacon Power Corporation, Attn: James M. Spiezio, Secretary, 65 Middlesex Road, Tyngsboro, Massachusetts 01879. Director nominees submitted
by our stockholders will be considered on the same terms as other nominees. All members of our Nominating and Governance Committee qualify as "independent" pursuant to the Nasdaq Stock Market Rules.
The Nominating and Governance Committee held 7 meetings during the last fiscal year. The charter for our Nominating and Governance Committee can be found on our web site at www.beaconpower.com.

Section 16(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") requires our directors and officers, and persons who beneficially own more than ten percent of a
registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock. Directors, officers and greater than ten percent
stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

To
our knowledge, during our fiscal year ended December 31, 2007, all Section 16(a) filing requirements applicable to our directors, officers and ten-percent
stockholders were satisfied.

82

---





Item 11.    Director and Executive Officer Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

Our executive compensation and benefit program has been designed to encourage our Executive Officers and Senior Management to pursue our strategic objectives
while effectively managing the risks and challenges inherent in a development stage company transitioning into a commercial company. We have created a compensation package that combines short and
long-term components through a mix of base salary, bonus and equity compensation, in the proportions we believe are most appropriate to incentivize and reward our Executive Officers and
Senior Management for achieving our strategic objectives. Moreover, the program is designed to be competitive with comparable employers and to align management's incentives with the
long-term interests of our stockholders. Our compensation-setting process consists of establishing targeted overall compensation for each Executive Officer and Senior Manager and then
allocating that compensation among fixed and variable compensation. At the executive and senior levels, we design the incentive compensation to reward company-wide performance, shareholder
value creation, and the achievement of specific financial, operational and strategic objectives.

Our
compensation program is a performance-oriented structure exemplified by the elements of compensation that is at risk for our Executive Officers. For example over 70% of our CEO's
total compensation is variable and is based on performance relative to strategic objectives.

In
2007 our Executive Officers performance to strategic objectives resulted in an 80% payout of the targeted bonus. The objectives for 2007 had been heavily weighted on the Executive
Officers being successful in obtaining sufficient equity-based financing to complete development of our flywheel systems, build-out the new manufacturing facility and have sufficient
operating cash to begin the procurement of key components for the construction of the first megawatt of frequency regulation power. The targeted raise for the year was $20 million which was
exceeded as the equity raised for the year totaled over $45 million. In 2006 the payout of the targeted bonus for the Executive Officers was 30% as the targets for that year were only partially
met.

Role of Our Compensation Committee

Our Compensation Committee approves, administers and interprets our executive compensation policies. Our Compensation Committee is appointed by our Board of
Directors, and consists entirely of directors who are "outside directors" for purposes of Section 162(m) of the Internal Revenue Code, "non-employee directors" for purposes of
Rule 16b-3 under the Exchange Act and "independent directors" for purposes of the Nasdaq Stock Market rules. Our Compensation Committee has as members Mr. Stephen P. Adik,
and Mr. Virgil G. Rose and is chaired by Mr. Jack P. Smith.

Our
Compensation Committee reviews and makes recommendations to our Board of Directors to ensure that our compensation program is consistent with our compensation philosophy and
corporate governance guidelines and, subject to the approval of our Board (without the participation of the CEO), establishes the compensation paid or granted to our Executive Officers, which include
our CEO, CFO and CTO. The Compensation Committee also establishes an overall pool of compensation for Senior Management and other employees.

Compensation
Committee Interlocks and Insider Participation. Messrs. Adik, Smith and Rose are non-employee directors who have no interlocking relationships as defined
by the SEC, and are all independent pursuant to the Nasdaq Stock Market Rules applicable to members of this committee.

83

---



Role of Compensation Consultant

The role of Watson Wyatt is to provide the Compensation Committee with an assessment of the compensation structure for the Executive Officers in terms of overall
compensation as well as the components of that compensation, including base salary, bonus and long term incentives. This assessment includes a competitive reference of both total compensation and the
components of that compensation to companies that the consultant and the Compensation Committee agree are an appropriate peer group. In addition, Watson Wyatt provides its forward view of the trends
in compensation both in the aggregate as well as the components to insure that our program offers competitive compensation.

Role of our Executive Officers

The role of the CEO and CFO is to allocate the compensation pool approved by the Compensation Committee among all our other employees, including the other Senior
Managers, and to provide recommendations to the Compensation Committee in regards to any equity compensation to be granted for Senior Management and other employees.

During
the transition from development stage to commercial, we have aligned the compensation structure of all other employees to the same company-wide strategic objectives
and performance as the Executive Officers' and Senior Managers' compensation. As we transition to commercialization, we expect to design the incentive compensation for the employees other than Senior
Managers to reward the achievement of specific operational goals within areas under the control of the relevant employees as well as company-wide performance.

Evolution of our Compensation Strategy

Our compensation strategy is necessarily tied to our stage of development. Accordingly, the specific direction, emphasis and components of our executive
compensation program will continue to evolve in parallel with the evolution of our business strategy. For example, as we transition from development stage to commercial with more predictable financial
resources, our compensation programs may also evolve, reflecting the changing needs of the business and available resources. Similarly, our goals will be modified to incorporate changing requirements
expected of us, such as compliance with all the requirements of the Sarbanes-Oxley Act and the effectiveness of our stockholder communications. Our Compensation Discussion and Analysis will, in the
future, describe these evolutionary changes, if any.

Program Participants

We have a compensation program for our Executive Officers and a separate program for the remainder of the Senior Managers. Our Executive Officers are:



In
addition, the two highly-compensated managers named below (who are included in our compensation tables) are compensated pursuant to a separate compensation program, and together with
the Executive Officers, are referred to as "Senior Management" or our "Senior Managers."



84

---





Development of a Formal Compensation Program

Our Compensation Committee has taken the following steps to ensure that our compensation and benefit programs for Executive Officers are consistent with our
compensation philosophy and our corporate governance guidelines:



Based
on these efforts and examinations, the Compensation Committee developed a compensation program intended to be in place for the next several years and continues to monitor this
program to insure its effectiveness.

Targeted Compensation Framework

To test the competitiveness of our compensation program, Watson Wyatt compared our compensation practices and levels to a group of specific peer companies, both
representative of companies of similar size and industry.

Since
our company has grown, Watson Wyatt updated the compensation benchmarking peer group, which was approved by the Compensation Committee in January 2008. In selecting the peer
comparison group, the following criteria were used:



Using
the above screening criteria, the peer comparison group was determined to be Active Power Inc., Akeena Solar Inc., Ascent Solar Technologies, Capstone Turbine
Corporation, Daystar Technologies Inc., Evergreen Energy Inc., Hoku Scientific Inc., Ocean Power Technologies Inc., Satcon Technology Corporation, Spire Corporation, and
UQM Technologies, Inc. A majority of the above

85

---



companies
operate in the electrical equipment sub-sector (same as our company) and compete against each other for executive talent.

With
the assistance of Watson Wyatt, we compared the following aspects of our compensation program to those of our peer group members:



This
analysis resulted in a decision implemented in 2006 to shift a portion of short-term incentive opportunity to long-term incentives to appropriately balance
near term operational goals with longer term shareholder value creation. Specifically, we reduced each Executive Officer's short-term incentive targets and introduced a portfolio approach
to delivering long-term incentives, comprised of stock options, restricted stock units (RSUs) and performance stock units (PSUs). The structure developed as a result of those analyses and
subsequent discussions serves as the foundation for our executive compensation program going forward. Based on our most recent analysis we believe this structure was appropriate for the 2007
compensation structure.

We
intend to continue our strategy of compensating our Executive Officers at competitive levels, through programs that emphasize performance-based incentive compensation in the form of
cash and equity. To that end, total executive compensation is structured to ensure that, due to the nature of our business, there is an equal focus on our financial performance and stockholder return.
For 2007, the total compensation paid to our Executive Officers generally was between 50th and 75th percentile of total compensation paid to the executive officers of our peer group.
Base salaries were competitive with the market median with the exception of the CEO, which was around the market 25th percentile. An adjustment has been made in the CEOs 2008
compensation. We believe that the positioning of our Executive Officer compensation was consistent with our financial performance, the individual performance of each of our executives and the
interests of stockholder. We also believe that the total compensation was reasonable in the aggregate. Further, in light of our compensation philosophy, we believe that the total compensation package
for our Executive Officers should continue to consist of base salary, annual cash incentive awards (bonus), long-term equity-based incentive compensation, and certain other benefits.

86

---



The
competitive posture of our total annual direct compensation will vary from year to year based on our results and individual performance versus the performance of the peer group
companies and their respective level of annual performance bonus awards made to their executives. We believe our target total annual direct compensation is generally positioned at approximately the
50th to 60th percentile.

Components of Compensation Program

Our performance-driven compensation program has both current and long term components. Our Executive Officers' compensation is defined in the Executive Agreements
(which are further detailed in the section titled "Executive Officer Employment Agreements" below.) All of our other employees, including the other Senior Managers, are employees at will. However,
they participate in the compensation programs as noted below.

Current Compensation Components

We utilize current compensation components that include base salary and cash bonuses to motivate and reward our employees, including our Executive Officers, in
accordance with our defined objectives. Our Compensation Committee has established this program to set and refine management objectives and to measure performance against those objectives. The
Compensation Committee reviews its conclusions on short term compensation with the Board (without the participation of the CEO), and once a consensus is reached, the short term compensation decisions
are presented to the Executive Officers.

Base Salary

Base salary will typically be used to reward the experience, skills, knowledge and responsibilities required of each of our Executive Officers, as well as
competitive market conditions. In establishing the 2007 base salaries, our Compensation Committee considered the proposals made by the Executive Officers and the recommendations made by Watson Wyatt,
who were retained to do an update of their findings from the prior year. The factors considered in determining salary and annual increases to salary, which are adjusted effective January 1 of
each year, were:



Using
the same criteria outlined above, our Compensation Committee works directly with its independent compensation consultant to determine the compensation recommendations that our
Compensation Committee makes to our Board of Directors regarding specific compensation actions for the Executive Officers. The Executive Officers' base salaries increased from 2005 to 2006 by 4.0% to
4.3% and from 2006 to 2007 by 2.0% to 4.0%. For 2008 the Executive Officers' base salaries for the

87

---



CFO
and CTO increased 4%. The base salary of the CEO increased by 15% as a result of the analysis of the peer group. The Compensation Committee evaluates each Executive Officer's base salary in terms
of his individual performance and his relative percentile performance to the peer group. In the increases in 2006 and 2007 base salary, the range between Executive Officers was small, reflecting
comparable performance to expectations for each Executive Officer, and base salaries being in line with its guideline relative to the peer group. The 2008 base salary increases for the CFO and CTO
reflect comparable performance to expectations and base salaries bring in line with its guidelines relative to the peer group. In the case of the CEO, the base salary increase was higher than the
other Executive Officers to bring base salary in line with its guidelines relative to the peer group.

Executive Officer


2005 Base
Salary


2006 Base
Salary


% IncreaseF. William Capp


$
240,000


$
250,000


4.2%James M. Spiezio



187,000



195,000


4.3%Matthew L. Lazarewicz



171,600



178,500


4.0%


|
|

Executive Officer


2006 Base
Salary


2007 Base
Salary


% IncreaseF. William Capp


$
250,000


$
257,500


3.0%James M. Spiezio



195,000



202,705


4.0%Matthew L. Lazarewicz



178,500



182,000


2.0%


Annual Incentives

Performance Bonus

Overview of Performance Bonus Program

Awards under the program are based on a quantitative and qualitative review of all of the facts and circumstances related to the Company and each executive's or
employee's performance. Senior Managers may receive awards from zero to 100% of his target bonus based on the review of results. Additional awards of up to 50% of the potential bonus may be awarded
for performance at levels above targeted goals and objectives or improvement in the timing of achieving certain results. The criteria for these potential additions to the bonus are clearly defined as
part of establishing the potential bonus structure each year.

On
an individual level, the Compensation Committee attempts to set clearly defined goals for each Executive Officer, focusing on the categories mentioned below, with an emphasis on
quantifiable and achievable goals. Once the defined goals have been identified, the Compensation Committee engages in a collaborative process with the Executive Officers to reach agreement on the
following aspects of the short term goals:



88

---





The
Compensation Committee sees this process both as the optimal means of assembling accurate information regarding the expectation and realization of performance, as well as an integral
part of our culture of collaborative, team-oriented management.

Discretionary Bonus

Additional discretionary awards of up to 25% of the potential bonus may be awarded for performance to targets that emerge subsequent to the establishment of the
year's bonus program or other achievements not previously identified.

The
Compensation Committee evaluates each Executive Officer and Senior Manager as well as our other employees once each year based on the achievement of set goals. This review is
typically done during the first quarter of the year. We review final results at the end of the year versus pre-determined objectives and begin discussions regarding performance objectives
for the next fiscal year. Performance bonuses may be awarded in the form of cash or RSUs and equity-based awards.

Total
compensation for our Executive Officer and Senior Managers as well as the remainder of our employee team may vary significantly from year to year, based on the percentage of
achievement of goals. In addition, the value of equity awards in either RSUs or stock options may vary significantly in value based on our stock's performance.

2007 Performance Bonus and Resulting Bonus Payout

Our business strategy is to become a leader in providing frequency regulation services to the electrical grid. We intend to build our service business through our
internal research efforts, our use of proprietary technologies, expansion of manufacturing capabilities and our deployment of facilities dedicated to providing economically viable frequency regulation
services to the electrical grid. In order to accomplish these goals, we will need to expand manufacturing capabilities, acquire appropriate locations for installation of our flywheel systems and raise
additional financing. We must also focus on continually strengthening our management and technical teams, in order to provide the human resources necessary to carry out our business objectives.

In
2007, we made significant progress in executing our strategic plan. For 2007, the target goals and results were as follows:

|
|
|
|
|
|
|
|

89

---



Stretch Goals.Additional bonus amounts could be awarded for exceeding certain targets related to the
timing of flywheel development, fundraising, and other revenue-related contracts. These stretch goals were designed to be extremely difficult to achieve; however, if met, could have resulted in bonus
payouts up to 145% of the Targeted bonus amounts for the officers and 162.5% of the Targeted bonus amounts for the other Senior Managers.

Based
on these goals and the resulting attainment, each Executive Officer was judged to have achieved 80% of his goals, and each other Senior Manager was judged to have achieved 75% of
his goals. Accordingly, for our Executive Officers and Senior Managers, the Target and actual bonuses paid in February 2008 for our 2007 Performance Plan were as follows:

Name


2007 Base
Salary


Bonus
Potential as
a% Salary


2007 Target
Bonus
Potential


Bonus
Percent
Awarded
(as a % of
Target)


Bonus Amount PaidF. William Capp


$
257,500


50.0%


$
128,750


80.0%


$
103,000James M. Spiezio



202,705


35.0%



70,947


80.0%



56,758Matthew L. Lazarewicz



182,000


35.0%



63,700


80.0%



50,960Chet Lyons



135,500


37.4%



50,667


75.0%



38,000James Arseneaux



138,000


31.5%



43,470


75.0%



32,600


The
bonus potential as a percent of salary was defined in the Executive Officers' Employment Agreements with the Company. These agreements are further described below. For
Mr. Lyons and Mr. Arseneaux, the Target is stated as a percentage of his salary, and is consistent with the bonus percentage for which he was eligible in prior years.

2006 Performance Bonus Program

For 2006, the Target goals, scoring metrics and 2006 results used to calculate the bonuses were as follows:

| |                                                                                                                                                                                                   |  | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|
| | 25kWh Flywheel Development: metrics relate to operation through speed range and power as of certain target
dates and ordering of long lead parts related to prototypes                            |  | 
| | Smart Energy Matrix Development: metrics relate to management's activities in marketing the company, obtaining ISO certification and
selecting a site for our first frequency regulation facility |  | 
| | Fundraising: metrics relate to achievement of specific financing goals and maintenance of investor awareness                                                                                      |  | 
| | Government Contracts: metrics relate to performance for existing contracts and obtaining new contracts                                                                                            |  | 
| | New Revenue: metrics relate to identification of potential new revenue sources and product sales                                                                                                  |  | 

Stretch Goals.Additional bonus amounts could be awarded for exceeding certain targets related to
flywheel development, fundraising, and other revenue-related contracts. These stretch goals were

90

---



designed
to be extremely difficult to achieve; however, if met, could have resulted in bonus payouts up to 146% of the Targeted bonus amounts.

Based
on these goals and the resulting attainment, each Executive Officer was judged to have achieved 30% of his goals, and each other Senior Manager was judged to have achieved 35% of
his goals. Accordingly, for our Senior Managers, the Target and actual bonuses paid in March 2007 for our 2006 Performance Plan were as follows:

Name



2006 Base
Salary



Bonus
Potential as
a % Salary



2006 Target
Bonus
Potential



Bonus
Percent
Awarded
(as a % of
Target)



Bonus
Amount
PaidF. William Capp



$
250,000



50.0%



$
125,000



30%



$
37,500James M. Spiezio




195,000



35.0%




68,250



30%




20,475Matthew L. Lazarewicz




178,500



35.0%




62,475



30%




18,743Chester R. Lyons




130,000



38.5%




50,000



35%




17,500Richard L. Hockney




131,000



26.7%




35,000



35%




12,250


The
bonus potential as a percent of salary was defined in the Executive Officers' Employment Agreements with the Company. These agreements are further described below. For
Mr. Hockney, the Target is stated as a percentage of his salary, and is consistent with the bonus percentage for which he was eligible in prior years. For Mr. Lyons, as with other new
hires during 2006, the Target amount was defined in his employment offer letter.

Long-term Compensation

At present, our long-term compensation for Executive Officers consists of a combination of common stock options and RSUs, all with a three year
vesting period, and performance stock units (PSUs) tied to achieving specific longer term objectives. We believe this strategy of utilizing a
combination of options, RSUs and PSUs is appropriate for aligning the interests of our Executive Officers with those of our stockholders over the long term, focuses on attaining key operational
milestones, and provides an effective retention feature. All Options, RSUs and PSUs are granted under our Third Amended and Restated 1998 Stock Incentive Plan. Details as to the valuation of these
grants is included in our Notes to Consolidated Financial Statements included herein, and are incorporated here by reference. Equity grant practices, including recent changes, are detailed in a
subsequent section of this discussion. Our practice is to grant stock options and RSUs on an annual basis at the time of annual performance review. The typical target expected value of the annual long
term incentive grant is 100% of base salary for the CEO and 55% of base salary for the CFO and CTO. PSUs were granted in 2006 as a special grant to motivate the executives to achieve specific
long-term financial objectives.

Common Stock Option Grants

Our common stock option grants are designed to align management's performance objectives with the interests of our stockholders. We believe that these options
provide an important component of executive compensation which is fully aligned with our shareholder's interests whereby the impact of any business setbacks, whether Company-specific or industry
based, achievement of objectives or other performance matters impacts the Executive Officers as well as shareholders directly. Our Compensation Committee also grants options to key employees based on
this same rationale and in addition, enables these key employees to participate in the long term appreciation of our stockholder value. In addition, all new permanent, full-time employees
are granted options when they join the Company. We further

91

---



believe
that our option grants provide a means to assist in the retention of key employees, inasmuch as they are in almost all cases subject to vesting over an extended period of time.

We
analyze the following external market comparisons when we set the number of options or RSUs to be granted to each executive. On an individual basis, we compare:



In
2006, options vesting over three years granted to our Executive Officers pursuant to the Executive Agreements were as follows: Mr. Capp, 118,671 options; Mr. Spiezio,
50,910 options; and Mr. Lazarewicz, 46,602 options. The option exercise price was set, according to the Executive Agreements, at the average of the high and low stock price on the date of
grant, which was $1.58. The market closing price on the date of grant was $1.55.

In
2007, options vesting over three years granted to our Executive Officers pursuant to the Executive Agreements were as follows: Mr. Capp, 445,893 options; Mr. Spiezio,
192,772 options; and Mr. Lazarewicz, 173,743 options. A portion of the options granted were intended to have been granted with the 2006 Executive Agreements, but were omitted through
administrative error. These options were granted in March 2007 at the exercise price in effect as of the date of the 2006 agreements, which was $1.58, and included accelerated vesting provisions as if
the options had been granted in March 2006. The remainder of the options had exercise prices based on the stock closing price on the date of grant, which was $0.89.

Restricted Stock Unit Grants

RSUs were granted to our Executive Officers pursuant to the Executive Agreements. Our issuance of RSUs is a further effort to align management's performance
objectives with the interest of shareholders by having the same attributes as our vesting stock options with the additional alignment of each Executive Officer owning actual shares. These RSUs vest
quarterly over a three year period, and are generally converted to common stock on the vesting dates. The numbers of RSUs issued to each of the Executive Officers based upon the 2006 Executive
Agreements were as follows: Mr. Capp, 23,133 units; Mr. Spiezio, 9,924 units, and Mr. Lazarewicz, 9,084 units. The compensation value of these RSUs was calculated using the stock
closing price on the date of grant, which was $1.55. The numbers of RSUs issued to each of the Executive Officers based upon the 2007 Executive Agreements were as follows: Mr. Capp, 39,597
units, Mr. Spiezio, 17,152 units; and Mr. Lazarewicz, 15,399 units. The compensation value of these RSUs was calculated using the stock closing price on the date of grant, which was
$0.89.

The
charts below show long term incentive (LTI) grants as a percentage of base salary for 2006 and 2007:

Name


2007 Base
Salary


Fair Value
of Options
Granted


Value of
RSUs
Granted


Total LTI


LTI as
% Base
SalaryF. William Capp


$
257,500


$
196,003


$
35,241


$
231,244


90%James M. Spiezio



202,705



84,902



15,265



100,167


49%Matthew L. Lazarewicz



182,000



76,223



13,705



89,928


49%


92

---



|
|

|
|
|
|
|
|

Performance Stock Unit Grants

Our Performance Stock Units (PSUs) are also designed to align management's performance objectives to shareholder interest by providing stock grants that
cliff-vest upon achievement of specific longer term objectives of interest to our investors.

The
Executive Officers were granted PSUs as part of the Executive Agreements in 2006 to incentivize the Executive team to maintain a sustained drive and focus on moving the
development-stage company successfully into production. The PSUs were structured to provide Mr. Capp with potential awards valued at $1,000,000 and Mr. Spiezio and Mr. Lazarewicz
with awards valued at $500,000 each of RSUs, where the unit price used to calculate the number of units was based on the average of the high and the low stock price on the date of grant, $1.58. This
equates to a potential award of 632,911 shares to Mr. Capp and 316,456 shares each to Mr. Spiezio and Mr. Lazarewicz. There were no additional PSUs granted in 2007.

The
PSUs cliff vest only upon achievement of certain conditions:





Size of Adjusted EBITDA:


Number of RSUs in the Actual AwardUnder $2,000,000


No Award$2,000,000


50% of the Potential Award$2,000,000 to $4,000,000


(Potential Award X Adjusted EBITDA)/4,000,000Over $4,000,000


100% of the Potential Award


93

---





Based
on our current business plan as of December 2007, executive management believes that it is likely that the full potential award will be earned. Accordingly, a pro-rata
portion of the fair value of the award is being expensed ratably over the service period over which the PSUs are earned. It is also included in the Summary Compensation Table as a Stock Award.

Equity Grant Practices

During 2007, our Board granted common stock options, RSUs and PSUs based upon the recommendations of our Compensation Committee and the Executive Agreements.
These grants to Executive Officers were generally made during regularly scheduled meetings of the Board of Directors. Mr. Capp and Mr. Spiezio have been authorized by the Board of
Directors to issue common stock option grants to individuals being hired, within certain limits which have been predetermined by the Board based upon job title/function.

In
developing specific grant dates, the Board of Directors takes into account a wide variety of factors including the pricing of our most recently completed equity financing; the status
of additional equity or debt transactions; the status of our various research and development activities; the quality and growth of our management team; and specific and general market comparables. In
addition, the Board took into account the valuation opinion of our outside consultant, who provided valuations of our common stock and appropriate conversion factors between stock options and RSUs.

In
addition to the options granted to the Executive Officers, our policy has been to grant common stock options to all full-time permanent new hires at the time of
employment; however the number of options varies depending on the position and experience of the new hire. Further, options or RSUs may be granted to employees as part of the annual compensation
review. Typically, options granted vest quarterly over a three year period.

Prior
to the third quarter of fiscal 2006, option grants had exercise prices that were calculated as the average between the high and the low prices for our stock on the date of grant.
During the third quarter of 2006, the Board changed its policy in relation to option grants to reflect SEC guidance that the exercise prices should be based on the stock closing price on the Nasdaq
Stock Market on the date of grant.

Watson Wyatt Analysis of Pay Mix

According to Watson Wyatt's analysis, we deliver a higher portion of pay to the CEO via long-term incentive compensation relative to annual
compensation as compared to the
peer group. This is common for development-stage companies, which typically focus more on LTI as opposed to cash compensation. The charts below compare Mr. Capp's compensation pay mix to that
of CEO's in the peer group:

94

---





Chief Executive Officer Pay Mix

GRAPHIC

GRAPHIC


The
CFO and CTO have similarly-designed LTI packages, whereas the market typically differentiates pay for the two executives. Generally, CTOs of development stage companies have higher
variances in their LTI packages than do CFO's, as is reflected in the peer market data. The charts below compare Mssrs. Spiezio and Lazarewicz's pay mix percentages to those of the respective peer
groups.

Chief Financial Officer Pay Mix

GRAPHIC

GRAPHIC


Chief Technical Officer Pay Mix

GRAPHIC

GRAPHIC


In
total, we believe that our executives' pay mix reflect a significant percentage of pay at risk, well above those of their peers, which we believe is appropriate given our status as a
development-stage company.

95

---



Executive Officer Employment Agreements

On March 2, 2007, we entered into employment agreements with our Executive Officers, commencing on the date of the agreement and continuing until
March 31, 2008, unless renewed or terminated. Additional agreements providing for long term incentive compensation consisting of Restricted Stock Units (RSUs) and stock options were also dated
March 2, 2007. The terms of these agreements were similar to those of the Executive Officer agreements dated May 8, 2006. However, the 2006 agreements also included performance-based
RSUs. The terms of the long term compensation are discussed further below. These agreements, in total, will be referred to as the "Executive Agreements." In addition to the Base Salary and Targeted
Bonus amounts (discussed above under "Current Compensation" section), the Executive Agreements specified other benefits, such as vacation time and fringe benefits. The fringe benefits include those
available to our other employees, such as group health and dental insurance, life insurance, group long and short-term disability insurance, 401(k) plan, and stock plan participation. In
addition, each Executive Officer is entitled to reimbursement for an executive physical every other year (not to exceed $1,000 for each such physical), as well as an additional life insurance policy
over and above the insurance plan provided to all employees. Further, in the event that the Executive Officer becomes disabled and receives disability insurance payments
that are less than his monthly base salary, we will pay him the difference between his normal base salary and the insurance payment, for the duration of his employment. These agreements also contain
certain provisions related to severance and change of control, which are discussed further in the section titled, "Potential Payments upon Termination or Change in Control." We believe these benefits
are consistent with those offered by other companies.

We
do not have a supplemental retirement plan or any form of executive retirement plan.

Some
additional provisions of the Executive Agreements include the following:



96

---





REPORT OF THE COMPENSATION COMMITTEE

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussion with management, we have
recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December 31, 2007.

The
following report is provided by the following directors, who constitute the Compensation Committee:

| |  | Submitted by the Compensation Committee:      
| |  | ----------------------------------------------
| |  | Jack P. Smith,ChairmanVirgil Rose
Stephen Adik

Notwithstanding
anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that
incorporate future filings including this Annual Report on Form 10-K, in whole or in part, the foregoing Compensation Committee Report shall not be incorporated by reference into
any such filings.

97

---



Set forth below is information regarding compensation earned by or paid or awarded to our Senior Managers during the year ended December 31, 2007:

Summary Compensation Table.The following table(s) sets forth the total compensation paid in the year
ended December 31, 2007 to F. William Capp, our Principal Executive Officer; James M. Spiezio, our Principal Financial Officer; and our next three most highly paid officers: Matthew Lazarewicz,
our Chief Technology Officer; Chester Lyons, our Director of Marketing and Sales; and James Arseneaux, our Director of Engineering.

|
|
|
|
|
|
|
|
|
|
|
|
|

98

---





Name and Principal Position


Year


RSUs in Lieu
of 2005 Bonus


RSUs per
Officer
Comp Agreement


Performance-
Based RSUs


Total Stock
AwardsF. William Capp


2006


$
326,141


$
24,140


$
181,818


$
532,099F. William Capp


2007







32,701



272,727



305,428James M. Spiezio


2006



152,714



10,357



90,909



253,980James M. Spiezio


2007







14,126



136,364



150,490Matthew L. Lazarewicz


2006



139,913



9,480



90,909



240,302Matthew L. Lazarewicz


2007







12,751



136,364



149,115Chester Lyons


2006















Chester Lyons


2007















Richard Hockney


2006



53,138











53,138James Arseneaux


2007


















99

---



|
|
|
|
|
|
|
|
|
|
|
|
|

100

---



Grants of Plan-Based Awards.The following table shows all grants made to Senior Managers
during the year ended December 31, 2007:

|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|

Note that the column titled "Estimated Future Payouts Under Equity Incentive Plan Awards" was not presented for 2007
because there were no new Equity Incentive Plan Awards made during 2007. However, in 2006, PSUs were awarded to the Executive Officers under their Executive Agreements. These performance-based awards
will vest in 2009 or 2010 upon achievement of certain performance criteria, as discussed in the CD&A.

101

---



Outstanding Equity Awards at Fiscal Year-End.The following table shows the unexercised options, unvested stock
grants, and equity incentive plan awards outstanding relating to our Senior Management as of December 31, 2007:

|
|
|
|
|
|
|
|
|

102

---



# Shares Vesting for Date Shown:Mr. Capp


Mr. Spiezio


Mr. Lazarewicz


Mr. Lyons


Mr. ArseneauxVesting Date


Options


Stock


Options


Stock


Options


Stock


Options


OptionsJanuary 9, 2008




















12,500March 31, 2008


47,032


5,225


20,300


2,256


18,356


2,040


6,250


6,667April 9, 2008




















12,499June 30, 2008


47,032


5,225


20,300


2,256


18,356


2,040


6,250


6,666July 9, 2008




















12,501September 30, 2008


47,032


5,225


20,300


2,256


18,356


2,040


6,250


6,667October 9, 2008




















12,500December 31, 2008


47,065


5,234


20,319


2,256


18,369


2,040


6,250


6,667January 9, 2009




















12,501March 31, 2009


29,686


3,298


12,859


1,429


11,544


1,283


6,250


6,666June 30, 2009


29,686


3,298


12,859


1,429


11,544


1,283


6,250


6,667September 30, 2009


29,686


3,298


12,859


1,429


11,544


1,283


6,250


6,667December 31, 2009


29,823


3,319


12,918


1,433


11,603


1,286


6,251


6,667


Option Exercises and Stock Vested.The following table sets forth the number of
shares acquired and the value realized upon exercise of stock options during 2006 and the number of shares our common stock acquired on vesting of RSUs during 2007. The value realized is measured as
the difference between the exercise price and the fair market value when the options were exercised or the RSU converted to common stock.

Option Awards


Stock AwardsName


Number of
Shares Acquired
on Exercise (#)


Value Realized
on Exercise ($)


Number of
Shares Acquired
on Vesting (#)


Value Realized
on Vesting ($)F. William Capp





$



20,900


$
22,730James M. Spiezio









9,024



9,810Matthew L. Lazarewicz









8,160



8,878Chester Lyons


13,106



10,926






James Arseneaux
















The
number of shares vested includes shares that vested as of December 31, 2007, but which could not be issued during 2007 because the vesting date fell on a date during which we
were closed for business. Accordingly, since the shares were not issued, there was no value realized upon the vesting of these options. The number of shares involved was 5,225 for Mr. Capp,
2,040 for Mr. Lazarewicz, and 2,256 for Mr. Spiezio. The stock price per share as of the vesting date was $1.52. However, there were also shares that vested as of December 31,
2006 which could not be issued until 2007, and the value of these shares is included in the amounts shown in the column titled, "Value Realized on Vesting" shown above. The number of shares involved
was 1,927 for Mr. Capp, 757 for Mr. Lazarewicz, and 827 for Mr. Spiezio. The stock price per share as of the vesting date of December 31, 2006 was $0.99, but the value as
of the date of issuance was $0.76.

103

---





POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Severance Compensation & Termination Protection

The Executive Agreements provide for severance compensation to be paid if the executives are terminated under certain conditions, such as a change in control of
the Company or a termination without cause by us, each as is defined in the agreements.

Definitions

The "Termination Date" is the date on which the Executive Officer resigns or notifies us that he will resign, or the date on which we notified the Executive
Officer that employment will be terminated.

The
following are the definitions for the various termination and change of control scenarios:



Termination Payments for Each Type of Termination



104

---





Effect of Termination of Employment Relative to RSUs and Options

If the executive terminates for any reason, including by resignation or termination (with or without Cause), the executive may retain all RSUs that have vested
before the termination date. However, any RSUs vesting after the Termination Date will be forfeited. In relation to options, if employment is terminated by reason of death, disability, resignation or
without Cause, the vested shares underlying the option will expire if not exercised within 365 days after the Termination Date, and any options that were not vested before the termination date
are forfeited. In the case of termination for Cause, all vested shares underlying the option will expire immediately. In addition, we may, in our sole discretion, by written notice demand that any or
all stock certificates for shares acquired pursuant to the exercise of the option, or any profit realized from the sale or transfer of such shares, be returned to us. The exercise price will be
returned to the Executive Officer, without interest.

105

---



If
the Executive Officers terminated as of December 31, 2007, the following options and RSUs would have been forfeited or would expire by December 31, 2008 if not
exercised:

|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|

Note that the Executive Officers had received options from grants made prior to the May 6, 2006 Executive Agreements. Options received from
those prior grants were fully vested as of December 31, 2007. Certain of those options would expire within 90 days of termination, if not exercised.

Effect of Termination of Employment Relative to Performance Stock Units

Executive Officers would retain any PSUs that would have vested if he terminates after year end for 2009 or 2010, but prior to the issuance of the audit opinion,
as long as the audit opinion is actually received by us. Prior to year end for 2009 or 2010, if the Executive Officers' employment is terminated without Cause but not for resignation for Good Reason,
the executive may receive a pro-rated actual award if the "Termination Stock Price" is higher than the "Target Stock Price." The "Termination Stock Price" is defined as the
30-day Volume-Weighted-Average price as of the date prior to the Termination Date. The "Target Stock Price" is defined as the average of the high and low prices of our common

106

---



stock
on the effective date of the PSU grant (which is May 8, 2006), multiplied by 15% and compounded annually and prorated for any partial year.

Based
on the criteria noted above, if any of the Executive Officers had resigned or been terminated on December 31, 2007, the calculation to determine any pro-rated
award would have been as follows:

|Termination Stock Price (30-day Volume-Weighted Average Prices as of 12/31/2007) |  | $                                     | 1.62
|-------------------------------------------------------------------------------- |  | ------------------------------------- | ----
|Target Stock Price                                                               |  | Low stock price on May 8, 2006        |     
|                                                                                 |  | High stock price on May 8, 2006       |     
|                                                                                 |  |                                       |     
|                                                                                 |  | Average of high/low                   |     
|                                                                                 |  | Portion of year                       |     
|                                                                                 |  |                                       |     
|                                                                                 |  |                                       |     
|                                                                                 |  | Target increase rate                  |     
|                                                                                 |  | Pro-rated target increase %           |     
|                                                                                 |  | Target increase per share:            |     
|                                                                                 |  | Target stock price as of 12/31/06     |     
|                                                                                 |  | Targeted increase per share for 2007: |     
|                                                                                 |  | Targeted stock price as of 12/31/07:  |     

Since
the Termination Stock Price of $1.62 was less than the Target Stock Price of $1.99, the executives would not have been entitled to a pro-rated award if they had been terminated as of
the end of fiscal 2007.

107

---



The following table shows the amounts that would have payable as of December 31, 2007, under various termination scenarios:

|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|

108

---





Change of Control

Objectives

As part of our normal course of business, we engage in discussions with other companies about possible collaborations, licensing and/or other ways in which the
companies may work together to further our respective long-term objectives. In addition, as a development stage company with intellectual property, we may become a potential acquisition
target by companies significantly larger and better financed than we are. In certain scenarios, the potential for a merger or for being acquired may be in the best interests of our stockholders. We
provide a component of severance compensation, along with accelerated vesting of certain long-term equity compensation, if an Executive Officer is terminated as a result of a change of
control transaction. We believe that this promotes the ability of our Executive Officers to act in the best interests of our stockholders even though they could be terminated as a result of the
transaction.

Definition

An "Acquisition Event" is defined as (a) any merger or consolidation which results in our voting securities outstanding immediately prior thereto
representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than 50% of the combined voting power of
our voting securities or such surviving or acquiring entity outstanding immediately after such merger or consolidation; (b) any sale of all or substantially all of our assets; or (c) our
complete liquidation.

Impact of Change of Control on Options and RSUs

Upon the occurrence of an Acquisition Event, the authorized administrator of the Plan shall take any one or more of the following actions with respect to the RSUs
and Options:



109

---







If an Acquisition Event had occurred on December 31, 2007, the following Options would have been forfeited if not exercised prior to the consummation of the acquisition event. In
addition, the RSUs shown below were vested but un-issued as of December 31, 2007. Since the RSUs vested on December 31, 2007, which occurred during the Company's holiday
shutdown period, these RSUs would have potentially been forfeited as well. However, if the Acquisition Event were consummated subsequent to December 31, 2007, the RSUs shown below would likely
have been issued prior to consummation.

|
|
|
|
|
|
|





Officer


Payment for
Unvested
RSUs


Payment for
Outstanding
Options*F. William Capp


$
51,865


$
224,512James M. Spiezio



22,411



97,251Matthew L. Lazarewicz



20,208



87,310




110

---







Officer


Options (#)


Option
Compensation
Cost


RSU (#)


RSU
Compensation
CostF. William Capp


307,042


$
70,043


34,122


$
14,256James M. Spiezio


132,714



30,288


14,744



6,164Matthew L. Lazarewicz


119,672



27,286


13,295



5,554


Note
that options granted prior to 2006 were fully vested prior as of December 31, 2007.

Impact of Change of Control on PSUs

In the event of an Acquisition Event, if the average of the high and low prices of our Common Stock on the day prior to the date of the closing is higher than the
"Target Stock Price" (as previously defined), we will be considered to have awarded fully-vested PSUs to the Executive Officers in accordance with the following formula:

Prorated
Actual Award = Potential Award X (Lapsed Months/56), where the "Lapsed Months" mean the number of calendar months that have lapsed from the Effective Date
(May 8, 2006) to the Closing Date.

If
such an Acquisition Event had occurred as of December 29, 2007, the calculation would have been as follows:

Average stock price on the day prior to closing:High stock price on December 31, 2007

$
1.57Low stock price on December 31, 2007

$
1.45Average of high/low

$
1.51

$
1.51Target stock price at 12/31/07 (as calculated above)

$
1.99

$
1.99


Since
the average of the stock price on the day prior to closing was less than the Target Stock Price, no prorated actual award would have been granted at December 31, 2007 should
there have been an Acquisition Event closing on that date.

111

---



DIRECTOR COMPENSATION

The following table represents the compensation paid to our Board of Directors with respect to fiscal 2007.

Name


Year


Fees Earned or
Paid in Cash
($)(1)


Option
Awards ($)
(2)(3)


Total
($)Stephen P. Adik


2007


$
60,500


$
30,000


$
90,500Daniel E. Kletter


2007



48,625



53,398



102,023Jack P. Smith


2007



51,750



30,000



81,750William E. Stanton


2007



34,500



26,572



61,072Virgil G. Rose


2007



35,375



47,616



82,991Edward A. Weihman


2007



24,875



53,832



78,707Lisa W. Zappala


2007



25,000



26,572



51,572




Total compensation per Director Compensation Table (above):

$
280,625Plus: 2006 compensation paid in 2007


41,500Less: 2007 compensation paid in January 2008


(30,500
)Total director compensation on cash basis for fiscal 2007

$
291,625


112

---



Name


Grant Date
of Stock
and Option
Awards
during 2007


Number of
Options
Granted
during 2007


Grant Date
Fair Value
of Stock and
Option Awards


Options
Outstanding at
December 31,
2007 (#)Stephen P. Adik


12/13/07


13,387


$
13,253


255,134Daniel E. Kletter


12/13/07


13,387



13,253


113,387Jack P. Smith


12/13/07


13,387



13,253


288,440William E. Stanton












74,357Virgil G. Rose


01/25/07


100,000



64,000Virgil G. Rose


12/13/07


13,387



13,253


113,387Edward A. Weihman


07/06/07


100,000



111,000Edward A. Weihman


12/13/07


13,387



13,253


113,387Lisa W. Zappala












150,000


Standard Director Compensation Arrangements

Our non-employee directors are compensated with a package that consists of both stock options and cash. The following table illustrates our existing
directors' compensation structure for fiscal 2007:

Cash Retainer:

$10,000Equity Retainer (common stock options):

$25,000 (i)
1 year vestFees for Attending Board Meetings:

$2,000/meeting
$1,000/callFees for Attending Meetings of Committees Of Which a Director Is a Member:

$1,500/meeting
$500/callMaximum Meeting Fees/Day:

Max. $3,500/dayCommittee Chair Retainer:

$2,500Audit Chair Retainer:

$10,000Audit Member Premium:

$5,000


113

---





All director options are granted under our Third Amended and Restated 1998 Stock Incentive Plan. Historically, option grants are typically made when a new director joins the Board, and
in late November or early December of each fiscal year to existing directors. Upon joining the board, directors receive a one-time grant of an option to purchase 100,000 shares of common
stock with an exercise price equal to the closing price of our common stock on the date of grant. These options typically vest monthly over a three-year period, expire after ten years and
continue to be exercisable once vested, regardless of whether the director continues to serve on our board. The annual director option grants for 2007 were granted at the regularly-scheduled December
board meeting. At that meeting, the board voted to ensure that, going forward, annual director option grants be automatically granted to all non-employee directors of the Company on December 1
of each year (commencing in 2008), on the same basis as described in Note (i) above. If December 1 does not fall on a business day, then the grant shall be considered to occur on the
next business day.

Former
directors Mr. Stanton and Ms. Zappala did not receive any option grants during 2007 because they resigned from the Board of Directors prior to December 2007 when
such options were granted to existing directors. Mr. Weihman and Mr. Rose joined the Board during 2007, and each received an option to purchase 100,000 shares of common stock at such
time, in addition to the annual retainer grant issued in December. In April 2007, Mr. Adik, Mr. Smith, Mr. Stanton and Ms. Zappala each entered into an agreement with the
Company to amend their November 2006 Director Option Agreements to compress what was previously a three year vesting period for such grants into a one-year vesting period.

The
following table illustrates our existing directors' compensation structure for fiscal 2008:

Cash Retainer:

$10,000Equity Retainer (common stock options):

$25,000 (i)
1 year vestFees for Attending Board Meetings:

$2,000/meeting
$1,000/callFees for Attending Meetings of Committees Of Which a Director Is a Member:

$1,500/meeting
$500/callMaximum Meeting Fees/Day:

Max. $4,500/dayCompensation Chair Retainer:

$7,500Audit Chair Retainer:

$10,000Audit Member Premium:

$5,000All other Chair Retainer:

$5,000


Item 12.    Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of February 29, 2008, certain information concerning the ownership of shares of our Common Stock by:



114

---





Each
beneficial owner other than The Quercus Trust has an address c/o Beacon Power Corporation, 65 Middlesex Road, Tyngsboro, Massachusetts 01879

|                                                                                                     |  | Shares beneficially owned | 
|---------------------------------------------------------------------------------------------------- |  | ------------------------- | 
|
|F. William Capp(2)                                                                                   |  | 2,317,636                 | 
|Matthew L. Lazarewicz(2)                                                                             |  | 1,136,874                 | 
|James M. Spiezio(2)                                                                                  |  | 1,063,105                 | 
|James Arseneaux(2)                                                                                   |  | 312,033                   | 
|Jack P. Smith(2)                                                                                     |  | 282,515                   | 
|Stephen P. Adik(2)                                                                                   |  | 246,209                   | 
|Chester R. Lyons(2)                                                                                  |  | 131,841                   | 
|Daniel E. Kletter(2)                                                                                 |  | 53,111                    | 
|Virgil G. Rose(2)                                                                                    |  | 46,128                    | 
|Edward Weihman(2)                                                                                    |  | 29,461                    | 
|5% Shareholders                                                                                      |  |                           | 
|Capital Ventures International(3)
One Capitol Place
Grand Cayman, Cayman Islands
British West Indies |  | 18,836,392                | 
|The Quercus Trust(4)
2309 Santiago Drive
Newport Beach, CA 92660                                     |  | 21,036,098                | 
|All directors and executive officers as a group (8 persons)                                          |  | 5,175,039                 | 

---

115

---





Equity Compensation Plan InformationThe following table gives information about equity awards under
our stock option plan and employee stock purchase plan, as of December 31, 2007.

|Plan category                                              |  | Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights |  | Weighted average
exercise price of
outstanding options,
warrants and rights |      | Number of securities
remaining available for
future issuance
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------
|
|Equity compensation plans approved by security holders     |  | 8,612,488                                                                                   |  | $                                                                           | 1.18 |                                                             
|Equity compensation plans not approved by security holders |  | 100,000                                                                                     |  | $                                                                           | 1.23 |                                                             
|                                                           |  |                                                                                             |  |                                                                             |      |                                                             
|Total                                                      |  | 8,712,488                                                                                   |  | $                                                                           | 1.18 |                                                             
|                                                           |  |                                                                                             |  |                                                                             |      |                                                             

For
additional information concerning our equity compensation plans, see discussion in footnotes 2 and 8 to our consolidated financial statements and under the caption "Compensation
Discussion and Analysis" in our proxy statement for the Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or prior to April 30, 2008.

Item 13.    Certain Relationships and Related Transactions and Director Independence

There were no related party transactions in the year ended December 31, 2007.

There
are no family relationships among any of our directors or executive officers. Messrs. Adik, Smith, Kletter, Weihman and Rose, representing a majority of our directors, are
determined to be independent under the rules of the NASDAQ Stock Market. Our board holds regularly scheduled meetings at which only these independent directors are present.

116

---



Related Party Transaction Policy and Procedures

The following policy and procedure has been adopted in writing by us, as part of the Nominating and Governance Committee's charter:

Related Party Transaction Policy and Procedures

Policy

It is the policy of the our Board of Directors that all Interested Transactions with Related Parties, as those terms are defined in this policy, shall be subject
to approval or ratification in accordance with the procedures set forth below.

Procedures

The Nominating and Corporate Governance Committee (the "Committee") shall review the material facts of all Interested Transactions and either approve or
disapprove of the entry into the Interested Transaction, subject to the exceptions described below. If advance Committee approval of an Interested Transaction is not feasible, then the Interested
Transaction shall be considered and, if the Committee determines it to be appropriate, ratified at the Committee's next regularly scheduled meeting. In determining whether to approve or ratify an
Interested Transaction, the Committee shall take into account, among other factors it deems appropriate, whether the Interested Transaction is on terms no less favorable than terms generally available
to an unaffiliated third-party under the same or similar circumstances and the extent of the Related Person's interest in the transaction.

The
Committee has reviewed the categories of Interested Transactions described below in "Standing Pre-Approval for Certain Interested Transactions" and determined that under
the terms of this policy the Company is approved to enter into each of the Interested Transactions described therein. The Committee may add additional categories of Interested Transactions to the list
of standing pre-approved Interested Transactions.

No
director shall participate in any discussion or approval of an Interested Transaction for which he or she is a Related Party, except that the director shall provide all material
information concerning the Interested Transaction to the Committee.

If
an Interested Transaction will be ongoing, the Committee may establish guidelines for the Company's management to follow in its ongoing dealings with the Related Party.

Thereafter,
the Committee, on at least an annual basis, shall review and assess ongoing relationships with the Related Party to see that they are in compliance with the Committee's
guidelines and that the Interested Transaction remains appropriate.

Definitions

An "Interested Transaction" is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any
indebtedness or guarantee of indebtedness) in which (1) the aggregate amount involved will or may be expected to exceed $100,000 in any calendar year, (2) the Company is a party or a
participant, and (3) any Related Party has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of
another entity).

A
"Related Party" is any (a) person who is or was (since the beginning of the last fiscal year, even if they do not presently serve in that role) an Executive Officer, director or
nominee for election as a director, (b) greater than 5 percent beneficial owner of the Company's common stock, or (c) Immediate Family Member of any of the foregoing.

117

---



"Immediate
Family Member" includes a person's spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law and anyone residing in such person's home (other than a tenant or employee).

Standing Pre-Approval for Certain Interested Transactions

The Committee has reviewed the categories of Interested Transactions described below and determined that under the terms of this policy the Company is approved to
enter into each of the Interested Transactions so described, even if the aggregate amount involved will exceed $100,000:



Item 14.    Principal Accountant Fees and Services

Principal Accounting Fees and Services

We have engaged Miller Wachman, LLP ("Miller Wachman") as our independent registered public accounting firm since October 29, 2004, and had engaged
Deloitte & Touche, LLP ("Deloitte") since

118

---



before
our initial public offering in November 2000 through the date of their resignation, August 27, 2004. Our most recent fiscal audit was performed by Miller Wachman.

Principal
accounting fees billed during 2007 and 2006 are as follows:

2007

2006Audit Fees

$
65,361

$
75,000Audit-Related Fees


114,000


127,371Tax Fees


17,708


10,000All Other Fees





Total Fees

$
197,069

$
212,371


Audit Fees

The aggregate audit fees billed by Miller Wachman for the fiscal year ended December 31, 2007 and 2006 were $65,361 and $75,000, respectively. These fees
include amounts for the audit of our consolidated annual financial statements and the reviews of the consolidated financial statements included in our Quarterly Reports on
Form 10-Q, including related services such as attest services and consents.

Audit-Related Fees

Audit-related fees billed during 2007 and 2006 were $114,000 and $127,371, respectively. These fees included work related to consent letters, review of
registration filings and quarterly reviews of our financials.

Tax Fees

The aggregate fees billed by Miller Wachman for tax services rendered during the fiscal years ended December 31, 2007 and 2006, respectively, were $17,708
and $10,000, respectively. These fees were for the preparation and filing of the 2006 income tax return and developing estimated payments for 2007 income taxes.

All Other Fees

There were no other fees paid to our auditors during 2007 or 2006.

Audit Committee Pre-Approval Requirements

The charter of our Audit Committee provides that it has the sole authority to review in advance and grant any pre-approvals of (i) all auditing
services to be provided by the independent auditor, (ii) all significant non-audit services to be provided by the independent auditors
as permitted by Section 10A of the Securities Exchange Act of 1934 and (iii) all fees and the terms of engagement with respect to such services. All audit and non-audit
services performed by Miller Wachman during fiscal 2006 were pre-approved pursuant to the procedures outlined above.

119

---





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 Document                                                                                                                                                                                                                                                                                        
|-------------- |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | +    |  | Sixth Amended and Restated Certificate of Incorporation,                                                                                                                                                                                                                                                       
|3.2            |  | +    |  | Certificate of Amendment of the Sixth Amended and Restated Certificate of Incorporation, dated June 25, 2007.                                                                                                                                                                                                  
|3.3            |  | +    |  | Certificate of Amendment of the Sixth Amended and Restated Certificate of Incorporation, dated June 26, 2007.                                                                                                                                                                                                  
|3.4.           |  | (18) |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                   
|3.5            |  | (16) |  | Certificate of Designation of Series A Junior Participating Preferred Stock, filed with the Secretary of State of Delaware on October 4, 2002.                                                                                                                                                                 
|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            |  | (20) |  | Amendment No. 2 to Rights Agreement dated as of August 8, 2007.                                                                                                                                                                                                                                                
|4.4            |  | (21) |  | Amendment No. 3 to Rights Agreement dated as of October 24, 2007.                                                                                                                                                                                                                                              
|4.5            |  | (4)  |  | Form of specimen stock certificate.                                                                                                                                                                                                                                                                            
|10.1.1         |  | (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.
|10.1.3         |  | (15) |  | Third Amended and Restated 1998 Stock Incentive Plan of the Company.                                                                                                                                                                                                                                           
|10.1.4         |  | (16) |  | Form of Incentive Stock Option Agreement of the Company.                                                                                                                                                                                                                                                       
|10.1.5         |  | (16) |  | Form of Non-Qualified Stock Option Agreement of the Company.                                                                                                                                                                                                                                                   
|10.1.6         |  | (1)  |  | Form of Non-Qualified Stock Option Agreement of the Company issued to certain consultants on July 24, 2000 and list of holders thereof.                                                                                                                                                                        
|10.1.7         |  | (15) |  | Employee Stock Purchase Plan of the Company.                                                                                                                                                                                                                                                                   
|10.1.8         |  | (1)  |  | Amended and Restated License Agreement dated October 23, 1998 between the Company and SatCon Technology Corporation                                                                                                                                                                                            
|10.1.9         |  | (22) |  | Lease dated as of July 23, 2007 between the Company and GFI Tyngsboro, LLC.                                                                                                                                                                                                                                    
|10.1.10        |  | (5)  |  | Form of Director and Officer Indemnification Agreement of the Company.                                                                                                                                                                                                                                         
|10.1.11        |  | (16) |  | Form of Restricted Stock Unit Agreement of the Company.                                                                                                                                                                                                                                                        
|10.1.12        |  | (14) |  | Sandia Labs Purchase Order.                                                                                                                                                                                                                                                                                    
|10.1.13        |  | (6)  |  | Agreement dated January 31, 2005 between the Company and the New York State Energy Research and Development Authority.                                                                                                                                                                                         

120

---



|10.1.14 |  | (7)  |  | Agreement dated January 31, 2005 between the Company and California State Energy Resources Conservation and Development Commission.                                                                                                                                                                                                                                                                     
|------- |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1.15 |  | (8)  |  | Investment Agreement dated April 22, 2005 among the Company, Perseus 2000 Expansion, L.L.C. and Perseus Capital, L.L.C.                                                                                                                                                                                                                                                                                 
|10.1.16 |  | (9)  |  | Common Stock Purchase Warrant dated May 24, 2005 issued by the Company to Perseus 2000 Expansion, L.L.C.                                                                                                                                                                                                                                                                                                
|10.1.17 |  | (9)  |  | Amended and Restated Common Stock Purchase Warrant dated May 24, 2005 issued by the Company to Perseus Capital, L.L.C.                                                                                                                                                                                                                                                                                  
|10.1.18 |  | (9)  |  | Registration Rights Agreement dated May 24, 2005 among the Company, Perseus 2000 Expansion, L.L.C. and Perseus Capital L.L.C.                                                                                                                                                                                                                                                                           
|10.1.19 |  | (10) |  | Option Agreement dated July 25, 2005 between the Company and Lisa Zappala.                                                                                                                                                                                                                                                                                                                              
|10.1.20 |  | (11) |  | Agreement dated October 7, 2005 between the Company and the Air Force Research Laboratory.                                                                                                                                                                                                                                                                                                              
|10.1.21 |  | (12) |  | 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.
|10.1.22 |  | (12) |  | Form of Warrant of the Company issued pursuant to the November 2005 financing.                                                                                                                                                                                                                                                                                                                          
|10.1.23 |  | (19) |  | Performance-based Restricted Stock Unit Agreement dated May 8, 2006 between the Company and F. William Capp.                                                                                                                                                                                                                                                                                            
|10.1.24 |  | (19) |  | Performance-based Restricted Stock Unit Agreement dated May 8, 2006 between the Company and James M. Spiezio.                                                                                                                                                                                                                                                                                           
|10.1.25 |  | (19) |  | Performance-based Restricted Stock Unit Agreement dated May 8, 2006 between the Company and Matthew L. Lazarewicz.                                                                                                                                                                                                                                                                                      
|10.1.26 |  | (19) |  | Restricted Stock Unit and Option Agreement dated May 8, 2006 between the Company and F. William Capp.                                                                                                                                                                                                                                                                                                   
|10.1.27 |  | (19) |  | Restricted Stock Unit and Option Agreement dated May 8, 2006 between the Company and James M. Spiezio.                                                                                                                                                                                                                                                                                                  
|10.1.28 |  | (19) |  | Restricted Stock Unit and Option Agreement dated May 8, 2006 between the Company and Matthew L. Lazarewicz.                                                                                                                                                                                                                                                                                             
|10.1.29 |  | (17) |  | Employment agreement dated March 2, 2007 between the Company and F. William Capp                                                                                                                                                                                                                                                                                                                        
|10.1.30 |  | (17) |  | Employment agreement dated March 2, 2007 between the Company and James M. Spiezio                                                                                                                                                                                                                                                                                                                       
|10.1.31 |  | (17) |  | Employment agreement dated March 2, 2007 between the Company and Matthew L. Lazarewicz                                                                                                                                                                                                                                                                                                                  
|10.1.32 |  | (17) |  | Restricted Stock Unit and Option Agreement dated March 2, 2007 between the Company and F. William Capp.                                                                                                                                                                                                                                                                                                 
|10.1.33 |  | (17) |  | Restricted Stock Unit and Option Agreement dated March 2, 2007 between the Company and James M. Spiezio.                                                                                                                                                                                                                                                                                                
|10.1.34 |  | (17) |  | Restricted Stock Unit and Option Agreement dated March 2, 2007 between the Company and Matthew L. Lazarewicz.                                                                                                                                                                                                                                                                                           
|14.1    |  | (13) |  | Corporate Code of Conduct dated December 19, 2007.                                                                                                                                                                                                                                                                                                                                                      

121

---



|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 2002
|32.1 |  | + |  | 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 February 14, 2005 (File No. 001-16171).  
|(7)  | Incorporated by reference from the Form 8-K filed on February 16, 2005 (File No. 001-16171).  
|(8)  | Incorporated by reference from the Form 8-K filed on April 25, 2005 (File No. 001-16171).     
|(9)  | Incorporated by reference from the Form 8-K filed on May 26, 2005 (File No. 001-16171).       
|(10) | Incorporated by reference from the Form 8-K filed on July 29, 2005 (File No. 001-16171).      
|(11) | Incorporated by reference from the Form 8-K filed on October 13, 2005 (File No. 001-16171).   
|(12) | Incorporated by reference from the Form 8-K filed on November 7, 2005 (File No. 001-16171).   
|(13) | Incorporated by reference from the Form 8-K filed on December 19, 2007 (File No. 000-31973).  
|(14) | Incorporated by reference from the Form 8-K filed on September 7, 2006 (File No. 000-31973).  
|(15) | Incorporated by reference from the Form S-8 filed on March 22, 2006 (File No. 333-132638).    
|(16) | Incorporated by reference from the Form 10-K filed on March 30, 2006 (File No. 000-31973).    
|(17) | Incorporated by reference from the Form 8-K filed on March 7, 2007 (File No. 000-31973).      
|(18) | Incorporated by reference from the Form 8-K filed on October 1, 2007 (File No. 000-31973)     
|(19) | Incorporated by reference from the Form 10-Q filed on May 9, 2006 (File No. 000-31973).       
|(20) | Incorporated by reference from the Form S-3 filed on August 17, 2007 (Fine No. 333-145165).   
|(21) | Incorporated by reference from the Form 8-K filed on October 26, 2007 (File No. 000-31973).   
|(22) | Incorporated by reference from the Form 8-K filed on July 23, 2007 (File No. 000-31973.)      
|+    | Filed herewith.                                                                               

122

---





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 CORPORATION
| |  | ------------------------
| |  | By:                     
| |  | Date:                   

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 CAPPF. William Capp     |  | President and Chief Executive Officer, and Director (Principal Executive Officer)                                                          |  | March 11, 2008
|/s/JAMES M. SPIEZIOJames M. Spiezio   |  | Vice President of Finance, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) |  | March 11, 2008
|/s/STEPHEN P. ADIKStephen P. Adik     |  | Director                                                                                                                                   |  | March 11, 2008
|/s/DANIEL E. KLETTERDaniel E. Kletter |  | Director                                                                                                                                   |  | March 11, 2008
|/s/VIRGIL G. ROSEVirgil G. Rose       |  | Director                                                                                                                                   |  | March 11, 2008
|/s/JACK P. SMITHJack P. Smith         |  | Director                                                                                                                                   |  | March 11, 2008
|/s/EDWARD A. WEIHMANEdward A. Weihman |  | Director                                                                                                                                   |  | March 11, 2008

123

---