SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------
                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                      OF THE SECURITIES EXCHANGE ACTOF 1934

                   For the fiscal year ended December 31, 2001
                        Commission file number 000-31973

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

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

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

                              (978) 694-9121 Phone
                               (978) 694-9127 Fax
              (Registrant's telephone number, including area code)
                            ------------------------
        Securities registered pursuant to Section 12(b) of the Act: None
                    Securities registered pursuant to Section
                                12(g) of the Act:

                     Common Stock, par value $.01 per share
                            ------------------------
     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___

     Indicate by check mark 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 ______

     As of  March  22,  2002,  the  market  value  of the  voting  stock  of the
Registrant held by non-affiliates of the Registrant was $28,656,474.

     The number of shares of the  Registrant's  common stock, par value $.01 per
share, outstanding as of March 22, 2002 was 42,770,856

                       DOCUMENTS INCORPORATED BY REFERENCE

Pertinent  extracts from the  Registrant's  Proxy  Statement for the 2002 Annual
Meeting of Stockholders to be filed with the Securities and Exchange  Commission
are  incorporated by reference into Part III of this Form 10-K. Such information
incorporated  by reference  shall not be deemed to  specifically  incorporate by
reference the information referred to in Item 402(a)(8) of Regulation S-K.



<PAGE>



                                Table of Contents
                                                                           Page
PART I
  Item 1.  Business                                                           2
  Item 2.  Properties                                                         8
  Item 3.  Legal Proceedings                                                  8
  Item 4.  Submission of Matters to a Vote of Security Holders                8
  Item 4A. Executive Officers of the Company                                  8

PART II
  Item 5.  Market For Registrant's Common Equity and Related
             Stockholder Matters                                             10
  Item 6.  Selected Financial Data                                           11
  Item 7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations                             13
  Item 7A. Quantitative and Qualitative Disclosure about Market Risk         23
  Item 8.  Financial Statements and Supplementary Data                       24
  Item 9.  Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure                             46

PART III
  Item 10. Directors and Executive Officers                                  47
  Item 11. Executive Compensation                                            47
  Item 12. Security Ownership of Certain Beneficial Owners
             and Management                                                  47
  Item 13. Certain Relationships and Related Transactions                    47

PART IV
  Item 14. Exhibits, Financial Statement Schedules, and
             Reports on Form 8-K                                             48

  Signatures                                                                 51



<PAGE>



Note Regarding Forward Looking Statements:

This Annual Report on Form 10-K contains forward-looking  statements concerning,
among other things,  the Company's  expected  future  revenues,  operations  and
expenditures and estimates of the potential markets for the Company's  products.
Such  statements  made by the Company  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 achieved by
the  Company may differ  materially  from these  projections  due to a number of
factors as  discussed  in the section  entitled  "Quantitative  and  Qualitative
Disclosure  about  Market  Risk - Certain  Factors  Affecting  Future  Operating
Results" of this Form 10-K.

                                     PART I

Item 1.  Business

Overview

We design,  develop and offer for sale,  flywheel-based power systems  providing
highly reliable,  cost-competitive,  environmentally  friendly,  uninterruptible
electric  power  for  commercial  facilities,  communications,  cable,  computer
networks,  the internet and  industrial manufacturing plants. We  currently sell
two  high-energy  flywheel-based  products  and soon will be offering high-power
uninterruptible  power supply  (or UPS) flywheel-based  products.  Our  current,
high-energy  products  deliver a low amount of power over  a long period of time
(typically  measured in hours), and the UPS products will be designed to deliver
high  amounts  of  power  over  a short  period of time  (typically  measured in
seconds).  We expect to be able to deliver the first of our proposed  high-power
UPS products late in 2002.

Users of electricity can experience  significant  losses in their  operations if
their electricity supply is partially or wholly interrupted,  such as by voltage
sags and surges or power outages. When grid-supplied electricity is interrupted,
these users must  employ some means to replace it. Even if the utility  industry
were to undertake  substantial upgrades and other investments to improve overall
utility grid reliability,  the grid's exposure to severe weather,  accidents and
other external  events means that the absolute  level of power quality  required
for  today's  sophisticated   electronic  and  industrial  applications  remains
difficult to achieve without local  uninterrupted  power protection close to the
place of use.

Lead-acid batteries are the most commonly used devices for providing replacement
electric  power and  ensuring  power  quality,  either  alone or as a  temporary
measure  until  generators  or  other  power  sources  can  be  activated.   Our
flywheel-based  systems  are  among the  energy  storage  technologies  that can
perform the same function as batteries.  Flywheel systems draw electrical energy
from a primary power source while that source is operational, store that energy,
and then convert that energy to provide immediate,  peak-power,  voltage support
and  uninterruptible  electric  power when the primary  power source fails or is
disrupted.

We believe that our current and anticipated  flywheel-based  products offer cost
and significant performance advantages over conventional,  battery-based back-up
power  and  UPS  systems.   These  advantages   include  improved  certainty  of
operations, more reliable monitoring,  higher reliability,  significantly longer
life,   improved   recharging   capability,   significantly   reduced  scheduled
maintenance,  more reliable monitoring, and greater environmental  friendliness.
We  expect  the  initial  cost to  users  of our UPS  products  to be  generally
competitive  with  those  of  battery  driven  UPS  systems  and we  expect  the
life-cycle costs to be  significantly  less than competing  systems.  Life-cycle
comparisons  consider the costs over the life of the product and include initial
costs,  expense  of  maintaining,   monitoring,  replacement  and  disposing  of
competing  products.  We also anticipate that our systems will provide customers
significantly  better  reliability  over  conventional  back-up  power  and  UPS
systems.


From  our  inception  through  December  31,  2001 we have  incurred  losses  of
approximately $94.1 million.  We do not expect to become profitable before 2004.
Also, our losses may fluctuate from quarter to quarter as our costs fluctuate.

Markets for our Products

High-power UPS Market. In the UPS market, power quality systems consist of three
interconnected devices; (a) solid-state  switches  and  control electronics, (b)
batteries  or flywheels  to supply  short-term  power and (c) engine  generators
to  supply  longer-term  power.  A short-term  energy  storage device  (having a
duration of seconds to minutes)  with control  electronics  is referred to as an
uninterruptible power  supply, or UPS. A UPS coupled with a generator to protect
against  longer-term  outages (minutes  to hours or  days) is  referred to as a
continuous power system, or CPS.

A  UPS  protects  sensitive  systems  from  sags,  surges  and  other  temporary
interruptions  or variations in  utility-supplied  power. If the UPS electronics
determines  that the power being supplied from the grid is  unacceptable or that
insufficient power is being supplied,  it will draw power from the back-up power
source to ensure uninterrupted, quality power.

A CPS provides back-up power for a lengthy period, thus if the power disturbance
lasts for more than a few seconds,  the CPS generator is activated and begins to
provide longer-term back-up power.  Internet service  providers, data processing
centers,  semiconductor  plants  and cellular  phone sites all  use CPS to  keep
critical  business equipment operating when electric utility grid power falters.

We believe that our flywheel systems provide significant advantages to potential
customers  due to the numerous  problems  associated  with lead acid  batteries,
including:

   o     Reliability. Batteries are not only prone to heat buildup and acid
         leaks that lead to battery failure, but when they are repeatedly used
         at close to their maximum power output, their power output capacity can
         rapidly decrease, reducing the batteries' effectiveness over time.
         Also, the amount of power available in battery systems may not readily
         be monitored and, therefore, the amount of energy cannot be assured.

   o     Cost. The use of batteries poses both direct and indirect costs. In
         addition to bearing the initial purchase costs of the batteries, a user
         must allocate significant space to large battery arrays (space that
         could otherwise be allocated to revenue generating equipment), must
         inspect and test them on site every few months (as their power output
         degrades over time), must cool them with costly air conditioning (if
         the user wishes to avoid the rapid degradation in performance and life
         that results with temperature variations), and must replace them every
         two to six years (depending on type of use, environment and other
         factors).

   o     Life. In applications where discharges use all or most of the battery's
         available reserve, the life of batteries is significantly reduced.

   o     Environmental. Batteries contain toxic materials such as lead and
         sulfuric acid and are considered hazardous waste and their disposal
         encounters rigorous and costly governmental environmental regulations.
         Facilities with spent batteries must make arrangements with hazardous
         waste handlers for disposal. Both the costs associated with disposal
         and the complexity of compliance for proper handling, permitting and
         regulatory requirements continue to increase and may accelerate sharply
         as pressure increases to curb such hazardous wastes.

The UPS  market  wattage  needs  range  from  200  watts to two  megawatts.  The
percentage of this market that is expected to be flywheel based is not known due
to the short history of such  flywheel-based  products.  However,  we expect the
percentage to increase as more market participants sell flywheel-based  products
and their advantages become better known.

High-Energy  Market.  The needs and  dynamics  of the back-up  power  market are
different than the market for our  anticipated  high-power  UPS products.  These
products supply low power for a longer time (as  contrasted to the UPS products,
which  supply  higher  power  for a  shorter  period), and have been designed to
address specifically the  back-up power needs of the telecommunications industry
(for example, telephony,  broadband, cable  and wireless (cellular) networks) in
decentralized locations in suburban and rural areas.

The  telecommunications  industry,  however,  experienced a significant  overall
slowdown that began in 2000 and is continuing,  and there can be no assurance of
when it will recover.  Significant  reductions  in both  maintenance budgets and
capital  build-out budgets  at telecommunications companies made these potential
customers  more  conservative  with their spending and  expenditure analysis and
less  willing  to try  new  technology solutions, such  as  our products.  These
conditions  have  also  discouraged   potential  customers  from  comparing  our
products'  life-cycle cost to that of batteries  because the savings produced by
our  products  accrue in the  future,  whereas the  additional  cost is realized
immediately. Because of these factors  we have elected to  shift our development
effort from high energy to high power in 2002.

Customers  that  might be  receptive  to our  products  are  those for which the
advantages of our products  outweigh their greater  initial cost. Some potential
customers might have particular needs for 100% reliability, such as critical use
facilities, hospitals, data centers and call centers; or a power source might be
very  expensive  to replace or  maintain  due to its  location  or for any other
reason (making life-cycle  analysis more attractive);  or a power source or site
might be  located  where  there  are  dramatic  swings in  temperature  or where
temperatures  were  very  high  (making  batteries  impractical  due  to  severe
degradation of performance).

Our Products

Late in  2002,  we  expect  to be able to  deliver  the  first  of our  proposed
high-power  UPS  products:  our Smart  Power(TM)  250 kWh  flywheel  UPS  (which
consists of a flywheel  system coupled with control  electronics).  As mentioned
earlier, this new product would bridge the supply of power for a short period of
time (measured in seconds) from interruption of electricity until the customer's
longer-term  source (such as generator or fuel cell) begins to operate.  Because
our UPS product will use a composite  flywheel,  we  anticipate  that it will be
able to supply  power for  approximately  twice as long as devices  using  steel
flywheels.  Our UPS product can be configured to achieve higher power (depending
on  customer  needs) by  connecting  units in  parallel.  It is  designed  to be
compatible with industry standards for standby  generators,  enabling its use in
CPS. We intend to expand the power output of our UPS product up to 500kWh.

We believe that this UPS product will be superior to battery-based UPS systems -
in life-cycle cost to the customer, in function,  and in environmental  benefits
described earlier.  We also expect this product to be superior to other flywheel
based  products  with which it will  compete.  We  anticipate  that it will also
require  significantly  less  maintenance  and  will  provide  superior  quality
performance.

The  flywheel  and  control  electronics  components  of our  UPS  product  have
previously  been  marketed   outside  the  United  States  by  their  respective
manufacturers..  We signed a distribution  agreement with our flywheel  supplier
early in 2001 for  these  systems,  and we are also  purchasing  the  associated
control  electronics.  The only needed adaptation of these components for the US
market is the  conversion of the control  electronics  component to US voltages,
which is being  undertaken  by the  supplier.  In the future,  we may design and
produce  components  for our UPS  product  to  replace  those  we are  currently
purchasing from third-party suppliers.

Our existing high-energy products -- the 2kWh and 6kWh flywheel Smart Energy(TM)
systems--  have surpassed  100,000 hours of field trials without  failure of our
mechanical  system,  which we believe  verifies  our ability to deliver  greater
reliability  than  battery  technologies.  At  Verizon  Communications,  Century
Communications, now part of Adelphia Communications, Rogers Cable, and WinDBreak
Cable, we have  successfully  maintained power with no degradation of service in
planned and unplanned losses of utility power.  Also, our systems can be adapted
to deliver the amount of power and back-up time required to meet customer  needs
by paralleling  flywheels.  This has been  successfully  demonstrated at Verizon
Communications sites.

We have obtained  Underwriters  Laboratory approval for our high-energy products
and plan to pursue the same for our UPS  product.  In  addition,  we have passed
Federal Communications  Commission (FCC) Class B emissions testing. We intend to
obtain FCC certification for our high-power  products this year. We designed and
certified our high-energy  product in accordance to Telcordia  standards,  which
represent the safety standards established by the  telecommunications  industry.
Our  high-power  products have been designed and will be tested for  concurrence
with the Institute of Electrical and Electronics  Engineers (IEEE) 587 standard,
which is the standard for all UPS systems.

Our Technology

Since our formation, we have been developing flywheel energy storage products to
offer customers  superior  reliability and performance at competitive costs. Our
composite  flywheel  is a  rotating  wheel on  hybrid,  magnetic  bearings  that
operates in a near frictionless vacuum environment.  Energy is stored as kinetic
energy  in  the  rotating  flywheel  rim.  The  flywheel  is  powered  up to its
operational  speed,  like a motor,  using  electricity  from an  external  power
source. The flywheel is able to spin for extended periods with great efficiency,
because  friction  and drag  are  virtually  eliminated  by  employing  magnetic
bearings and a vacuum in the container. Because it has very low friction, little
power is required to maintain the flywheel's  operating speed. When the external
power source is  eliminated,  the spinning  flywheel  drives a generator and its
bi-directional  inverter  converts the kinetic  energy into  electrical  energy,
providing it to an end-user as back up or UPS power.

Although  flywheels  have been  used  since the  industrial  revolution,  recent
attempts at commercializing flywheel systems have been based on technology first
developed for aerospace and nuclear processing applications and have resulted in
compact  high-energy  flywheels that can be commercially cost  competitive.  The
products  we  offer  employ  new  enabling   materials   and  products  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  high-strength,  lightweight fiber composites,  such as graphite
and fiberglass combined with resins,  which allow our flywheel to rotate at high
speeds and store large  amounts of energy  relative  to similar  size and weight
machines made from metals.  For example,  a 600-pound steel flywheel  running at
8,000  revolutions per minute (RPM) will store  approximately  900 watt-hours of
energy.  In contrast,  our 150-pound,  composite  flywheel running at 22,500 RPM
stores 2,700 watt-hours of energy and delivers 2,000 watt-hours of energy to the
load. On a per pound basis, our flywheel  technology is much more efficient than
steel flywheels.

Our  proprietary  technology  enables  the design of  maintenance-free  flywheel
products,  in that our products can employ a  proprietary  internal  rather than
external  vacuum system and our bearing systems have been designed and developed
to have a long life  with no  scheduled  replacement  or  maintenance  required.
Competing  flywheel  products rely on bearings and separate  vacuum systems that
require periodic maintenance and replacement.  Our proprietary  technologies are
used in our  high-energy  products,  but  have  not  yet  been  employed  in our
anticipated high-power UPS products.

Research and Development

We believe  that our  research  and  development  efforts are  essential  to our
ability  to  successfully  design  and  deliver  our  products  to our  targeted
customers,  as well as to modify and improve  them to reflect the  evolution  of
markets and customers. Our research and development team has worked closely with
potential communications customers to define product features and performance to
address  specific  needs.  Our  research  and  development  expenses,  including
engineering  expenses,  were approximately  $17,628,000 in 2001,  $12,715,000 in
2000 and  $3,506,000 in 1999. We anticipate  maintaining  significant  levels of
research and development  expenditures  in the future.  At December 31, 2001, we
employed  53  engineers  and  technicians  who  were  engaged  in  research  and
development. By March 22, 2002, that number had been reduced to 32.

Manufacturing

Historically, our manufacturing has consisted of the welding and assembly of our
products.  We have previously  contracted-out the manufacture of our high-energy
back-up power flywheel  components,  using our design  drawings and processes to
facilitate  more rapid growth by taking  advantage of third  parties'  installed
manufacturing capacity. For a limited number of non-proprietary  components,  we
generate  performance  specifications  and  obtain  either  standard  or  custom
components. We then perform the final assembly and testing.

Our shift in emphasis from high-energy  back-up power products to high-power UPS
products does not fundamentally  alter our previous plans to limit the amount of
manufacturing  we actually  do.  Although we recently  moved into a new facility
that  has  expanded  capacity,  we  expect  to  continue  to  rely  on  contract
manufacturing and outside  suppliers.  The supplier of the flywheel unit for our
new high-power UPS product and the supplier of the control  electronics for that
product are both single source suppliers, and the loss or interruption of supply
from either of these suppliers would adversely  affect our ability to market our
high-power UPS product,  and thus, our financial  results.  We are maintaining a
limited  manufacturing  staff, many of whom have been trained in and are skilled
in six-sigma quality control techniques. Six-sigma is a strategic implementation
of total quality management  principles.  We expect to apply these skills to our
contract  manufacturers  when  appropriate  and  also  to  our  state-of-the-art
composite  flywheel-manufacturing  laboratory. To manage cost and supplier risk,
we plan to have the ability to  manufacture  composite  rims (the most expensive
portion of flywheel  units),  if we determine that it is in our best interest to
do so. We have personnel skilled in management, design, and the manufacturing of
composites. These people, using our composite laboratory and suppliers, evaluate
manufacturing  processes and develop both the  equipment  and  personnel  skills
required to manage our suppliers' manufacturing processes.

Sales and Marketing

Initially,  we intend to sell our new UPS product (expected to be deliverable in
the third quarter of 2002) directly to customers,  and to build market  interest
through power quality manufacturer's representatives and through lead generation
via advertising, trade press articles, participation in industry conferences and
limited  direct mail to specific  power quality  customers.  We expect that this
will evolve into an alliance and channel strategy,  involving relationships with
power  quality  manufacturer's  representatives,  OEMs,  architects,  engineers,
system  integrators,  electrical  contractors  and power  quality  personnel  in
electric utilities.

With respect to our existing  high-energy back-up power products,  our marketing
strategy has been to identify key prospects and to work with those  companies to
formulate  our  product  plan,   pricing,   initial   installation  and  service
strategies.  We have  installed  on-site  and  working  demonstration  units  at
Verizon,  Cox  Communications,  WinDBreak  Cable and Rogers Cable.  We also have
sites  identified  and  installations  scheduled  at Verizon  Wireless  and AT&T
Broadband. We will continue to perform market analysis to identify opportunities
for installations  that fit the unique  characteristics of those products and to
emphasize the value proposition of our high-energy products. Potential customers
for  these  products   include   businesses  with  heightened   needs  for  100%
reliability, such as critical use facilities such as hospitals, data centers and
call centers.  We believe that our high-energy  products will also be attractive
to customers  with power sources that are very  expensive to replace or maintain
due to their location or other reason,  or power sources located where there are
high or low prevailing temperatures or dramatic changes in temperature.

Backlog

At December 31, 2001, our backlog of orders was approximately $90,000 consisting
of six units. We expect to ship these units during 2002.

Customer Service

We intend to provide maintenance and support for our UPS product and high-energy
products,  although we expect to contract out such  functions at an  appropriate
time. All our products are designed to have  maintenance-free  lives of at least
20 years.

Competition

Substantially  all of the UPS market  today  consists of sales of  battery-based
products,  rather than  battery-free  technologies.  The power quality and power
reliability  markets are intensely  competitive,  with the  principal  bases for
competition being system  reliability and quality,  brand recognition and price,
including  the initial  cost of the system to the customer and the total cost of
ownership.  Various energy  technology  companies  compete in the UPS market. We
will compete with:

   o Manufacturers and developers of battery technologies; and

   o Other companies developing flywheel technology.

Examples of other  technologies that are potentially  competitive  include ultra
capacitors,  fuel cells and super-conducting  magnetic energy storage.  Although
our  anticipated  UPS  product  will be new to the market,  we believe  that its
anticipated  higher  reliability,  lower  maintenance and long life technologies
will allow us to compete successfully. While we have not yet sold any units, our
market  research  indicates  that we should be able to demonstrate a competitive
value proposition. There are other companies selling diesel generators and micro
turbines that are competitors in the broadest sense, although we believe that in
most cases, our flywheels will be complementary to their equipment.

As for our high-energy  back-up power  products,  competition is on the basis of
cost and value to the  customer,  and we plan to continue to emphasis  the value
proposition of our high-energy products based upon dependability,  environmental
benefits, and long maintenance-free life of our products.

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.  The intellectual property rights of our
initial UPS product are owned or  controlled  by the  suppliers  of the two main
elements of that product.  We are  developing  technologies  that we expect will
result in a combination of UPS patents and trade secrets in the future.  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. These protections,  however, may afford only limited protection for
our technology.

We hold a perpetual, exclusive, royalty-free, worldwide right and license to use
SatCon Technology Corporation's flywheel technologies and patents for stationary
terrestrial  flywheel  applications.  Those  rights  include  eight  issued U.S.
patents and 13 U.S. and foreign patent applications that expire on various dates
between 2012 and 2018. This license covers SatCon's technologies and patents and
all improvements made by SatCon through the date of our initial public offering.
We are not entitled to any future  improvements to its flywheel  technology that
SatCon develops. We own all technology improvements we develop that are based on
the  technology licensed by us to SatCon. We have a patent on our vacuum system.
We also have one pending US  patent application, and 10 other applications being
prepared  for  filing.  Our  patent  and trade  secret  rights  are of  material
importance  to us and to our future  prospects.  We are actively  pursuing  both
national and foreign patent protection.

Government Regulation

We do not  believe  that  we will be  subject  to  existing  federal  and  state
regulatory   commissions   governing  electric  utilities  and  other  regulated
entities. We do believe 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,  pipeline  connections and
related matters. We intend to encourage the standardization of industry codes to
avoid  having  to comply  with  differing  regulations  on a  state-by-state  or
locality-by-locality  basis.  We have  obtained FCC approval of our  high-energy
products, and plan to pursue the same for our UPS product.

Employees

At December 31,  2001,  we had a total staff of 92  full-time  employees  and 12
independent   contractors,   of  which   approximately   21  were   involved  in
manufacturing  and assembly of our products,  53 were engineers and  technicians
involved in research and development,  ten were in sales, marketing and customer
service.  The remaining 20 people were involved in  administrative  tasks.  As a
first step in the  implementation  of our  strategy  discussed in Item 1 of this
document,  we  reduced  staffing  at all  levels of the  company in an effort to
preserve our cash  position.  As of March 22,  2002,  we had a total staff of 56
full-time employees and six independent contractors, of which four were involved
in manufacturing and assembly of our products, 32 were engineers and technicians
involved in research  and  development,  three were in sales and  marketing  and
three  in  customer   service.   The   remaining  20  people  were  involved  in
administrative  tasks.  None of our employees  are  represented  by a union.  We
consider our relations with our employees to be excellent.

Item 2.  Properties

Our principal  executive  offices,  laboratory and manufacturing  facilities are
located at a single  location in Wilmington,  Massachusetts.  This 51,650 square
foot facility operates under a lease that expires on September 30, 2007.

Item 3.  Legal Proceedings

We are not involved in any legal proceedings. However, we may  from time to time
be involved in legal proceedings in the ordinary course of our business.

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

None.

Item 4A.  Executive Officers of the Company

Our executive officers, their positions and their ages as of March 22, 2002, are
as follows:

 Name                       Age      Position

 William F. Capp             53      President and Chief Executive Officer,
                                     Director
 Robert D. French            62      Vice President of Manufacturing
 Matthew L. Lazarewicz       51      Vice President of Engineering
 Stephen A. Spanos           38      Corporate Controller
 James M. Spiezio            53      Vice President of Finance and Chief
                                     Financial Officer


William  F.  Capp.  Mr.  Capp has served as our  President  and Chief  Executive
Officer since  December 1,  2001when he joined  Beacon  Power.  Prior to joining
Beacon  Power,  Mr. Capp was the President of Bracknell  Corporation,  a company
that provided  infrastructure  for the  telecommunications  industry with annual
sales  of $350  million  and 30  regional  offices  in the US and  Canada.  From
1997-2000,  Mr.  Capp served as the  President  of York  International  where he
increased  aftermarket  sales by over 50% from 1997 to 1999,  which were the two
most profitable years in that division's history. From 1978-1997,  Mr. Capp held
numerous  positions  at  Ingersoll  Rand.  From  1992-1997,  he  served  as Vice
President and General Manager of the Compressor Division were he was responsible
for an  operation  with over 700  employees.  He managed a complex  supply chain
including  over $100  million in  purchases  from a variety of  companies.  From
1989-1992,  Mr. Capp was the Vice  President of  Technology  for The  Torrington
Company,  which  is a  $900  million  manufacturer  of  bearings  and  precision
components to the automotive and other industries  worldwide.  Mr. Capp assisted
in the development of new products,  new manufacturing  technologies and project
management.  He also held numerous other engineering  positions within Ingersoll
Rand.  Prior to joining  Ingersoll  Rand in 1978,  he worked  for  Ford's  Truck
Division  in such  positions  as project  engineering,  supervisor,  and product
planning. Mr. Capp received his Bachelor of Science in Aeronautical  Engineering
from Purdue  University and his Master of Business  Administration  and Master's
Degrees in Mechanical  Engineering from the University of Michigan.  He also has
his Black Belt Training Program from the American Society for Quality.


Robert D.  French.  Mr.  French  joined us in April  2000 as Vice  President  of
Manufacturing and is responsible for all phases of production.  Prior to joining
us, Mr. French worked for the General  Electric  Company in various  capacities.
His last position there was with the Aircraft  Engine Group,  where from 1995 to
2000, he worked on moving the U.S. Navy's newest fighter engine,  the F414, from
development  to full  production.  Prior to this,  Mr.  French was  involved  in
building and operating an automated  factory for jet engine  components and held
positions as Manager of Engine Assembly and Flight Support and as  Manufacturing
Program Manager for several engine product lines. His professional  career began
with the U.S. Army Materials and Mechanics Research Center,  where he progressed
from Metallurgist to Director of the Metals and Ceramics Laboratory.  Dr. French
received his  Bachelor's  and Master's  Degrees in Mechanical  Engineering  from
Northeastern University and his Ph.D. in Engineering,  with a major in Materials
Science, from Brown University.

Matthew  L.  Lazarewicz.  Mr.  Lazarewicz  has served as our Vice  President  of
Engineering  since February 1999. Prior to joining us, Mr. Lazarewicz worked for
General  Electric Company in various  capacities.  He started his 25-year career
with the  General  Electric  Company  in the gas  turbine  division  as a design
engineer.  After a transfer  to GE Aircraft  Engines,  he  progressed  through a
variety of positions in design,  manufacturing,  quality, marketing, and product
support in both military and commercial applications. Most recently he served as
a manager  of program  independent  analysis  from 1996 to 1999,  and he was the
mechanical  design manager for the F414 engine used in the Navy front line F/A18
fighter from 1991 to 1996.  This  included the  development  through  production
phases.  He was recognized as the GE Aircraft Engines "Engineer of the Year" and
received the  Department of Defense  "Excellence in  Acquisition"  Award for his
leadership of this project. 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.

Stephen  A.  Spanos.  Mr.  Spanos  joined us in  January  2001 as our  Corporate
Controller.  He has over  fifteen  years  of  financial  accounting  experience,
including  eight  years of  public  accounting  and  seven  years  in  financial
management.  Prior to joining  Beacon  Power,  Mr. Spanos was with Waste Systems
International,  a publicly traded solid-waste  management company,  from October
1998 to January  2001 where he last served as  Corporate  Controller.  From 1996
until  October  1998,  Mr.  Spanos  held  financial  management  positions  with
Picturetel, a manufacturer of videoconferencing products and Zoom Telephonics, a
manufacturer  of modems and other  telephony  products.  Mr. Spanos holds both a
Bachelor  of Science in  Business  Administration  and a  Master's  of  Business
Administration  from Boston  University.  Mr. Spanos is also a Certified  Public
Accountant.

James M. Spiezio.  Mr.  Spiezio joined us in May 2000. He has served as our Vice
President  of  Finance  and  Chief  Financial  Officer  since  July 2000 and our
Corporate  Controller  from May 2000 to July  2000.  He  worked  as a  financial
consultant  from  November 1999 to May 2000.  He has over  twenty-five  years of
diversified  manufacturing and financial management experience.  Prior to acting
as an independent  financial  consultant,  Mr.  Spiezio was the Chief  Financial
Officer  at  Starmet  Corporation,  a  diversified  metallurgical  manufacturing
company,  from January 1993 to November 1999. While at Starmet he also served as
President  of a wholly  owned  manufacturing  facility  for five  years and held
additional  financial  management  positions including Corporate  Controller and
Manager  Planning  and  Analysis.  Prior to joining  Starmet,  Mr.  Spiezio held
financial  management  positions with United Technologies  Corporation,  Pratt &
Whitney Aircraft Group in accounting, cost and business analysis. Prior to Pratt
& Whitney, Mr. Spiezio held financial management positions with General Electric
Company in both the Power Systems and Apparatus  Services  business groups.  Mr.
Spiezio is a graduate of the Indiana University School of Business.

<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

The  Company's  Common Stock is quoted on the NASDAQ  National  Market under the
symbol  "BCON".  The following  table sets forth the high and low sales price of
the common stock for the period indicated.

                                            High            Low

Fourth quarter 2001                        $ 1.85          $0.75
Third quarter 2001                         $ 6.06          $1.30
Second quarter 2001                        $ 8.20          $3.65
First quarter 2001                         $10.75          $4.81

Fourth quarter (November 17, 2000*
through December 31, 2000)                 $10.13          $6.13
--------------
* November 17, 2000 was the first day of trading for our common stock.

On March 19,  2002,  the last  reported  sale price of the  common  stock on the
NASDAQ National Market was $0.75 per share, and there were 257 holders of record
of common stock.

We have never declared or paid cash dividends on shares of our common stock.  We
expect to retain any future  earnings to finance the  expansion of our business,
and therefore we 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.

Recent Sales of Unregistered Securities

During 2001, we issued no unregistered securities.

Use of Proceeds of Initial Public Offering

On November 16,  2000,  the  Securities  and  Exchange  Commission  declared our
Registration  Statement  on Form S-1  (File  No.  333-43386)  effective.  In our
initial  public  offering  during the fourth  quarter of 2000, we sold 9,200,000
shares of our common stock, inclusive of the underwriters' over allotment, at an
initial public  offering price of $6.00 per share. We received net proceeds from
our initial public offering of  approximately  $49.3 million,  reflecting  gross
proceeds of $55.2 million net of underwriter  commissions of approximately  $3.9
million and other  offering  costs payable to persons,  other than  directors or
officers, of approximately $2.0 million.

From November 16, 2000 to December 31, 2001, we spent approximately $9.0 million
for inventory and materials  used in research and  development  and $6.7 million
for  property  and  equipment,  including  the  build-out of our facility at 234
Ballardvale Street in Wilmington,  MA. In addition,  we spent approximately $1.2
million to pay dividends on our preferred stock that accrued through the date of
our initial public offering. We have spent approximately $15.5 million for other
working  capital  needs.  In addition to the above,  we advanced  funds totaling
approximately $785,000 to three officers of the Company.  Approximately $152,000
of these  advances  was repaid by the  officers  during  2001.  The advances are
expected to be repaid in full by the officers  and are secured by the  officers'
holdings of Beacon Power Corporation common stock.  Through March 22 of 2002, an
additional $125,000 has been repaid on these advances, including one officer who
has paid in full.  The remainder of the net offering  proceeds has been invested
in short-term, income producing bank deposits pending their use for the purchase
of property and equipment  and working  capital  needs.  Other than as disclosed
above,  none of these  amounts were direct or indirect  payments to directors or
officers of the issuer or their  associates or to persons  owning 10% or more of
our common stock or to any of our affiliates.

<PAGE>
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 following  tables present selected  historical  financial data for the years
ended December 31, 2001,  2000,  1999, 1998 and for the period from May 8, 1997,
the date of our inception, through December 31, 2001.
<TABLE>
<CAPTION>
<S>                                           <C>           <C>           <C>          <C>         <C>            <C>

                                                                                               Period from Date    Period from Date
                                                                                                 of Inception        of Inception
                                                       Year ended December 31,                 (May 8, 1997) to   (May 8, 1997) to
                                                                                                  December 31,        December 31,
                                                 2001         2000         1999          1998           1997               2001
                                             --------------------------------------------------------------------------------------
                                                                 (In Thousands, except Per Share Data)

Statement of Operations Data:
Revenues                                      $       -      $    50      $   269      $     -        $   232         $    551

Operating expenses:
   Selling, general and administrative            8,940        4,631        1,559        1,188          1,168           17,486
   Research and development                      17,628       12,715        3,506        3,524          2,292           39,664
   Loss on sales commitments                          -           51          325            -              -              376
   Depreciation and amortization                  1,324          401          219           78              -            2,022
                                             --------------------------------------------------------------------------------------
Total operating expenses                         27,892       17,798        5,609        4,790          3,460           59,548
                                             --------------------------------------------------------------------------------------
Loss from operations                            (27,892)     (17,748)      (5,340)      (4,790)        (3,228)         (58,997)
Interest and other income (expense), net          1,746          330         (331)          (3)           117            1,857
                                             --------------------------------------------------------------------------------------
Net loss                                        (26,146)     (17,418)      (5,671)      (4,793)        (3,111)         (57,140)

Preferred stock dividends                             -      (35,797)        (917)        (112)             -          (36,826)
Accretion of redeemable convertible
  preferred stock                                     -          (64)         (42)          (7)             -             (113)
                                             --------------------------------------------------------------------------------------
Loss to common shareholders                   $(26,146)   $  (53,279)      (6,630)      (4,912)        (3,111)         (94,079)
                                             ======================================================================================
Net loss per share, basic and diluted         $ (0.61)    $   (10.77)    $(393.52)    $(291.58)     $ (184.67)
                                             =====================================================================
Shares used in computing net loss per
share, basic and diluted                        42,551         4,946           17           17             17
                                             =====================================================================


</TABLE>

<TABLE>
<CAPTION>
<S>                                             <C>         <C>         <C>           <C>           <C>
                                                                  As of December 31,
                                                 2001        2000          1999         1998        1997
                                              -----------------------------------------------------------
                                                                    (In thousands)
Balance Sheet Data:
Cash and cash equivalents                      $34,602      $62,497     $    234     $  2,491       $ 30
Working capital                                 32,788       59,224         (878)       1,481        (29)
Total assets                                    42,131       67,738          974        2,992        112
Redeemable convertible preferred stock               -            -        4,535        4,493          -
Total stockholders' equity (deficiency)        $38,981      $63,308     $ (8,591)     $(2,720)      $ (1)

</TABLE>


<PAGE>



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

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 our
plans, estimates, intentions, expectations and beliefs. Our 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  "Certain  Factors  Affecting  Future  Operating  Results"  section  and
contained elsewhere in this Form 10-K.

Overview

We design, develop and offer for sale battery-free, flywheel-based power systems
to  provide   highly   reliable,   cost-competitive,   environmentally-friendly,
uninterruptible electric power for industrial  manufacturing plants,  commercial
facilities, communications and computer networks, the Internet. Although we have
been a  producer  of  high-energy  flywheel-based  products,  we  will  soon  be
offering,  high-power  uninterruptible  power  supply  (or  UPS)  flywheel-based
products. We expect to be able to deliver the first of these proposed high-power
 UPS products during the third quarter of 2002.

From  our  inception  through  December  31,  2001 we have  incurred  losses  of
approximately  $94.1 million. We expect to continue to incur losses as we expand
our  product  development  and  commercialization  program  and  prepare for the
commencement  of full  manufacturing  operations.  We expect  that  losses  will
fluctuate from quarter to quarter and that such fluctuations may be substantial.

Revenues.  During the fourth quarter of 2000 and throughout 2001, we shipped our
first units.  While we have orders to ship six  additional  commercial  units in
2002,  we are seeking  other  markets for our current  products and other future
products.  Prior to the fourth  quarter of 2000, our revenues were the result of
development contracts with government entities focused on the design of flywheel
technologies.  We have placed  several  development  prototypes  with  potential
customers  and shipped  pre-production  units.  These  products were provided to
potential  customers  without  charge  or on a  demonstration  basis to allow us
access to field test  information  and to  demonstrate  the  application  of our
technologies.

Selling,  General and Administrative  Expenses. Our sales and marketing expenses
consist  primarily of  compensation  and  benefits  for our sales and  marketing
personnel and related business development  expenses.  During 2001, we increased
our sales and  marketing  effort by hiring  five sales  persons  and  initiating
several  marketing  research efforts to help us find markets for our current and
future products. Prior to 2001, our historical sales and marketing expenses have
not been  material.  We continue  to rely on  engineering  personnel  to provide
technical  specifications  and product overviews to our potential customer base.
We expect sales and marketing  expenses to continue to increase as we expand our
marketing  efforts  to seek  new  markets  for our  products.  Our  general  and
administrative  expenses consist  primarily of compensation and benefits related
to our corporate staff,  professional fees, insurance and travel. During October
2001 and again in March 2002,  we reduced our  headcount in sales and  marketing
and in administration  functions. As a result of these reductions, we expect our
selling,  general  and  administrative  expenses  to be reduced  during  2002 as
compared to 2001.

Research  and  Development.  Our  cost  of  research  and  development  consists
primarily of the cost of compensation and benefits for research and development,
manufacturing  and support staff,  as well as materials and supplies used in the
engineering design process.  These costs increased  significantly during 2001 as
we  completed  the  designs  of our 2kWh unit and our 6kWh  units as well as the
related electronics.  While we do not expect to incur any significant additional
costs for the 2kWh or 6kWh units,  we do expect to incur  significant  costs for
the design and development of our  high-powered  products.  These costs began in
the first quarter of 2002 and are expected to continue  throughout the remainder
of 2002  and  into  2003.  As a part of the new  strategy  for  moving  into the
high-powered  market,  we have reduced the number of our development  teams from
two to one.  The one team will focus  solely on the  high-powered  design.  As a
result of this, we reduced our headcount with respect to  development  engineers
significantly  in March 2002.  Therefore,  while we will continue to develop the
new  high-powered  products,  we expect our cost of research and  development in
2002 to be reduced compared to 2001.

Loss on Sales Commitments.  We will establish reserves for anticipated losses on
sales commitments when our cost estimates  indicate a loss will be incurred.  We
accrued  such losses  during the year based on our  estimated  costs to complete
delivery  commitments  during  2000 and  2001.  We have  adjusted  our  delivery
schedule and reversed projected losses contemplated earlier in 2000 and 2001. We
expect  to  decrease  our cost  per unit  through  engineering  design  changes,
operating efficiencies, and volume purchasing discounts.

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 do have intellectual property
in the form of a patent on our vacuum  system  that we will begin to amortize in
2002. We also expect to obtain other patents during 2002 and beyond.

Interest and Other  Income/Expense,  net. Our non-operating  income and expenses
are primarily  attributable to interest income attributable to cash on hand from
our  private  financings  and  initial  public  offering  and  interest  expense
associated with our capital.

Preferred  Stock  Dividends.  Prior to our initial public offering of our common
stock, we had various classes of preferred stock  outstanding  each of which was
entitled to receive dividends.  We accrued dividend expense monthly according to
the  requirements  of each class of  preferred  stock.  In  addition,  we issued
warrants to purchase  common stock in  conjunction  with the issuance of certain
classes of the preferred  stock. Any value assigned to these warrants is charged
to dividend expense. As a result of our initial public stock offering during the
fourth quarter of 2000, we no longer have any preferred stock  outstanding.  All
outstanding dividends were paid in full during 2001.

Results of operations:

Comparison of Year ended December 31, 2001 and 2000

Revenue.  During 2001 we shipped 20 flywheel  units.  These units were primarily
demonstration and test units. As such, any proceeds from the sale of these units
were  applied as a  reduction  against  research  and  development  expense.  We
recorded  $50,000 of  revenue  during the year ended  December  31,  2000.  This
revenue was derived from a milestone related shipment of our first two units. No
revenue  was  recognized  for five  other  units  that we  shipped in the fourth
quarter of 2000.  Proceeds from these sales  totaling  $69,000 were applied as a
reduction against research and development expense in 2001.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses for 2001 totaled  approximately  $8,940,000 compared to
approximately  $4,631,000 during the year ended December 31, 2000. This increase
of  $4,309,000  is primarily  the result of increased  compensation  and benefit
costs due to the increased staffing required for infrastructure  development and
expansion of our sales and marketing  effort.  During  October 2001 and again in
March  2002,   we  reduced  our   headcount  in  sales  and   marketing  and  in
administration  functions.  As a  result  of these  reductions,  we  expect  our
selling,  general  and  administrative  expenses  to be reduced  during  2002 as
compared to 2001.

Research and Development  Expenses.  Research and development  expenses for 2001
were  approximately  $17,628,000,  compared to approximately  $12,715,000 during
2000.  This  increase  of  $4,913,000  is  primarily  the  result  of  increased
compensation  and  benefit  costs  related  to an  increase  in  the  number  of
engineering  and   manufacturing   personnel  and  materials  used  for  product
development. These costs increased significantly during 2001 as we completed the
designs of our 2kWh unit and our 6kWh units as well as the related  electronics.
While we do not expect to incur any significant additional costs for the 2kWh or
6kWh  units,  we do  expect  to  incur  significant  costs  for the  design  and
development of our high-powered products. These costs began in the first quarter
of 2002 and are expected to continue  throughout  the remainder of 2002 and into
2003. As a part of the new strategy for moving into the high-powered  market, we
have reduced the number of our  development  teams from two to one. The one team
will focus solely on the  high-powered  design.  As a result of this, we reduced
our headcount with respect to development engineers significantly in March 2002.
Therefore,  while we will continue to develop the new high-powered  products, we
expect our cost of research and  development  in 2002 to be reduced  compared to
2001.

Loss on Sales Commitments.  Loss on sales commitments for 2000 was approximately
$51,000. No loss on sales commitments was recorded during 2001. We accrued these
losses during 2000 based on our estimated costs to complete delivery commitments
during 2000 and 2001.  We have  adjusted  our  delivery  schedule  and  reversed
projected losses contemplated earlier in 2000. As a result, at both December 31,
2001 and 2000 there was no cumulative accrual.

Depreciation  and  Amortization.  Depreciation  and  amortization  for 2001 were
approximately  $1,324,000  compared to approximately  $401,000 during 2000. This
increase of $923,000 is attributable  to amortization of leasehold  improvements
at the new  facility in  Wilmington  MA as well as  amortization  on  additional
machinery and equipment and other capital assets acquired in 2001.

Interest and Other Income/(Expense),  net. Our net non-operating income for 2001
was  approximately  $1,746,000  compared to approximately  $330,000 in 2000. The
increase is  attributable  to interest  income  associated  with the higher cash
balances resulting from our stock offering during the fourth quarter of 2000.

Preferred Stock Dividends.  During 2000, we accrued preferred stock dividends on
redeemable  convertible  preferred stock of approximately  $35,797,000.  Of this
amount  $33,000,000  was a non-cash  charge  from the  issuance  of  warrants in
connection  with the  issuance of our Class F redeemable  convertible  preferred
stock. In addition,  we recorded a $1,300,000  non-cash charge from the issuance
in warrants to purchase  common  stock in  conjunction  with the issuance of our
Class D  redeemable  convertible  preferred  stock.  As a result of our  initial
public stock  offering  during the fourth quarter of 2000, we no longer have any
preferred stock outstanding.  All outstanding dividends were paid in full during
2001.

Comparison of Year ended December 31, 2000 and 1999

Revenue. We recorded $50,000 of revenue during the year ended December 31, 2000.
This  revenue was derived  from a  milestone  related  shipment of our first two
units.  No revenue  was  recognized  for five other units that we shipped in the
fourth  quarter.  Proceeds from these sales  totaling  $90,000 were applied as a
reduction  against  research and  development  expense in 2001.  During 1999 our
revenue was  approximately  $269,000,  which  resulted  from work  performed  on
contracts to demonstrate applications of our technologies.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses totaled approximately  $4,631,000 during the year ended
December 31,  2000,  compared to  approximately  $1,559,000  during  1999.  This
increase of  $3,072,000 is primarily  the result of increased  compensation  and
benefit  costs  due  to  the  increased  staffing  required  for  infrastructure
development  and  expansion  of our sales  and  marketing  effort.  We expect to
continue to increase and  strengthen our sales and marketing  effort  throughout
2001.

Research and Development  Expenses.  Research and development  expenses for 2000
were  approximately  $12,715,000,  compared to approximately  $3,506,000  during
1999.  This  increase  of  $9,209,000  is  primarily  the  result  of  increased
compensation  and  benefit  costs  related  to an  increase  in  the  number  of
engineering  and   manufacturing   personnel  and  materials  used  for  product
development.  During the fourth  quarter of 2000, we completed  the  development
process of our first commercial  product and are actively  developing our family
of products.  During 2001,  we expect this  research and  development  effort to
continue at about the same level as during 2000.

Loss on Sales Commitments.  Loss on sales commitments for 2000 was approximately
$51,000  compared to $325,000  during 1999.  We accrued  these losses during the
year based on our estimated costs to complete delivery  commitments  during 2000
and 2001. We have adjusted our delivery  schedule and do not expect to incur the
losses  contemplated  earlier in the year. As a result, at December 31, 2000 the
cumulative accrual was $0.

Depreciation  and  Amortization.  Depreciation  and  amortization  for 2000 were
approximately  $401,000  compared to  approximately  $219,000  during 1999. This
increase of $182,000 is  attributable  to increases  in capital  lease costs and
capital equipment expenditures.

Interest and Other Income/(Expense),  net. Our net non-operating income for 2000
was  approximately   $330,000,   compared  to  net   non-operating   expense  of
approximately  ($331,000)  for 1999.  The increase is  attributable  to interest
income  associated  with the higher  cash  balances  resulting  from our various
financings  early in 2000 and the  proceeds  of our stock  offering  during  the
fourth quarter of 2000.

Preferred Stock Dividends.  During 2000, we accrued preferred stock dividends on
redeemable  convertible  preferred stock of approximately  $35,797,000.  Of this
amount  $33,000,000  was a non-cash  charge  from the  issuance  of  warrants in
connection  with the  issuance of our Class F redeemable  convertible  preferred
stock. In addition,  we recorded a $1,300,000  non-cash charge from the issuance
in warrants to purchase  common  stock in  conjunction  with the issuance of our
Class D redeemable convertible preferred stock.

Liquidity and Capital Resources

Our cash  requirements  depend  on many  factors,  including  our  research  and
development  activities,  continued  efforts to  commercialize  our products and
additional  market  development.  We expect to make significant  expenditures to
fund our working capital,  develop our technologies and explore opportunities to
find and develop other markets to sell our products. From our inception to date,
our  primary  cash  requirements  have been to fund  research  and  development,
establish production capabilities including capital expenditures and for working
capital including various infrastructure costs.

Net  cash  used  in  operating   activities  was  approximately   ($24,220,000),
($12,458,000)  and  ($4,840,000)  for 2001,  2000, and 1999,  respectively.  The
primary  component to the  negative  cash flow from  operations  is from the net
losses.  For the year 2001,  we had a net loss of  approximately  ($26,146,000).
This was offset by approximately  $1,324,000 for depreciation and  amortization;
$347,000  for a  non-cash  expense  from the  change in stock  option  terms for
certain terminated  employees;  other non-cash  consulting expenses of $340,000;
$303,000 for a non-cash  charge in connection  with the  settlement of a lawsuit
and approximately $109,000 from the sale or disposal of certain fixed assets and
tooling. Changes in operating assets and liabilities used approximately $497,000
of cash during 2001. The primary  components were decreased accounts payable and
accrued   expenses  of  approximately   $857,000  and  decreased   inventory  of
approximately  $208,000.  These were offset by  decreased  prepaid  expenses and
other current  assets of  approximately  $274,000 and an increase in our accrual
for accrued  compensation  and benefits of $444,000.  For the year 2000 we had a
net  loss  of  approximately   ($17,418,000)  offset  by  non-cash  expenses  of
approximately  3,799,000.  Changes in operating assets and liabilities generated
cash of  approximately  $1,161,000  during 2000.  For the year 1999 we had a net
loss of approximately  ($5,671,000) offset by non-cash expenses of approximately
$1,014,000.  Changes in  operating  assets and  liabilities  used  approximately
($183,000) of cash during 1999.

Net  cash  used  in  investing   activities  was   approximately   ($3,655,000),
($3,702,000) and ($461,000) for 2001, 2000 and 1999, respectively. The principal
uses of cash were related to the purchase of equipment  including  the leasehold
improvements to the new operating  facility and the payment of security deposits
pursuant to obtaining the new facility lease.

Net cash used from financing  activities was approximately  $21,000 during 2001.
This compares to net cash generated of approximately  $78,423,000 and $3,045,000
for 2000 and 1999, respectively. During 2001, the principal sources of cash were
approximately $829,000 from the exercise of employee stock options and shares of
common  stock  issued under out Employee  Stock  Purchase  Plan.  In addition we
refinanced   certain   fixed  assets  under   capital   leases  that   generated
approximately  $496,000.  These proceeds were offset by the payment of dividends
accrued in 2000 related to various classes of preferred  stock of  approximately
$1,159,000  and the repayment of capital  leases of $186,000.  During 2000,  the
principal  source of cash was our initial  public  stock  offering  which raised
approximately  $49,341,000  net of  $5,858,000 of expenses  associated  with the
offering.  Additionally, we raised approximately $28,352,000 during 2000 through
our sale of Class F Preferred  stock.  During 1999, we received cash proceeds of
$3,150,000 from the issuance of notes payable to investors.  Remaining  proceeds
from  our initial  public  stock  offering  of  approximately  $34.6 million at
December 31, 2001 were  held in short-term,  interest-bearing  investment  grade
securities to provide liquidity for operations.

Based upon our operating plan and our recent reduction in headcount,  we believe
that our cash and cash  equivalents  and future cash flow from  operations  will
satisfy the Company's working capital needs for the next 24 months.  Inasmuch as
we do not  expect to become  profitable  during  this  period,  our  ability  to
continue as a going  concern  thereafter  will depend on our being able to raise
additional  capital.  We may not be able to raise this  capital at all, or if we
are  able to do so,  it may be on  terms  that  are  extremely  dilutive  to our
shareholders.

Impact of Recently Issued Accounting Standards Not Yet Implemented

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations,"  and SFAS
No. 142, "Goodwill and Other Intangible  Assets." SFAS No. 141 will apply to all
business  combinations  that the Company  enters into after June 30,  2001,  and
eliminates  the  pooling-of-interests  method  of  accounting.  SFAS No.  142 is
effective  for fiscal years  beginning  after  December 15, 2001.  Under the new
Statements,  goodwill and intangible assets deemed to have indefinite lives will
no  longer be  amortized  but will be  subject  to  annual  impairment  tests in
accordance  with the  Statements.  Other  intangible  assets will continue to be
amortized over their useful lives.  We do not expect  adoption of this statement
to have a material impact on its financial position or results of operations.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal of  Long-Lived  Assets,  which  supercedes  SFAS No. 121.  SFAS No. 144
further refines the requirements of SFAS No. 121 that companies (1) recognize an
impairment  loss  only if the  carrying  amount  of a  long-lived  asset  is not
recoverable  based on its  undiscounted  future  cash  flows and (2)  measure an
impairment loss as the difference  between the carrying amount and fair value of
the asset.  In  addition,  SFAS No. 144  provides  guidance  on  accounting  and
disclosure issues surrounding long-lived assets to be disposed of by sale. We do
not expect adoption of this statement to have a material impact on its financial
position or results of operations.

Inflation

We do not believe our operations have been materially affected by inflation.

Certain Factors Affecting Future Operating Results

The Value Proposition of our High-Energy Products may not be Recognized

There can be no assurance that we will be able to compete successfully against
batteries in the high-energy market unless we successfully establish the value
proposition of our products based upon dependability, environmental benefits,
and long maintenance-free life of our products.


We Will Need Additional Financing Which May not Be Available to Us on Acceptable
Terms or At All.

We will  need to  secure  additional  financing  in the  future to carry out our
business  plan.  We  believe  our cash  balances  will fund our  operations  for
approximately 24 months. We may also need additional  financing for a variety of
reasons including:

   o  expanding research and development;

   o  expanding manufacturing equipment and facilities faster than planned;

   o  funding additional working capital; or

   o  acquiring complementary products, businesses or technologies.

We cannot be  certain  that we will be able to raise  additional  funds on terms
acceptable to us, or at all. Any future  financing may result in dilution to our
shareholders.  If future  financing  is not  available  or is not  available  on
acceptable  terms, our business,  results of operations and financial  condition
would be materially adversely affected. See "Selected Historical Financial Data"
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operations."


Our Stockholders may Suffer Substantial Dilution if we Issue Additional Equity
to Obtain Financing.

If we raise  additional  funds by  issuing  additional  equity  securities,  our
existing stockholders will likely experience substantial dilution.  Furthermore,
the newly  issued  securities  could have  rights  superior to the rights of the
common stock outstanding.


Our Stock May be Disqualified from the National Market System of Nasdaq

By letter  dated March 13, 2002,  the Nasdaq  notified us that because our stock
has been trading for less than one dollar for 30  consecutive  trading  days, on
June 11, 2002 our stock will be removed from the National  Market  System unless
it trades for more than one dollar for ten trading days before that date. If our
stock is so removed,  we plan to apply to have our stock  quoted on the SmallCap
Market,  but there is no assurance that this application will be granted.  If it
is not granted, our stock will be quoted on the OTCBB.


We Face Intensified Competition from Batteries Due to Their Declining Prices and
improved life. As a Consequence Our Customers are Less Likely to Realize the
Value Proposition of Our Products.

The performance of batteries has improved while battery prices have declined due
to lower volume demand from the communications  markets and others and increased
competition  resulting from an increase in the number of battery  manufacturers.
These changes in battery pricing and  performance  make it more difficult for us
to establish a value proposition of our high-energy products.


Our Initial Target Market, the Communications Industry, Has Experienced a Sharp
Decline, Which may Adversely Affect Our Financial Performance and Stock Price.

We initially targeted the communications markets for the sale of our high-energy
products.  However, this industry,  which had previously sustained high rates of
infrastructure  build-out,  has experienced a sharp decline in build-out as well
as maintenance spending.  Significant reductions in both maintenance budgets and
capital build-out budgets at  telecommunications  companies made these potential
customers more  conservative  with their spending and  expenditure  analysis and
less willing to try new technology solutions, such as our products.


It Is Difficult to Evaluate Us and to Predict Our Future Performance, Because We
Have a Short Operating History and Are a Development Stage Company. Therefore,
Our Future Financial Performance May Disappoint Investors and Result in a
Decline in Our Stock Price.

We have a limited operating history. We were formed in May 1997 to commercialize
electrical power systems based on flywheel energy storage.  We are a development
stage company  making the transition to the  manufacturing  of new products in a
new and developing sector.  Unless we can achieve  significant market acceptance
of our  products at volumes and with margins that allow us to cover our costs of
operations,  we may never  advance  beyond our start-up  phase.  In light of the
foregoing,  it is difficult or impossible  for us to predict  future results and
investors  should not be assured that we will have future  revenue  growth.  See
"Business," "Selected Financial Data" and "Management's  Discussion and Analysis
of Financial Condition and Results of Operations."


We Have Incurred Losses Since Our Inception and Anticipate Continued Losses
Through at Least 2003.

We have incurred net losses to common shareholders and negative cash flows since
our  inception  in May  1997.  We had  net  losses  to  common  shareholders  of
approximately  ($26,146,000) in 2001,  ($53,279,000) in 2000 and ($6,630,000) in
1999.  Since  our  inception  in May  1997,  we have had net  losses  to  common
shareholders totaling  ($94,078,000).  We expect to continue to incur net losses
through at least 2003.  Although we are looking for ways to economize and reduce
costs,  our efforts may prove even more expensive than we currently  anticipate.
Our revenue must grow  substantially  if we are to offset these higher  expenses
and become profitable. Even if we do achieve profitability,  we may be unable to
sustain or increase our  profitability  in the future.  See "Selected  Financial
Data" and  "Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations."


We Have Very Limited Experience Manufacturing Flywheel Energy Storage Systems on
a Commercial Basis, and We May Be Unable to Achieve Profitability.

We may not  achieve  profitability  if we cannot  develop  or obtain  efficient,
low-cost manufacturing  capability,  processes and suppliers that will enable us
to meet the quality,  price,  engineering,  design and  production  standards or
production volumes required to meet our product  commercialization  schedule, if
any, or to satisfy the requirements of our customers or the market generally. To
date,  we have  focused  primarily  on  research  and  development  and  have no
experience  manufacturing flywheel energy storage systems on a commercial basis.
See "Business."


We Might Fail to Develop a Successful High- Power UPS Product .

The successful development of our high-power UPS products will involve
significant technological challenges including:

   o reducing manufacturing costs for the flywheel's shaft, hub and rim,
     bearings and  related electronics in order to make them profitable;

   o ensuring minimal warranty expenses through design and quality control;

   o extending the product to  new applications.


Because We Depend on Third-Party Suppliers for the Development and Supply of Key
Components for Our Products, and Because We Do Not Have Contracts with These
Suppliers, We Could Experience Disruptions in Supply that Could Delay or
Decrease Our Revenues.

Our business,  prospects, results of operations, or financial condition could be
harmed if we are unable to maintain  satisfactory  relationships with suppliers.
To  accelerate  development  time  and  reduce  capital  investment,  we rely on
third-party  suppliers  for  several of our key  components.  We do not have any
contracts with these suppliers. If these suppliers should fail to timely deliver
components that meet our quality,  quantity,  or cost  standards,  then we could
experience  production  delays or cost  increases and our financial  performance
could be adversely affected. Because the components with limited sources are key
components  that are  complex,  difficult to  manufacture  and require long lead
times, we may have difficulty finding alternative  suppliers on a timely or cost
effective  basis.  As a result,  we could  experience  shortages in supply or be
unable to be cost  competitive  in the markets we are pursuing.  The supplier of
the  flywheel  unit for our new  high-power  UPS product and the supplier of the
control  electronics for that product are both single source suppliers,  and the
loss or  interruption  of supply from either of these  suppliers would adversely
affect our ability to market our high-power UPS product, and thus, our financial
results. See "Business."


In the Event of SignificantSales Growth, We Will Need to Develop or Obtain
Manufacturing Capacity for Our Products. There Can be No Assurance That We Will
be Able to Accomplish TheseTasks.

If we have an opportunity to produce  significant volumes of products to satisfy
customer demands,  we will need to develop or obtain  manufacturing  capacity to
meet quality,  profitability  and delivery  schedules.  We may need to establish
additional manufacturing facilities or expand our current facilities. We have no
experience  in the volume  manufacture  of flywheel  systems and there can be no
assurance  that we will be able to accomplish  these tasks,  if necessary,  on a
timely basis to meet customer demand or at all.


We Face Intense Competition and We May Be Unable to Compete Successfully.

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

Technological  advances in  alternative  energy  products  or other  alternative
energy  technologies may render our systems  obsolete.  We do not presently have
any products or technologies other than flywheel systems under development.  Our
system is,  however,  only one of a number of alternative  energy products being
developed by potential competitors that have potential commercial  applications,
including super capacitors,  fuel cells, advanced batteries,  and other types of
alternative energy technologies. See "Business."

The performance of batteries has improved while battery prices have declined due
to lower volume demand from the communications  markets and others and increased
competition resulting from an expansion of the number of battery  manufacturers.
These  changes in  battery  pricing  and  performance  coupled  with the lack of
recognition of the value proposition of our high-energy  products have precluded
the general acceptance of our high-energy products.


Government Regulation May Impair Our Ability to Market Our Product.

Government  regulation  of our product,  whether at the federal,  state or local
level,  including any regulations  relating to installation and servicing of our
products,  may increase  our costs and the price of our systems,  and may have a
negative impact on our revenue and profitability.  We cannot assure you 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, pipeline connections 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 and we begin distributing our systems to our early
target markets,  federal,  state or local government entities or competitors may
seek to impose regulations.


Product Liability Claims Against Us Could Result in Substantial Expenses and
Negative Publicity Which Could Impair Successful Marketing of Our Products.

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


Safety Failures by Our Products or Those of Our Competitors Could Reduce Market
Demand or Acceptance for Flywheels in General.

A serious accident involving either our flywheels or our competitors'  flywheels
could be a significant deterrent to customer acceptance and adversely affect our
financial  performance.  With any form of energy storage,  including  machinery,
chemicals,  fuel or other means of energy  storage,  there is the possibility of
accident.  If a flywheel  fails and the energy stored is released,  the flywheel
could  break  apart and the  pieces  could be  ejected  at a high rate of speed.
However,  we have designed our  flywheels so that if they fail,  the flywheel is
expected  to shut  down  rather  than to  disintegrate.  To  date,  our  testing
validates this design conclusion. Also, we believe that one of the advantages of
composite  flywheels  over  metal  flywheels  is that in the event of a flywheel
failure,  the flywheel tends to delaminate rather than (as in the case of metal)
to break into a small number of large fragments  which have greater  possibility
of penetrating a containment vessel. A consortium of government,  academic,  and
industry  representatives  has  been  formed  to  address  containment  flywheel
safety.in  the event of this kind of  flywheel  failure.  At this early stage of
commercialization,  there are differing  approaches to  containment  safety.with
disagreement in the community on the most effective means.


Our Financial Performance Could Be Adversely Affected by Our Need to Hire and
Retain Key Executive Officers and Skilled Technical Personnel.

Because  our  future  success  depends to a large  degree on the  success of our
technology,  our  competitiveness  will depend  significantly  on whether we can
attract and retain skilled technical personnel,  especially  engineers,  and can
retain members of our executive  team. We have  employment  agreements only with
Messrs. Capp, Spiezio, Lazarewicz and French. Mr. Capp's employment is in effect
until  December  1, 2004,  but the other  employment  agreements  will expire on
October 26, 2002.

In the fourth  quarter of 2001 and the first quarter of 2002,  we  substantially
reduced our workforce.  Competition for skilled personnel is intense,  and as we
seek to determine the right size for our workforce,  we may not be successful in
attracting and retaining the personnel or executive  talent necessary to develop
our products and operate  profitably.  Because we must have a certain  number of
skilled  technical  personnel,  there is a limit to the  amount  by which we can
reduce expenses while maintaining development programs.


There May Be Only a Modest Number of Potential Customers for Our High-Power UPS
Products. To the Extent We Obtain Customers, We May Have To Rely On A Limited
Number Of Such Customers, And Our Business May Be Adversely Affected By The Loss
Of, Or Reduced Purchases By, Any One Of Those Customers.

There may only be a limited number of potential customers for our high-power UPS
product,  in  which  case we will be  subject  to the  risk  that the loss of or
reduced purchases by any single customer could adversely affect our business.


If We Are Unable to Successfully Market, Distribute and Service Our Products
Internationally We May Experience a Shortfall in Expected Revenues and
Profitability Which Could Lead to a Reduction in Our Stock Price.

In addition to the risks we face when operating within the US,  additional risks
are present when we operate internationally. A part of our business strategy may
be to expand our customer  base by  marketing,  distributing  and  servicing our
products  internationally  through  distributors.  We  have  limited  experience
developing  and  manufacturing  our products to comply with the  commercial  and
legal requirements of international markets. Our ability to properly service our
products internationally will depend on third party service providers.  There is
no assurance that we will be able to locate service providers in every region or
that these providers will effectively service our products. Also, our success in
those markets will depend,  in part, on our ability to secure foreign  customers
and our  ability  to  manufacture  products  that meet  foreign  regulatory  and
commercial  requirements.  In addition, our planned international operations are
subject  to  other  inherent   risks,   including   potential   difficulties  in
establishing   satisfactory   distributorship    relationships   and   enforcing
contractual  obligations and intellectual  property rights in foreign countries,
fluctuations  in  currency  exchange  rates.  If we are  unable to  successfully
market,  distribute  or  service  our  products  internationally,  we may  never
experience profitability and our stock price may decline.


Any Failure to Protect Our Intellectual Property Could Seriously Impair Our
Competitive Position.

We cannot  assure  you 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  our  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,  or will protect us
from  competitors.  Even if all  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.

We rely,  in part,  on  contractual  provisions to protect our 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 our  competitors  or others  to limit or  eliminate  any
competitive advantages we may have, thereby harming our business prospects.  See
"Business."


Our Majority Stockholders Will Control All Matters Requiring a Stockholder Vote,
Which will Limit Other Investors' Ability to Influence the Outcome of Matters
Requiring Stockholder Approval.

Stockholders  who owned our company  prior to our initial  public  offering  own
approximately  59.0% of our  outstanding  stock as of December  31,  2001.  If a
sufficient  number of these  stockholders were to vote together as a group, they
would have the ability to control our board of directors and its  policies.  For
instance,  these  stockholders  would  be able to  control  the  outcome  of all
stockholder votes,  including votes concerning director  elections,  charter and
by-law  amendments and possible  mergers,  corporate  control contests and other
significant corporate  transactions.  These stockholders may use their influence
to approve  actions that are adverse to the interest of other  investors,  which
could depress our stock price.


The Share Prices of Companies in Our Sector have been Highly Volatile and Our
Share Price Could Be Subject to Extreme Price Fluctuations.

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


Provisions of Delaware Law and of Our Charter and By-laws May Inhibit a Takeover
that Stockholders Consider Favorable.

Provisions in our certificate of  incorporation  and by-laws and in the Delaware
corporate  law may make it difficult and expensive for a third party to pursue a
tender  offer,  change in control  or  takeover  attempt  that is opposed by our
management  and board of  directors.  Public  stockholders  who might  desire to
participate  in  such a  transaction  may  not  have  an  opportunity  to do so.
Beginning  with our  annual  stockholder  meeting  in  2001,  we  implemented  a
staggered  board of directors  that will make it difficult for  stockholders  to
change the composition of the board of directors in any one year.  Additionally,
our board of directors may authorize  issuances of "blank check" preferred stock
that could be used to increase the number of outstanding shares and discourage a
takeover attempt. These anti-takeover  provisions could substantially impede the
ability of public stockholders to benefit from a change in control or change our
management and board of directors.

Item 7A.  Quantitative and Qualitative Disclosure about Market Risk

Our cash equivalents and investments,  all of which have maturities of less than
one year,  may expose us to interest  rate risk.  At December 31,  2001,  we had
approximately  $60,000 of cash  equivalents  which  were held in a  non-interest
bearing  checking  account.  Also at December  31,  2001,  we had  approximately
$5,664,000  invested in  interest-bearing  money market accounts;  approximately
$1,996,000 in  high-grade  commercial  paper and  approximately  $26,882,000  in
high-grade bonds. 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 $150,000, which we do not feel is material.

<PAGE>


Item 8.  Financial Statements and Supplementary Data

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

                                                                           Page


Independent Auditors' Report                                                25

Consolidated Balance Sheets at December 31, 2001 and 2000                   26

Consolidated Statements of Operations for the years ended
 December 31, 2001, 2000 and 1999 and for the period
 May 8, 1997 (date of inception) to December 31, 2001.                      27

Consolidated Statements of Stockholders' Equity
 (Deficiency) for the years  ended December 31, 2001,
 2000 and 1999 and for the period  May 8, 1997 (date
 of inception) to December 31, 2001.                                        28

Consolidated Statements of Cash Flows for the years
 ended December 31, 2001, 2000 and 1999 and for the
 period May 8, 1997 (date of inception) to December
 31, 2001.                                                                  32

Notes to Consolidated Financial Statements                                  34




<PAGE>



                          INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of
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,  2001  and  2000,  and  the  related  consolidated  statements  of
operations,  stockholders'  equity  (deficiency)  and cash flows for each of the
three years in the period ended December 31, 2001 and for the period from May 8,
1997 (date of inception) through December 31, 2001. These consolidated financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall  consolidated  financial  statement  presentation.  We believe  that our
audits provide a reasonable basis for our opinion.

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, 2001 and 2000 and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  2001 and the period  from May 8, 1997 (date of  inception)
through  December 31, 2001 in conformity  with accounting  principles  generally
accepted in the United States of America.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 8, 2002


<PAGE>



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


                                                           December 31,
                                                        2001            2000
                                                      --------------------------
Assets
Current assets:
  Cash and cash equivalents                           $ 34,601,585   $62,497,102
  Inventory                                                      -       207,613
  Prepaid expenses and other current assets              1,131,065       857,137
                                                      --------------------------
   Total current assets                                 35,732,650    63,561,852

Property and equipment, net (Note 3)                     6,188,507     3,417,884
Deposits                                                     8,292       673,278
Other assets                                               201,504        84,992
                                                     ---------------------------
Total assets                                          $ 42,130,953   $67,738,006
                                                     ===========================

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                    $    911,465    $1,728,330
  Accrued compensation and benefits                        721,130       277,086
  Due to related party (Note 13)                            35,532        52,725
  Dividends payable (Note 8)                                     -     1,159,373
  Other accrued expenses                                   941,100       981,671
  Current portion of capital lease
    obligations (Note 4)                                   335,145       138,648
                                                      --------------------------
   Total current liabilities                             2,944,372     4,337,833

Capital lease obligations, net of
  current portion (Note 4)                                 205,352        92,245
Commitments (Note 5)

Stockholders' equity:
  Preferred stock(Note 6)
  Common stock, $.01 par value;
    110,000,000 shares authorized;
    42,770,856 and 42,033,314 shares
    issued and outstanding in 2001 and
    2000, respectively                                     427,709       420,333
  Deferred stock compensation                             (211,564)  (2,070,659)
  Additional paid-in capital                           132,911,256   132,958,758
  Deficit accumulated during
    the development stage                              (94,146,172) (68,000,504)
                                                      --------------------------
   Total stockholders' equity                           38,981,229    63,307,928
                                                      --------------------------
Total liabilities and stockholders' equity            $ 42,130,953  $ 67,738,006
                                                      ==========================


                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>
<S>                                             <C>               <C>             <C>           <C>
                                                                                                Cumulative from
                                                                                                  May 8, 1997
                                                                                                   (Date of
                                                                                                  Inception,)
                                                   Year ended         Year ended     Year ended        through
                                                   December 31       December 31     December 31     December 31
                                                      2001               2000           1999            2001
                                                ----------------------------------------------------------------

Revenue                                             $          -   $      50,000   $    268,868    $    551,184

Operating expenses:
 Selling, general and administrative                   8,939,589       4,630,915      1,558,985      17,486,125
 Research and development                             17,627,714      12,714,823      3,506,031      39,664,014
 Loss on sales commitments                                     -          50,974        325,000         375,974
 Depreciation and amortization                         1,323,958         401,013        218,594       2,021,773
                                                ----------------------------------------------------------------

  Total operating expenses                            27,891,261      17,797,725      5,608,610      59,547,886
                                                ----------------------------------------------------------------

Loss from operations                                 (27,891,261)    (17,747,725)    (5,339,742)    (58,996,702)

Other income (expense):
 Interest income                                       2,157,724         747,202         25,118       3,057,969
 Interest expense                                       (303,160)       (370,299)      (356,869)     (1,045,058)
 Other expense                                          (108,971)        (47,216)             -        (156,187)
                                                ----------------------------------------------------------------
  Total other income (expense), net                    1,745,593         329,687       (331,751)      1,856,724
                                                ----------------------------------------------------------------

Net loss                                             (26,145,668)     17,418,038)    (5,671,493)    (57,139,978)

Preferred stock dividends (Note 8)                             -     (35,796,675)      (916,852)    (36,825,680)
Accretion of redeemable convertible
preferred stock                                                -         (64,435)       (41,671)       (113,014)
                                                ----------------------------------------------------------------
Loss to common shareholders                         $(26,145,668)  $ (53,279,148)  $ (6,630,016)  $ (94,078,672)
                                                ================================================================
Loss per share - basic and diluted                  $      (0.61)  $      (10.77)  $    (393.52)
                                                ================================================
Weighted-average common shares outstanding            42,550,502       4,946,411         16,848
                                                ================================================

</TABLE>

                 See notes to consolidated financial statements.

<PAGE>


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

<TABLE>
<CAPTION>
<S>                                            <C>           <C>            <C>        <C>            <C>              <C>

                                                      Class A                   Class C
                                                   Preferred Stock           Preferred Stock               Common Stock
                                                Shares        Amount       Shares      Amount          Shares          Amount
                                             -----------------------------------------------------------------------------------
Balance at May 8, 1997 (Date of Inception)            -     $        -            -   $        -              -      $         -
Issuance of founder's shares                          -              -            -            -      6,750,000           67,500
Issuance of Class A preferred stock           1,125,000      5,000,000            -            -              -                -
Recapitalization                              3,373,313         67,466            -            -     (6,746,626)         (67,466)
Rounding for fractional shares                        -              -            -            -             (2)               -
Issuance of Class C preferred and
common stock                                          -              -            6       29,866         13,476              134
Accrual of consulting expense                         -              -            -            -              -                -
Repayment of subscription receivable                  -              -            -            -              -                -
Net loss                                              -              -            -            -              -                -
                                         ---------------------------------------------------------------------------------------
Balance, December 31, 1997                    4,498,313      5,067,466            6       29,866         16,848              168

Issuance of Class A preferred stock
for services                                    120,000        300,000            -            -              -                -
Issuance of Class A preferred stock
for services and interest on loans                4,594         11,485            -            -              -                -
Dividend on Class D redeemable
convertible preferred stock                           -              -            -            -              -                -
Repayment of subscription receivable                  -              -            -            -              -                -
Amortization of deferred consulting
expense, net                                          -              -            -            -              -                -
Accretion of redeemable preferred stock
to redemption value                                   -              -            -            -              -                -
Net loss                                              -              -            -            -              -                -
                                         ----------------------------------------------------------------------------------------
Balance, December 31, 1998                    4,622,907      5,378,951            6       29,866         16,848              168

Issuance of Class A preferred stock
for services                                    145,000        362,500            -            -              -                -
Dividend on Class D redeemable
convertible preferred stock                           -              -            -            -              -                -
Deferred stock compensation                           -              -            -            -              -                -
Amortization of deferred stock
compensation                                          -              -            -            -              -                -
Amortization of deferred consulting
expense, net
Issuance of warrants to holders of Class
D redeemable convertible preferred stock              -              -            -            -              -                -
Issuance of warrants for bridge loans                 -              -            -            -              -                -
Accretion of redeemable preferred stock
to redemption value                                   -              -            -            -              -                -
Net loss                                              -              -            -            -              -                -
                                         ----------------------------------------------------------------------------------------
Balance, December 31, 1999                    4,767,907      5,741,451            6       29,866         16,848              168

Dividends on redeemable convertible
preferred stock                                       -              -            -            -              -                -
Issuance of warrants                                  -              -            -            -              -                -
Deferred stock compensation                           -              -            -            -              -                -
Amortization of deferred stock
compensation                                          -              -            -            -              -                -
Accretion of redeemable preferred stock
to redemption value                                   -              -            -            -              -                -
Proceeds from stock offering                          -              -            -            -      9,200,000           92,000
Conversion of Class A preferred stock        (4,767,907)    (5,741,451)           -            -      9,535,814           95,358
Conversion of Class C preferred stock                 -              -           (6)     (29,866)            12                -
Conversion of redeemable convertible
preferred stock                                       -              -            -            -     19,823,704          198,237
Deferred consulting                                   -              -            -            -              -                -
Common stock issuance for consulting                  -              -            -            -        134,464            1,345
Payment of accrued dividend                           -              -            -            -        859,330            8,593
Cashless warrant exercise                             -              -            -            -      1,982,876           19,829
Exercise of stock options                             -              -            -            -        480,266            4,803
Net loss                                              -              -            -            -              -                -
                                         ---------------------------------------------------------------------------------------
Balance, December 31, 2000                            -    $         -            -     $      -     42,033,314       $  420,333

Issuance of stock options                             -              -            -            -              -                -
Deferred stock compensation                           -              -            -            -              -                -
Amortization of deferred stock
compensation                                          -              -            -            -              -                -
Common stock issued through Employee
Stock Purchase Plan                                   -              -            -            -         54,956              550
Common stock issuance for consulting
Change in option terms for severed
employees                                             -              -            -            -              -                -
Exercise of stock options                             -              -            -            -        682,586            6,826
Net loss                                              -              -            -            -              -                -
                                         ---------------------------------------------------------------------------------------
Balance, December 31, 2001                            -    $         -            -     $      -     42,770,856       $  427,709
                                         =======================================================================================
</TABLE>


                See notes to consolidated financial statements.


<PAGE>
<TABLE>
<CAPTION>
<S>                                           <C>          <C>          <C>            <C>            <C>           <C>
                                                                                                                        Total
                                               Deferred     Deferred     Additional       Stock                      Stockholders'
                                              Consulting     Stock         Paid-in     Subscription   Accumulated    (Deficiency)
                                               Expense    Compensation     Capital      Receivable      Deficit         Equity
                                             ------------------------------------------------------------------------------------
Balance at May 8, 1997 (Date of inception)    $       -     $       -     $       -      $        -    $        -      $        -

Issuance of founder's shares                          -             -             -               -       (67,500)              -
Issuance of Class A preferred stock for
services                                              -             -             -      (5,000,000)            -               -
Recapitalization                                      -             -             -               -             -               -
Rounding for fractional shares                        -             -             -               -             -               -
Issuance of Class C preferred and common
stock                                                 -             -             -               -             -          30,000
Accrual of consulting expense                    87,500             -             -               -             -          87,500
Repayment of subscription receivable                  -             -             -       2,992,492             -       2,992,492
Net loss                                              -             -             -               -    (3,111,381)     (3,111,381)
                                         -----------------------------------------------------------------------------------------
Balance, December 31, 1997                       87,500             -             -      (2,007,508)   (3,178,881)         (1,389)

Issuance of Class A preferred stock for
services                                      (150,000)             -             -               -             -         150,000
Issuance of Class A preferred stock for
services and interest on loans                       -              -             -               -             -          11,485
Dividend on Class D redeemable
convertible preferred stock                          -              -             -               -      (112,153)       (112,153)
Repayment of subscription receivable                 -              -             -       2,007,508             -       2,007,508
Amortization of deferred consulting
expense, net                                    25,000              -             -               -             -          25,000
Accretion of redeemable preferred stock
to redemption value                                  -              -             -               -        (6,908)         (6,908)
Net loss                                             -              -             -               -    (4,793,398)     (4,793,398)
                                         -----------------------------------------------------------------------------------------
Balance, December 31, 1998                     (37,500)             -             -               -    (8,091,340)     (2,719,855)

Issuance of Class A preferred stock           (125,000)             -             -               -             -         237,500
Dividend on Class D redeemable
convertible preferred stock                          -              -             -               -      (636,852)       (636,852)
Deferred stock compensation                                   (65,318)       65,318               -             -               -
Amortization of deferred stock
compensation                                                    8,670             -               -             -           8,670
Amortization of deferred consulting
expense, net                                    62,500              -             -               -             -          62,500
Issuance of warrants to holders of Class
D redeemable convertible preferred stock             -              -       280,000               -      (280,000)              -
Issuance of warrants for bridge loans                -              -       170,000               -             -         170,000
Accretion of redeemable preferred stock
to redemption value                                  -              -             -               -       (41,671)        (41,671)
Net loss                                             -              -             -               -    (5,671,493)     (5,671,493)
                                         -----------------------------------------------------------------------------------------
Balance, December 31, 1999                    (100,000)       (56,648)      515,318               -   (14,721,356)     (8,591,201)

Dividends on redeemable convertible
preferred stock                                      -              -             -               -    (1,496,675)     (1,496,675)
Issuance of warrants                                 -              -    36,070,366               -   (34,300,000)      1,770,366
Deferred stock compensation                          -     (2,944,649)    2,944,649               -             -               -
Amortization of deferred stock
compensation                                         -        930,638             -               -             -         930,638
Accretion of redeemable preferred stock
to redemption value                                  -              -             -               -       (64,435)        (64,435)
Proceeds from stock offering, net of
expenses                                             -              -    49,249,537               -             -      49,341,537
Conversion of Class A preferred stock                -              -     5,646,093               -             -               -
Conversion of Class C preferred stock                -              -        29,866               -             -               -
Conversion of redeemable convertible
preferred stock                                      -              -    36,496,431               -             -      36,694,668
Deferred consulting                            598,284              -             -               -             -         598,284
Common stock issuance for consulting          (498,284)             -       496,939               -             -               -
Payment of accrued dividend                          -              -     1,077,714               -             -       1,086,307
Cashless warrant exercise                            -              -       (19,829)              -             -               -
Exercise of stock options                            -              -       451,674               -             -         456,477

Net loss                                             -              -             -               -   (17,418,038)    (17,418,038)
                                         -----------------------------------------------------------------------------------------
Balance, December 31, 2000                           -     (2,070,659)  132,958,758               -   (68,000,504)     63,307,928

Issuance of stock options                            -              -       303,160               -             -         303,160
Deferred stock compensation                          -      1,566,906    (1,566,906)              -             -               -
Amortization of deferred stock
compensation                                         -        340,081             -               -             -         340,081
Common stock issued through Employee
Stock Purchase Plan                                  -              -       109,394               -             -         109,944
Common stock issuance for consulting                 -        (47,892)       47,892               -             -               -
Change in option terms for severed
employees                                            -              -       346,591               -             -         346,591
Exercise of stock options                            -              -       712,367               -             -         719,193
Net loss                                             -              -             -               -   (26,145,668)    (26,145,668)
                                         -----------------------------------------------------------------------------------------
Balance, December 31, 2001                    $       -  $  (211,564)  $132,911,256       $       -  $(94,146,172)    $38,981,229
                                         ========================================================================================

</TABLE>

<PAGE>



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

<TABLE>
<CAPTION>
<S>                                                        <C>            <C>             <C>            <C>
                                                                                                         Cumulative from
                                                                                                            May 8, 1997
                                                                                                             (Date of
                                                                                                             Inception)
                                                             Year ended      Year ended    Year ended         through
                                                             December 31     December 31   December 31      December 31
                                                                 2001           2000          1999               2001
                                                            -------------------------------------------------------------
Cash flows from operating activities:
 Net loss                                                   $ (26,145,668)  $(17,418,038)   $(5,671,493)    $(57,139,978)
 Adjustments to reconcile net loss to net cash used in
 operating activities:
  Depreciation and amortization                                 1,323,958        401,013        218,594        2,021,773
  Loss on sale of fixed assets                                    108,971         47,416              -          156,387
  Interest expense relating to issuance of warrants                     -        201,000        170,000          371,000
  Non-cash charge for change in option terms                      346,591              -              -          346,591
  Non-cash charge for option issue                                303,160              -              -          303,160
  Amortization of deferred consulting expense, net                      -        598,284        300,000        1,160,784
  Amortization of deferred stock compensation                     340,081        930,638              -        1,270,719
  Warrants issued for consulting services                               -      1,569,366              -        1,569,366
  Accrued loss on sales commitments                                     -         50,974        325,000          375,974
  Services and interest expense paid in preferred
  stock                                                                 -              -              -           11,485
 Changes in operating assets and liabilities:
  Inventory                                                       207,613       (207,613)             -                -
  Prepaid expenses and other current assets                      (273,928)      (841,150)         4,320       (1,131,065)
  Accounts payable                                               (816,865)     1,315,184       (409,577)         911,465
  Accrued compensation and benefits                               444,044        167,880         41,023          721,130
  Accrued interest                                                      -        111,420        164,140          275,560
  Due to related party                                            (17,193)        52,725        (18,611)          35,532
  Accrued loss on sales commitments                                     -       (375,974)             -        (375,974)
  Other accrued expenses and current liabilities                  (40,570)       938,449         36,270          949,770
                                                            -------------------------------------------------------------
  Net cash used in operating activities                       (24,219,807)   (12,458,426)    (4,840,334)     (48,166,321)

Cash flows from investing activities:
 (Increase)/decrease in other assets                              664,986       (683,054)      (110,180)        (175,218)
 Purchases of property and equipment                           (4,320,064)    (3,019,266)      (350,881)      (7,947,634)
                                                            -------------------------------------------------------------
  Net cash used in investing activities                        (3,655,078)    (3,702,320)      (461,061)      (8,122,852)

Cash flows from financing activities:
 Initial public stock offering, net of expenses                         -     49,341,537              -       49,341,537
 Payment of dividends                                          (1,159,373)             -              -       (1,159,373)
 Shares issued under Employee Stock Purchase Plan                 109,944              -              -          109,944
 Exercise of employee stock options                               719,193        456,477              -        1,175,670
 Issuance of preferred stock                                            -     28,351,791              -       32,868,028
 Repayment of subscription receivable                                   -              -              -        5,000,000
 Payment on capital leases                                       (186,247)      (126,307)      (105,406)        (490,899)
 Proceeds from capital lease refinancing                          495,851              -              -          495,851
 Proceeds from notes payable issued to investors                        -        400,000      3,150,000        3,550,000
                                                            -------------------------------------------------------------
  Net cash provided (used) by financing activities                (20,632)    78,423,498      3,044,594       90,890,758

Increase (decrease) in cash and cash equivalents              (27,895,517)    62,262,752     (2,256,801)      34,601,585
Cash and cash equivalents, beginning of period                 62,497,102        234,350      2,491,151                -
                                                            -------------------------------------------------------------
Cash and cash equivalents, end of period                     $ 34,601,585    $62,497,102    $   234,350     $ 34,601,585
                                                            =============================================================
</TABLE>

                 See notes to consolidated financial statements.



<PAGE>



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

1.  Nature of Business and Operations

Nature of Business.  Beacon  Power  Corporation  (the  "Company" or "Beacon") (a
development  stage  company) was  incorporated  on May 8, 1997 as a wholly owned
subsidiary of SatCon  Technology  Corporation  ("SatCon").  Since its inception,
Beacon has been engaged in the  development of flywheel  devices for storing and
transmitting  kinetic  energy.  During the fourth  quarter of 2000,  the Company
shipped its first  seven  units.  Because  the  Company has not yet  generated a
significant amount of revenue from its principal operations, it is continuing to
be accounted  for as a development  stage  company under  Statement of Financial
Accounting  Standards  No.  7.  The  Company  has a  single  operating  segment,
manufacturing  alternative power sources. The Company's organizational structure
has no  divisions  or  subsidiaries  dictated  by product  lines,  geography  or
customer type.

Operations.  The Company has  experienced net losses since its inception and, as
of December 31, 2001, had an accumulated deficit of approximately $94.1 million.
The  Company is  currently  facing the  challenge  of  ongoing  development  and
refinement of its commercial  product.  This ongoing research and development is
expected to require  significant  outlays of capital.  As  discussed  in Note 7,
during the fourth  quarter of 2000,  the  Company  completed  an initial  public
offering  of its common  stock and raised  approximately  $49.3  million  net of
offering  expenses.  Management  believes  that this  funding is  sufficient  to
continue its  operations as a going concern  through at least December 31, 2002.
During March 2002, in an effort to reduce is monthly cash burn rate, the Company
reduced it  headcount  by 37%.  This  action  combined  with other cost  cutting
measures  taken  earlier will insure the Company has enough cash for the next 24
months.

2.  Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

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 the Company and its subsidiary Beacon Power Securities  Corporation.
All significant  intercompany  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.

Stock Split. The accompanying  financial  statements  reflect a 2-for-1 split of
the  Company's   common  stock,   which  occurred   immediately   prior  to  the
effectiveness of the Company's initial public stock offering.  All share and per
share information herein has been retroactively restated to reflect this split.

Summary of Significant Accounting Policies

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

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

Inventory.  At December 31, 2001,  the Company wrote all of its inventory off to
research and development expense as management  determined that any inventory on
hand at December 31, 2001 would only be used for development of future products.
At December 31, 2000,  inventory consists of raw materials and is carried at the
lower of cost or market utilizing the first-in first-out ("FIFO") method.

Employee Advances.  During 2001, the Company advanced  approximately $785,000 to
three officers of the Company.  The officers  repaid  approximately  $152,000 of
these  advances  during 2001.  The advances are expected to be repaid in full by
the  officers  and  are  secured  by the  officers'  holdings  of  Beacon  Power
Corporation common stock. The balance is included in prepaid and other assets in
the  accompanying  consolidated  balance  sheet.  During March 2002, one officer
repaid her balance of $120,000 in full.

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.

Other Assets.  Other assets  consist of unamortized  legal  expenses  related to
patents and various deposits on long-term assets and on the Company's  operating
facility.

Loss on Sales Commitments. When the Company has sales commitments that are firm,
have  fixed-prices  and the direct costs to manufacture  products covered by the
Company's  firm sales  commitments  are in excess of the fixed  selling  prices,
revenue and cost of revenue on such sales commitments are recorded as deliveries
are made..  Direct  costs  consist of materials  and direct  labor costs.  These
excess costs have been  estimated and accrued as losses on sales  commitments in
the  period  in  which  the  sales  commitment  is made.  Estimates  of costs to
manufacture  products  are  reviewed  and  revised  periodically  and changes in
estimated  losses from such revisions are recorded in the  accounting  period in
which the revisions are made. At December 31, 2001, no estimated losses on sales
commitments are anticipated.

Long-Lived  Assets.  In  accordance  with  Statement  of  Financial   Accounting
Standards  ("SFAS") No. 121 long-lived assets to be held and used by the Company
are  reviewed  to  determine  whether  any events or  changes  in  circumstances
indicate  that the  carrying  value of the  asset  may not be  recoverable.  The
conditions 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.  The Company recognizes a loss for the difference
between the estimated fair value of the asset and the carrying amount.  The fair
value of the asset is measured using either available market prices or estimated
discounted cash flows.  The Company's  analyses  indicate that there has been no
impairment of long-lived assets.

Revenue  Recognition.  Revenue  relates to work  performed  under  research  and
development  contracts and delivery of units.  Revenue is recognized as services
are performed or when products are shipped and all related costs are estimable.

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

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  carryforwards  using the currently  enacted
tax rates and laws. A valuation  allowance is provided to the extent realization
of deferred tax assets is not considered more likely than not.

Research  and  Development.  Research  and  development  costs are  expensed  as
incurred.

Financial  Instruments.  The  carrying  amount  of cash  and  cash  equivalents,
accounts payable, accrued expenses, notes payable to investors and capital lease
obligations approximate their fair values.

Concentration of Credit Risk. Financial instruments that potentially subject the
Company to significant  concentration  of credit risk consist  primarily of cash
and  cash  equivalents.  Substantially  all  of  the  Company's  cash  and  cash
equivalents are managed by one financial  institution.  At December 31, 2001 and
2000,  the Company had cash  balances  at a financial  institution  in excess of
federally  insured  limits.  However,  the Company  does 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.

Recently Issued Accounting Pronouncements.

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations,"  and SFAS
No. 142, "Goodwill and Other Intangible  Assets." SFAS No. 141 will apply to all
business  combinations  that the Company  enters into after June 30,  2001,  and
eliminates  the  pooling-of-interests  method  of  accounting.  SFAS No.  142 is
effective  for fiscal years  beginning  after  December 15, 2001.  Under the new
Statements,  goodwill and intangible assets deemed to have indefinite lives will
no  longer be  amortized  but will be  subject  to  annual  impairment  tests in
accordance  with the  Statements.  Other  intangible  assets will continue to be
amortized over their useful lives.  The Company does not expect adoption of this
statement  to have a material  impact on its  financial  position  or results of
operations.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal of  Long-Lived  Assets,  which  supercedes  SFAS No. 121.  SFAS No. 144
further refines the requirements of SFAS No. 121 that companies (1) recognize an
impairment  loss  only if the  carrying  amount  of a  long-lived  asset  is not
recoverable  based on its  undiscounted  future  cash  flows and (2)  measure an
impairment loss as the difference  between the carrying amount and fair value of
the asset.  In  addition,  SFAS No. 144  provides  guidance  on  accounting  and
disclosure issues  surrounding  long-lived assets to be disposed of by sale. The
Company does not expect  adoption of this statement to have a material impact on
its financial position or results of operations.

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.  Diluted loss per share was computed in the same manner. At December 31,
2001, the impact of the Company's outstanding potential common shares, including
options and warrants (computed using the treasury stock method) totaling 671,504
shares, were excluded from the calculation because such items were antidilutive.


3.  Property and Equipment

Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
<S>                                             <C>             <C>               <C>
                                                 Estimated
                                                    Useful
                                                     Lives          2001            2000
                                                -------------------------------------------
Machinery and equipment                            5 years       $ 1,996,711      $ 694,486
Furniture and fixtures                             7 years           733,018         54,433
Service vehicles                                   5 years            63,792              -
Office equipment                                   3 years         2,030,653      1,217,263
Leasehold improvements                          Lease term         2,072,577      1,489,569
Equipment under capital lease obligations       Lease term         1,081,726        535,450
                                                                  --------------------------

    Total                                                          7,978,477      3,991,201
Less accumulated depreciation and amortization                    (1,789,970)      (573,317)
                                                                  --------------------------

    Property and equipment, net                                   $6,188,507    $3,417, 884
                                                                  ==========================
</TABLE>


4.  Capital Lease Obligations

The Company leases equipment under capital lease agreements expiring through
January 2003. Future obligations under such capital leases as of December 31,
2001 are as follows:

2002                                                         $367,696
2003                                                          217,761
                                                        ---------------
                                                              585,457
Less amount representing interest                             (44,960)
                                                        ---------------
                                                              540,497
Less current portion of capital lease obligations            (335,145)
                                                        ---------------

Capital lease obligations, excluding current portion         $205,352
                                                        ===============


5.  Commitments

The Company leases office and light manufacturing space under an operating lease
through  September  30,  2007 and has an  operating  lease  for  certain  office
equipment  which expired  October  2001.  At December 31, 2001,  the Company has
provided  the  lessor  with an  irrevocable  letter of  credit in the  amount of
$400,454. This letter of credit is secured by a cash deposit.

Future minimum annual lease payments under non-cancelable operating leases as of
December 31, 2001 are as follows:

                                          2002               $461,622
                                          2003                490,675
                                          2004                490,675
                                          2005                500,359
                                          2006                529,413
                                       Thereafter            $397,059


Total rent expense was $567,239,  $473,576 and $199,405,  during 2001,  2000 and
1999, respectively.
6.  Preferred Stock

As a result of the initial public offering of the Company's common stock and the
conversion of all outstanding  shares of all classes of the preferred stock, the
Company  amended its charter and cancelled  all its classes of preferred  stock.
The Company 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
its Board of  Directors.  At December  31,  2001 and 2000,  there are 10 million
shares of preferred stock authorized with none outstanding.

7.  Common Stock

Initial  Public  Offering.  During the fourth  quarter of 2000, the Company sold
9,200,000  shares of its  common  stock,  inclusive  of the  underwriters'  over
allotment,  at an initial public offering price of $6 per share. Net proceeds to
the  Company  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.

Reserved Shares.  At December 31, 2001,  13,839,129  shares of common stock were
reserved  for issuance  under the  Company's  stock option plan and  outstanding
warrants.

8.  Redeemable Convertible Preferred Stock and Stock Warrants

Class D Redeemable Convertible Preferred Stock and Class D Stock Warrants. Prior
to its initial public offering, the Company's capital structure included Class D
redeemable convertible preferred stock ("Class D Stock"). All outstanding shares
of the Class D Stock plus accrued dividends were either converted into shares of
common stock during the initial public offering or were paid in cash in February
2001.  After the initial public  offering,  the Company  amended its charter and
cancelled all its Class D Stock.

Under the conditions of the Class D Stock offering,  the Company issued warrants
in October 1999 to three investors to purchase 772,500 shares of common stock at
$1.67,  772,500  shares of common stock at $2.25,  and 772,500  shares of common
stock at $3.00 (the "October 1999  warrants").  The estimated  fair value of the
warrants  at the date of their  issuance  was  $280,000.  Upon  issuance  of the
warrants,  this amount was  recorded as a dividend to the holders of the Class D
Stock and credited to additional paid-in-capital. These warrants expire December
31, 2004.

Additional  warrants were issued under the Class D Stock agreement  during April
2000 to three investors to purchase  712,500 shares of common stock at $1.67 per
share,  712,500 shares of common stock at $2.25 per share, and 712,500 shares of
common stock at $3.00 per share.  Upon issuance of these  warrants,  the Company
recorded a dividend of  approximately  $1,300,000  for the fair market  value of
these warrants based on the Black-Scholes  option pricing model.  These warrants
expire December 31, 2004.

In December 2000, an investor exercised a portion of its warrants, in a cashless
transaction,  to purchase 300,000 shares of the Company's common stock at $1.67,
300,000 shares of the Company's  common stock at $2.25 and 300,000 shares of the
Company's common stock at $3.00 per share. Net shares issued totaled 608,843.

Class E Redeemable Convertible Preferred Stock and Class E Stock Warrants. Prior
to its initial public offering, the Company's capital structure included Class E
redeemable convertible preferred stock ("Class E Stock"). All outstanding shares
of the Class E Stock plus accrued dividends were either converted into shares of
common stock during the initial public offering or were paid in cash in February
2001. After the initial public offering, the Company amended its charter and
cancelled all its Class E Stock.

In conjunction with the issuance of the Senior Notes in August 1999, the Company
issued warrants to four investors to purchase 315,000 shares of Class E Stock at
an exercise price of $2.50 per share (the "August 1999 warrants"). The estimated
fair value of these warrants at the date of grant was $170,000.  This amount was
recorded as a discount on the Senior  Notes and was charged to interest  expense
in 1999, as the Senior Notes were demand notes. These warrants were to expire on
August 2, 2004.

In conjunction with the Class E Stock  conversion,  warrants to purchase 315,000
shares,  issued in  conjunction  with the issuance of the Senior Notes in August
1999, were cancelled. In exchange,  warrants to purchase 306,535 shares of Class
E Stock at $2.50 per share were issued. These warrants expire April 7, 2005. The
estimated fair market value of these warrants was approximately $344,000.  Since
these warrants replaced the August 2, 1999 warrants, the amount allocated to the
August 1999 warrants  have been  reallocated  to Class E Stock  Warrants and the
remaining  $174,000 was charged to interest  expense in the year ended  December
31, 2000. As a result of the initial public stock offering by the Company in the
fourth quarter of 2000, the holders of the warrants are now entitled to purchase
613,070 shares of the Company's common stock instead of the Class E Stock.

In December  2000,  an investor  exercised  its  102,398 of its  warrants,  in a
cashless transaction, to purchase 84,433 shares of the Company's common stock.

Class F Redeemable Convertible Preferred Stock and Class F Stock Warrants. Prior
to its initial public offering, the Company's capital structure included Class F
redeemable convertible preferred stock ("Class F Stock"). All outstanding shares
of the Class F Stock plus accrued dividends were either converted into shares of
common stock during the initial public offering or were paid in cash in February
2001.  After the initial public  offering,  the Company  amended its charter and
cancelled all its Class F Stock.

In  conjunction  with the  issuance  of the Class F Stock,  the  Company  issued
warrants to seven investors to purchase  6,333,333 shares of its common stock at
an exercise price of $2.25. The estimated fair value of the warrants at the date
of their issuance was $33,000,000. This amount was recorded as a dividend to the
holders of the Class F Stock and credited to additional  paid-in-capital  during
2000. These warrants expire on May 23, 2005. During December 2000, two investors
exercised 1,884,800 of their warrants,  in a cashless  transaction,  to purchase
1,289,600 shares of the Company's common stock.

Consultant  Warrants.  The Company issued warrants to two  consultants  that are
exercisable for an aggregate of 70,000 shares of its common stock at an exercise
price of $6.00 per share. The holder of one of these warrants to purchase 50,000
shares of common stock may exercise its warrant at any time prior to January 31,
2002.  None of these warrants were  exercised  prior to January 31, 2002 and the
warrants have expired. The holder of the other warrant to purchase 20,000 shares
of common  stock may  exercise  its warrant at any time prior to August 2, 2005.
These  warrants  were fully vested upon the issuance and the Company  recorded a
charge to consulting expense of $213,861.

On October 24, 2000, the Company  issued  240,000  warrants to an investor at an
exercise  price of  $2.10  per  share in  conjunction  with an  agreement  by an
affiliate of that investor to provide the Company with technical expertise.  One
half of the  warrants  vest  immediately,  the  remainder  vest as services  are
utilized.  During the fourth quarter of 2000,  the company  recorded a charge to
consulting  expense for  $1,355,505  to  recognize  the fair market value of the
vested  warrants.  The Company has  deferred  the  remaining  warrants  and will
revalue the amount and record additional expense as necessary in future quarters
as the remaining services are provided.  Deferred compensation relating to these
warrants  was  approximately  $150,000 and  $1,100,000  at December 31, 2001 and
2000.  The  agreement  terminates  and any  unvested  options are  forfeited  on
November 1, 2003.

All warrants  were valued on the date of grant using the  Black-Scholes  (common
stock) or the Binary Option Pricing Model  (preferred  stock).  The  assumptions
used to value these warrants were as follows:

<TABLE>
<CAPTION>
<S>                                                   <C>         <C>         <C>        <C>         <C>

                                                        April                  August     October
                                                         2000        2000       1999        1999        1997
                                                       Warrants    Warrants   Warrants    Warrants    Warrants
                                                     ------------------------------------------------------------

Risk-free interest rate                                 6.15%        6.5%       5.62%       5.86%        6.25%
Expected life of warrant                              12 months    Various    30 months  27 months    24 months
Expected dividend payment rate, as a percentage
of the stock price on the date of grant                   0%          0%         0%          0%           0%
Assumed volatility                                       73%         100%        60%        60%          48%

</TABLE>


9.  Stock Options

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

Stock option activity since inception is as follows:

                                                      Weighted-    Weighted-
                                                       Average       Average
                                         Number of    Exercise          Fair
                                           Shares       Price          Value
                                       ----------------------------------------
Outstanding at inception                           -

    Granted                                  647,874   $ 0.89        $0.35
                                       ----------------------------------------

Outstanding, December 31, 1997               647,874     0.89
    Granted                                  199,126     0.89         0.38
    Canceled, forfeited or expired           (10,000)    0.89
                                       ----------------------------------------

Outstanding, December 31, 1998               837,000     0.89
    Granted                                1,467,000     0.89         0.40
    Canceled, forfeited or expired          (295,688)    0.89
                                       ----------------------------------------

Outstanding, December 31, 1999             2,008,312     0.89
    Granted                                3,443,688     3.15        1.78
    Exercised                               (480,266)    0.89
    Canceled, forfeited or expired          (238,694)    2.37
                                       ----------------------------------------

Outstanding, December 31, 2000             4,733,040     2.50
    Granted                                2,361,007     2.94        1.93
    Exercised                               (682,586)    1.05
    Canceled, forfeited or expired        (1,561,560)    4.07
                                       ----------------------------------------
Outstanding, December 31, 2001             4,849,901   $ 2.37
                                       ========================================

The following table summarizes information about stock options outstanding at
December 31, 2001:

                                                                   Vested
                                  Weighted-                 ________   _________
                                   Average     Weighted-               Weighted-
                       Number     Remaining      Average      Number     Average
                   of Options   Contractual     Exercise          of    Exercise
Exercise Price    Outstanding          Life        Price     Options       Price
--------------------------------------------------------------------------------

         $0.89      2,082,696          8.92        $0.89     856,363       $0.89
 $1.78 - $2.50      1,320,396          8.70        $2.23     571,945       $2.33
 $3.10 - $4.10        774,000          9.37        $3.49     654,001       $3.31
 $5.10 - $5.27        327,674          9.05        $5.64      71,009       $5.11
 $6.00 - $7.22        271,635          9.05        $6.34     105,476       $6.27
 $9.25 - $9.31         73,500          9.10        $9.26       8,333       $9.31


Included in the above schedules are grants of 160,000 and 162,000 options made
to non-employee consultants in 2000 and 1999, respectively.

As described in Note 2, the Company uses the intrinsic-value method to measure
compensation expense associated with grants of stock options to employees. If
the Company had used the fair value method to measure compensation, reported net
loss would have been as follows:




                                    Year ended       Year ended      Year ended
                                    December 31      December 31     December 31
                                       2001             2000            1999
                                  ----------------------------------------------

Net loss to common
  shareholders as reported         $ (26,145,668)  $ (53,279,148)  $ (6,630,016)
Net loss--pro forma                  (28,753,668)    (54,175,173)    (7,154,362)
Loss per share--as reported        $       (0.61)  $      (10.77)  $    (393.52)
Loss per share--pro forma          $       (0.68)  $      (10.95)  $    (424.64)



     The fair value of the  options on their grant date was  measured  using the
     Black-Scholes  option-pricing  model.  Key  assumptions  used to apply this
     option-pricing model are as follows:

                                        2001             2000            1999
                                        --------------------------------------

Risk-free interest rate                 3.0% - 6.25%  6.25% and 6.5%     6.0%
Expected life of option                 1-3 years         3 years      3 years
Expected dividend payment rate,
as a percentage of the stock
price on the date of grant                  0%               0%           0%
Assumed volatility                      100% - 135%         100%          60%



     The option-pricing  model used was designed to value readily tradable stock
     options with relatively short lives. However,  management believes that the
     assumptions  used to  value  the  options  and the  model  applied  yield a
     reasonable  estimate  of the  fair  value  of the  grants  made  under  the
     circumstances (see also Note 13).

10.  Employee Stock Purchase Plan

     On October 15, 2000 the Company  adopted an Employee  Stock  Purchase  Plan
     (the "Plan") under which eligible  employees are able to purchase shares of
     the  Company's  Common  Stock at 85% of the market value at the date of the
     start of each six month option period or the end of such period,  whichever
     is lower.  Under the  provisions  of the Plan up to  1,000,000  shares  are
     authorized.  Shares purchased under the Plan in 2001 totaled 54,956 and the
     weighted  average grant date fair value of the shares  purchased was $2.00.
     No shares were issued  under this Plan during the year ended  December  31,
     2000.  There are 945,044  shares  available  under the Plan at December 31,
     2001.

11.  Income Taxes

    The components of the provision (benefit) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
<S>                                   <C>                 <C>             <C>           <C>

                                                                                         Cumulative from
                                                                                           May 8, 1997
                                                                                             (Date of
                                         Year ended       Year ended      Year ended      Inception) to
                                        December 31,     December 31,    December 31,      December 31,
                                            2001              2000           1999              2001
                                      -------------------------------------------------------------------

State - current                                 17,156                                            17,156
Federal--deferred                         $ (9,919,839)   $ (5,115,236)  $ (1,995,158)      $(19,663,058)

State--deferred                             (1,679,472)       (993,055)      (352,087)        (3,489,230)

Increase in valuation allowance             11,599,311       6,108,291      2,347,245         23,152,288
                                      -------------------------------------------------------------------

Provision (benefit) for income taxes      $     17,156        $     -         $     -        $    17,156
                                      ===================================================================

</TABLE>


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                       40
                                                         -------
         Effective rate                                     -- %
                                                         =======


   The components of the Company's deferred tax assets and liabilities consisted
 of the following at December 31:

                                                  2001            2000
                                            ------------------------------

Long-term assets:
    Net operating loss carryforwards         $20,279,512      $10,403,206
    Research and development credits           2,208,080        1,017,264
    Loss on sales commitments                          -                -
    Other                                        664,696          132,507
                                            ------------------------------

Net deferred tax assets before
  valuation allowance                         23,152,288       11,552,977
Less valuation allowance                     (23,152,288)     (11,552,977)
                                            ------------------------------

Net deferred tax assets                      $         -      $         -
                                            ==============================

The valuation allowance increased by $11,599,311 in 2001 and $6,108,291 in 2000,
primarily due to the generation of net operating loss carryforwards and credits
for which realization is not reasonably assured.

The Company has available for future periods federal and state tax net operating
loss  carryforwards for federal and state purposes of approximately  $50,652,000
and $51,024,000, respectively, as of December 31, 2001. In addition, the Company
has business  credits of  approximately  $1,378,000 and $830,000 for federal and
state  purposes,  respectively  as of December 31, 2001.  The net operating loss
carryforwards  expire  beginning  in 2012 and 2002 for  federal  and  state  tax
purposes,  respectively.  The federal research and development  credits begin to
expire in 2012.  The  Company  did not pay any income  taxes from  inception  to
December 31, 2001.

Under the provisions of the Internal Revenue Code, certain  substantial  changes
in the Company's  ownership may have  limited,  or may limit in the future,  the
amount of net operating loss  carryforwards  which could be utilized annually to
offset  future  taxable  income and income  tax  liabilities.  The amount of any
annual  limitation  is  determined  based upon the  Company's  value prior to an
ownership change.

12.  Benefit Plan

In 1998,  the Company  created a 401(k) Profit Sharing Plan (the "Plan") for its
full-time  employees.  Each  participant  in the Plan may elect to  contribute a
percentage of his or her annual  compensation  to the Plan on a pre-tax basis up
to the annual limit  established by the Internal  Revenue  Service.  The Company
matches  employee  contributions  at a rate  of 50%  up to the  first  6% of the
employee's  contributions.  The Company may also elect to make a  profit-sharing
contribution at the discretion of the Board of Directors. Employee contributions
are fully vested.  Company  matching and profit sharing  contributions  vest 20%
after two years of service  consisting of at least 1,000 hours per calendar year
and 20% annually thereafter.  Company contributions were $189,883,  $102,085 and
$41,963 during 2001, 2000 and 1999, respectively.

13.  Related Party Transactions

Consulting Agreements. The Company entered into consulting agreements with three
investors.   The  contracts  were  seven-year  agreements,   renewable  annually
thereafter,  for consulting services to be provided by the investors in exchange
for annual issuances of shares of the Company's Class A Stock. During 2000, 1999
and 1998,  $586,000,  $300,000  and  $175,000,  respectively,  was  recorded  as
consulting expense relating to these agreements,  and 67,232 (ultimately 134,464
shares of common  stock),  145,000 and 120,000  shares of Class A Stock in 2000,
1999 and 1998, respectively,  were issued as compensation under these contracts.
Prepaid and accrued consulting  expenses have been recorded  annually,  based on
the terms and dates of the consulting  agreements.  The services provided by the
investors  were recorded based upon the value of the  securities  issued.  These
contracts all expired upon the completion of the initial public  offering of the
Company's common stock in November 2000.

Patents.  The Company has entered into an agreement  with SatCon  whereby SatCon
granted the Company a perpetual license to use the technology patented by SatCon
relating to the field of flywheel energy storage products, systems and processes
for stationary terrestrial applications.

Services  Agreements.  Through  2000,  SatCon  performed  certain  research  and
development,  administrative and other services for the Company. Amounts paid to
SatCon for such services  amounted to approximately  $0,  $551,000,  $59,000 and
$2,404,000 during 2001, 2000, 1999 and the period from inception to December 31,
2001, respectively.  No amounts were payable to SatCon relating to such services
at either December 31, 2001 or 2000.

Inventory.  The Company  used SatCon to perform  certain  engineering  and other
processing  tasks on certain of the electrical  components of its product.  This
was discontinued during 2001, with the Company's next generation electronics. As
such,  the Company had no  inventory  at SatCon for  processing  at December 31,
2001. At December 31, 2000,  the Company had $153,500 of its inventory at SatCon
for  processing.  The Company had  payables to SatCon for  electronic  component
purchases   totaling  $35,532  and  $52,725  at  December  31,  2001  and  2000,
respectively.

Distribution  Agreement.  In 1997, the Company signed a 20-year  agreement which
granted an investor  exclusive  rights to  distribute  certain of the  Company's
products in a territory  comprised of seven Mid-Atlantic states and the District
of Columbia.  However,  the Company  retained the right to  distribute  products
directly to cable television and telephone companies.

14.  Summary of Non-cash Investing and Financing Activities:

During the year ended December 31, 2001,  2000 and 1999,  cash paid for interest
was approximately $34,000, $370,000 and $184,000, respectively.

During the year ended December 31, 2001,  2000 and 1999, cash paid for taxes was
approximately $1,600, $1,800 and $500, respectively.

During 2001,  2000 and 1999, the Company  acquired  assets totaling $0, $281,034
and $0 of assets with capital leases.

During the year ended  December  31,  2001,  the Company  recorded a decrease in
deferred  compensation from the issuance of non-qualified stock options to third
parties  of  $1,580,352.  This was  offset  by a charge  to  additional  paid in
capital.  During 2000, the Company recorded an increase in deferred compensation
from the issuance of non-qualified stock options to third parties of $1,844,649.
This is offset by a credit to additional paid in capital.

During 2000,  the Company  converted its bridge notes of $3,550,000  and accrued
interest on those notes  totaling  $275,560 into Class E redeemable  convertible
preferred stock.

In April  2000,  the  Company  cancelled  certain  warrants  that were issued in
conjunction  with the Class E  Preferred  stock.  This  resulted  in a charge to
Additional Paid in Capital of $170,000.

As a result of its initial  public stock  offering  during the fourth quarter of
2000, the Company converted 4,767,907 shares of its Class A Preferred Stock into
9,535,814 shares of its common stock.

As a result of its initial  public stock  offering  during the fourth quarter of
2000,  the Company  converted  6 shares of its Class C  preferred  stock into 12
shares of its common stock.

As a result of its initial  public stock  offering  during the fourth quarter of
2000, the Company converted all of its outstanding  shares of its Class D, E and
F redeemable  convertible  preferred stock into 19,823,704  shares of its common
stock.

During 2000, the company paid dividends on its redeemable  convertible preferred
stock totaling  $1,086,307  through the issuance of 859,330 shares of its common
stock.

As a result of its initial  public stock  offering  during the fourth quarter of
2000, the Company paid accrued consulting expense totaling $498,284 with 134,464
shares of its common stock.

In December 2000, the Company issued  1,982,876  shares of its common stock as a
result of two holders of the  Company's  warrants  exercising a portion of their
warrants in a cashless exercise transaction.

During 1999 the Company issued warrants  valued at $450,000 in conjunction  with
certain financing arrangements.

During 1999 the Company issued non-qualified stock options valued at $65,318 for
certain consulting agreements.


15.   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  presented.  The  operating
results for any quarter are not necessarily indicative of results for any future
quarters.
<TABLE>
<CAPTION>
<S>                                     <C>               <C>                  <C>             <C>
                                                                       2001
                                          First            Second              Third             Fourth
                                         Quarter           Quarter            Quarter           Quarter
                                     -------------------------------------------------------------------------

Revenue                                 $          -       $          -        $         -       $         -

Loss from operations                      (6,296,072)        (6,869,317)        (8,063,401)       (6,662,471)
Net loss                                $ (5,799,436)      $ (6,302,084)       $(7,588,410)      $(6,455,738)
Loss per share - basic and diluted      $      (0.14)      $      (0.15)       $     (0.18)      $     (0.15)
Weighted-average common shares
outstanding                               42,169,642         42,523,462         42,739,635        42,760,695

</TABLE>


<TABLE>
<CAPTION>
<S>                                    <C>                 <C>                <C>               <C>

                                                                       2000
                                           First            Second             Third             Fourth
                                          Quarter          Quarter            Quarter           Quarter
                                     -------------------------------------------------------------------------

Revenue                                 $           -       $         -        $         -       $    50,000

Loss from operations                       (2,893,697)       (2,295,054)        (4,582,851)       (7,976,123)
Net loss                                $  (3,018,735)      $(2,526,898)       $(4,247,082)      $(7,625,323)
Loss per share - basic and diluted      $     (179.17)      $    (73.39)       $    (34.74)      $     (0.39)
Weighted-average common shares
outstanding                                    16,848            34,430            122,269        19,504,373


</TABLE>



<PAGE>

Item  9.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

None.

<PAGE>

                                    PART III


Item 10.  Directors and Executive Officers of the Registrant

Information  concerning  executive officers of the Company that responds to this
Item is  incorporated by reference from Item 4A contained in Part 1 of this Form
10-K.  The  information  that responds to this Item with respect to Directors is
incorporated by reference from the section  entitled  "Election of Directors" in
the  Company's  definitive  proxy  statement  for its  2002  Annual  Meeting  of
Stockholders, which is required to be filed pursuant to Regulation 14A under the
Securities  Exchange Act of 1934  ("Exchange  Act") and which will be filed with
the SEC not later than 120 days after the end of the Company's  fiscal year (the
"Proxy  Statement").  Information  with respect to  compliance  by the Company's
directors  and  executive  officers  with  Section  16(a) of the Exchange Act is
incorporated by reference from the section  entitled  "Section 16(a)  Beneficial
Ownership Reporting Compliance" in the Proxy Statement.

Item 11.  Executive Compensation

Information  required in response to this Item is incorporated by reference from
the  section  entitled   "Compensation  of  Executive  Officers"  in  the  Proxy
Statement.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information  required in response to this Item is incorporated by reference from
the sections entitled "Election of Directors" and "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.


Item 13.  Certain Relationships and Related Transactions

Information  required in response to this Item is incorporated by reference from
the section  entitled  "Other  Information  Relating to Directors,  Nominees and
Executive Officers" in the Proxy Statement.

<PAGE>

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

         1.  Financial Statements

The financial statements are listed under Part II, Item 8 of this Report.

         2.  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.

         3.  Exhibits

The exhibits are listed below under Part IV, Item 14(c) of this report.

Reports on Form 8-K

         None

Exhibits

Exhibit
Number              Description of Document

   3.1   Sixth Amended and Restated Certificate of Incorporation (Incorporated
         by reference to Exhibit No. 3.1 to the Registration Statement on Form
         S-1 of Beacon Power Corporation No. 333-43386 filed on November 16,
         2000).

   3.2   Amended and Restated Bylaws (Incorporated by reference to Exhibit No.
         3.2 to the Registration Statement on Form S-1 of Beacon Power
         Corporation No. 333-43386 filed on November 16, 2000).

10.1.1   Securities Purchase Agreement by and among SatCon Technology
         Corporation, Duquesne Enterprises (n/k/a DQE Enterprises, Inc.) and
         Beacon Power Corporation dated May 28, 1997 (Incorporated by reference
         to Exhibit No. 10.1.1 to the Registration Statement on Form S-1 of
         Beacon Power Corporation No. 333-43386 filed on November 16, 2000).

10.1.2   Securities Purchase Agreement by and among Beacon Power Corporation,
         Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a DQE  Enterprises,
         Inc.), Micro-Generation Technology Fund, L.L.C. and SatCon  Technology
         Corporation dated October 23, 1998 (Incorporated by reference to
         Exhibit No. 10.1.2 to the Registration Statement on Form S-1 of Beacon
         Power Corporation No. 333-43386 filed on November 16, 2000).

10.1.3   Securities Purchase  Agreement  by and among Beacon Power Corporation,
         Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a DQE Enterprises,
         Inc.),  Micro-Generation  Technology Fund, L.L.C. and SatCon Technology
         dated April 7, 2000 (Incorporated  by  reference  to Exhibit No. 10.1.3
         to the Registration Statement on Form S-1 of Beacon Power Corporation
         No. 333-43386 filed on November 16, 2000).

10.1.4   Securities  Purchase Agreement  by and among  Beacon Power Corporation,
         Perseus Capital, L.L.C., Micro-Generation Technology Fund, L.L.C.,
         Mechanical Technology Incorporated,  The Beacon Group Energy Investment
         Fund II, L.P. and Penske Corporation dated April 21, 2000 (Incorporated
         by reference to Exhibit No. 10.1.4 to the Registration Statement on
         Form S-1 of Beacon Power Corporation No. 333-43386 filed on November
         16, 2000).

10.1.5   Securities Purchase Agreement by and among Beacon Power Corporation,
         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  dated May 23, 2000 (Incorporated  by
         reference  to Exhibit No. 10.1.5 to the Registration  Statement on Form
         S-1 of Beacon Power Corporation No. 333-43386 filed on November 16,
         2000).

10.1.6   Investor Rights Agreement by and among Beacon Power Corporation,
         Perseus Capital, L.L.C., DQE Enterprises,  Inc.,  Micro-Generation
         Technology Fund, L.L.C., Mechanical Technology Incorporated, GE Capital
         Equity Investments, Inc., The Beacon Group Energy Investment Fund II,
         L.P., Penske Corporation,  SatCon Technology Corporation,  James S.
         Bezreh, Russel S. Jackson, Russell A. Kelley, Stephen J. O'Connor, Jane
         E. O'Sullivan and Robert G. Wilkinson dated May 23, 2000  (Incorporated
         by reference to Exhibit No. 10.1.6 to the Registration  Statement on
         Form S-1 of Beacon Power Corporation No. 333-43386 filed on November
         16, 2000).

10.1.7   Form of Warrant of Beacon Power Corporation issued  pursuant to class D
         financing and list of holders thereof (Incorporated  by  reference  to
         Exhibit No. 10.1.7 to the  Registration Statement on Form S-1 of Beacon
         Power Corporation No. 333-43386 filed on November 16, 2000).

10.1.8   Form of Warrant of Beacon Power Corporation issued  pursuant to class E
         financing and list of holders thereof (Incorporated by reference  to
         Exhibit No. 10.1.8 to the Registration Statement  on Form S-1 of Beacon
         Power Corporation No. 333-43386 filed on November 16, 2000).

10.1.9   Form of Warrant of Beacon Power Corporation issued  pursuant to class F
         bridge financing and list of holders thereof (Incorporated by reference
         to Exhibit No. 10.1.9 to the Registration Statement on Form S-1 of
         Beacon Power Corporation No. 33-43386 filed on November 16, 2000).

10.1.10  Form of Warrant of Beacon Power Corporation  issued pursuant to class F
         financing and list of holders thereof (Incorporated  by  reference  to
         Exhibit No. 10.1.10 to the Registration Statement on Form S-1 of Beacon
         Power Corporation No. 333-43386 filed on November 16, 2000))

10.1.11  Warrant of Beacon Power  Corporation issued to Cox Communications, Inc.
         dated August 2, 2000 (Incorporated by reference  to Exhibit No. 10.1.11
         to the Registration Statement on Form S-1 of Beacon  Power  Corporation
         No. 333-43386 filed on November 16, 2000).

10.1.12  Warrant of Beacon Power Corporation issued to Kaufman-Peters dated
         August 2, 2000 (Incorporated by reference to Exhibit No. 10.1.12 to the
         Registration  Statement on Form S-1 of Beacon Power  Corporation No.
         333-43386 filed on November 16, 2000).

10.1.13  Warrant of Beacon  Power  Corporation  issued to GE Capital  Equity
         Investments,  Inc. dated  October  24, 2000 (Incorporated  by reference
         to Exhibit No. 10.1.13 to the  Registration  Statement  on Form S-1 of
         Beacon Power Corporation No. 333-43386 filed on November 16, 2000).

10.1.14  Second Amended and Restated 1998 Stock Incentive Plan of Beacon Power
         Corporation (Incorporated by reference to Exhibit No. 10.1.14 to the
         Registration  Statement on Form S-1 of Beacon Power  Corporation No.
         333-43386 filed on November 16, 2000).

10.1.15  Form of Incentive Stock Option  Agreement of Beacon Power  Corporation
         (Incorporated  by reference to Exhibit No. 10.1.15 to the Registration
         Statement on Form S-1 of Beacon Power Corporation No. 333-43386 filed
         on November 16, 2000).

10.1.16  Form of Non-Qualified Stock Option Agreement of Beacon Power
         Corporation (Incorporated by reference to Exhibit No. 10.1.16 to the
         Registration Statement on Form S-1 of Beacon Power Corporation No.
         333-43386 filed on November 16, 2000).

10.1.17  Form of Non-Qualified  Stock Option Agreement of Beacon Power
         Corporation issued to certain consultants on July 24,  2000 and list of
         holders thereof (Incorporated by reference to Exhibit No. 10.1.17 to
         the Registration Statement on Form S-1 of Beacon Power Corporation No.
         333-43386 filed on November 16, 2000).

10.1.18  Amended and Restated License Agreement by and between Beacon Power
         Corporation and SatCon Technology  Corporation   dated October 23, 1998
         (Incorporated  by reference to Exhibit No. 10.1.18 to the  Registration
         Statement on Form S-1 of Beacon Power Corporation No. 333-43386 filed
         on November 16, 2000).

10.1.19  Lease between Beacon Power  Corporation  and BCIA New England  Holdings
         LLC dated July 14, 2000  (Incorporated  by reference  to Exhibit No.
         10.1.20 to the  Registration  Statement  on Form S-1 of Beacon  Power
         Corporation  No. 333-43386 filed on November 16, 2000).

10.1.20  Letter Agreement among Beacon Power  Corporation,  GE Capital Equity
         Investments,  Inc. and GE Corporate Research and  Development  dated
         October 24, 2000 (Incorporated  by reference to Exhibit No.  10.1.24 to
         the Registration Statement on Form S-1 of Beacon Power Corporation No.
         333-43386 filed on November 16, 2000).

10.1.21  Form of Director and Officer Indemnification Agreement (Incorporated by
         reference to Exhibit No. 10.1.25 to the Registration Statement on Form
         S-1 of Beacon Power Corporation No. 333-43386 filed on November 16,
         2000).

10.1.22  Form of Employment Agreement and list of parties thereto  (Incorporated
         by reference to Exhibit No. 10.1.26 to the Registration Statement on
         Form S-1 of Beacon Power Corporation No. 333-43386 filed on November
         16, 2000).

10.1.23  Employment Agreement Dated December 1, 2001 between F. William Capp and
         Beacon Power Corporation.

  11.1   Statement of Computation of Earnings per Share.  (This exhibit has been
         omitted  because the  information is shown in the financial statements
         or notes thereto.)

  23.1   Consent of Deloitte & Touche LLP



<PAGE>


                                   SIGNATURES

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

                            BEACON POWER CORPORATION

                            By:  /s/ F. William Capp
                                 ---------------------------
                                 F. William Capp
                                 President and Chief Executive Officer

                                 Date: April 1, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


               Signature                     Title                    Date

    /s/ F. William Capp        President and Chief Executive
    --------------------       Officer and Director
    F. William Capp            (Principal Executive Officer)      April 1, 2002

    /s/ James M. Spiezio       Vice President of Finance and
    --------------------       Chief Financial Officer
    James M. Spiezio           (Principal Financial Officer)      April 1, 2002

    /s/ Stephen A. Spanos      Corporate Controller
    ---------------------      (Principal Accounting Officer)
    Stephen A. Spanos                                             April 1, 2002



    /s/ Philip J. Deutch
    Philip J. Deutch           Director                           April 1, 2002

    /s/ Alan P. Goldberg
    Alan P. Goldberg           Director                           April 1, 2002

    /s/ Nancy Hawthorne
    Nancy Hawthorne            Director                           April 1, 2002

    /s/ Jack P. Smith
    Jack P. Smith              Director                           April 1, 2002

    /s/ Kenneth M. Socha
    Kenneth M. Socha           Director                           April 1, 2002

    /s/ William E. Stanton
    William E. Stanton         Director                           April 1, 2002


                                  -------------


<PAGE>


Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-50260 of Beacon Power  Corporation  on Form S-8 of our report dated March 8,
2002  appearing in this Annual  Report on Form 10-K of Beacon Power  Corporation
for the year ended December 31, 2001.

/S/ Deloitte & Touche, LLP

Boston, MA
March 27, 2002