**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

Washington, D.C.20549

----

**FORM10-K/A**

**AmendmentNo. 1**

**x****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the fiscal year endedDecember 31, 2006**

**Or**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from        to        **

** **

**Commission file number 000-31973**

 

**Beacon Power Corporation**

(Exact name of registrantas 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,  MA**                       | ** ** | **01887-1032**       |
| (address of  principal executive offices) |       | (Zip code)           |

 

**(978) 694-9121**

 (Registrant’s telephone number, including areacode)

 

Securities registeredpursuant to Section 12(b) of the Act: **None**

 

Securities registeredpursuant to Section 12(g) of the Act:

 

**Common Stock, par value $.01 pershare**

**Preferred Share Purchase Rights**

 

(Title of class)

   Indicate by check mark ifthe registrant is a well known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes oNo x

   Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes oNo x

     Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     Yes oNo x

     Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K  o

     Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in rule 12b-2 of the ExchangeAct.
| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

   Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).    Yes o No x

   As of June 30, 2006 themarket value of the voting and non-voting common stock of the registrant heldby non-affiliates of the registrant was $74,573,811. In determining the marketvalue of non-affiliated voting stock, shares of the registrant’s common stockbeneficially owned by each executive officer, director and any known person tobe the beneficial owner of more than 20% of the registrant’s voting stock havebeen excluded. This determination of affiliate status is not necessarily aconclusive determination for other purposes.

     The number of shares ofthe Registrant’s common stock, par value $.01 per share, outstanding as ofMarch 21, 2007 was 71,342,885.

DOCUMENTS INCORPORATED BY REFERENCE

The Exhibit Index (Item No. 15) located on pages    through    incorporatesseveral documents by reference as indicated therein.

 

----

**EXPLANATORY NOTE**

This Amendment No. 1 on Form 10-K/Aamends our Annual Report on Form 10-K for the year ended December 31, 2006, asfiled with the Securities and Exchange Commission on March 30, 2007, to includethe information required by Part III of Form 10-K.  The information required by Items 10 – 14 ofPart III is no longer being incorporated by reference to the Proxy Statementrelated to the Company’s 2007 Annual Meeting of Shareholders.  As required by Rule 12b—15 under theSecurities Exchange Act of 1934, new certifications of our principal executiveofficer and principal financial officer are being filed as exhibits to thisAmendment No. 1 on Form 10-K/A.  Thisamendment is not intended to update any other information presented in theAnnual Report as originally filed.

2

----

**TABLE OF CONTENTS**
|                  | ** ** | ** **                                                             | ** ** | **Page** |
|------------------|------------|------------------------------------------------------------------------|------------|----------|
| Explanatory Note |       |                                                                   |       |     |
| ** **       |       | **Part III**                                                           |       |     |
| ** **       |       |                                                                   |       |     |
| Item 10          |       | Directors Executive Officers  and Corporate Governance                 |       | 4        |
|             |       |                                                                   |       |     |
| Item 11          |       | Executive Compensation                                                 |       | 8        |
|             |       |                                                                   |       |     |
| Item 12          |       | Security  Ownership of Certain Beneficial Owners and Management and    |       |     |
|             |       | Related  Stockholder Matters                                           |       | 34       |
|             |       |                                                                   |       |     |
| Item 13          |       | Certain  Relationships, Related Transactions and Director Independence |       | 36       |
|             |       |                                                                   |       |     |
| Item 14          |       | Principal  Accountant Fees and Services                                |       | 38       |
|             |       |                                                                   |       |     |
| ** **       |       | **Part IV**                                                            |       |     |
| ** **       |       |                                                                   |       |     |
| Item 15          |       | Exhibits and  Financial Statement Schedules                            |       | 40       |
|             |       |                                                                   |       |     |
| Signatures       |       |                                                                   |       | 43       |

 

3

----

**PART III**

**Item 10.  Directors and Executive Officers of theRegistrant**

**Executive Officers**

The names, ages, currentpositions and principal occupations during the last five years of our currentExecutive Officers Executive Officers are described below.
| Name                  | ** ** | **Age**    | ** ** | **Position**                                               |
|-----------------------|------------|------------|------------|------------------------------------------------------------|
| ** **            | ** ** | ** ** | ** ** | ** **                                                 |
| F. William Capp       |       | 58         |       | President and Chief Executive Officer, Director            |
|                  |       |       |       |                                                       |
| Matthew L. Lazarewicz |       | 56         |       | Vice President of Engineering and Chief Technical  Officer |
|                  |       |       |       |                                                       |
| James M. Spiezio      |       | 59         |       | Vice President of Finance, Chief Financial Officer,        |
|                       |       |       |       | Treasurer and Secretary                                    |

 

*F. William Capp.*

Mr. Capp has served as our President,Chief Executive Officer and Director since December 1, 2001 when he joined theCompany.  Mr. Capp received his Bachelorof Science in Aeronautical Engineering from Purdue University, a Master ofBusiness Administration and a Master’s Degree in Mechanical Engineering fromthe University of Michigan.

*Matthew L. Lazarewicz.*

Mr. Lazarewicz has served as our VicePresident of Engineering since February 1999, and was named our Chief TechnicalOfficer in September of 2001. Mr. Lazarewicz is a Registered ProfessionalEngineer in the Commonwealth of Massachusetts and received both Bachelor’s andMaster’s Degrees in Mechanical Engineering from the Massachusetts Institute ofTechnology.  Mr. Lazarewicz alsocompleted his Master’s Degree in Management at the Massachusetts Institute ofTechnology Sloan School of Management.

*James M. Spiezio.*

Mr. Spiezio joined our Company in May2000. He has served as Vice President of Finance, Chief Financial Officer andTreasurer since July 2000, Secretary since March 2001, and was our CorporateController from May 2000 to July 2000. He has over twenty-six years ofdiversified manufacturing and financial management experience. Mr. Spiezio is agraduate of the Indiana University School of Business.

**Directors**

Our Board of Directors consists of seven members, six of whom arenon-employee directors.

4

----

 

*F. William Capp, age 58 (director since 2001)*

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

*Stephen P. Adik, age 64 (director since 2004)*

*Audit Committee*

*Compensation Committee*

*Nominating and GovernanceCommittee*

Mr. Adik served as ViceChairman at NiSource Inc., (NYSE: NI), a Fortune 500 electric, natural gas andpipeline company, from December 2000 until his retirement in December2003.  He served on the Board of NiSourcefrom December 2000 to May 2005.  He is amember of the Board of Directors and Chairman of the Audit Committee ofNorthWestern Corporation, an electric and natural gas company. He is also amember of the Board of Directors of the Chicago South Shore and South BendRailroad, a regional railroad company. Mr. Adik received his Bachelor of Science degree in MechanicalEngineering from the Stevens Institute of Technology, and an MBA degree inFinance from Northwestern University.

*Daniel E. Kletter, age 68(director since October 2006)*

*Audit Committee*

*Nominating and Governance Committee*

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

*Virgil G. Rose, age 61(director since January 2007)*

*Compensation Committee*

*Nominating and Governance Committee*

Mr. Rose has been an independentconsultant providing advisory services that include working with the UnitedStates Department of Energy, California Energy Commission, California ISO,Bonneville Power Authority, National Labs, and numerous west coast utilities since2004.  From 2001 to 2004, Mr. Rose wasSenior Vice President and Director of Energy Delivery and Management at Nexant,an international energy industry consulting company. Mr. Rose has 38 years ofexperience in the electric utility industry in various consulting, engineering,system operation, and management capacities, including 27 years with PacificGas & Electric (PG&E).  Mr. Rosereceived a Bachelor of Science in Electrical Engineering from Fresno State University,a Master of Science in Electrical Engineering from Santa Clara University, andhas completed the Advanced Management Program at Harvard University.

*Jack P. Smith, age 58(director since 2001)*

*Audit Committee*

*Compensation Committee*

*Nominating and GovernanceCommittee*

5

----

Mr. Smith is Chairman, Director andco-owner of Silversmith Inc, a producer of natural gas well metering andautomated data reporting systems.  Mr.Smith co-founded Silversmith Inc. in 2003. Prior to his current engagement with Silversmith, Mr. Smith wasPresident and CEO of Holland Neway International, a leading producer ofcommercial vehicle suspensions and brake systems.  Mr. Smith also serves on the Board ofDirectors of Bissell Corporation in Grand Rapids, Michigan, SRAM Corporation inChicago and Weasler Engineering in Wisconsin. He is a Trustee of Grand Valley State University Foundation.  Mr. Smith received his Bachelor of Scienceand Masters Degree in Mechanical Engineering and a Masters Degree in BusinessAdministration from the University of Michigan.

William E. Stanton, age 63 (director since 1997)

Mr. Stanton has been a director of Beaconsince its formation in 1997.  He servedas the President and Chief Executive Officer of Beacon from January 1998through December of 2001.  Prior tojoining Beacon, Mr. Stanton was the Chief Operating Officer of SatConTechnology Corporation from September 1995 to May 1997, where he managedoperations and the strategy development to shift SatCon from a contractresearch and development company to a commercial product organization.  This strategy included the formation ofBeacon Power.  Prior to joining SatCon,Mr. Stanton, in his 26 years at the Charles Stark Draper Laboratory, held thepositions of Vice President of Operations, Vice President of CorporateDevelopment, Director of New Programs, Director of Avionics Programs, AvionicsProgram Manager, Director of Electronics Engineering, Principal Engineer, andElectronics Engineer.  Mr. Stanton is onthe board of his home owners association, was a founder and director of anin-school child-care center, and owned and operated residential rentalproperty.  He received a Bachelor’sDegree in Electrical Engineering from the University of Maine, a Master’sDegree in Instrumentation and Control from the Massachusetts Institute ofTechnology, and a Master’s in Business Administration from the Harvard BusinessSchool.  Mr. Stanton’s term of officeexpires in 2007.
|          | Lisa W.                   | Zappala, age 46  (director since 2005) |
|----------|---------------------------|----------------------------------------|
| * * | *Compensation  Committee* |

 

Ms. Zappala, currently an independentconsultant, was, from 1995 to 2003, Senior Vice President, Treasurer and, from1998 to 2003, Chief Financial Officer of Aspen Technology, Inc., then a $300million publicly traded software and services company.  While at Aspen Technology, Ms. Zappala helpedcomplete successful public and private equity fundraising rounds totaling over$400 million, as well as more than a dozen acquisitions.  Ms. Zappala also serves on the board ofAmicas, Inc., a publicly traded software company, as well as another privatelyheld company.  Prior to Aspen Technology,from 1981 to 1993, she practiced public accounting as a CPA at Arthur Andersen& Co.  Ms. Zappala’s term of officeexpires in 2007.

**Board ofDirectors’ Meetings and Committees**

**Meetings**.  During the fiscal year ended December 31,2006, our Board of Directors held seventeen meetings.  Each director attended more than 75% of theaggregate of (i) the total number of meetings of our Board of Directors heldduring the period for which he or she has been a director and (ii) the totalnumber of meetings held by all committees of our Board of Directors on which heor she served during period that he or she served.

**Committees**.  Our Board of Directors has established threestanding committees:  the AuditCommittee, the Compensation Committee and the Nominating and GovernanceCommittee.  No member of any of thesecommittees is an employee of Beacon.  Themembership of each committee is listed below.

| Audit                    | ** ** | **Compensation**       | ** ** | **Nominating and Governance** |
|--------------------------|------------|------------------------|------------|-------------------------------|
| Stephen P. Adik, *Chair* | * *   | Jack P. Smith, *Chair* | * *   | Virgil G. Rose, *Chair*       |
| Jack P. Smith            |       | Stephen P. Adik        |       | Stephen P. Adik               |
| Daniel E. Kletter        |       | Lisa W. Zappala        |       | Jack P. Smith                 |
|                          |       | Virgil G. Rose         |       | Daniel E. Kletter             |

 

*Audit Committee.* Under rules of the Nasdaq Stock Market, our Audit Committee must have atleast three members, all of whom must be “independent.”  All members of our Audit Committee qualify as“independent” as defined in the Nasdaq Stock Market and SEC standards.  Each of Mr. Adik and Mr. Kletter is qualifiedas an Audit Committee Financial Expert, as defined by the SEC.  The Audit Committee is appointed by andreports to our Board of Directors.  Itsresponsibilities include, but are not limited to, the appointment, compensationand dismissal of our independent auditors, review of the scope and results ofour independent auditors’ audit activities, evaluation of the independence ofour independent auditors and review of our accounting controls and policies,financial reporting practices and internal audit control procedures and relatedreports.  During the last fiscal year,the Audit Committee held nine meetings. The Audit Committee’s charter can be found on our website atwww.beaconpower.com.

*Compensation Committee.* Our Compensation Committee has the authority to set the compensation ofour Chief Executive Officer and all other executive officers and has theresponsibility to review the design, administration and effectiveness of allprograms and policies concerning executive compensation and establishing andreviewing general policies relating to compensation and benefits ofemployees.  The Compensation Committeeadministers our Third Amended and Restated 1998 Stock Incentive Plan andEmployee Stock Purchase Plan.  Messrs.Adik, Smith and Rose and Ms. Zappala are non-employee directors who have nointerlocking relationships as defined by the SEC, and are all independentpursuant to the Nasdaq Stock Market Rules applicable to members of thiscommittee.  The Compensation Committeeheld five meetings during the last fiscal year.

6

----

*Nominating and Governance Committee.* Prior to August 8, 2006, the Nominating and Governance Committee wasnamed the Nominating Committee.  TheNominating and Governance Committee recommends to the Board corporategovernance guidelines applicable to the Board and to the Company and overseesthe effectiveness of our corporate governance in accordance with thoseguidelines.  The committee alsoidentifies individuals qualified to become Board members, reviews thequalifications of nominee directors and recommends to the Board the directornominees for annual meetings of stockholders and candidates to fill vacancieson the Board.  Additionally, thecommittee recommends to the Board the directors to be appointed to Boardcommittees.  A stockholder may nominate aperson for election as a director by complying with Section 2.2 of our By-Laws,which provides that advance notice of a nomination must be delivered to Beaconand must contain the name and certain information concerning the nominee andthe stockholders who support the nominee’s election.  A copy of this By-Law provision may beobtained by writing to Beacon Power Corporation, Attn:  James M. Spiezio, Secretary, 234 BallardvaleStreet, Wilmington, Massachusetts 01887. Director nominees submitted by our stockholders will be considered onthe same terms as other nominees.  Allmembers of our Nominating and Governance Committee qualify as “independent”pursuant to the Nasdaq Stock Market Rules. The Nominating and Governance Committee held seven meetings during thelast fiscal year.  The charter for ourNominating and Governance Committee can be found on our web site atwww.beaconpower.com.

**Director Independence**

There are nofamily relationships among any of our directors or executive officers.  Messrs. Adik, Smith, Kletter and Rose and Ms.Zappala, representing a majority of our directors, are determined to beindependent under the rules of the NASDAQ Stock Market.  Our board holds regularly scheduled meetingsat which only these independent directors are present.

**Limitationof Liability and Indemnification**

Our Certificate ofIncorporation limits the liability of our directors, officers and various otherparties whom we have requested to serve as directors, officers, trustees or insimilar capacities with other entities to us or our stockholders for anyliability arising from an action to which such persons are a party by reason ofthe fact that they were serving Beacon or at our request to the fullest extentpermitted by the Delaware General Corporation Law.

We have enteredinto indemnification agreements with our directors and Executive Officers.  Subject to certain limited exceptions, underthese agreements, we will be obligated, to the fullest extent not prohibited bythe Delaware General Corporation Law, to indemnify such directors and officersagainst all expenses, judgments, fines and penalties incurred in connectionwith the defense or settlement of any actions brought against them by reason ofthe fact that they were Beacon directors or Executive Officers.  We also maintain liability insurance for ourdirectors and Executive Officers in order to limit our exposure to liabilityfor indemnification of our directors and Executive Officers.

##### **Communicationwith Our Board of Directors**

Our Board ofDirectors provides a process for our stockholders and other interested partiesto send communications directly to our non-employee directors.  Any person who desires to contact thenon-employee directors may do so by writing to: Board of Directors, c/o Beacon Power Corporation, 234 BallardvaleStreet, Wilmington, Massachusetts 01887.

Communications received will be forwarded directly to the Chair of the Nominatingand Governance Committee.  The Chair ofthe Nominating and Governance Committee will, in his discretion, forward suchcommunications to other directors, members of our management or such otherpersons as he deems appropriate.  TheChair of the Nominating and Governance Committee, or, if appropriate, ourmanagement, will respond in a timely manner to any substantive communicationsfrom a stockholder or interested party.

Our AuditCommittee also provides a process to send communications directly to thecommittee about our accounting, internal accounting controls or auditingmatters.  Any person who desires tocontact the Audit

7

----

Committee regarding suchmatters may do so by writing to Audit Committee of the Board of Directors, c/oBeacon Power Corporation, 234 Ballardvale Street, Wilmington, Massachusetts01887.

Communicationsreceived by mail will be forwarded directly to, the Chair of the AuditCommittee.  The Chair of the AuditCommittee, in his discretion, will forward such communications to otherdirectors, members of our management or such other persons as he deemsappropriate.  The Chair of the AuditCommittee, or, if appropriate, our management, will respond in a timely mannerto any substantive communications from a stockholder or an interested party.

**Code of Conduct**

We have adopted a code of conduct thatapplies to all of our employees, including our chief executive officer and ourchief financial officer.  A copy of our *Corporate Code Of Conduct* can be found on the Internet atour website www.beaconpower.com, or by request, free of charge by writing toour Investor Relations Department at our principal executive office 234Ballardvale Street, Wilmington, MA 01887. We intend to disclose on our websiteany amendments to the Code, or any waiver from a provision of the Code.

**Item11.  Executive Compensation**

# **COMPENSATIONDISCUSSION AND ANALYSIS**

***Role of Our Compensation Committee. ***Our Compensation Committee approves, administersand interprets our executive compensation policies. Our Compensation Committeeis appointed by our Board of Directors, and consists entirely of directors whoare “outside directors” for purposes of Section 162(m) of the InternalRevenue Code, “non-employee directors” for purposes of Rule 16b-3 underthe Exchange Act and “independent directors” for purposes of the Nasdaq StockMarket rules.  Our Compensation Committeehas as members Mr. Stephen P. Adik, Mr. Virgil G. Rose, and Ms. Lisa W.Zappala and is chaired by Mr. Jack P. Smith.

Our CompensationCommittee reviews and makes recommendations to our Board of Directors to ensurethat our compensation program is consistent with our compensation philosophyand corporate governance guidelines and, subject to the approval of our Board(without the participation of the CEO), establishes the compensation paid orgranted to our Executive Officers, including our CEO. The CompensationCommittee also establishes an overall pool of compensation for SeniorManagement and other employees.

***Roleof our Executive Officers***.  The role of the CEO and CFO is to allocatethe compensation pool approved by the Compensation Committee among all ourother employees, including the other Senior Managers, and to providerecommendations to the Compensation Committee in regards to any equitycompensation to be granted for Senior Management and other employees.

***GeneralPhilosophy***.  Ourexecutive compensation and benefit program has been designed to encourage ourSenior Management to pursue our strategic objectives while effectively managingthe risks and challenges inherent in a development stage company. We havecreated a compensation package that combines short and long-term componentsthrough a mix of base salary, bonus and equity compensation, in the proportionswe believe are most appropriate to incentivize and reward our Senior Managementfor achieving our strategic objectives. Moreover, the program is designed to becompetitive with comparable employers and to align management’s incentives withthe long-term interests of our stockholders. Our compensation-setting process consists of establishing targetedoverall compensation for each Senior Manager and then allocating thatcompensation among fixed and variable compensation.  At the senior levels, we design the incentivecompensation to reward company-wide performance, shareholder value creation,and the achievement of specific financial, operational and strategicobjectives.

For the remainderof our employees, during the transition from development stage to commercial,we have tied their awards to the same company-wide performance as the SeniorManagers’ compensation.  As we transitionto commercialization, we expect to design the incentive compensation for theemployees other than Senior Managers to reward the achievement of specificoperational goals within areas under the control of the relevant employees aswell as company-wide performance.

8

----

***Evolutionof our Compensation Strategy.***  Our compensation strategy is necessarily tiedto our stage of development. Accordingly, the specific direction, emphasis andcomponents of our executive compensation program will continue to evolve inparallel with the evolution of our business strategy. For example, if wetransition from development stage to commercial with more predictable financialresources, our compensation programs may also evolve, reflecting the changingneeds of the business and available resources. Similarly, our goals will bemodified to incorporate changing requirements expected of us, such ascompliance with all the requirements of the Sarbanes Oxley Act and theeffectiveness of our stockholder communications. Our Compensation Discussionand Analysis will, in the future, describe these evolutionary changes, if any.

***Program Participants.***  We have a compensation programfor our Executive Officers and a separate program for the remainder of theSenior Managers. Our Executive Officers are:

·      F. William Capp, Chief Executive Officer(CEO)

·      James M. Spiezio, Chief Financial Officer(CFO)

·      MatthewL. Lazarewicz, Chief Technical Officer (CTO)

In addition, thetwo highly-compensated managers named below (who are included in ourcompensation tables) are compensated pursuant to a separate compensationprogram, and, together with the Executive Officers are referred to as “SeniorManagement” or our “Senior Managers.”

·      ChesterR. Lyons, Director of Marketing and Sales

·      RichardL. Hockney, Chief Engineer

***Developmentof a Formal Compensation Program.*** In 2005 ourCompensation Committee took the following steps to ensure that our compensationand benefit programs for Executive Officers are consistent with ourcompensation philosophy and our corporate governance guidelines:

·      Engagedand directed Watson Wyatt, as our independent executive compensation andbenefits consultant, to assess the competitiveness of our compensation program,and provide a high-level review of our 2006 long-term incentive plan

·      Withthe assistance of Watson Wyatt, developed appropriate compensation packages bytargeting a competitive level of pay as measured against our peer groupdescribed below

·      Maintaineda practice of reviewing the performance and determining the total compensationearned, paid or awarded to our Chief Executive Officer independent of inputfrom him

·      Developedcompensation guidelines for our Chief Financial Officer and Chief TechnicalOfficer with assistance from our Chief Executive Officer, and determined whatwe believe to be appropriate total compensation based on competitive levels asmeasured against our peer group

·      Maintainedthe practice of holding executive sessions, without executive officers present,at every Compensation Committee meeting, and

·      Forthe remainder of the team, including other Senior Managers, the CompensationCommittee and Executive Officers review the compensation program to insureconsistency with our compensation philosophy and governance guidelines.

Based on thisexamination, the Compensation Committee developed a compensation programintended to be in place for the next several years.

***TargetedCompensation Framework.*** To test the competitiveness of our compensation program, Watson Wyattcompared our compensation practices and levels to (a) competitive market surveydata and (b) a group of specific peer companies, both representative ofcompanies of similar size and industry.

Watson Wyattdefined the peer group, which was approved by the Compensation Committee. Inselecting the peer comparison group, the following criteria were used:

9

----

·                  Publicly-tradedcompanies subject to disclosure requirements governed by the SEC

·                  Companiesthat operate within the industrial machinery and/or high technology industries

·                  Companiesthat are similar in size to the company:

·                  Market capitalization – generally withina range of .5X – 2.5X of our own

·                  Revenue – within a range of $0 to $50million

·                  Companies thatare generally in a similar business stage.

Using the abovecriteria, the peer comparison group was determined to be Active Power Inc.,Ault Inc., Capstone Turbine Corporation, Composite Technology Corporation, LimeEnergy, Ener1, Inc., Espey Mfg & Electronics Corp., LDL Group Incorporated,PECO II Incorporated, PowerCold Corporation, Spire Corporation, Taylor Devices,Inc., Tech/Ops Sevcon, Inc., Technology Research Corporation and UQMTechnologies, Inc.

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

1.               CurrentLandscape

·                  Currentprograms and trends in the marketplace were observed to provide an overview ofthe current compensation environment, competitive market practices and emergingtrends.

2.               TotalDirect Compensation

·                  Allcompensation including base salaries, annual incentives and the fair value oflong-term incentives.

·                  Theseevaluations were utilized to determine whether compensation opportunities werecompetitive with market levels and are delivering an appropriate mix of pay,both fixed and variable.

3.               CarriedInterest

·                  Intrinsic,i.e., “in-the-money” value of options and full value shares.

·                  Thisevaluation was to assess the retentive value of current equity holding levelsand the degree of shareholder alignment.

4.               Usage& Dilution

·                  Usage:Number of shares and options being granted as a percentage of sharesoutstanding

·                  Dilution:Number of shares currently outstanding and available for grant in the currentequity program

·                  Bothof these measurements were considered over a one and three year period.  This assessment considered the relativecompetitiveness, from a share number perspective, that the equity program hasoffered historically and the resulting potential shareholder dilution.

5.               PlanExpense

·                  Cost of thecurrent equity program as a percentage of market capitalization to assess thetotal expense of delivering long-term incentives relative to the group of PeerCompanies.

This analysis resulted in the decision to shift a portion of short-termincentive opportunity to long-term incentives to appropriately balance nearterm operational goals with longer term shareholder value creation.Specifically, we reduced each Executive Officer’s short-term incentive targetsand introduced a portfolio approach to delivering long-term incentives,comprised of stock options, restricted stock units (RSUs) and performance stockunits (PSUs).  The structure developed asa result of those analyses and subsequent discussions serves as the foundationfor our executive compensation program going forward.

We intend tocontinue our strategy of compensating our Executive Officers at competitivelevels, through programs that emphasize performance-based incentivecompensation in the form of cash and equity. To that end, total executivecompensation is structured to ensure that, due to the nature of our business,there is an equal focus on our financial performance and stockholder return.For 2006, the total compensation paid to our Executive Officers generally wasbetween 50th and 75th percentile of total compensation paid to the executiveofficers of our peer group. We believe that this positioning was consistentwith our financial performance, the individual performance of each of our executivesand stockholder return. We also believe that the total compensation wasreasonable in the aggregate. Further, in light of our compensation philosophy,we believe that the total compensation package for our Executive Officersshould continue to consist of base salary, annual cash incentive awards(bonus), long-term equity-based incentive compensation, and certain otherbenefits.

10

----

The competitiveposture of our total annual direct compensation will vary from year to yearbased on our results and individual performance, versus the performance of thepeer group companies and their respective level of annual performance bonusawards made to their executives. We believe our target total annual directcompensation is generally positioned at approximately the 50th to 60thpercentile.

***Components ofCompensation Program.*** Our performance-driven compensationprogram has both current and long term components. Our Executive Officers’compensation is defined in the Executive Agreements (which are further detailedin the section titled “Executive Officer Employment Agreements” below.)  All of our other employees, including theother Senior Managers, are employees at will. However, they participate in the compensation programs as noted below.

***CurrentCompensation Components*. **We utilize current compensation components that include base salaryand cash bonuses to motivate and reward our employees, including our ExecutiveOfficers, in accordance with our defined objectives. Our Compensation Committeehas established this program to set and refine management objectives and tomeasure performance against those objectives. The Compensation Committeereviews its conclusions on short term compensation with the Board (without theparticipation of the CEO), and once a consensus is reached, the short termcompensation decisions are presented to the Executive Officers.

***BaseSalary.***

Base salary willtypically be used to reward the experience, skills, knowledge andresponsibilities required of each of our Executive Officers, as well ascompetitive market conditions. In establishing the 2006 base salaries, ourCompensation Committee considered the proposals made by the Executive Officersand the recommendations made by Watson Wyatt, who were retained to do an updateof their findings from the prior year. The factors considered in determining salary and annual increases tosalary, which are adjusted effective January 1 of each year, were:

·              Seniority

·              Functional role

·              Level of responsibility

·              Performance and accomplishments

·              Comparisons against marketbenchmarks described earlier in this discussion

·              Trends in compensation for thegeographic region

·              Professional effectivenessincluding leadership, commitment, creativity, and team building

·              Knowledge, skills, attitude andfocus

·              Competitive market forcorresponding positions within comparable geographic areas and industries

Using the samecriteria outlined above, our Compensation Committee works directly with itsindependent compensation consultant to determine the compensation recommendationsthat our Compensation Committee makes to our Board of Directors regardingspecific compensation actions for the Executive Officers.  The Executive Officers’ base salariesincreased from 2005 to 2006 by 4.0% to 4.3%.
| Executive Officer | ** ** | **2005 Base  Salary** | ** ** | **2006 Base  Salary** | ** ** | **% Increase** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------------|------------|---------------------|------------|
| F. William Capp        |       | $                          | 240,000    |                       | $          | 250,000             |       | 4.2 | % |
| James M. Spiezio       |       | 187,000                    |       | 195,000                    |       | 4.3                 | %          |
| Matthew L. Lazarewicz  |       | 171,600                    |       | 178,500                    |       | 4.0                 | %          |
|                        |            |                            |            |                            |            |                     |            |  |  |

 

***PerformanceBonus***

***Overviewof Performance Bonus Program.*** Awards under the program are based on a quantitativeand qualitative review of all of the facts and circumstances related to theCompany and each executive’s or employee’s

11

----

performance.  Senior Managers may receive awards from zeroto 100% of his target bonus based on the review of results.  Additional awards of up to 50% of thepotential bonus may be awarded for performance at levels above targeted goalsand objectives or improvement in the timing of achieving certain results.  The criteria for these potential additions tothe bonus are clearly defined as part of establishing the potential bonusstructure each year.

On an individuallevel, the Compensation Committee attempts to set clearly defined goals foreach Executive Officer, focusing on the categories mentioned below, with anemphasis on quantifiable and achievable goals. Once the defined goals have beenidentified, the Compensation Committee engages in a collaborative process withthe Executive Officers to reach agreement on the following aspects of the shortterm goals:

•                    Agreementthat the goals formulated are viewed by the Executive Officers as the correctdrivers for the business from their perspectives

•       Consistencyof these goals with our short and long term strategies

•       Timing,measurability and relative values that should be ascribed to each goal; and

•       Agreementthat the goals are difficult yet realistically attainable.

The CompensationCommittee sees this process both as the optimal means of assembling accurateinformation regarding the expectation and realization of performance, as wellas an integral part of our culture of collaborative, team-oriented management.

The CompensationCommittee evaluates each Senior Manager as well as our other employees onceeach year based on the achievement of set goals. This review is typically doneduring the first quarter of the year. We review final results at the end of theyear versus pre-determined objectives and begin discussions regardingperformance objectives for the next fiscal year. Performance bonuses may beawarded in the form of cash or RSUs and equity-based awards.

Total compensationfor our Senior Managers as well as the remainder of our employee team may varysignificantly from year to year, based on the percentage of achievement ofgoals. In addition, the value of equity awards in either RSUs or stock optionsmay vary significantly in value based on our stock’s performance.

***2006Performance Bonus and Resulting Bonus Payout.***  Our business strategy, as detailed in theCompany’s Annual Report on Form 10-K, is to become a leader in providingfrequency regulation services to the electrical grid. We intend to build ourservice business through our internal research efforts, our use of proprietarytechnologies, expansion of manufacturing capabilities and our deployment offacilities dedicated to providing economically viable frequency regulationservices to the electrical grid. In order to accomplish these goals, we willneed to expand manufacturing capabilities, acquire appropriate locations for installationof our flywheel systems and raise additional financing. We must also focus oncontinually strengthening our management and technical teams, in order toprovide the human resources necessary to carry out our business objectives.

In 2005 and 2006,we made significant progress in executing our strategic plan. For 2006, thetarget goals and results were as follows:
| Description of goal                                                                                                                                                                                              | ** ** | **Results**                                                                                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                       | ** ** | ** **                                                                                                |
| **25kWh Flywheel Development****:** metrics relate to operation through speed range and  power as of certain target dates and ordering of long lead parts related to  prototypes                                 |       | Operation through speed range achieved independent  of prototype malfunction. Achieved 80% of power goal. |
| ** **                                                                                                                                                                                                       |       |                                                                                                      |
| **Smart Energy Matrix Development****:** metrics relate to management’s activities in marketing  the company, obtaining ISO certification and selecting a site for our first  frequency regulation facility |       | Goals achieved, with the exception of site selection  (which is still in process).                        |

 

12

----

 
| Description of goal                                                                                                    | ** ** | **Results**               |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|
| ** **                                                                                                             |       |                      |
| **Fundraising****:**  metrics relate to achievement of specific financing goals and maintenance of  investor awareness |       | Partial achievement.      |
| ** **                                                                                                             |       |                      |
| **Government Contracts****:**  metrics relate to performance for existing contracts and obtaining new  contracts       |       | Goals achieved.           |
| ** **                                                                                                             |       |                      |
| **New Revenue****:**  metrics relate to identification of potential new revenue sources and product  sales             |       | Goals partially achieved. |

 

***StretchGoals***. Additional bonus amounts could be awarded forexceeding certain targets related to flywheel development, fundraising, andother revenue-related contracts. These stretch goals were designed to beextremely difficult to achieve; however, if met, could have resulted in bonuspayouts up to 146% of the Targeted bonus amounts.

Based on thesegoals and the resulting attainment, each Executive Officer was judged to haveachieved 30% of his goals, and each other Senior Manager was judged to haveachieved 35% of his goals. Accordingly, for our Senior Managers, the Target andactual bonuses paid in March 2007 for our 2006 Performance Plan were asfollows:
| Name                   | ** ** | **2006 Base  Salary** | ** ** | **Bonus  Potential as a  % Salary** | ** ** | **2006 Target  Bonus  Potential** | ** ** | **Bonus  Percent  Awarded  (as a % of  Target)** | ** ** | **Bonus  Amount  Paid** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------|------------|
| F. William Capp        |       | $                          | 250,000    |                                               | 50.0       | %                                      | $          | 125,000                                                         |       | 30                      | %          | $ | 37,500 |   |
| James M. Spiezio       |       | 195,000                    |       | 35.0                                               | %          | 68,250                                 |       | 30                                                              | %          | 20,475                  |       |
| Matthew L.  Lazarewicz |       | 178,500                    |       | 35.0                                               | %          | 62,475                                 |       | 30                                                              | %          | 18,743                  |       |
| Chester R. Lyons       |       | 130,000                    |       | 38.5                                               | %          | 50,000                                 |       | 35                                                              | %          | 17,500                  |       |
| Richard L. Hockney     |       | 131,000                    |       | 26.7                                               | %          | 35,000                                 |       | 35                                                              | %          | 12,250                  |       |
|                        |            |                            |            |                                                    |            |                                        |            |                                                                 |            |                         |            |  |  |  |

 

The bonuspotential as a percent of salary was defined in the Executive Officers’Employment Agreements with the Company. These agreements are further describedbelow.  For Mr. Hockney, the Target isstated as a percentage of his salary, and is consistent with the bonuspercentage for which he was eligible in prior years.  For Mr. Lyons, as with other new hires during2006, the Target amount was defined in his employment offer letter.

***2005Performance Bonus Program.*** Bonuses paid to our Senior Managers for their2005 performance were paid in RSUs during 2006 instead of cash.  These RSUs were approved by the Board ofDirectors and granted in February 2006, and are included in our 2006compensation tables. These RSUs vested and were converted to common stock infour installments during 2006, subject to continued employment. The use of RSUsinstead of cash for bonus payouts was a determination made by the Board andagreed to by the Executive Officers as a means of improving our cash position.The number of RSUs granted was calculated on a discounted stock price at dateof grant in order to compensate the employees for the reduced liquidity of thestock in lieu of cash.

For 2005, theTarget goals, scoring metrics and 2005 results used to calculate the bonuseswere as follows:

13

----

 
| Description of goal                                                                                                                                  | ** ** | **Results**                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|
| ** **                                                                                                                                           | ** ** | ** **                   |
| **Demonstration Flywheels:** metrics relate to approval of demonstration  and successful operation of demonstration units in California and New York |       | Goals substantially achieved |
| ** **                                                                                                                                           |       |                         |
| **Government Contracts:** metrics relate to obtaining new  contracts                                                                                 |       | Goals achieved               |
| ** **                                                                                                                                           |       |                         |
| **Marketing:** metrics relate to development efforts in the utility industry                                                                         |       | Goals partially achieved     |
| ** **                                                                                                                                           |       |                         |
| **Merger Approval:** metrics relate to obtaining shareholder approval in relation to  a proposed merger and integration of the acquired company      |       | Goals not met                |
| ** **                                                                                                                                           |       |                         |
| **Fundraising:** metrics relate to achievement of specific financing goals                                                                           |       | Goals substantially achieved |

 

**Stretch Goals:**No stretch goals were established for 2005.

For our SeniorManagers, the Target and actual bonuses paid in RSUs during 2006 for our 2005Performance Plan were as follows:
| **Name**              | ** ** | **2005 Base  Salary** | ** ** | **2005  Bonus  Potential** | ** ** | **Target  Bonus  Potential  as %  Salary** | ** ** | **Bonus  Percent  Awarded  (as % of  Target  Bonus)** | ** ** | **Bonus  Award  (Prelim)** | ** ** | **# RSU  Awarded** | ** ** | **Grant  Date  FMV of  RSU** | ** ** |
|-----------------------|------------|----------------------------|------------|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| F. William Capp       |       | $                          | 240,000    |                       | $          | 240,000                                         |       | 100                                                             | %          | 66.5                       | %          | $                       | 159,600    |                              | 173,479    |   | $ | 326,141 |   |
| James M. Spiezio      |       | 187,000                    |       | 112,380                    |       | 60                                              | %          | 66.5                                                            | %          | 74,733                     |       | 81,231                  |       | 152,714                           |       |
| Matthew L. Lazarewicz |       | 171,600                    |       | 102,960                    |       | 60                                              | %          | 66.5                                                            | %          | 68,468                     |       | 74,422                  |       | 139,913                           |       |
| Richard L. Hockney    |       | 126,100                    |       | 33,000                     |       | 26                                              | %          | 78.8                                                            | %          | 26,004                     |       | 28,265                  |       | 53,138                            |       |
|                       |            |                            |            |                            |            |                                                 |            |                                                                 |            |                            |            |                         |            |                                   |            |  |  |  |  |

 

Mr. Lyons was notan employee in 2005 but did receive a sign on bonus of $10,000 in cash during2006.

***Long-termCompensation***

At present, ourlong-term compensation for Executive Officers consists of a combination ofcommon stock options and RSUs, all with a three year vesting period, andperformance stock units (PSUs) tied to achieving specific longer termobjectives.  We believe this strategy ofutilizing a combination of options, RSUs and PSUs is consistent with theapproach of other development stage companies in our industry and, in ourCompensation Committee’s view, is appropriate for aligning the interests of ourExecutive Officers with those of our stockholders over the long term, focuseson attaining key operational milestones, and provides an effective retentionfeature.  All Options, RSUs and PSUs aregranted under our Third Amended and Restated 1998 Stock Incentive Plan.  Details as to the valuation of these grantsis included in our Notes to Consolidated Financial Statements as included inour Annual Report on Form 10-K, and are incorporated here by reference.  Equity grant practices, including recentchanges, are detailed in a subsequent section of this discussion.

***CommonStock Option Grants.*** Our common stock option grants are designed to align management’sperformance objectives with the interests of our stockholders. We believe thatthese options provide an important component of executive compensation which isfully aligned with our shareholder’s interests whereby the impact of anybusiness setbacks, whether Company-specific or industry based, achievement ofobjectives or other performance matters impacts the Executive Officers as wellas shareholders directly. Our Compensation Committee also grants options to keyemployees based on this same rationale and in addition, enables these keyemployees to participate in the long term appreciation of our stockholdervalue.  In addition, all new permanent,full-time employees are granted options when they join the Company. We furtherbelieve that our option grants provide a means to assist in the

14

----

retention of keyemployees, inasmuch as they are in almost all cases subject to vesting over anextended period of time.

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

·                  The fair value of the grants using aBlack-Scholes valuation for equity awards that is consistent withSFAS 123(R)

·                  The number of common stock options andRSUs granted by position; and

·                  The competitive level of our equity-based compensationpractices versus the market, including levels, share usage levels, dilution andoverall equity plan expense.

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

In addition, Mr.Lyons joined the Company during the first quarter of 2006, and was granted atotal of 150,000 options as part of his new hire compensation.

***RestrictedStock Unit Grants.*** RSUs were granted to our ExecutiveOfficers pursuant to the Executive Agreements. Our issuance of RSUs is afurther effort to align management’s performance objectives with the interestof shareholders by having the same attributes as our vesting stock options withthe additional alignment of each Executive Officer owning actual shares. TheseRSUs vest quarterly over a three year period, and are generally converted tocommon stock on the vesting dates. The number of RSUs issued to each of theExecutive Officers were as follows:  Mr.Capp, 23,133 units; Mr. Spiezio, 9,924 units, and Mr. Lazarewicz, 9,084 units.The compensation value of these RSUs was calculated using the stock closingprice on the date of grant, which was $1.55.

***PerformanceStock Unit Grants.*** Our Performance Stock Units (PSUs) arealso designed to align management’s performance objectives to shareholderinterest by providing stock grants that cliff-vest upon achievement of specificlonger term objectives of interest to our investors.

The ExecutiveOfficers were granted PSUs as part of the Executive Agreements. The PSUs werestructured to provide Mr. Capp with potential awards valued at $1,000,000 andMr. Spiezio and Mr. Lazarewicz with awards valued at $500,000 each of RSUs,where the unit price used to calculate the number of units was based on theaverage of the high and the low stock price on the date of grant, $1.58.  This equates to a potential award of 632,911shares to Mr. Capp and 316,456 shares each to Mr. Spiezio and Mr. Lazarewicz.

The PSUs cliff vest only upon achievement of certain conditions:

a.               Achievementof the following Adjusted EBITDA goals for the fiscal years ending in 2009 or2010.  (Adjusted EBITDA is defined as netearnings before Interest, Taxes, Depreciation, Amortization and Stock CompensationExpense.)  The scale for potential awardis as follows:
| Size of Adjusted EBITDA:  | ** ** | **Number of RSUs in the Actual Award**      |
|---------------------------|------------|---------------------------------------------|
| Under $2,000,000          |       | No Award                                    |
| $2,000,000                |       | 50% of the Potential Award                  |
| $2,000,000 to  $4,000,000 |       | Potential Award X Adjusted EBITDA/4,000,000 |
| Over $4,000,000           |       | 100% of the Potential Award                 |

 

b.              In additionto achieving the above listed Adjusted EBITDA goals, the Company must havereceived a signed, unqualified opinion (without a going concern limitation) inregards to our audit of the fiscal year ending in 2009 or 2010 that theachievement of the Adjusted EBIDTA targets are recognized.

15

----

c.               In addition,the executive must be our employee at all times through the last day ofwhichever of the two fiscal years the other conditions have been satisfied.

Based on our currentbusiness plan as of December 2006, executive management believes that it islikely that the full potential award will be earned.  Accordingly, a pro-rata portion of the fairvalue of the award is being expensed ratably over the service period over whichthe PSUs are earned.  It is also includedin the Summary Compensation Table as a Stock Award.

***EquityGrant Practices.***

During 2006, ourBoard granted common stock options, RSUs and PSUs based upon therecommendations of our Compensation Committee and the Executive Agreements.These grants to Executive Officers were generally made during regularlyscheduled meetings of the Board of Directors. Mr. Capp and Mr. Spiezio havebeen authorized by the Board of Directors to issue common stock option grantsto individuals being hired within certain limits which have been predeterminedby the Board, based upon job title/function.

In developingspecific grant dates, the Board of Directors takes into account a wide varietyof factors including the pricing of our most recently completed equityfinancing; the status of additional equity or debt transactions; the status ofour various research and development activities; the quality and growth of ourmanagement team; and specific and general market comparables. In addition, theBoard took into account the valuation opinion of our outside consultant, whoprovided valuations of our common stock and appropriate conversion factorsbetween stock options and RSUs.

In addition to theoptions granted to the Executive Officers, our policy has been to grant commonstock options to all full-time permanent new hires at the time of employment;however the number of options varies depending on the position and experienceof the new hire.  Further, options orRSUs may be granted to employees as part of the annual compensationreview.  Typically, options granted vestquarterly over a three year period.

Prior to the thirdquarter of fiscal 2006, option grants had exercise prices that were calculatedas the average between the high and the low prices for our stock on the date ofgrant.  Based on a review of 2006 grants,these exercise prices exceeded or equaled the stock closing prices on the datesof grant.  During the third quarter of2006, the Board changed its policy in relation to option grants to reflect SECguidance that the exercise prices should be based on the stock closing price onthe Nasdaq Stock Market on the date of grant.

***Executive Officer Employment Agreements***.

On May 8, 2006, we entered into employmentagreements with our Executive Officers, commencing on the date of the agreementand continuing until December 31, 2006, unless renewed or terminated.   Additional agreements providing for longterm incentive compensation consisting of Restricted Stock Units (RSUs), stockoptions, and performance-based RSUs were signed on the same date. The terms ofthe long term compensation are discussed further below. These agreements, intotal, will be referred to as the “Executive Agreements.” In addition to theBase Salary and Targeted Bonus amounts (discussed above under “CurrentCompensation” section), the Executive Agreements specified other benefits, suchas vacation time and fringe benefits. The fringe benefits include those available to our other employees, suchas group health and dental insurance, life insurance, group long and short-termdisability insurance, 401(k) plan, and stock plan participation.  In addition, each Executive Officer is entitledto reimbursement for an executive physical every other year (not to exceed$1,000 for each such physical), as well as an additional life insurance policyover and above the insurance plan provided to all employees.  Further, in the event that the ExecutiveOfficer becomes disabled and receives disability insurance payments that areless than his monthly base salary, we will pay him the difference between hisnormal base salary and the insurance payment, for the duration of hisemployment.  These agreements alsocontain certain provisions related to severance and change of control, whichare discussed further in the section titled, “Potential Payments uponTermination or Change in Control.”  We believethese benefits are consistent with those offered by other companies.

Beacon does nothave a supplemental retirement plan or any form of executive retirement plan.

16

----

Some additionalprovisions of the Executive Agreements include the following:

·                  *Golden Parachute Payment Excise Tax Protection*.  In the event that the excise tax imposed bySection 4999 of the IRS code of 1986 (or any successor penalty or excise taxsubsequently imposed by law) applies to any payments or benefits specificallypaid or conferred under the Executive Agreement, we will pay an additionalamount to the executive equal to the amount of the excise tax, up to a maximumof $500,000 in regards to salary, vacation, and bonus; up to a maximum of$250,000 in regards to stock options or non-performance-based RSUs; and up to amaximum of $500,000 in regards to the PSUs granted per the ExecutiveAgreements.

·                  *Other Provisions*. The Executive Officers do not have the right to vote any shares ofcommon stock that may be acquired through conversion of RSUs or options orreceive any dividends attributed to such shares unless and until the commonstock issuable upon conversion of the RSU or exercise of the option has been soissued.  In the event of any stock split,stock dividend, recapitalization, reorganization, merger, consolidation,combination, exchange of shares, liquidation, spin-off, or other similar changein capitalization or event, or any distribution to holders of common stockother than a normal cash dividend, the number and class of securities each RSUand the number of shares underlying the option shall be convertible into underthe Agreement will be appropriately adjusted by the Company.

·                  TheExecutive Officer is required to pay us or make provision satisfactory to usfor payment of any taxes required to be withheld in connection with theAgreement no later than each vesting date for RSUs.  No shares of common stock will be issuedpursuant to the exercise of the option unless the Executive Officer pays us ormakes satisfactory provision for payment of any federal, state, or localwithholding takes required by law with respect to the option.

17

----

REPORT OF THECOMPENSATION COMMITTEE

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management.  Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December 31, 2006.

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

Submitted by the Compensation Committee:

Jack P. Smith, *Chairman*

Lisa W. Zappala

Virgil G. Rose

Stephen P. Adik

The foregoing Compensation Committee Reportis not deemed to be “soliciting material” or to be “filed” with the SEC orsubject to Regulation 14A or 14C under the Securities Exchange Act of 1934 orto the liabilities of Section 18 of the Securities Exchange Act of 1934, andwill not be deemed to be incorporated by reference into any filing under theSecurities Act of 1933 or the Securities Exchange Act of 1934, except to theextent we specifically incorporate it by reference into such a filing.

Set forth below isinformation regarding compensation earned by or paid or awarded to our SeniorManagers during the year ended December 31, 2006:

18

----

***Summary Compensation Table.*******The following table(s) sets forth the totalcompensation paid with respect to the year ended December 31, 2006 to F.William Capp, our Principal Executive Officer; James M. Spiezio, our PrincipalFinancial Officer; and our next three most highly paid officers: MatthewLazarewicz, our Chief Technology Officer; Chester Lyons, our Director ofMarketing and Sales; and Richard Hockney, our Chief Engineer.
| **Name and Principal  Position**          | ** ** | **Year**   | ** ** | **Salary**       | ** ** | **Bonus**        | ** ** | **Stock  Awards** | ** ** | **Option  Awards** | ** ** | **Non-  Equity  Incentive  Plan Comp.** | ** ** | **Changes in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-------------------|------------|--------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **($) (1)** | ** ** | **($) (1)** | ** ** | **($) (2)**       | ** ** | **($) (3)**   | ** ** | **($) (4)**                             | ** ** | **($) (5)**                                                                                  | ** ** | **($) (6)**                      | ** ** | **($)**   | ** ** |
| *Principal Executive Officer*F. William Capp        |       | 2006       |       | $                | 250,000    |             | $          | —            |       | $                  | 532,099    |                                         | $          | 84,694                                                                                       |       | $                                | 37,500     |      | $          | — |   | $ | 7,300 |   | $ | 911,593 |   |
| *Principal Financial Officer*James M. Spiezio       |       | 2006       |       | 195,002          |       | —           |       | 253,980           |       | 36,334             |       | 20,475                                       |       | —                                                                                       |       | 21,726                           |       | 527,517   |       |
| *Chief Technology Officer*Matthew L.  Lazarewicz    |       | 2006       |       | 178,500          |       | —           |       | 240,302           |       | 33,259             |       | 18,743                                       |       | —                                                                                       |       | 11,081                           |       | 481,885   |       |
| *Director of Marketing & Sales*Chester R. Lyons |       | 2006       |       | 127,500          |       | 10,000           |       | —            |       | 101,010            |       | 17,500                                       |       | —                                                                                       |       | —                           |       | 256,010   |       |
| *Chief  Engineer*Richard L.  Hockney                |       | 2006       |       | 131,000          |       | —           |       | 53,138            |       | —             |       | 12,500                                       |       | —                                                                                       |       | 3,930                            |       | 200,318   |       |
|                                                     |            |            |            |                  |            |                  |            |                   |            |                    |            |                                              |            |                                                                                              |            |                                  |            |           |            |  |  |  |  |  |  |  |  |

 

----

(1)                Salaries andcash bonuses are reported on the accrual basis. Mr. Lyons was hired by Beacon in January 2006, and the cash bonus was ahiring bonus paid to him at that time.

(2)                Stockincludes the SFAS 123(R) “fair value” of the RSU’s granted to employees inlieu of 2005 cash bonuses based upon the 2005 Incentive Compensation plan,since these were granted (approved by the Board of Directors) during 2006. Notethat the amount related to the RSU’s granted in lieu of 2005 bonuses had beenaccrued at the end of 2005, and had been reported as “Bonus” in the 2005Summary Compensation Table that was included in our Annual Report on Form10-K/A for 2005 which was filed with the SEC on May 1, 2006.  The stock awards also include the vested orearned portion of the fair value of the RSUs granted to the Executive Officersin 2006 and the PSUs which will become payable in 2009 or 2010 if 

19

----

certain performancegoals are met. These performance goals relate to the achievement of certainAdjusted EBITDA (defined as net earnings before Interest, Taxes, Depreciation,Amortization and Stock Compensation expense) targets for the fiscal yearsending in 2009 or 2010, the receipt of an unqualified audit opinion without agoing concern limitation for the specified year, and continuation of employmentuntil the other conditions are satisfied. No award is available for Adjusted EBITDA less than $2 million.  To receive the full award, Adjusted EBITDA inexcess of $4 million is required.  IfAdjusted EBITDA is between $2 million and $4 million, the award will beprorated.   See the ConsolidatedFinancial Statements, in particular Note 8 as shown in our Annual Report onForm 10-K and filed with the SEC on March 30, 2007, as well as the CompensationDiscussion and Analysis, for a discussion of these plans. The details of theamounts shown in the “Stock Awards” column is as follows:
| Name and Principal Position          | ** ** | **RSUs Issued per  2005 Bonus  Incentive Plan** | ** ** | **RSUs per  Executive  Agreements** | ** ** | **PSUs per  Executive  Agreements** | ** ** | **Total Stock  Awards** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| *Principal Executive Officer*F. William Capp        |       | $                                                                   | 326,141    |                                     | $          | 24,140                                   |       | $                            | 181,818    |   | $ | 532,099 |   |
| *Principal Finance Officer*James M. Spiezio         |       | 152,714                                                             |       | 10,357                                   |       | 90,909                                   |       | 253,980                      |       |
| *Chief Technology Officer*Matthew L. Lazarewicz     |       | 139,913                                                             |       | 9,480                                    |       | 90,909                                   |       | 240,302                      |       |
| *Director of Marketing & Sales*Chester R. Lyons |       | —                                                              |       | —                                   |       | —                                   |       | —                       |       |
| *Chief  Engineer*Richard L. Hockney                 |       | 53,138                                                              |       | —                                   |       | —                                   |       | 53,138                       |       |
|                                                     |            |                                                                     |            |                                          |            |                                          |            |                              |            |  |  |  |  |

 

(3)                  Optionsinclude the SFAS 123(R) “fair value” related to the vested portion of theoptions granted in 2006.  See theConsolidated Financial Statements, in particular Note 8, for a discussion ofthe assumptions made in the valuation of these options, as well as Management’sDiscussion and Analysis of our Annual Report on Form 10-K, both of which areincorporated here by reference.  Note,however, that although the stock compensation for options recorded in ourfinancial statements is calculated, per the requirements of SFAS 123(R),using management’s estimate of forfeitures of 10%, the amounts included inthese Executive Compensation tables is a gross amount that does not take intoconsideration the expected forfeiture rate (as required by the SEC).

(5)                  The amountsshown as “Non-Equity Incentive Plan Compensation” represent the actual bonusesearned per the 2006 Incentive Bonus Plan. These bonuses were paid in March2007.  See details of the incentive bonusplan structure in the Compensation Discussion and Analysis.

(5)                  All of ouremployees, including our Executive Officers, are eligible to participate in ourqualified deferred-contribution plan (401(k)). There are no additional executive retirement plans.

(6)                  The amountsshown in the “All Other Compensation” column consist of the following:

20

----

 
| Name                   | ** ** | **Year** | ** ** | **Officer  Life  Insurance  Premium  (a)** | ** ** | **Company  Contributions to  401(k) Plan  (b)** | ** ** | **Health  Insurance  Premiums for  Plan Not  Generally  Available to  Employees  (c)** | ** ** | **Total - All  Other  Compensation** | ** ** |
|------------------------|------------|----------|------------|--------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| F. William Capp        |       | 2006     |       | $                                          | 2,953      |                                                      | $          | —                                                                                                |       | $                                              | 4,347      |   | $ | 7,300 |   |
| James M. Spiezio       |       | 2006     |       | 15,876                                     |       | 5,850                                                     |       | —                                                                                                |       | 21,726                                         |       |
| Matthew L.  Lazarewicz |       | 2006     |       | 5,726                                      |       | 5,355                                                     |       | —                                                                                                |       | 11,081                                         |       |
| Chester R. Lyons       |       | 2006     |       | —                                     |       | —                                                    |       | —                                                                                                |       | —                                         |       |
| Richard L. Hockney     |       | 2006     |       | —                                     |       | 3,930                                                     |       | —                                                                                                |       | 3,930                                          |       |
|                        |            |          |            |                                            |            |                                                           |            |                                                                                                       |            |                                                |            |  |  |  |  |

 

----

(a)          Representsthe cost of life insurance coverage which is provided to the Executive Officersfor which we are not the beneficiary.

(b)         Wematch 50% of the amount our plan participants contribute to our qualifieddefined contribution (401(k)) plan. The maximum company matching contributionis 3% of salary.  The amounts shownrepresent the company matching contributions for the individuals choosing toparticipate in the plan.

(c)          All full-time employeesare eligible to participate in our health insurance plans, for which we pay asubstantial portion of the premium and the employees pay the remainder.  Two plans are available for eligible employeesliving in the State of Massachusetts, and a third plan is available forout-of-state residents.  This third planprovides expanded geographical coverage, but is more costly.  Mr. Capp has chosen to participate in thisplan, although he does not meet the geographical requirements imposed on thegeneral workforce.  Accordingly, the netincremental annual premium cost is included here as a perquisite.

21

----

 

***Grants of Plan-Based Awards.*******The following table showsall grants made to Senior Managers during the year ended December 31, 2006:
| ** **     | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **        | ** ** | ** **        | ** ** | **All**            | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------|------------|------------|------------|------------------------------------------|------------|--------------------------------------|------------|-------------|------------|----------------------------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **        | ** ** | ** **        | ** ** | **Other**          | ** ** | **All Other** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **     | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **        | ** ** | ** **        | ** ** | **Stock**          | ** ** | **Option**         | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **     | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **        | ** ** | ** **        | ** ** | **Awards:**        | ** ** | **Awards:**        | ** ** | ** **         | ** ** | ** ** | ** ** | **Grant**  | ** ** |
| ** **     | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **                           | ** ** | ** **  | ** ** | **Estimated Future Payouts** | ** ** | **Number**        | ** ** | **Number**        | ** ** | **Exercise**       | ** ** | ** **         | ** ** | **Date Fair** | ** ** |
| ** **     | ** ** | ** ** | ** ** | **Estimated Future Payouts**   | ** ** | **Under Equity Incentive** | ** ** | **of**      | ** ** | **of**                                 | ** ** | **or Base**  | ** ** | **Market**        | ** ** | **Value of**  | ** ** |
| ** **     | ** ** | ** ** | ** ** | **Under Non-Equity Incentive** | ** ** | **Plan Awards (2)**        | ** ** | **Shares**  | ** ** | **Securities**                         | ** ** | **Price of** | ** ** | **Price on** | ** ** | **Stock and** | ** ** |
| ** **     | ** ** | **Grant**  | ** ** | **Plan Awards (1)**            | ** ** | ** **                           | ** ** | ** **  | ** ** | **Maximum**                            | ** ** | **of Stock** | ** ** | **Underlying**    | ** ** | **Option**         | ** ** | **Grant**          | ** ** | **Option**         | ** ** |
| **Name**       | ** ** | **Date**   | ** ** | **Threshold**                            | ** ** | **Target**                           | ** ** | **Maximum** | ** ** | **Threshold**                          | ** ** | **Target**        | ** ** | **Threshold**     | ** ** | **or Units**  | ** ** | **Options**        | ** ** | **Awards**         | ** ** | **Date**   | ** ** | **Awards** | ** ** |
| ** **     | ** ** | ** ** | ** ** | **($)**                                  | ** ** | **($)**                              | ** ** | **($)**     | ** ** | **(#)**                                | ** ** | **(#)**           | ** ** | **(#)**           | ** ** | **(#) (3)**   | ** ** | **(#) (4)**   | ** ** | **($/Sh)**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mr. Capp       |       | 2/14/2006  |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       | 173,479            |       |               |       |               |       |       |       | $          | 326,141    |   |
| Mr. Capp       |       | 5/8/2006   |       | $                                        | —     |                                 | $          | 125,000     |       | $                                      | 182,500    |              |       |              |       |               |       |               |       |               |       |       |       |       |       |   |   |   |
| Mr. Capp       |       | 5/8/2006   |       |                                     |       |                                 |       |        |       | 316,456                                |       | 632,911           |       | 632,911           |       |               |       |               |       |               |       |       |       | 1,000,000  |       |
| Mr. Capp       |       | 5/8/2006   |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       | 23,133             |       |               |       |               |       |       |       | 35,856     |       |
| Mr. Capp       |       | 5/8/2006   |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       |               |       | 118,671            |       | $                  | 1.58       |       | $          | 1.55       |       | 125,791 |   |
| Mr. Spiezio    |       | 2/14/2006  |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       | 81,231             |       |               |       |               |       |       |       | 152,714    |       |
| Mr. Spiezio    |       | 5/8/2006   |       | $                                        | —     |                                 | 68,250     |        | 99,645     |                                   |       |              |       |              |       |               |       |               |       |               |       |       |       |       |       |   |
| Mr. Spiezio    |       | 5/8/2006   |       |                                     |       |                                 |       |        |       | 158,228                                |       | 316,456           |       | 316,456           |       |               |       |               |       |               |       |       |       | 500,000    |       |
| Mr. Spiezio    |       | 5/8/2006   |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       | 9,924              |       |               |       |               |       |       |       | 15,382     |       |
| Mr. Spiezio    |       | 5/8/2006   |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       |               |       | 50,910             |       | $                  | 1.58       |       | $          | 1.55       |       | 53,965 |   |
| Mr. Lazarewicz |       | 2/14/2006  |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       | 74,422             |       |               |       |               |       |       |       | 139,913    |       |
| Mr. Lazarewicz |       | 5/8/2006   |       | $                                        | —     |                                 | 62,475     |        | 91,214     |                                   |       |              |       |              |       |               |       |               |       |               |       |       |       |       |       |   |
| Mr. Lazarewicz |       | 5/8/2006   |       |                                     |       |                                 |       |        |       | 158,228                                |       | 316,456           |       | 316,456           |       |               |       |               |       |               |       |       |       | 500,000    |       |
| Mr. Lazarewicz |       | 5/8/2006   |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       | 9,084              |       |               |       |               |       |       |       | 14,080     |       |
| Mr. Lazarewicz |       | 5/8/2006   |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       |               |       | 46,602             |       | $                  | 1.58       |       | $          | 1.55       |       | 49,398 |   |
| Mr. Lyons      |       | 2/14/2006  |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       |               |       | 100,000            |       | $                  | 1.88       |       | $          | 1.88       |       | 126,000 |   |
| Mr. Lyons      |       | 3/9/2006   |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       |               |       | 50,000             |       | $                  | 1.54       |       | $          | 1.52       |       | 52,000 |   |
| Mr. Lyons      |       | 4/24/2006  |       | $                                        | —     |                                 | 50,000     |        | 73,000     |                                   |       |              |       |              |       |               |       |               |       |               |       |       |       |       |       |   |
| Mr. Hockney    |       | 2/14/2006  |       |                                     |       |                                 |       |        |       |                                   |       |              |       |              |       | 28,265             |       |               |       |               |       |       |       | 53,138     |       |
| Mr. Hockney    |       | 4/24/2006  |       | $                                        | —     |                                 | 35,000     |        | 51,100     |                                   |       |              |       |              |       |               |       |               |       |               |       |       |       |       |       |   |
|                |            |            |            |                                          |            |                                      |            |             |            |                                        |            |                   |            |                   |            |                    |            |                    |            |                    |            |            |            |            |            |  |  |  |  |  |  |

 

----

1.               Non-Equity Incentive Plan Awards: The amount shown in the Target column represents the amount which SeniorManagers were eligible to receive if all goals for the 2006 Performance BonusPlan were met.  If none of the goals wereachieved, no bonus would be paid (as reflected in the Threshold

22

----

column.) In addition, there were “stretch goals” which, if achieved, could haveresulted in bonus payments up to 146% of the Target amounts.  These “stretch goal” amounts are reflected inthe “Maximum” column in the table above.

2.               EstimatedFuture Payouts under Equity Incentive Plan Awards:  The amounts shown as Estimated Future Payoutsunder Equity Incentive Plan Awards represent PSUs granted under the ExecutiveAgreements.  The Threshold amount shownon the table above represents 50% of the Potential Award, whereas the Targetand Maximum amounts represent 100% of the Potential Award.

3.               All OtherStock Awards:

a.               Stock Awardsdated 2/14/2006:  These awards represent RSUs issued based upon the 2005 Bonus IncentivePlan.  These RSUs vested in four substantiallyequal installments, and converted to common stock on those dates, which were5/19/2006, 5/26/2006, 8/18/2006 and 11/17/2006. These shares were valued, for stock compensation purposes, at the stockclosing price at the grant date, which was $1.88.

b.              Stock AwardsDated 5/8/2006: These awards represent RSUs granted to the Executive Officers per theExecutive Agreements.  These RSUs vestquarterly over three years, and were valued at the stock closing price at thedate of grant, which was $1.55.

4.               All OtherOption Awards:

a.               OptionAwards dated 5/8/2006: These awards represent options granted to the Executive Officers per theExecutive Agreements.  The optionexercise price per these agreements was set at the average of the high and lowstock price on the date of grant, which was $1.58.  The stock closing price on this date was$1.55.

b.              OptionAwards Dated 3/9/2006 and 2/14/2006:  Mr. Lyons joined the Company during the firstquarter of 2006, and was granted a total of 150,000 options as part of his newhire compensation. The options granted to Mr. Lyons had an exercise price thatwas calculated as the average between the high and the low prices for our stockon the date of grant.  These exerciseprices exceeded or equaled the stock closing prices on the dates of grant.

23

----

***OutstandingEquity Awards at Fiscal Year-End.***The following tableshows the unexercised options, unvested stock grants, and equity incentive planawards outstanding relating to our Senior Management as of December 31, 2006:
|                       | ** ** | **Option Awards**                                                                 | ** ** | **Stock Awards**                                                                         | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable  (1)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested (#)  (1)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  have Not  Vested ($)  (2) (3)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Unearned  Shares,  Units or  Other  Rights  That Have  Not Vested  (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares,  Units, or  Other  Rights That  Have Not  Vested ($)  (2)** | ** ** |
| F. William Capp       |       | 900,000                                                                                |       |                                                                                          |       |   |   | $ | 0.89 |   | 12/1/2011 |   |   |   |   |   |   |   |   |   |
|                       |       | 600,000                                                                                |       |                                                                                          |       |   |   | $ | 0.74 |   | 10/13/2014 |   |   |   |   |   |   |   |   |   |
|                       |       | 39,556                                                                                 |       | 79,115                                                                                        |       |   |   | $ | 1.58 |   | 5/8/2016 |   | 15,425 |   | $ | 15,271 |   | 316,456 |   | $ | 313,291 |   |
|                  |       |                                                                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| James M. Spiezio      |       | 103,333                                                                                |       |                                                                                          |       |   |   | $ | 2.10 |   | 5/10/2010 |   |   |   |   |   |   |   |   |   |
|                       |       | 50,000                                                                                 |       |                                                                                          |       |   |   | $ | 2.50 |   | 6/5/2010 |   |   |   |   |   |   |   |   |   |
|                       |       | 80,000                                                                                 |       |                                                                                          |       |   |   | $ | 0.70 |   | 3/15/2012 |   |   |   |   |   |   |   |   |   |
|                       |       | 450,000                                                                                |       |                                                                                          |       |   |   | $ | 0.74 |   | 10/13/2014 |   |   |   |   |   |   |   |   |   |
|                       |       | 16,968                                                                                 |       | 33,942                                                                                        |       |   |   | $ | 1.58 |   | 5/8/2016 |   | 6,616 |   | $ | 6,550 |   | 158,228 |   | $ | 156,646 |   |
|                  |       |                                                                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Matthew L. Lazarewicz |       | 166,666                                                                                |       |                                                                                          |       |   |   | $ | 0.89 |   | 10/19/2009 |   |   |   |   |   |   |   |   |   |
|                       |       | 50,000                                                                                 |       |                                                                                          |       |   |   | $ | 2.50 |   | 6/5/2010 |   |   |   |   |   |   |   |   |   |
|                       |       | 80,000                                                                                 |       |                                                                                          |       |   |   | $ | 0.70 |   | 3/15/2012 |   |   |   |   |   |   |   |   |   |
|                       |       | 350,000                                                                                |       |                                                                                          |       |   |   | $ | 0.74 |   | 10/13/2014 |   |   |   |   |   |   |   |   |   |
|                       |       | 15,532                                                                                 |       | 31,070                                                                                        |       |   |   | $ | 1.58 |   | 5/8/2016 |   | 6,056 |   | $ | 5,995 |   | 158,228 |   | $ | 156,646 |   |
|                  |       |                                                                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Chester R. Lyons      |       | 24,999                                                                                 |       | 75,001                                                                                        |       |   |   | $ | 1.88 |   | 2/14/2016 |   |   |   |   |   |   |   |   |   |
|                       |       | 12,499                                                                                 |       | 37,501                                                                                        |       |   |   | $ | 1.54 |   | 3/9/2016 |   |   |   |   |   |   |   |   |   |
|                  |       |                                                                                   |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Richard L. Hockney    |       | 3,000                                                                                  |       |                                                                                          |       |   |   | $ | 5.27 |   | 8/2/2011 |   |   |   |   |   |   |   |   |   |
|                       |       | 125,000                                                                                |       |                                                                                          |       |   |   | $ | 0.74 |   | 10/13/2014 |   |   |   |   |   |   |   |   |   |
|                       |            |                                                                                        |            |                                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

24

----

----

(1)                                  Vestingof options and RSUs is outlined in the table below. The PSUs, as reflected inthe Equity Incentive Award Column, contingently vest upon the completion of theannual audits for 2009 or 2010, assuming the performance and employmentrequirements are met. These requirements are detailed in the CompensationDiscussion and Analysis.
|                       | ** ** | **# Shares Vesting for Date Shown:** | ** ** |
|-----------------------|------------|---------------------------------------------------------------|------------|
| ** **            | ** ** | **Mr. Capp**                                             | ** ** | **Mr. Spiezio** | ** ** | **Mr. Lazarewicz** | ** ** | **Mr. Lyons** | ** ** |
| **Vesting Date** | ** ** | **Options**                                                   | ** ** | **Stock** | ** ** | **Options** | ** ** | **Stock** | ** ** | **Options** | ** ** | **Stock** | ** ** | **Options** | ** ** |
| January 9, 2007       |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,500 |   |
| March 31, 2007        |       | 9,889                                                         |       | 1,927 |   | 4,242 |   | 827 |   | 3,883 |   | 757 |   |   |   |
| April 9, 2007         |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,500 |   |
| June 30, 2007         |       | 9,889                                                         |       | 1,927 |   | 4,242 |   | 827 |   | 3,883 |   | 757 |   |   |   |
| July 9, 2007          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,501 |   |
| September 30,  2007   |       | 9,889                                                         |       | 1,927 |   | 4,242 |   | 827 |   | 3,883 |   | 757 |   |   |   |
| October 9, 2007       |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,500 |   |
| December 31,  2007    |       | 9,889                                                         |       | 1,927 |   | 4,242 |   | 827 |   | 3,883 |   | 757 |   |   |   |
| January 9, 2008       |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,500 |   |
| March 31, 2008        |       | 9,889                                                         |       | 1,927 |   | 4,242 |   | 827 |   | 3,883 |   | 757 |   |   |   |
| April 9, 2008         |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,501 |   |
| June 30, 2008         |       | 9,889                                                         |       | 1,927 |   | 4,242 |   | 827 |   | 3,883 |   | 757 |   |   |   |
| July 9, 2008          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,500 |   |
| September 30,  2008   |       | 9,889                                                         |       | 1,927 |   | 4,242 |   | 827 |   | 3,883 |   | 757 |   |   |   |
| October 9, 2008       |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,500 |   |
| December 31,  2008    |       | 9,892                                                         |       | 1,936 |   | 4,248 |   | 827 |   | 3,889 |   | 757 |   |   |   |
| January 9, 2009       |       |                                                          |       |   |   |   |   |   |   |   |   |   |   | 12,500 |   |

 

(2)                                  UnvestedRSUs and PSUs were valued at the closing price of our stock on the Nasdaq StockMarket as of December 29, 2006, which was $0.99.

(3)                                  OnDecember 31, 2006, a portion of the RSUs granted to the Executive Officersbased upon their Executive Agreements vested. However, these RSUs could not be converted to common stock becauseDecember 31, 2006 fell on a Sunday. The numbers of shares that vested but werenot converted were as follows:  Mr. Capp,1,927 shares; Mr. Spiezio, 827 shares; and Mr. Lazarewicz, 757 shares.

***Option Exercises and Stock Vested.***The following table sets forth the number of shares acquired and thevalue realized upon exercise of stock options during 2006 and the number ofshares of our common stock acquired on vesting of RSUs during 2006. The valuerealized is measured as the difference between the exercise price and the fairmarket value when the options were exercised or the RSU converted to commonstock.
| ** **            | ** ** | **Option Awards**                                              | ** ** | **Stock Awards**                              | ** ** |
|-----------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Name**              | ** ** | **Number of  Shares Acquired  on Exercise (#)** | ** ** | **Value Realized  on Exercise ($)** | ** ** | **Number of  Shares  Acquired on  Vesting (#)** | ** ** | **Value Realized  on Vesting ($)** | ** ** |
| F. William Capp       |       | —                                                              |       | $                                                  | —     |   | 181,187 |   | $ | 222,080 |   |
| James M. Spiezio      |       | —                                                              |       | —                                             |       | 84,539 |   | 103,699 |   |
| Matthew L. Lazarewicz |       | —                                                              |       | —                                             |       | 77,450 |   | 95,004 |   |
| Chester R. Lyons      |       | —                                                              |       | —                                             |       | — |   | — |   |
| Richard L. Hockney    |       | 25,000                                                              |       | 27,875                                             |       | 28,265 |   | 34,978 |   |
|                       |            |                                                                     |            |                                                    |            |  |  |  |  |  |  |

 

Thenumber of shares vested includes shares that vested as of December 31, 2006,but for which common stock could not be issued during 2006 because the vestingdate, which was the last day of the fiscal year, fell on a

25

----

Sunday,and because the trading window for insiders was closed.  The Executive Agreements require us topostpone issuance of shares that vest during such periods.  Accordingly, since the shares were notissued, there was no value realized upon the vesting of these RSUs.  The number of shares involved was 1,927 forMr. Capp, 757 for Mr. Lazarewicz, and 827 for Mr. Spiezio.  The stock price per share as of the vestingdate was $0.99.

**POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE INCONTROL**

***SeveranceCompensation & Termination Protection***

The ExecutiveAgreements provide for severance compensation to be paid if the executives areterminated under certain conditions, such as a change in control of the Companyor a termination without cause by us, each as is defined in the agreements.

***Definitions***

The “Termination Date” is the date onwhich the Executive Officer resigns or notifies us that he will resign, or thedate on which we notified the Executive Officer that employment will beterminated.

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

·                  *Termination for Cause*. We have the option to terminate any of the executives immediately uponwritten notice for “cause.”  “Cause” isdefined as a finding by the Board of Directors that the executive has committedvarious egregious acts, such as fraud, embezzlement or other felony, orotherwise materially breached his obligations to the Company.

·                  *Resignation without “Good Reason*.”  The executive can terminate the agreement,for any reason, upon providing us at least 90 days written notice.

·                  *Termination without Cause*. We can elect to terminate the executive, without Cause, upon at least 90days written notice.

·                  *Resignation with “Good Reason*.”  The executive can terminate the agreementwith at least 30 days written notice in certain circumstances, known as “GoodReason.”  These reasons include materialdiminution of the duties, responsibilities, position or job title without theexecutive’s written consent, a material breach by the Company of itsobligations under this agreement, a change in the primary location to alocation more than 50 miles away from Wilmington, MA, sale of the business, orin the case of Mr. Capp, CEO, his failure to be nominated for reelection to theBoard or his removal from the Board without cause.

·                  *Death or Disability*. We can terminate the employment of the executive, at our discretion,upon the disability of the executive.  Ingeneral, disability is defined as physical or mental incapacity to perform hisnormal duties for a period of 60 days.

·                  *Continuation / Non-renewal of Contract*.  Unless the Agreement has been otherwiseterminated before the end of the scheduled employment period (which wasDecember 31, 2006), the Company and the executive agree to discuss in goodfaith the possible continuation of the executive’s employment, commencing sixmonths prior to such date.  If we fail tooffer the executive a new employment agreement, with at least equivalentmaterial terms to this agreement by year end, and in fact the executive ceasesto be our employee (except for cause), certain payments will become due asnoted below.

26

----

***Termination Payments for Each Type of Termination***

·                  *Terminations for Cause or Resignations without Good Reason*.  If the executive is terminated for “Cause” orresigns without “Good Reason,” we would pay the executive his accrued basesalary through the last date of his employment, and would continue to providethe remainder of the benefits (e.g., health insurance) through the TerminationDate.

·                  *Terminations without Cause or Resignations with Good Reason*.  If we elect to terminate the executive “withoutCause” or if the executive resigns with 30 days notice for “Good Reason,” wewill pay to the executive a cash amount equal to his monthly base salarymultiplied by twelve, and will continue to provide the remainder of the benefitpackage until the first anniversary of the Termination Date.  Additionally, within five business days ofthe Termination Date, we will pay the executive an amount equal to the bonuspaid (or which has been determined but not yet paid) for the prior fiscal year,prorated for the portion of the current fiscal year which was worked, up to amaximum of 80% of the executive’s base salary for the prior year.  We believe this is appropriate because theterminated Executive Officer is bound by confidentiality and non-competeprovisions covering one year after termination and because we and the ExecutiveOfficer have a mutually agreed to severance package that is in place prior toany termination event. This provides us with more flexibility to make a changein senior management if such a change is in our and our stockholders’ bestinterests.

·                  *Death or Disability*. In the event employment is terminated due to death or disability of theexecutive, we will continue to pay to the executive or his estate an amountequal to the base salary for a three-month period following the TerminationDate, and will continue all health and dental insurance benefits for atwelve-month period following the Termination Date.

·                  *Continuation / Non-renewal of Contract*.  If, at the end of the employment period, wefail to offer the executive a substantially equivalent contract and theexecutive ceases to be an employee, except for cause, we agree to pay theexecutive a monthly amount for twelve months equal to his last prevailingmonthly base salary, plus one-twelfth of his bonus for our most recent fiscalyear.

The following table shows the amountsthat would have payable as of December 31, 2006, under various terminationscenarios:
| Officer          | ** ** | **Type of Termination**            | ** ** | **Accrued  Salary (1)** | ** ** | **Accrued  Vacation** | ** ** | **Accrued  Bonus for  2006** | ** ** | **Health & Dental  Benefits**            | ** ** |
|------------------|------------|----------------------------------------------|------------|------------------------------|------------|-----------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|
| F. William Capp  |       | Termination  for Cause                       |       | $                            | —     |                  | $          | 44,837                            |       | $                                                      | —     |   | Discontinued  on termination date |   |
|                  |       | Resignation  without “Good Reason” |       | —                       |       | 44,837                |       | —                            |       | Discontinued  on termination date                      |       |
|                  |       | Termination  without Cause                   |       | 250,000                      |       | 44,837                |       | 37,500                            |       | Continued  until first anniversary of termination date |       |
|                  |       | Resignation  with “Good Reason”    |       | 250,000                      |       | 44,837                |       | 37,500                            |       | Continued  until first anniversary of termination date |       |
|                  |       | Death  or disability (2)                     |       | 62,500                       |       | 44,837                |       | 37,500                            |       | Continued  until first anniversary of termination date |       |
|                  |       | Non-renewal  of contract (3)                 |       | 250,000                      |       | 44,837                |       | 37,500                            |       | Discontinued  on termination date                      |       |
|             |       |                                         |       |                         |       |                  |       |                              |       |                                                   |       |
| James M. Spiezio |       | Termination  for Cause                       |       | —                       |       | 25,275                |       | —                            |       | Discontinued  on termination date                      |       |
|                  |       | Resignation  without “Good Reason” |       | —                       |       | 25,275                |       | —                            |       | Discontinued  on termination date                      |       |
|                  |            |                                              |            |                              |            |                       |            |                                   |            |                                                        |            |  |  |  |

 

27

----

 
| Officer               | ** ** | **Type of Termination**            | ** ** | **Accrued  Salary (1)** | ** ** | **Accrued  Vacation** | ** ** | **Accrued  Bonus for  2006** | ** ** | **Health & Dental  Benefits**            | ** ** |
|-----------------------|------------|----------------------------------------------|------------|------------------------------|------------|-----------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|
|                       |       | Termination  without Cause                   |       | 195,000                      |       | 25,275                |       | 20,475                            |       | Continued  until first anniversary of termination date |       |
|                       |       | Resignation  with “Good Reason”    |       | 195,000                      |       | 25,275                |       | 20,475                            |       | Continued  until first anniversary of termination date |       |
|                       |       | Death  or disability (2)                     |       | 48,750                       |       | 25,275                |       | 20,475                            |       | Continued  until first anniversary of termination date |       |
|                       |       | Non-renewal  of contract (3)                 |       | 195,000                      |       | 25,275                |       | 20,475                            |       | Discontinued  on termination date                      |       |
|                  |       |                                         |       |                         |       |                  |       |                              |       |                                                   |       |
| Matthew L. Lazarewicz |       | Termination  for Cause                       |       | —                       |       | 24,976                |       | —                            |       | Discontinued  on termination date                      |       |
|                       |       | Resignation  without “Good Reason” |       | —                       |       | 24,976                |       | —                            |       | Discontinued  on termination date                      |       |
|                       |       | Termination  without Cause                   |       | 178,500                      |       | 24,976                |       | 18,743                            |       | Continued  until first anniversary of termination date |       |
|                       |       | Resignation  with “Good Reason”    |       | 178,500                      |       | 24,976                |       | 18,743                            |       | Continued  until first anniversary of termination date |       |
|                       |       | Death  or disability (2)                     |       | 44,625                       |       | 24,976                |       | 18,743                            |       | Continued  until first anniversary of termination date |       |
|                       |       | Non-renewal of contract  (3)                 |       | 178,500                      |       | 24,976                |       | 18,743                            |       | Discontinued on  termination date                      |       |

 

----

(1)          Salaries arepaid bi-weekly for that two week period; therefore, there were no accruedsalaries as of December 31, 2006.  Allamounts shown represent termination payments under the terms of the ExecutiveAgreements, rather than accruals for regular time worked.

(2)          One-third ofthis amount to be paid each month over a three month period.

(3)          One-twelfthof this amount to be paid each month over a twelve month period.

***Effect of Termination of Employment Relative to RSUs, PSUs and Options.***

***Options and Non-performance-based RSUs.***  If the executive terminates for any reason,including by resignation or by termination (with or without Cause), theexecutive may retain all RSUs and options that have vested before thetermination date.  However, any RSUs oroptions vesting after the Termination Date will be forfeited, with a specialexception related to options. In relation to options, if employment isterminated by reason of death, disability, resignation or without Cause, thevested shares underlying the option will expire if not exercised within 365days after the Termination Date.  In thecase of termination for Cause, all vested shares underlying the option willexpire immediately.  In addition, we may,in our sole discretion, by written notice demand that any or all stockcertificates for shares acquired pursuant to the exercise of the option, or anyprofit realized from the sale or transfer of such shares, be returned tous.  The exercise price will be returnedto the Executive Officer, without interest.

If the ExecutiveOfficers terminated as of December 31, 2006, the following options and RSUswould have been forfeited or would expire by December 31, 2007 if notexercised:

28

----

 
| ** **            | ** ** | **# Un-Vested Units  Forfeited:** | ** ** | **Vested Options That  Would Expire by 12/31/07  if Not Exercised** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| **Officer**           | ** ** | **Options**                                 | ** ** | **RSU**                                                                                                | ** ** | **From 5/8/06  Agreement** | ** ** | **From Prior  Option  Grants** | ** ** |
| F. William Capp       |       | 79,115                                      |       | 15,425                                                                                                 |       | 39,556 |   | 1,500,000 |   |
| James M. Spiezio      |       | 33,942                                      |       | 6,616                                                                                                  |       | 16,968 |   | 683,333 |   |
| Matthew L. Lazarewicz |       | 31,070                                      |       | 6,056                                                                                                  |       | 15,532 |   | 646,666 |   |

 

Note that the Executive Officers hadreceived options from grants made prior to the May 8, 2006 ExecutiveAgreements.  Options received from thoseprior grants were fully vested as of December 31, 2006.  Certain of these options would expire within90 days of termination, if not exercised.

Noneof the options that were vested as of December 31, 2006 had been exercised;therefore if any of the Executive Officers had been terminated for Cause as offiscal year end, there were no proceeds or gains which could have beenreturned.  However, all of the vestedoptions shown above would have been immediately forfeited.

***Performance Stock Units.**** *Executive Officers would retain any PSUs that would havevested if he terminates after year end for 2009 or 2010, but prior to theissuance of the audit opinion, as long as the audit opinion is actuallyreceived by us.  Prior to year end for2009 or 2010, if the Executive Officers’ employment is terminated without Causebut not for resignation for Good Reason, the executive may receive a pro-ratedactual award if the “Termination Stock Price” is higher than the “Target StockPrice.”  The “Termination Stock Price” isdefined as the 30-day Volume-Weighted-Average price as of the date prior to theTermination Date. The “Target Stock Price” is defined as the average of thehigh and low prices of our common stock on the effective date of the PSU grant(which is May 8, 2006), multiplied by 15% and compounded annually and proratedfor any partial year.

Basedon the criteria noted above, if any of the Executive Officers had resigned orbeen terminated on December 29, 2006 (the last business day of the fiscalyear), the calculation to determine any pro-rated award would have been asfollows:
| Termination Stock Price  (30-day Volume-Weighted Average Prices as of 12/28/2006  (pursuant to employment agreements based on date prior to Termination Date) |   | $                                 | 1.11   |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|------------|
|                                                                                                                                                          |   |                              |   |       |   |   |   |   |   |
| Target Stock Price                                                                                                                                            |   | Low  stock price on May 8, 2006   |   |       |   | $ | 1.51 |   |   |   |
|                                                                                                                                                          |   | High stock price on May  8, 2006  |   |       |   | $ | 1.64 |   |   |   |
|                                                                                                                                                               |   | Average of high/low               |   |       |   | $ | 1.58 |   |   |   |
|                                                                                                                                                          |   |                              |   |       |   |   |   |   |   |
|                                                                                                                                                               |   | Portion of year                   |   | 5/8/2006   |   |   |   |   |   |
|                                                                                                                                                               |   |                              |   | 12/31/2006 |   | 237.00 |   | days |   |
|                                                                                                                                                               |   |                              |   |       |   | 64.9 | % | of  year |   |
|                                                                                                                                                          |   | Target increase rate              |   |       |   | 15.0 | % |   |   |
|                                                                                                                                                     |   |                              |   |       |   |   |   |   |   |
|                                                                                                                                                          |   | Pro-rated target  increase %      |   |       |   | 9.7 | % |   |   |
|                                                                                                                                                               |   | Target increase per  share:       |   |       |   | $ | 0.15 |   |   |   |
|                                                                                                                                                          |   | Target stock price as of 12/31/06 |   |       |   | $ | 1.73 |   | $ | 1.73 |   |

 

Sincethe Termination Stock Price was less than the Target Stock Price, the ExecutiveOfficers would not have been entitled to a pro-rated PSU award if they had beenterminated as of the end of fiscal 2006.

29

----

***Change of Control***

***Objectives.***As part of our normalcourse of business, we engage in discussions with other companies aboutpossible collaborations, licensing and/or other ways in which the companies maywork together to further our respective long-term objectives. In addition, as adevelopment stage company with intellectual property, we may become a potentialacquisition target by companies significantly larger and better financed thanwe are. In certain scenarios, the potential for a merger or for being acquiredmay be in the best interests of our stockholders. We provide a component ofseverance compensation, along with accelerated vesting of certain long-termequity compensation, if an Executive Officer is terminated as a result of achange of control transaction.  Webelieve that this promotes the ability of our Executive Officers to act in thebest interests of our stockholders even though they could be terminated as aresult of the transaction.

***Definition***. An “Acquisition Event” is defined as (a) any merger or consolidationwhich results in our voting securities outstanding immediately prior theretorepresenting immediately thereafter (either by remaining outstanding or bybeing converted into voting securities of the surviving or acquiring entity) lessthan 50% of the combined voting power of our voting securities or suchsurviving or acquiring entity outstanding immediately after such merger orconsolidation; (b) any sale of all or substantially all of our assets; or (c)our complete liquidation.

***Impact of Change of Control on Options and RSUs***.  Upon the occurrence of an Acquisition Event,the authorized administrator of the Plan shall take any one or more of thefollowing actions with respect to the RSUs and Options:

·                  Provide thatthe RSUs and/or options shall be assumed, or equivalent equity compensationsubstituted, by the acquiring or succeeding corporation

·                  Provide thatany portion of the RSUs that are vested but not converted and/or any portion ofthe options that are vested but not exercised become converted or exercisable,in full, as of a specified time prior to the acquisition event and willterminate immediately prior to the consummation of the Acquisition Event unlessexercised during that period.

If an Acquisition Eventhad occurred on December 31, 2006, the following Options would have beenforfeited if not exercised prior to the consummation of the acquisition event.In addition, the RSUs shown below were vested but un-issued as of December 31,2006.  Since the RSUs vested on December31, 2006, which was a Sunday, these RSUS would have potentially been forfeitedas well.  However, if the AcquisitionEvent were consummated subsequent to December 31, 2006, the RSUs shown belowwould likely have been issued prior to consummation.
|                       | ** ** | ** **                                                          | ** ** | **Vested Options That Would  Expire If Not Exercised by  12/31/07 (#)** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| **Officer**           | ** ** | **RSUs vested  but un-issued  at 12/31/06 (#)** | ** ** | **From 5/8/06  Agreement**                                                                                 | ** ** | **From Prior  Option  Grants** | ** ** |
| F. William Capp       |       | 1,927                                                               |       | 39,556                                                                                                          |       | 1,500,000 |   |
| James M. Spiezio      |       | 827                                                                 |       | 16,968                                                                                                          |       | 683,333 |   |
| Matthew L. Lazarewicz |       | 757                                                                 |       | 15,532                                                                                                          |       | 646,666 |   |

 

·                  If the termsof the Acquisition Event provide for cash payments to common shareholders foreach share of common stock surrendered, the following could occur:

·                  The unvestedRSUs will terminate upon consummation of the Acquisition Event, and theExecutive Officer will receive, in exchange, a cash payment equal to the amountof the

30

----

acquisition pricemultiplied by the number of shares of common stock subject to the unvestedRSUs.

·                  The optionswill terminate upon consummation of the Acquisition Event, and the ExecutiveOfficer will receive a cash payment equal to the amount (if any) by which theacquisition price times the number of options (both vested and unvested)exceeds the cash price of the option.

Ifan Acquisition Event occurred on December 31, 2006 and this action was elected,the amount of cash received by the Executive Officers would vary based on theacquisition price.  Assuming theacquisition price was equal to the closing price of our stock as of the end ofthe fiscal year ($0.99), the following payments would have been made:
| Executive Officer | ** ** | **Payment for  Unvested RSUs** | ** ** |
|------------------------|------------|------------------------------------------|------------|
| F. William Capp        |       | $                                        | 15,271     |   |
| James M. Spiezio       |       | 6,550                                    |       |
| Matthew L.  Lazarewicz |       | 5,995                                    |       |
|                   |       | $                                        | 27,816     |   |

 

In this scenario, therewould be no payment for the outstanding options because the assumed acquisitionprice ($0.99) is less than the Option exercise price ($1.58).

·                  Provide thatthe unvested RSUs and/or the Option become exercisable, realizable or vested infull, or be free of all conditions or restrictions, prior to the consummationof the Acquisition Event, or if applicable, be replaced by equivalent optionsby the acquiring or succeeding corporation.

The number of units thatcould potentially have become fully vested and the additional compensation costthat would have been recorded should an Acquisition Event have occurred atDecember 31, 2006 is as follows:
| Executive Officer | ** ** | **Options (#)** | ** ** | **Option  Compensation  Cost** | ** ** | **RSU (#)** | ** ** | **RSU  Compensation  Cost** | ** ** |
|------------------------|------------|----------------------|------------|--------------------------------|------------|------------------|------------|-----------------------------|------------|
| F. William Capp        |       | 79,115               |       | $                              | 36,987     |             | 15,425     |                        | $          | 11,716 |   |
| James M. Spiezio       |       | 33,942               |       | 15,868                         |       | 6,616            |       | 5,025                       |       |
| Matthew L.  Lazarewicz |       | 31,070               |       | 14,525                         |       | 6,056            |       | 4,600                       |       |
|                   |       | 144,127              |       | $                              | 67,380     |             | 28,097     |                        | $          | 21,341 |   |

 

Note that options granted prior to 2006would likely also become fully-vested; however there would be no additionalcompensation cost because these options were granted and fully vested prior toour implementation of SFAS 123(R). The number of additional options whichcould potentially have become fully-vested in this scenario was:  Mr. Capp, 1,500,000 shares; Mr. Spiezio,683,333 shares; and Mr. Lazarewicz, 646,666 shares.

***Impact of Change of Control on PSUs.***  In the event of an Acquisition Event, if theaverage of the high and low prices of our Common Stock on the day prior to thedate of the closing is higher than the “Target Stock Price” (as previouslydefined), we will be considered to have awarded fully-vested PSUs to theExecutive Officers in accordance with the following formula:

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

Ifsuch an Acquisition Event had occurred as of December 29, 2006, the calculationwould have been as follows:

31

----

Average stock price onthe day prior to closing:
| High stock price on December  28, 2006                |   | $      | 1.10   |   |
|-------------------------------------------------------|--------|--------|--------|--------|
| Low stock price on December 28, 2006                  |   | $      | 1.07   |   |
| Average of high/low                                   |   | $      | 1.09   |   |
|                                                  |   |   |   |
| Target stock price at  12/31/06 (as calculated above) |   | $      | 1.73   |   |

 

Sincethe average of the stock price on the day prior to closing was less than theTarget Stock Price, no prorated actual award would have been granted atDecember 31, 2006 should there have been an Acquisition Event closing on thatdate.

**DIRECTORCOMPENSATION**

The followingtable represents the compensation paid to our Board of Directors with respectto fiscal 2006.
| Name                | ** ** | **Year** | ** ** | **Fees Earned or  Paid in Cash ($)   (1)** | ** ** | **Option  Awards ($)  (2)** | ** ** | **Total ($)** | ** ** |
|---------------------|------------|----------|------------|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------|------------|
| Stephen P. Adik     |       | 2006     |       | $                                                                   | 86,500     |                             | $          | 3,486              |       | $ | 89,986 |   |
| John C. Fox         |       | 2006     |       | 15,667                                                              |       | —                           |       | 15,667             |       |
| Daniel E.  Kletter  |       | 2006     |       | 16,500                                                              |       | 8,813                            |       | 25,313             |       |
| Jack P. Smith       |       | 2006     |       | 85,000                                                              |       | 3,486                            |       | 88,486             |       |
| Kenneth M. Socha    |       | 2006     |       | 25,667                                                              |       | —                           |       | 25,667             |       |
| William E.  Stanton |       | 2006     |       | 34,500                                                              |       | 3,486                            |       | 37,986             |       |
| Lisa W. Zappala     |       | 2006     |       | 82,000                                                              |       | 3,486                            |       | 85,486             |       |
|                     |            |          |            |                                                                     |            |                                  |            |                    |            |  |  |  |

 

----

(1)          The totals shown aboveinclude retainers and board meeting fees earned in fiscal 2006.  Actual cash paid to the directors in 2006 isas follows:
| Total fees earned per  Director Compensation Table (above): |   | $       | 345,834 |   |
|-------------------------------------------------------------|--------|---------|---------|--------|
| Plus: 2005  compensation paid in 2006                       |   | 54,000  |    |
| Less: 2006  compensation accrued at December 31, 2006       |   | (41,500 | )       |
| Total director fees on  cash basis for fiscal 2006          |   | $       | 358,334 |   |

 

In addition to the individuals noted above, F. William Capp, CEO ofBeacon Power, serves as a member of the Board of Directors.  Mr. Capp’s compensation is shown in theSummary Compensation Table.  Mr. Cappdoes not receive any additional compensation for his service on the Board ofDirectors.

(2) Options granted todirectors in 2006 and options outstanding as of December 31, 2006 include thefollowing:

32

----

 
| Name                | ** ** | **Year** | ** ** | **Grant Date  of Stock and  Option  Awards  during 2006** | ** ** | **Number of  Options  Granted  during 2006** | ** ** | **Grant Date  Fair Value  of Stock and  Option  Awards** | ** ** | **Options  Outstanding at  December 31,  2006 (#)** | ** ** |
|---------------------|------------|----------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Stephen P. Adik     |       | 2006     |       | 11/29/06                                                                      |       | 41,747                                                 |       | $                                                                            | 30,058     |                                                               | 241,747    |   |
| John C. Fox         |       | 2006     |       |                                                                          |       | —                                                 |       | —                                                                       |       | 66,666                                                             |       |
| Daniel E.  Kletter  |       | 2006     |       | 10/12/06                                                                      |       | 100,000                                                |       | 76,000                                                                       |       | 100,000                                                            |       |
| Jack P. Smith       |       | 2006     |       | 11/29/06                                                                      |       | 41,747                                                 |       | 30,058                                                                       |       | 275,053                                                            |       |
| Kenneth M. Socha    |       | 2006     |       |                                                                          |       | —                                                 |       | —                                                                       |       | 197,498                                                            |       |
| William E.  Stanton |       | 2006     |       | 11/29/06                                                                      |       | 41,747                                                 |       | 30,058                                                                       |       | 124,995                                                            |       |
| Lisa W. Zappala     |       | 2006     |       | 11/29/06                                                                      |       | 41,747                                                 |       | 30,058                                                                       |       | 191,747                                                            |       |
|                     |            |          |            |                                                                               |            |                                                        |            |                                                                              |            |                                                                    |            |  |

 

***StandardDirector Compensation Arrangements.***

Our non-employeedirectors are compensated with a package that consists of both stock optionsand cash. The following table illustrates our existing directors’ compensationstructure for fiscal 2006:

| Cash Retainer:                                                              |   | $               | 10,000        |   |
|-----------------------------------------------------------------------------|--------|-----------------|---------------|--------|
| Equity Retainer  (common stock options):                                    |   | $               | 50,000 (i)    |   |
|                                                                        |   | 3 year vest     |          |
| Fees for  Attending Board Meetings:                                         |   | $               | 2,000/meeting |   |
|                                                                        |   | $               | 1,000/call    |   |
| Fees for  Attending Meetings of Committees Of Which a Director Is a Member: |   | $               | 1,500/meeting |   |
|                                                                        |   | $               | 500/call      |   |
| Maximum Meeting  Fees/Day:                                                  |   | Max. $3,500/day |          |
| Committee Chair  Retainer:                                                  |   | $               | 2,500         |   |
| Audit Chair  Retainer:                                                      |   | $               | 2,500         |   |
| Audit Member Premium:                                                       |   | $               | 30,000        |   |

 

----

(i)       InNovember 2006, directors received stock options with a value of $50,000.  The number of shares of common stockunderlying the options was determined by dividing such dollar value by theaverage closing price of our common stock for a three-month period that endedthree trading days before the date the options were granted.  The exercise price of the options is theclosing price on the date of grant.

All directoroptions are granted under our Third Amended and Restated 1998 Stock IncentivePlan.  Option grants are typically madewhen a new director joins the Board, and in late November of each fiscal yearto existing directors.  Upon joining theboard, directors receive a one-time grant of an option to purchase 100,000shares of common stock with an exercise price equal to the closing price of ourcommon stock on the date of grant.  Theseoptions typically vest monthly over a three-year period, expire after ten yearsand continue to be exercisable once vested, regardless of whether the directorcontinues to serve on our board.

Former directors,Messrs. Fox and Socha did not receive any option grants during 2006 becausethey resigned from the Board of Directors prior to November, 2006 when suchoptions were granted to existing directors. Mr. Kletter joined the Board on October 12, 2006, and received an optionto purchase 100,000 shares of common stock at such time, but did not receivethe annual grant for which existing directors are typically eligible.  Mr. Rose joined the Board subsequent to the2006 fiscal year end, and therefore did not receive any compensation during2006.  In April 2007, Mr. Stanton and Ms.Zappala each entered into an agreement with the Company to amend their

33

----

November 2006 DirectorOption Agreements to compress what was previously a three year vesting periodfor such grants into a one-year vesting period.

If Proposal 1 isapproved, we intend to for future annual option grants to existing directors tovest over a one year period. Additionally, we expect the number of shares of common stock underlyingthe annual options to be granted in 2007 to each director to be determined bydividing $25,000 (rather than $50,000, as in 2006) by the average closing priceof our common stock for a three-month period that ends three trading daysbefore the date the options are granted.

**COMPENSATION COMMITTEE INTERLOCKSAND INSIDER PARTICIPATION**

Themembers of our Board of Directors’ Compensation Committee in 2006 were Jack P.Smith, Stephen P. Adik, Kenneth M. Socha and Lisa W. Zappala.  During or prior to our fiscal year endedDecember 31, 2006, none of these members was an officer or employee of Beacon,or its subsidiary or, to our knowledge, had relationships requiring disclosureunder the SEC rules.  In making thesestatements, we have relied upon representations from our directors.

**Item 12.  Security Ownership of Certain BeneficialOwners and Management**

The following table sets forth, as of March 20, 2007, certain information concerning the ownership of shares of our Common Stock by:

·                                          Eachperson or group that we know beneficially owns more than five percent of theissued and outstanding shares of common stock

·                                          Eachdirector

·                                          OurSenior Managers and

·                                          Allof our directors and executive officers as a group.  Except as otherwise indicated, each personnamed has sole investment and voting power with respect to his, her or itsshares of common stock shown.
|                                                                   | ** ** | **Shares beneficially owned** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Name and Address of Beneficial Owner** | ** ** | **Number (1)**                     | ** ** | **Percent of  Class** | ** ** |
| Stephen P. Adik  (2)                                              |       | 205,798                                 |       | * |   |
| F. William Capp  (2)                                              |       | 2,081,639                               |       | 2.9 | % |
| Richard L.  Hockney (2)                                           |       | 230,800                                 |       | * |   |
| Daniel E.  Kletter (2)                                            |       | 16,667                                  |       | * |   |
| Matthew L.  Lazarewicz (2)                                        |       | 1,034,090                               |       | 1.4 | % |
| Chester B. Lyons  (2)                                             |       | 69,949                                  |       | * |   |
| Virgil G. Rose  (2)                                               |       | 8,333                                   |       | * |   |
| Jack P. Smith  (2)                                                |       | 242,104                                 |       | * |   |
| James M. Spiezio  (2)                                             |       | 949,516                                 |       | 1.3 | % |
| William E.  Stanton (2)                                           |       | 90,046                                  |       | * |   |
| Lisa W. Zappala  (2)                                              |       | 155,798                                 |       | * |   |
|                                                              |       |                                    |       |   |   |
| **5%  Shareholders**                                              |       |                                    |       |   |   |
| Perseus Capital,  L.L.C. (3)                                      |       | 4,077,914                               |       | 5.6 | % |
| 2099  Pennsylvania Ave, NW                                        |       |                                    |       |   |   |
| Suite 900                                                         |       |                                    |       |   |   |
| Washington, DC  20006                                             |       |                                    |       |   |   |
|                                                              | ** ** | ** **                              |       |   |   |
| **All directors and executive  officers as a group (9 persons)**  |       | 4,783,991                               |       | 6.4 | % |

 

34

----

----

*                         Lessthan 1%.

(1)                  Thenumber of shares beneficially owned by each stockholder is determined underrules issued by the Securities and Exchange Commission and includes voting orinvestment power with respect to those securities.  Under these rules, beneficial ownershipincludes any shares as to which the individual or entity has sole or sharedvoting power or investment power and includes any shares as to which the individualor entity has the right to acquire beneficial ownership within 60 days after March20, 2007 through the exercise of any warrant, stock option or other right.  The inclusion in this Annual Report on Form10-K/A of these shares, however, does not constitute an admission that thenamed stockholder is a direct or indirect beneficial owner of thoseshares.  The number of shares of Beaconcommon stock outstanding used in calculating the percentage for each listedperson includes the shares of Beacon common stock underlying warrants or optionsheld by that person that are exercisable or convertible within 60 days of March20, 2007, but excludes shares of Beacon common stock underlying warrants oroptions held by any other person.

(2)                  Includes thefollowing shares of the Company’s Common Stock which the indicated executiveofficer or director had the right to acquire within 60 days from March 20,2007, through the exercise of stock options: Mr. Adik, 205,798; Mr. Capp, 1,616,426; Mr. Hockney, 134,250; Mr.Kletter, 16,667; Mr. Lazarewicz, 680,554; Mr. Lyons, 68,749; Mr. Rose, 8,333;Mr. Smith, 239,104; Mr. Spiezio, 720,601; Mr. Stanton, 89,046; Ms. Zappala,155,798.

(3)                  Includes2,133,333 shares of common stock issuable upon the exercise of stock warrants,which may be exercised on or before March 20, 2007.

***EquityCompensation Plan Information.***The following table givesinformation about equity awards under our stock option plan and employee stockpurchase plan, as of December 31, 2006.
| Plan category                                          | ** ** | **Number of  securities to be  issued upon exercise  of outstanding  options, warrants  and rights** | ** ** | **Weighted average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of  securities  remaining  available for  future issuance** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 6,446,886                                                                                                                                    |       | $                                                                                                            | 1.23       |                                                                                | 12,653,061 |   |
| Equity  compensation plans not approved by security holders |       | 100,000                                                                                                                                      |       | $                                                                                                            | 1.23       |                                                                                | —     |   |
| Total                                                       |       | 6,546,886                                                                                                                                    |       | $                                                                                                            | 1.23       |                                                                                | 12,653,061 |   |

 

Foradditional information concerning our equity compensation plans, see discussionin footnote 8 to our consolidated financial statements, Stock Compensation.

35

----

**SECTION16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

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

To our knowledge,during our fiscal year ended December 31, 2006, all Section 16(a) filingrequirements applicable to our directors, officers and ten-percent stockholderswere satisfied.

**Item 13.  Certain Relationships and RelatedTransactions**

### There were no related party transactions in the year ended December 31,2006.

***Director Independence***

There are nofamily relationships among any of our directors or executive officers.  Messrs. Adik, Smith, Kletter and Rose and Ms.Zappala, representing a majority of our directors, are determined to beindependent under the rules of the National Association for Securities Dealers(“NASD”).  On September 1, 2006, bothJohn C. Fox and Kenneth M. Socha resigned from our Board of Directors.  Messrs. Fox and Socha were both independentdirectors during their tenure on our board.

***RelatedParty Transaction Policy and Procedures***

The followingpolicy and procedure has been adopted in writing by us, as part of theNominating and Governance Committee’s charter:

***RelatedParty Transaction Policy and Procedures***

## ***Policy.***  It is the policy of the our Board ofDirectors that all Interested Transactions with Related Parties, as those termsare defined in this policy, shall be subject to approval or ratification inaccordance with the procedures set forth below.

## ***Procedures****.*  TheNominating and Corporate Governance Committee (the “Committee”) shall reviewthe material facts of all Interested Transactions and either approve ordisapprove of the entry into the Interested Transaction, subject to theexceptions described below. If advance Committee approval of an InterestedTransaction is not feasible, then the Interested Transaction shall beconsidered and, if the Committee determines it to be appropriate, ratified atthe Committee’s next regularly scheduled meeting. In determining whether toapprove or ratify an Interested Transaction, the Committee shall take intoaccount, among other factors it deems appropriate, whether the InterestedTransaction is on terms no less favorable than terms generally available to anunaffiliated third-party under the same or similar circumstances and the extentof the Related Person’s interest in the transaction.

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

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

If an Interested Transaction will be ongoing, the Committee mayestablish guidelines for the Company’s management to follow in its ongoingdealings with the Related Party.

Thereafter, the Committee, on at least an annual basis, shall reviewand assess ongoing relationships with the Related Party to see that they are incompliance with the Committee’s guidelines and that the Interested Transactionremains appropriate.

36

----

## ***Definitions***

An “Interested Transaction” is any transaction, arrangement orrelationship or series of similar transactions, arrangements or relationships(including any indebtedness or guarantee of indebtedness) in which (1) theaggregate amount involved will or may be expected to exceed $100,000 in anycalendar year, (2) the Company is a party or a participant, and (3) any RelatedParty has or will have a direct or indirect interest (other than solely as aresult of being a director or a less than 10 percent beneficial owner ofanother entity).

A “Related Party” is any (a) person who is or was (since the beginningof the last fiscal year, even if they do not presently serve in that role) anExecutive Officer, director or nominee for election as a director, (b) greaterthan 5 percent beneficial owner of the Company’s common stock, or (c) ImmediateFamily Member of any of the foregoing.

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

## ***StandingPre-Approval for Certain Interested Transactions.**** *TheCommittee has reviewed the categories of Interested Transactions describedbelow and determined that under the terms of this policy the Company isapproved to enter into each of the Interested Transactions so described, evenif the aggregate amount involved will exceed $100,000:

1.                           ***Employment of ExecutiveOfficers. ***Any employmentby the Company of an Executive Officer of the Company if:

a.                           the related compensation is required to bereported in the Company’s proxy statement under Item 402 of Regulation S-K aspromulgated by the Securities and Exchange Commission (“Reg S-K”) as generallyapplicable to “named executive officers”; or

b.                          the Executive Officer is not an immediatefamily member of another Executive Officer or director of the Company, therelated compensation would be reported in the Company’s proxy statement underItem 402 of Reg S-K if the Executive Officer were a “named executive officer”,and the Company’s Compensation Committee approved (or recommended that theBoard approve) such compensation;

2.                           ***Director compensation. ***Any compensation paid to adirector if the compensation is required to be reported in the Company’s proxystatement under Item 402 of Reg S-K;

3.                           ***Certain transactions with othercompanies. ***Anytransaction with another company with which a Related Person’s onlyrelationship is as an employee (other than an Executive Officer), director orbeneficial owner of less than 10% of that company’s equity, if the aggregateamount involved does not exceed the greater of $1,000,000, or two percent ofthat company’s total annual revenues;

4.                           ***Certain Company charitablecontributions. ***Anycharitable contribution, grant or endowment by the Company to a charitableorganization, foundation or university at which a Related Person’s onlyrelationship is as an employee (other than an Executive Officer) or a director,if the aggregate amount involved does not exceed the lesser of $50,000, or 2percent of the charitable organization’s total annual receipts;

5.                           ***Transactions where all shareholdersreceive proportional benefits. ***Anytransaction where the Related Person’s interest arises solely from theownership of the Company’s common stock and all holders of the Company’s commonstock received the same benefit on a *prorata*basis (*e*.*g*. dividends);

6.                           ***Transactions involving competitivebids.*** Any transactioninvolving a Related Party where the rates or charges involved are determined bycompetitive bids;

37

----

7.                           ***Regulated transactions. ***Any transaction with a RelatedParty involving the rendering of services as a common or contract carrier, orpublic utility, at rates or charges fixed in conformity with law orgovernmental authority.

**Item 14.   Principal Accountant Fees and Services**

We have engaged Miller Wachman, LLP (“Miller Wachman”) as our independent registered public accounting firm since October 29, 2004, and had engaged Deloitte & Touche, LLP (“Deloitte”) since before our initial public offering in November 2000 through the date of their resignation, August 27, 2004.  Our most recent fiscal audit was performed by Miller Wachman.

Principal accounting fees billed during 2006 and 2005 are as follows:
|                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit Fees          |       | $        | 75,000     |     | $          | 94,959 |   |
| Audit-Related  Fees |       | 127,371  |       | 105,000  |       |
| Tax Fees            |       | 10,000   |       | 10,000   |       |
| All Other Fees      |       | —   |       | —   |       |
| Total Fees          |       | $        | 212,371    |     | $          | 209,959 |   |

 

**Audit Fees**

The aggregate audit fees billed by Miller Wachman for the fiscal year ended December 31, 2006 and 2005 were $75,000 and $94,959, respectively.  These fees include amounts for the audit of our consolidated annual financial statements and the reviews of the consolidated financial statements included in our Quarterly Reports on Form 10-Q, including related services such as attest services and consents.

**Audit-Related Fees**

Audit-related fees billed during 2006 and 2005 were $127,371 and $105,000, respectively. These fees included work related to consent letters, review of registration filings and quarterly reviews of our financials.  In 2005, the amount paid to Miller Wachman also included a re-audit of our financial statements from the date of inception through December 31, 2003.  We engaged these audits to simplify our financial reporting and regulatory filing process by removing the need to obtain consent from our predecessor auditor.

**Tax Fees**

The aggregate fees billed by Miller Wachman for tax services rendered during the fiscal years ended December 31, 2006 and 2005, respectively, were $10,000 and $10,000, respectively.  These fees were for the preparation and filing of the 2005 income tax return and developing estimated payments for 2006 income taxes.

**All Other Fees**

There were no other fees paid to our auditors during 2006 or 2005.

**Audit Committee Pre-Approval Requirements**

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

38

----

**Part IV**

**Item15.  Exhibits and Financial StatementSchedules**

**1. Financial Statements**

Schedules for whichprovision is made in the applicable regulations of the Securities and ExchangeCommission have been omitted because the information is disclosed in theConsolidated Financial Statements presented on our Annual Report on Form 10-Kfiled with the SEC on March 30, 2007, or because such schedules are notrequired or not applicable.

**2.  Exhibits**

The exhibits are listed below under Part IV, Item 15(c) of this report.
| Exhibit    | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                          |
|------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Ref**    | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                         |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 3.1        |       | (1)        |       | Sixth Amended and Restated Certificate of  Incorporation.                                                                                                                                                                                                                                                           |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 3.2        |       | (18)       |       | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                        |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 3.3        |       | (16)       |       | Certificate of Designation of Series A Junior  Participating Preferred Stock, filed with the Secretary of State of Delaware  on October 4, 2002.                                                                                                                                                                    |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 4.1        |       | (2)        |       | Rights Agreement dated as of September 25, 2002  between Beacon and Equiserve Trust Company, NA.                                                                                                                                                                                                                    |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 4.2        |       | (3)        |       | Amendment No. 1 to Rights Agreement dated as of  December 27, 2002.                                                                                                                                                                                                                                                 |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 4.3        |       | (4)        |       | Form of specimen stock certificate.                                                                                                                                                                                                                                                                                 |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.1     |       | (1)        |       | Securities Purchase Agreement dated May 23, 2000  among the Company, Perseus Capital, L.L.C., DQE Enterprises, Inc.,  Micro-Generation Technology Fund, L.L.C., Mechanical Technology Incorporated,  GE Capital Equity Investments, Inc., The Beacon Group Energy Investment Fund  II, L.P. and Penske Corporation. |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.2     |       | (15)       |       | Third Amended and Restated 1998 Stock Incentive Plan  of the Company.                                                                                                                                                                                                                                               |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.3     |       | (16)       |       | Form of Incentive Stock Option Agreement of the  Company.                                                                                                                                                                                                                                                           |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.4     |       | (16)       |       | Form of Non-Qualified Stock Option Agreement of the  Company.                                                                                                                                                                                                                                                       |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.5     |       | (1)        |       | Form of Non-Qualified Stock Option Agreement of the  Company issued to certain consultants on July 24, 2000 and list of holders  thereof.                                                                                                                                                                           |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.6     |       | (15)       |       | Employee Stock Purchase Plan of the Company.                                                                                                                                                                                                                                                                        |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.7     |       | (1)        |       | Amended and Restated License Agreement dated October  23, 1998 between the Company and SatCon Technology Corporation.                                                                                                                                                                                               |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                |
| 10.1.8     |       | (1)        |       | Lease dated July 14, 2000 between the Company and  BCIA New England Holdings LLC.                                                                                                                                                                                                                                   |

 

40

----

 
| 10.1.9        |   | (5)    |   | Form of Director and Officer Indemnification  Agreement of the Company.                                                                                                                                                                                                                                                                                                                                                |
|---------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.10       |   | (16)   |   | Form of Restricted Stock Unit Agreement of the  Company.                                                                                                                                                                                                                                                                                                                                                               |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.11       |   | (6)    |   | Agreement dated January 31, 2005 between the Company  and the New York State Energy Research and Development Authority.                                                                                                                                                                                                                                                                                                |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.12       |   | (7)    |   | Agreement dated January 31, 2005 between the Company  and California State Energy Resources Conservation and Development  Commission.                                                                                                                                                                                                                                                                                  |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.13       |   | (8)    |   | Investment Agreement dated April 22, 2005 among the  Company, Perseus 2000 Expansion, L.L.C. and Perseus Capital, L.L.C.                                                                                                                                                                                                                                                                                               |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.14       |   | (9)    |   | Common Stock Purchase Warrant dated May 24, 2005  issued by the Company to Perseus 2000 Expansion, L.L.C.                                                                                                                                                                                                                                                                                                              |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.15       |   | (9)    |   | Amended and Restated Common Stock Purchase Warrant  dated May 24, 2005 issued by the Company to Perseus Capital, L.L.C.                                                                                                                                                                                                                                                                                                |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.16       |   | (9)    |   | Registration Rights Agreement dated May 24, 2005  among the Company, Perseus 2000 Expansion, L.L.C. and Perseus Capital L.L.C.                                                                                                                                                                                                                                                                                         |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.17       |   | (10)   |   | Option Agreement dated July 25, 2005 between the  Company and Lisa Zappala.                                                                                                                                                                                                                                                                                                                                            |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.18       |   | (11)   |   | Agreement dated October 7, 2005 between the Company  and the Air Force Research Laboratory.                                                                                                                                                                                                                                                                                                                            |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.19       |   | (12)   |   | Securities Purchase Agreement dated November 4, 2005  among the Company and Iroquois Master Fund Ltd., Gryphon Master Fund, LP,  GSSF Master Fund, LP, Nite Capital LP, Enable Growth Partners, LP, Enable  Opportunity Partners, LP, Truk Opportunity Fund, LLC, Truk International  Fund, LP, Capital Ventures International and UBS O’Connor LLC FBO O’Connor  PIPES Corporate Strategies Master Limited. |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.20       |   | (12)   |   | Form of Warrant of the Company issued pursuant to  the November 2005 financing.                                                                                                                                                                                                                                                                                                                                        |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1.21       |   | (19)   |   | Performance-based Restricted Stock Unit Agreement  dated May 8, 2006 between the Company and F. William Capp.                                                                                                                                                                                                                                                                                                          |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
|  10.1.22 |   | (19)   |   | Performance-based Restricted Stock Unit Agreement  dated May 8, 2006 between the Company and James M. Spiezio.                                                                                                                                                                                                                                                                                                         |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
|  10.1.23 |   | (19)   |   | Performance-based Restricted Stock Unit Agreement  dated May 8, 2006 between the Company and Matthew L. Lazarewicz.                                                                                                                                                                                                                                                                                                    |
|          |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
|  10.1.24 |   | (19)   |   | Restricted Stock Unit and Option Agreement dated May  8, 2006 between the Company and F. William Capp.                                                                                                                                                                                                                                                                                                                 |

 

41

----

 
|  10.1.25 |   | (19)   |   | Restricted Stock Unit and Option Agreement dated May  8, 2006 between the Company and James M. Spiezio.                                                |
|---------------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |   |   |                                                                                                                                                   |
|  10.1.26 |   | (19)   |   | Restricted Stock Unit and Option Agreement dated May  8, 2006 between the Company and Matthew L. Lazarewicz.                                           |
|          |   |   |   |                                                                                                                                                   |
| 10.1.27       |   | (17)   |   | Employment agreement dated March 2, 2007 between the  Company and F. William Capp                                                                      |
|          |   |   |   |                                                                                                                                                   |
| 10.1.28       |   | (17)   |   | Employment agreement dated March 2, 2007 between the  Company and James M. Spiezio                                                                     |
|          |   |   |   |                                                                                                                                                   |
| 10.1.29       |   | (17)   |   | Employment agreement dated March 2, 2007 between the  Company and Matthew L. Lazarewicz                                                                |
|          |   |   |   |                                                                                                                                                   |
| 10.1.30       |   | (17)   |   | Restricted Stock Unit and Option Agreement dated March  2, 2007 between the Company and F. William Capp.                                               |
|          |   |   |   |                                                                                                                                                   |
| 10.1.31       |   | (17)   |   | Restricted Stock Unit and Option Agreement dated  March 2, 2007 between the Company and James M. Spiezio.                                              |
|          |   |   |   |                                                                                                                                                   |
| 10.1.32       |   | (17)   |   | Restricted Stock Unit and Option Agreement dated  March 2, 2007 between the Company and Matthew L. Lazarewicz.                                         |
|          |   |   |   |                                                                                                                                                   |
| 14.1          |   | (13)   |   | Corporate Code of Conduct dated October 15, 2001.                                                                                                      |
|          |   |   |   |                                                                                                                                                   |
| 16.1          |   | (14)   |   | Letter dated October 20, 2004 from Deloitte &  Touche LLP to the Company.                                                                          |
|          |   |   |   |                                                                                                                                                   |
| 21.1          |   | (20)   |   | Subsidiaries of the Company.                                                                                                                           |
|          |   |   |   |                                                                                                                                                   |
| 23.1          |   | (20)   |   | Consent of Miller Wachman LLP.                                                                                                                         |
|          |   |   |   |                                                                                                                                                   |
| 31.1          |   | +      |   | Certification of Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               |
|          |   |   |   |                                                                                                                                                   |
| 31.2          |   | +      |   | Certification of Principal Financial and Accounting  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                |
|          |   |   |   |                                                                                                                                                   |
| 32.1          |   | +      |   | Certification of Principal Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002 |
|          |   |   |   |                                                                                                                                                   |
| 32.1          |   | +      |   | Certification of Principal Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002 |

 

----

(1) Incorporated by reference from the Form S-1 filed on November 16,2000 (File No. 333-43386).

(2) Incorporated by reference from the Form 8-K filed on October 4,2002 (File No. 001-16171).

(3) Incorporated by reference from the Form 10-K filed on March 31,2003 (File No. 001-16171).

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

(5) Incorporated by reference from the Form 8-K filed on May 10, 2005(File No. 001-16171).

(6) Incorporated by reference from the Form 8-K filed on February 14,2005 (File No. 001-16171).

(7) Incorporated by reference from the Form 8-K filed on February 16,2005 (File No. 001-16171).

(8) Incorporated by reference from the Form 8-K filed on April 25, 2005(File No. 001-16171).

(9) Incorporated by reference from the Form 8-K filed on April 25, 2005(File No. 001-16171).

(10) Incorporated by reference from the Form 8-K filed on July 29, 2005(File No. 001-16171).

(11) Incorporated by reference from the Form 8-K filed on October 13,2005 (File No. 001-16171).

(12) Incorporated by reference from the Form 8-K filed on November 7,2005 (File No. 001-16171).

(13) Incorporated by reference from the Form 10-K filed on March 31,2005 (File No. 001-16171).

(14) Incorporated by reference from the Form 8-K filed on November 2,2004 (File No. 001-16171).

(15) Incorporated by reference from the Form S-8 filed on March 22,2006 (File No. 333-132638).

(16) Incorporated by reference from the Form 10-K filed on March 30,2006 (File No. 000-31973).

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

(18) Incorporated by reference from the Form 8-K filed on October 29,2006 (File No. 000-31973)

(19) Incorporated by reference from the Form 10-Q filed on May 9, 2006(File No. 000-31973).

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

+ Filed herewith.

42

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe 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: May 2,  2007        |

 

Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe 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)                       |       | May 2, 2007 |
|                   |       |                                                |       |        |
| /s/ James M. Spiezio   |       | Vice President of Finance, Chief Financial Officer, |       |        |
| James M. Spiezio       |       | Treasurer and SecretarySecretary                    |       |        |
|                   |       | (Principal Financial Officer)                       |       | May 2, 2007 |
|                   |       |                                                |       |        |
| /s/ Stephen P. Adik    |       |                                                |       |        |
| Stephen P. Adik        |       | Director                                            |       | May 2, 2007 |
|                   |       |                                                |       |        |
| /s/ Daniel E. Kletter  |       |                                                |       |        |
| Daniel E.  Kletter     |       | Director                                            |       | May 2, 2007 |
|                   |       |                                                |       |        |
| /s/ Virgil G. Rose     |       |                                                |       |        |
| Virgil G. Rose         |       | Director                                            |       | May 2, 2007 |
|                   |       |                                                |       |        |
| /s/ Jack P. Smith      |       |                                                |       |        |
| Jack P. Smith          |       | Director                                            |       | May 2, 2007 |
|                   |       |                                                |       |        |
| /s/ William E. Stanton |       |                                                |       |        |
| William E.  Stanton    |       | Director                                            |       | May 2, 2007 |
|                   |       |                                                |       |        |
| /s/ Lisa W. Zappala    |       |                                                |       |        |
| Lisa W. Zappala        |       | Director                                            |       | May 2, 2007 |

 

43

----