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

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2004
                                       or

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from _____ to _____

                        Commission file number 001-16171

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

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

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

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

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

                     Common Stock, par value $.01 per share
                            ------------------------
                                (Title of class)

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

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

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined by rule 12b-2 of the Act). ___ Yes _X_ No -

     As of June 28, 2004 the market value of the voting stock of the registrant
held by non-affiliates of the registrant was $14,557,694. In determining the
market value of non-affiliated voting stock, shares of the registrant's common
stock beneficially owned by each executive officer, director and any known
person to be the beneficial owner of more than 20% of the registrant's voting
stock have been excluded. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

     The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of March 30, 2005 was 43,665,143.

                       DOCUMENTS INCORPORATED BY REFERENCE

The Exhibit Index (Item No. 15) located on pages 49 and 50 incorporates  several
documents by reference as indicated therein.


<TABLE>
<CAPTION>
                                Table of Contents
                                                                                                      Page
PART I
<S>       <C>                                                                                         <C>
     Item 1.    Business .....................................................................         1
     Item 2.    Properties ...................................................................        10
     Item 3.    Legal Proceedings ............................................................        10
     Item 4.    Submission of Matters to a Vote of Security Holders ..........................        10

PART II
     Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and
                  Issuer Purchases of Equity Securities ......................................        11
     Item 6.    Selected Consolidated Financial Data .........................................        13
     Item 7.    Management's Discussion and Analysis of Financial
                  Condition and Results of Operations.........................................        15
     Item 7A.    Quantitative and Qualitative Disclosures about Market Risk ..................        33
     Item 8.    Financial Statements and Supplementary Data ..................................        34
     Item 9.    Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure ........................................        60
     Item 9A.   Controls and Procedures ......................................................        60
     Item 9B    Other Information ............................................................        60

PART III
     Item 10.   Directors and Executive Officers of the Registrant ...........................        61
     Item 11.   Executive Compensation .......................................................        65
     Item 12.   Security Ownership of Certain Beneficial Owners
                  and Management and Related Stockholder Matters .............................        69
     Item 13.   Certain Relationships and Related Transactions ...............................        71
     Item 14.   Principal Accountant Fees and Services .......................................        73

PART IV
     Item 15.   Exhibits and Financial Statement Schedules ...................................        74

     Signatures ..............................................................................        77
</TABLE>
<PAGE>

Note Regarding Forward Looking Statements:

This Annual Report on Form 10-K may include  statements  that are not historical
facts and are considered  "forward-looking" statements within the meaning of the
Private  Securities  Litigation  Reform  Act of  1995.  These  "forward-looking"
statements  reflect  Beacon Power  Corporation's  view about  future  events and
financial  performance,  including  among  other  things,  its  expected  future
revenues,  costs  of  operations  and  capital  expenditures,  estimates  of the
potential markets for its products,  the rate of growth in those markets and the
competitive  advantage  that the  Company's  products  has that  will  result in
gaining  market  share.  Such  statements  made by the  Company  fall within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E of the Securities Exchange Act of 1934, as amended. All such forward-looking
statements  are  necessarily  only  estimates  of future  results and the actual
results  achieved by the Company may differ  materially from these estimates due
to  a  number  of  factors  as  discussed  in  the  section  entitled  "Item  7.
Management's  Discussion  and Analysis of Financial  Condition"  and "Results of
Operations - Certain Factors Which May Affect Future Results" of this Form 10-K.

                                     PART I

Item 1.  Business

Overview

Beacon Power Corporation is a development stage company that was incorporated in
Delaware  on May 8, 1997.  The  Company's  principal  offices and  research  and
development  laboratory  are  located  at 234  Ballardvale  Street,  Wilmington,
Massachusetts,  01887-1032.  Beacon's  telephone  number  is  978-694-9121.  The
Company's web address is www.beaconpower.com. Investors can obtain copies of SEC
filings  from  this  site  free of  charge,  as well as from the SEC web site at
www.sec.gov,  or by contacting  Investor  Relations at the  Company's  principal
offices.

The Corporation and its  subsidiaries  (collectively  "Beacon" or "the Company")
design, develop, configure and offer for sale, advanced products and services to
support more reliable electricity grid operation. Its sustainable energy storage
and power conversion  solutions can help provide reliable electric power for the
utility,  renewable energy, and distributed  generation  markets.  The Company's
Smart  Energy  Matrix is a design  concept for a  megawatt-level,  utility-grade
flywheel-based  energy  storage  solution that would provide  sustainable  power
quality services for frequency regulation,  and support the demand for reliable,
distributed electrical power. The Company has the following products,  which are
in varying stages of development, production readiness or low volume production:

o    Smart Energy(TM) Matrix - A design concept for a high-power  flywheel-based
     system  combining  several  flywheels with power  electronics.  The Company
     believes the Smart Energy Matrix can provide frequency  regulation services
     for use by independent system operators and regional transmission operators
     to regulate  electrical  power.  The Company also  believes  that the Smart
     Energy  Matrix can regulate  the  frequency  of  electricity  produced by a
     distributed  generation  facility and compensate for temporary  differences
     between  the demand for  electricity  and the amount  being  produced.  The
     Company has a  preliminary  design for the Smart Energy Matrix and has been
     awarded contracts by the California State Energy Resources Conservation and
     Development  Commission  (CEC) and the New York State  Energy  Research and
     Development Authority (NYSERDA) for programs demonstrating the viability of
     the Company's flywheel based system for frequency regulation of electricity
     on the power grid. The Company has shifted virtually all of its development
     spending  towards  meeting  the  requirements  of these  two  programs.  To
     successfully provide frequency regulation,  the Company will need to obtain
     sufficient  funding to complete design of the matrix,  develop the flywheel
     components  and  power  electronics,  integrate  and  test the  matrix  and
     establish manufacturing capability to produce commercial products.

o    Smart Energy system - High-energy  flywheel-based  systems of 2kWh and 6kWh
     that store  electricity  for  telecommunications,  cable systems,  computer
     networks,  and Internet market  applications  have been produced in limited
     quantities and the Company has sufficient  capacity to return to production
     if market demand occurs. The Company believes that, based on existing Smart
     Energy  technology,  it could develop a higher energy 25kWh flywheel system
     for  renewable  applications  if market  interest is  sufficient to justify
     development.  The Company has been unable to successfully  market its Smart
     Energy 2kWh and 6kWh at commercially  acceptable  prices. At this time, the
     Company expects to use the results of its Smart Energy Matrix demonstration
     unit to assess  market  interest in its 25kWh design  product and determine
     whether there is sufficient  market demand at prices that would support the
     additional development activity required for the Company to bring this high
     energy product to market.

o    Smart  Power(TM) M5 inverter  system - An  electronic  system that converts
     direct current electricity produced by photovoltaic panels into alternating
     current  electricity for residential and commercial use. This product is in
     low volume production and the Company has sufficient capacity and resources
     to ramp production if market demand increases. As a result of the increased
     market  interest in the Company's  Smart Energy Matrix design,  the Company
     has redeployed  virtually all of its research and  development  effort from
     further   inverter   development  to  its  Smart  Energy  Matrix   flywheel
     technologies.  As  a  result  of  this  change  in  focus  and  lower  than
     anticipated  sales  volumes  of the Smart  Power M5, the  Company  has also
     reduced its  marketing  efforts on the Smart  Power M5 and has  established
     reserves  on  its  balance   sheet  for   inventories   and  open  purchase
     commitments.  Although it is continuing to support the product, the Company
     does not  believe  that  inverters  will be a  significant  portion  of the
     Company's business going forward.


From the Company's  inception  through December 31, 2004, it has incurred losses
of approximately $129 million.  The Company does not expect to become profitable
or obtain  positive  cash  flow  before  2008.  This  expectation  is based on a
business plan that includes  full scale  development  of its Smart Energy Matrix
beginning  in the  second  quarter  of  2005.  If  capital  to fund  full  scale
development  of the Smart  Energy  Matrix is  constrained,  the time to  achieve
profitability  or positive  cash flow would be extended.  The Company must raise
additional  equity to execute its  business  plan and the Company will not begin
full scale  development of the Smart Energy Matrix until  additional  equity has
been  raised.  Based  on the  Company's  rate of  expenditure  of  cash  and the
additional expenditures expected in support of its business plan the Company has
sufficient cash to fund operations through  approximately May, 2005. The Company
will need to obtain an equity investment as soon as practicable in 2005 to fund:

o    continuing as a going concern;
o    completion of the state demonstration contracts in California and New York;
o    ongoing research and development of the Smart Energy Matrix;
o    working capital requirements; and
o    developing new business.

The Company's losses and uses of cash may fluctuate  significantly  from quarter
to quarter as sales (if any), costs of development,  inventories and receivables
fluctuate. These fluctuations in cash requirements could put additional pressure
on the Company's cash position.  There can be no assurance that the Company will
be able to raise the required capital or that sufficient funds will be available
to it on terms that it deems acceptable, if they are available at all.

The Company  continues to be accounted for as a development  stage company under
Statement of Financial  Accounting  Standards No. 7 "Accounting and Reporting by
Development Stage Enterprises."

<PAGE>
PRODUCTS AND MARKETS

Smart Energy Matrix

The Company has  identified  an  application  for its Smart  Energy  Matrix in a
well-established market with attractive pricing characteristics.  This market is
the sale of frequency  regulation  services for the  electrical  power grid.  In
order to maintain a constant frequency  alternating current, the power grid must
continuously  balance the supply of power  generated with the varying demand for
it. This balance is  maintained  today by  constant,  small  adjustments  in the
output of some of the  generators  operating on the grid. Not all generators can
be successfully operated with constantly varying output, but all generators that
are able to operate this way incur higher  operating costs due to increased fuel
consumption and maintenance.  Using the Company's Smart Energy Matrix, frequency
regulation  can,  for  the  first  time,  be  provided  separately  with  higher
performance  and lower  operating  costs.  The Smart Energy  Matrix is the first
product specifically designed to address this application.

The requirements of the frequency  regulation  application are well matched with
the characteristics of the Smart Energy Matrix, which is designed to draw excess
energy when  generated  power exceeds  demand and deliver it when demand exceeds
supply. Unlike generator-based  frequency regulation, no fuel is consumed and no
emissions  are  generated.  The Smart  Energy  Matrix's  characteristics  should
simplify and  accelerate  the process for  utilities to establish  new sites and
obtain required permits for new facilities.  The Smart Energy Matrix can also be
located nearly anywhere advantageous to the power grid, even within distribution
systems.

The  Company has been  awarded  development  contracts  with CEC and NYSERDA for
demonstrating the viability of the Company's flywheel technologies for frequency
regulation.   The  demonstrations   will  be  conducted  using   one-tenth-power
prototypes of Beacon's planned  megawatt-level  system known as the Smart Energy
Matrix.  Under these  contracts,  the  Company  expects to develop and install a
system in both  California and New York during 2005 to demonstrate  the benefits
of using flywheel energy storage to provide frequency  regulation of the grid; a
service required by all grid operators.  Successful  demonstrations of frequency
regulation with CEC and NYSERDA may also demonstrate the system's  technical and
market  feasibility in other large,  important,  growing  markets related to the
North American grid.

From an environmental perspective, the Company's Smart Energy Matrix will reduce
fuel  consumption by generators  because they will be able to operate at greater
efficiency. In addition, during peak output requirements,  widespread use of the
Company's Smart Energy Matrix to provide  frequency  regulation  would avoid the
need to utilize the most  inefficient  generators.  Both of these changes in the
way generators are used would reduce carbon dioxide and other emissions.

Separate  from the  frequency  regulation  of the power grid  market  identified
above, the Company has identified an additional application for its Smart Energy
Matrix. That application is providing a high-power,  flywheel-based  system that
continuously  regulates the frequency of  electricity  produced by a distributed
generation facility and compensates for temporary differences between the demand
for electricity and the amount being produced. A distributed generation facility
is any  electrical  power source other than the power grid,  including  advanced
generators such as fuel cells, natural gas engines, wind turbines,  photovoltaic
arrays and microturbines  which usually supply local power to facilities such as
hospitals or manufacturing plants. The Company's Smart Energy Matrix can be used
to regulate the frequency of the distributed  generation facility's power in the
same way it regulates  the frequency of the power grid as described  above.  The
Smart Energy Matrix,  because of its fast response time, can also compensate for
the slow response  characteristics  of generators and thus provide  stability to
these micro-grid facilities. In distributed generation,  demand fluctuations are
a much higher  percentage of power  production  than is experienced in the power
grid,  which  adversely  affects the  distributed  generator's  ability to match
supply and demand.

The Smart Energy Matrix is being  designed to store enough energy to deliver one
megawatt for 15 minutes and can be ganged to deliver ten or more megawatts. Each
Smart Energy Matrix will consist of a container  housing multiple  flywheels and
the necessary power electronics to connect to the grid. The Smart Energy Matrix,
because of its container  design,  will be able to be quickly deployed and could
be easily relocated.

The Company has finished the preliminary designs for the Smart Energy Matrix and
believes that there is ample market  interest in the product to begin full scale
development  but  will  not  begin  significant   design  or  development  until
sufficient  funds to complete  development  have been obtained.  Once begun, the
development  cycle for  completion  of this  product is  expected to be 18 to 24
months and  achieving  significant  volume  production  capability  will take an
additional six to 12 months.  Therefore,  the Company will not generate revenues
from this product for  approximately  two to three years after  development  has
commenced.


Smart Power M5

The Smart Power M5 inverter system for the  photovoltaic  energy market converts
direct current  generated by solar cells from sunlight into alternating  current
required by residential and commercial  users for operating  electrical  devices
and reducing the amount of purchased power when it is connected to a power grid.
Solar cells contain semi-conducting  material that converts sunlight into direct
current  electricity.  The  Company's  Smart  Power M5  inverter  system has the
capacity  to  convert  direct  current  electricity  into up to  5,000  watts of
alternating current.

The Company began delivering its Underwriters Laboratory approved Smart Power M5
inverter  systems in December 2003. The Smart Power M5 has been designed for use
in North  American  grid-connected  solar  power  applications.  If the  Company
determines that there is sufficient market demand outside of North America,  the
Company could develop on and off grid  inverters for use  throughout  the world.
The  Company  also could  develop  inverters  for use in low power wind  turbine
applications if there were ample market interest.

The Company has not been successful in selling a significant  number of units of
its Smart Power M5 and  therefore has shifted  virtually all of its  development
and sales activities from the Smart Power M5 to its flywheel based products. The
Company does not believe that  inverters  will be a  significant  portion of the
Company's business going forward and is uncertain as to when or at what price it
will be able to sell its inventories. In 2004, the Company established a reserve
for its Smart Power M5 inventory.


Smart Energy

The  Company  has offered for sale its Smart  Energy  flywheel  products,  which
deliver a low level of power for a long  period of time  (typically  measured in
hours).  These products  include the 2kWh and 6kWh Smart Energy  systems,  which
have  demonstrated  quality  performance and reliability at numerous sites.  The
Smart Energy  products are tailored to the  telecommunications,  cable  systems,
computer  networks,  and Internet  markets.  The Company believes that its Smart
Energy  products offer life cycle cost  advantages and  significant  performance
improvements over  conventional,  battery-based  back-up power sources.  At this
time,  the  Company  does not have orders for its Smart  Energy  products or any
inventory of finished  products and does not have purchase  orders in place with
vendors  for  components.  In the event that the  Company  receives  significant
customer orders for these products,  it will need to place orders for components
with vendors and hire and train manufacturing personnel to assemble, inspect and
assist in the installation of deliverable units.

The Company's Smart Energy systems have approximately 450,000 hours of operation
in  customer  sites  without  failure of  mechanical  system,  which the Company
believes  verifies  the  reliability  of  its  technologies.   The  Company  has
successfully  maintained  power with no  degradation  of service in planned  and
unplanned losses of utility power at several telecom and cable sites.  Also, the
Company's systems can be adapted to deliver the amount of power and back-up time
required to meet specific  needs of customers by integrating  multiple  flywheel
systems in parallel. This has been successfully demonstrated at several sites.

The Company  believes that its Smart Energy  technology is an excellent  base to
begin  development  of a higher  energy  25kWh  flywheel  system  for  renewable
applications when the Company  determines that the market interest is sufficient
to justify that product's development.

<PAGE>
Approvals and Certifications

The Company has obtained Underwriters  Laboratory approval for its existing 2kWh
and 6kWh Smart Energy products.  The Company has also designed and certified its
Smart Energy  systems in  accordance  with  Telcordia  standards,  which are the
baseline   for   performance   and   safety   standards   established   by   the
telecommunications  industry.  The Company's  Smart Energy products are the only
flywheel  products  that have passed a Zone 4 earthquake  test while  operating,
making them suitable for use anywhere in the United States.  The Company's Smart
Energy flywheel systems have also been successfully  tested for concurrence with
the Institute of Electrical and Electronics Engineers (IEEE) 587 standard, which
is the required standard for all Uninterruptible Power Supply systems.

The Company has obtained Underwriters Laboratory approval for its Smart Power M5
inverter system.  The California Energy Commission and New York's Public Service
Commission have also approved this product for on-grid applications.


THE COMPANY'S TECHNOLOGY

Flywheel-based products

Since the Company's formation, it has been attempting to develop flywheel energy
storage products that offer superior  reliability and performance at competitive
costs. The Company's composite flywheel is a rotating wheel on hybrid,  magnetic
bearings that operates in a near-frictionless  vacuum environment.  When the rim
spins, it stores kinetic  energy.  The flywheel is powered up to its operational
speed using  electricity from an external power source.  The flywheel is able to
spin for extended  periods with great  efficiency  because friction and drag are
virtually  eliminated by employing  magnetic bearings and a vacuum  environment.
Because it has very low  friction,  little  power is required  to  maintain  the
flywheel's  operating  speed.  When  electrical  power is needed,  the  spinning
flywheel drives a generator and its bi-directional inverter converts the kinetic
energy into electrical energy.

Steel  flywheels have been used since the industrial  revolution in applications
such as piston  engines  to store  energy  during the power  stroke for  release
during the compression stroke. These applications are limited by the revolutions
per  minute at which  steel  flywheels  are able to operate  and by the  limited
density of storage of energy by volume of steel.  The  products  the Company has
designed and offers employ new enabling  materials such as high-strength  fiber,
efficient  electric  drives,  and  low-loss,  long-life  bearings  to create new
generations  of  flywheel  products.   The  Company's  composite  flywheels  are
fabricated from  high-strength,  lightweight fiber composites,  such as graphite
and fiberglass combined with resins,  which allow the flywheel to rotate at high
speeds and store large  amounts of energy  relative  to similar  size and weight
flywheels made from metals.  For example,  a 600-pound steel flywheel running at
8,000  revolutions per minute will store  approximately 900 watt-hours of energy
and can deliver up to 850  watt-hours  of energy.  In  contrast,  The  Company's
500-pound 6kWh composite  flywheel running at 22,500 RPM stores 7,200 watt-hours
of energy and delivers 6,000  watt-hours of energy.  On a per-pound  basis,  The
Company's  composite flywheel  technology delivers nearly 10 times the energy of
the best steel flywheels.

The  Company's  proprietary  technology  enables the design of  maintenance-free
flywheel  products in that its products  employ an internal rather than external
vacuum  system and its bearing  systems have been designed and developed to need
no scheduled  replacement or maintenance.  Competing  flywheel  products rely on
bearings and external  vacuum  systems that  require  periodic  maintenance  and
replacement.  The  Company's  Smart Energy  flywheel  systems have  dramatically
longer discharge times than any other flywheel energy storage  systems;  this is
possible because the Company's  technologies  result in higher amounts of stored
energy and minimal energy losses during operation.

<PAGE>
Inverter Products

The Company began developing its Smart Power M5 inverter system for photovoltaic
applications  during 2003.  This product is based on  intellectual  property the
Company acquired,  and has significantly  enhanced, in the areas of performance,
ease of installation, software integration, and reliability.

The  Company's   Smart  Power  M5  inverter   system  is  designed  for  use  in
grid-connected solar applications. When AC power is interrupted, the Smart Power
M5 inverter system immediately  converts to an independent battery back-up mode,
continuing to provide  electricity to critical  loads.  This product is the most
compact,  easy-to-install  and  efficient  product  available  for solar on-grid
applications  with  back-up  capability.  The Company has  developed  designs to
expand  its  product  offering  to  include  systems  for use in solar  off-grid
applications as well as high voltage on-grid and off-grid domestic applications.
The Company could develop international configurations for those applications if
it believes  they can be  successfully  marketed in  sufficient  volumes to be a
viable commercial product.  Although it is continuing to support the Smart Power
M5, the Company does not believe that inverters will be a significant portion of
the Company's business going forward.


Research and Development

The Company believes that its research and development  efforts are essential to
its ability to successfully  design and deliver  products,  as well as to modify
and  improve its  existing  products  to reflect  the  evolution  of markets and
customer  needs.  The Company has worked  closely  with  potential  customers to
define product  features and performance  requirements to address specific needs
for both flywheel based solutions and renewable  energy  applications.  Research
and development expenses,  including  engineering  expenses,  were approximately
$3,532,000 in 2004,  $3,550,000  in 2003,  and  $7,130,000 in 2002.  The Company
expects  research and  development  expenses in 2005 to be somewhat  higher than
those in 2004 due  primarily  to the costs of  development  for the Smart Energy
Matrix. If the Company is able to validate market opportunities for its inverter
products,  it may choose to make significant  levels of research and development
expenditures in order to pursue those markets. At December 31, 2004, the Company
employed  16  engineers  and  technicians  full time and had  three  independent
contractors  engaged in research and  development.  At December  31,  2003,  the
Company employed 18 engineers and technicians.

Manufacturing

The Company  assembles and tests Smart Power M5 inverters at its  facility.  The
Company has design drawings and process  specifications to ensure the quality of
components manufactured by its suppliers.  The Smart Power M5 inverter system is
a  combination  of   off-the-shelf   components   and  components   produced  to
specifications  developed by the Company.  The Company  believes it has adequate
vendor sources for all the  components for the Smart Power M5 inverter  systems.
The Company has sufficient  inventories  to satisfy  expected unit sales for the
remainder  of this year.  Although  the  Company is  continuing  to support  its
inverter  product,  the  Company  does  not  believe  that  inverters  will be a
significant  portion of the Company's business going forward and is uncertain as
to when or at what price it will be able to sell its  inventories.  In 2004, the
Company  established  a reserve for its inverter  inventory as a result of lower
than anticipated sales volumes of the Smart Power M5,

The  Company's  facility  was  designed  for the  assembly  and test of flywheel
systems and this  capability  continues  to be  available  in the event that its
designs gain market acceptance and the Company begins production.

The Company's  facility  continues to be underutilized as a result of reductions
in development  work and a lack of customer orders for its flywheel and inverter
systems.  The Company maintains a limited  manufacturing staff, many of whom are
skilled in Six-Sigma cost and quality control techniques.  If customers begin to
order  flywheel  systems,  the Company  expects to  establish  assembly and test
capabilities  using  outside  suppliers  to provide  components  to meet product
demand.  The  suppliers  of the  Company's  mechanical  flywheel and the control
electronics are both single-source suppliers. The loss or interruption of supply
from either of these suppliers would adversely  affect the Company's  ability to
deliver these products.

Sales and Marketing

The  Company's  sales and  marketing  efforts for its  flywheel-based  frequency
regulation product have been focused on regional transmission  operators and the
energy  research  organizations  in California and New York. The initial concept
for the  Smart  Energy  Matrix  was  developed  in  collaboration  with  the PJM
Interconnect  system,  which is the nation's first federally  regulated regional
transmission  operator.  PJM has worked closely with the Company to evaluate the
performance characteristics of its product. PJM has informed the Company that it
believes the  Company's  Smart Energy Matrix  flywheel  system could be added to
PJM's power grid and bid into the frequency  regulation  market. The Company has
more recently worked with the California  Independent System Operator (CAISO) to
evaluate the  potential of the Smart Energy  Matrix,  and the support from CAISO
was an  important  factor in the  contract  award from the CEC.  The  Company is
presenting  its Smart  Energy  Matrix  product  to other  regional  transmission
operators and power utilities to further establish interest.

The Company's sales and marketing efforts in renewable energy are focused on the
sale of its Smart  Power M5  inverter  systems  for North  American  solar power
applications. For the renewable energy market the Company is marketing its Smart
Power M5 inverter system to  distributors in North America who provide  products
to  residential  and commercial  installers.  The Company is attempting to build
market interest  through  advertising,  trade press articles,  participating  in
industry  conferences,  technical  presentations to installers,  trade shows and
homeowner shows.

Marketing  efforts for the Company's  Smart Energy  flywheel  products have been
limited to providing  support for its field trial  systems and  identifying  key
prospects and working with those companies to demonstrate the Company's  product
advantages,  which include,  life cycle cost benefits and high reliability.  The
Company has installed  on-site,  working  demonstration  units of both its Smart
Energy  products  at  various  major  telecommunications  and  cable  companies.
Although sales efforts for these  products have been limited,  the Company plans
to  continue  to  perform  market   analysis  to  identify   opportunities   for
installations  that require the unique  characteristics of these products and to
emphasize their value  proposition and greater technical  benefits.  The Company
believes  that its products  will also be  attractive  to  customers  with power
sources that are very  expensive to replace or maintain due to their location or
other factors,  or power sources  located where there are high or low prevailing
temperatures  or  dramatic  changes in  temperature.  And from an  environmental
perspective,  the Company  believes  its  flywheel  products,  which  contain no
hazardous chemicals, are more attractive to customers when compared to lead-acid
batteries.  During 2004, the Company also placed a 6kWh Smart Energy flywheel in
a Navy research facility for evaluation as a potential  technology to be used in
the Navy's next generation electric ship program.

Backlog

At December 31, 2004,  the Company did not have any firm sales  commitments  for
its products.

Customer Service

The Company  intends to provide  maintenance  and  support  for its  products by
utilizing its own customer  service  personnel as well as support as needed from
its engineering  organization.  In the future, the Company may elect to contract
all or part of the customer service activities to outside sources as it deems it
effective from both a customer  satisfaction and Company cost  perspective.  The
Company's Smart Power M5 inverter system is sold with a five-year warranty.

Competition

The Company believes its Smart Energy Matrix will offer superior performance and
cost benefits over fossil fuel generators.  The Company believes that, given the
demands of the frequency regulation market, batteries,  metal flywheel and other
alternative energy technologies,  such as fuel cells and ultra capacitors,  will
not  compete  with the Smart  Energy  Matrix.  This  market  is being  served by
well-known  utilities and independent  service  providers that use  conventional
generators and that have far greater resources than the Company. These utilities
and independent  service  providers are primarily  focused on the sale of energy
and provide  frequency  regulation  services  as a secondary  source of revenue.
Companies that are currently  providing  frequency  regulation include Allegheny
Energy Supply Company, Commonwealth Chesapeake Company, Dominion Virginia Power,
Ingenco Wholesale Power, NRG Power Marketing and Reliant Energy Services.

Substantially  all of the high-energy,  uninterrupted  power supply markets that
the  Company's  2kWh and 6kWh  Smart  Energy  flywheel  systems  compete  in are
dominated by  battery-based  products,  rather than  battery-free  technologies.
These  markets  are  intensely   competitive,   with  the  principal  bases  for
competition being system first cost, brand recognition, quality and reliability.

The Company's 2kWh and 6kWh Smart Energy flywheel  systems provide back-up power
and compete on the basis of life-cycle cost and value to the customer.  Although
the Company's products offer attractive  performance to cost benefit when viewed
on a life-cycle  cost basis,  customers  are more  focused on first cost,  which
makes it very  difficult  for the Company to  effectively  compete  with battery
based systems.  The Company plans to continue to emphasize the value proposition
of its products such as increased  dependability,  environmental  benefits,  and
their long maintenance-free lives.

The Company believes that its high-energy  flywheel systems provide  significant
advantages to potential  customers due to the numerous problems  associated with
lead-acid batteries, including:

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

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

o    Life. In applications where discharges consume all or most of the battery's
     available  reserve,  or where the batteries are used in facilities that are
     not air-conditioned, the life of batteries is significantly reduced.

o    Environmental.  Batteries contain toxic materials such as lead and sulfuric
     acid.  They are  considered  hazardous  waste  and their  disposal  entails
     rigorous  environmental  regulations.  Facilities with spent batteries must
     make  arrangements  with hazardous  waste  handlers for disposal.  Both the
     costs  associated with disposal and the complexity of compliance for proper
     handling,  permitting and regulatory  requirements continue to increase and
     may accelerate sharply as pressure increases to curb such hazardous wastes.
     There are companies  working to offer lead free chemical  batteries such as
     nickel metal hydride and lithium ion, as well as  alternative  technologies
     such as super capacitors and super conductive magnetic energy storage.

Additional alternative energy products that are potentially  competitive include
ultra capacitors and fuel cells with integrated hydrogen generation and storage.
There are other companies  selling diesel generators and micro turbines that are
competitors in the broadest  sense,  although the Company  believes that in most
cases, its flywheel systems will be complementary to that equipment.

There are several  products that compete with the Smart Power M5 inverter system
sold by companies with greater  experience in the solar power conversion market.
This market is intensely  competitive,  with the principal bases for competition
being system  reliability,  quality,  brand recognition,  and price. The Company
believes  that its product has a competitive  advantage due to its  reliability,
ability to continue to provide  power when the grid fails,  improved  design and
efficiency benefits.

Intellectual Property

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

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

The intellectual  property rights of the Company's  flywheel-based  products are
based  upon  a  combination   of  SatCon   Technology   Corporation's   flywheel
technologies and patents that the Company is licensed to use, in perpetuity, and
patents that the Company  holds or which are pending.  The Company was issued by
SatCon a perpetual, exclusive, royalty-free,  worldwide right and license to use
SatCon's flywheel  technologies and patents for stationary  terrestrial flywheel
applications.  Those rights include  eleven issued U.S.  patents and eleven U.S.
and foreign  patent  applications  that expire on various dates between 2012 and
2021. This license covers SatCon's technologies and patents and all improvements
made by SatCon through  November 16, 2000,  the date of Beacon's  initial public
offering.  The  Company is not  entitled  to any  improvements  to the  flywheel
technology that SatCon develops  subsequent to that date. The Company expects to
develop  additional  intellectual  properties  and trade secrets as it continues
developing additional Smart Energy and Smart Power flywheel systems. The Company
owns  all  technology  improvements  it has  developed  that  are  based  on the
technology  licensed from SatCon. The Company also holds patents on its flywheel
vacuum system,  heat pipe cooling system,  output paralleling  algorithm,  metal
hub, low-loss motor, co-mingled rims and earthquake-tolerant bearings and has 16
pending U.S. and foreign patent  applications,  and one other  application being
prepared for filing.

The  intellectual  property  rights for the  Company's  Smart  Power M5 inverter
systems are based on the  intellectual  property  assets  acquired from Advanced
Energy Systems, Inc., that the Company purchased in March 2003. These assets are
wholly-owned by the Company and include anti-islanding  software,  which ensures
safe grid utility interconnection and reliable transition to stand-by power when
the grid fails, as well as drawings,  source code, production know-how,  and all
associated documentation. The Company has made substantial improvements to these
assets including the user interface,  thermal  performance,  general reliability
and ease of manufacture.

Government Regulation

The Company  does not believe that it's Smart  Energy  Matrix or other  flywheel
products will be subject to existing  federal and state  regulatory  commissions
governing electric utilities and other regulated entities.  The Company believes
that its  products  and their  installation  will be  subject to  oversight  and
regulation  at the local  level in  accordance  with state and local  ordinances
relating to building codes,  safety,  pipeline  connections and related matters.
The Company intends to encourage the  standardization of industry codes to avoid
having  to  comply  with   differing   regulations   on  a   state-by-state   or
locality-by-locality basis.

Employees

At December 31, 2004, the Company's  headcount was 24 full-time  employees,  one
part-time employee and four independent  contractors,  of which approximately 19
were engineers and  technicians  involved in research and  development and three
were in sales,  marketing and customer service.  The remaining seven people were
involved  in  administrative   tasks.  None  of  the  Company's   employees  are
represented by a union and the Company considers its relations with employees to
be satisfactory.

Item 2.  Properties

The  Company's  principal   executive  offices,   laboratory  and  manufacturing
facilities are located at a single location in Wilmington,  Massachusetts.  This
51,650 square foot facility operates under a lease that expires on September 30,
2007. The Company's  facility was designed for the assembly and test of flywheel
systems and this  capability  continues  to be  available  in the event that its
designs gain market acceptance and the Company begins production. Currently, the
facility is substantially underutilized.

Item 3.  Legal Proceedings

The  Company  is not  involved  in any  legal  proceedings  that are  considered
material;  however, it may from time to time be involved in legal proceedings in
the ordinary course of its business.

On August 16,  2004,  Ricardo and Gladys  Farnes,  and TLER  Associates,  Ltd. a
Bahamas corporation  ("TLER"),  delivered a complaint to the Company,  naming as
defendants,   the  Company,   John  Doherty,   Richard  Lane,  and  unidentified
individuals  and  corporations.  The case was filed in  District  Court in Clark
County,  Nevada on or about  June 1, 2004,  and later was  removed to the United
States  District  Court for the  District of Nevada,  where it is  pending.  The
complaint alleges that in 2001, defendants (a) forged the signature of plaintiff
Ricardo  Farnes (a  principal  of TLER) to a document  purporting  to extend the
performance  period on a purchase  order issued by TLER to the Company,  and (b)
thereafter,   posted  on  the  internet  defamatory  and  personal   information
concerning the  plaintiffs.  The plaintiffs do not allege any specific amount of
damages,  and  instead  assert  that  damages  exceed  $10,000.  The Company has
answered the  complaint,  denying its material  allegations,  and is  vigorously
defending.  Although  the  outcome  of this  matter  cannot  yet be  determined,
management  does not expect that the ultimate  costs to resolve this matter will
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.


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

The Company held its 2004 annual meeting of shareholders on December 9, 2004. At
the meeting,  the Company's  stockholders  voted on the following two proposals,
both of which were approved. The shareholder votes were cast as follows:

Proposal 1: To elect the following nominees as directors:

------------------- --------------------- -------------------
Nominee             Votes for              Votes withheld
------------------- --------------------- -------------------
Stephen P. Adik     31,910,462             110,796
------------------- --------------------- -------------------
Jack P. Smith       31,880,306             140,952
------------------- --------------------- -------------------
Kenneth M. Socha    31,508,834             512,424
------------------- --------------------- -------------------

Proposal 2: To ratify the appointment of Miller Wachman, LLP as independent
accountants for the Company for the year ending December 31, 2004:

------------- ----------------- ------------------ -------------------
Votes for     Votes against     Votes abstain      Votes withheld
------------- ----------------- ------------------ -------------------
31,916,786    60,488            43,984             0
------------- ----------------- ------------------ -------------------

<PAGE>
                                     PART II

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

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

                                High            Low
Twelve months ended December 31, 2004
Fourth quarter                  $1.44          $0.36
Third quarter                   $0.62          $0.25
Second quarter                  $0.90          $0.27
First quarter                   $1.72          $0.71

Twelve months ended December 31, 2003
Fourth quarter                  $1.54          $0.70
Third quarter                   $1.34          $0.24
Second quarter                  $0.48          $0.16
First quarter                   $0.30          $0.16

On March 7, 2005 the last reported  sale price of the Company's  common stock on
the NASDAQ  SmallCap  Market was $1.17 per share,  and there were 314 holders of
record of common  stock.  The number of record  holders does not include  shares
held in "street name" through brokers.

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

Equity  Compensation  Plan  Information.  The following table gives  information
about equity  awards under the  Company's  stock option plan and employee  stock
purchase plan, as of December 31, 2004.

<TABLE>
<CAPTION>
<C>                                   <C>                       <C>                        <C>
------------------------------------- ------------------------- -------------------------- -------------------------
                                      Number of securities to       Weighted average
                                      be issued upon exercise       exercise price of        Number of securities
                                      of outstanding options,     outstanding options,     remaining available for
           Plan category                warrants and rights        warrants and rights         future issuance
------------------------------------- ------------------------- -------------------------- -------------------------
                                                (a)                        (b)                       (c)
------------------------------------- ------------------------- -------------------------- -------------------------
Equity compensation plans approved                           -                 $        -                         -
by security holders
------------------------------------- ------------------------- -------------------------- -------------------------
Equity compensation plans not                        6,217,575                 $     1.06                         -
approved by security holders
------------------------------------- ------------------------- -------------------------- -------------------------
Total                                                6,217,575                 $     1.06                         -
------------------------------------- ------------------------- -------------------------- -------------------------
</TABLE>

For additional  information  concerning the Company's equity compensation plans,
see discussion in footnotes 8, 9 and 10 to the Company's  consolidated financial
statements,  Stock Options,  Employee  Stock Purchase Plan and Restricted  Stock
Units.


Recent Sales of Unregistered Securities

During 2004, the Company issued no unregistered securities.


Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the fourth quarter of 2004,  there were no purchases made by or on behalf
of the Company or any  affiliated  purchaser of shares of the  Company's  common
stock.

<PAGE>


Item 6.  Selected Consolidated Financial Data

The following selected financial data should be read together with "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
the financial  statements,  including the related notes, found elsewhere in this
Form 10-K.

The following  tables present selected  historical  financial data for the years
ended December 31, 2004,  2003, 2002, 2001 and 2000, and for the period from May
8, 1997, the date of the Company's inception, through December 31, 2004.

<TABLE>
<CAPTION>


                                                                                                              Period from Date
                                                                     Year ended December 31,                   of Inception
                                                ------------------------------------------------------------- (May 8, 1997) to
                                                    2004         2003         2002         2001         2000  December 31, 2004
                                                ---------    ---------    ---------    ---------    ---------    ---------
                                                                   (in thousands, except per share data)
Consolidated Statements of Operations Data:
<S>                                             <C>          <C>          <C>          <C>          <C>          <C>
Revenues ....................................   $     325    $    --      $    --      $    --      $      50    $     876
Cost of goods sold ..........................       1,458         --           --           --           --          1,458
                                                ---------    ---------    ---------    ---------    ---------    ---------
Gross margin ................................      (1,133)        --           --           --             50         (582)

Operating expenses:
     Selling, general and administrative ....       4,196        4,936        5,637        8,940        4,631       32,255
     Research and development ...............       3,532        3,550        7,130       17,628       12,715       53,876
     Loss on sales commitments ..............        --           --           --           --             51          376
     Depreciation and amortization ..........         187          285        1,644        1,324          401        4,138
     Restructuring charges ..................        --           --          2,159         --           --          2,159
     Loss on impairment of assets ...........        --            367        4,297         --           --          4,664
                                                ---------    ---------    ---------    ---------    ---------    ---------
Total operating expenses ....................       7,915        9,138       20,867       27,892       17,798       97,468
                                                ---------    ---------    ---------    ---------    ---------    ---------
Loss from operations ........................      (9,048)      (9,138)     (20,867)     (27,892)     (17,748)     (98,050)
Interest and other income (expense), net ....       3,719          520           28        1,746          330        6,124
                                                ---------    ---------    ---------    ---------    ---------    ---------
Net loss ....................................      (5,329)      (8,618)     (20,839)     (26,146)     (17,418)     (91,926)
Preferred stock dividends ...................        --           --           --           --        (35,797)     (36,826)
Accretion of redeemable convertible preferred
stock .......................................        --           --           --           --            (64)        (113)
                                                ---------    ---------    ---------    ---------    ---------    ---------
Loss to common shareholders .................      (5,329)      (8,618)     (20,839)     (26,146)     (53,279)    (128,865)
                                                =========    =========    =========    =========    =========    =========
Net loss per share, basic and diluted .......   ($   0.12)   ($   0.20)   ($   0.49)   ($   0.61)   ($  10.77)
                                                =========    =========    =========    =========    =========
Shares used in computing net loss per share,       43,453       42,886       42,797       42,551        4,946
basic and diluted
                                                =========    =========    =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>

                                                                   As of December 31,
                                                  2004        2003         2002         2001       2000
                                               ----------- ------------ ------------ ----------- ----------
                                                                     (in thousands)
Balance Sheet Data:
<S>                                                <C>          <C>         <C>         <C>        <C>
Cash and cash equivalents                          $5,097       $8,909      $17,867     $34,201    $62,051
Working capital                                     4,213        8,838       16,865      32,383     58,778
Total assets                                        7,086       12,067       20,906      42,131     67,738
Total stockholders' equity                         $5,110       $9,692      $18,075     $38,981    $63,308
</TABLE>



<PAGE>

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

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

Critical accounting policies and estimates

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

Revenue  Recognition.  Although the Company has shipped  products,  and recorded
contract  revenues,  its  operations  have not yet  reached a level  that  would
qualify it to emerge from the  development  stage.  Therefore it continues to be
accounted  for as a  development  stage  company  under  Statement  of Financial
Accounting  Standards  No. 7  "Accounting  and  Reporting by  Development  Stage
Enterprises."

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

Government Contract Revenue Recognized on the  Percentage-of-Completion  Method.
The Company  recognizes  contract  revenues  using the  percentage-of-completion
method,  based  primarily on contract costs incurred to date compared with total
estimated  contract costs.  Changes to total estimated contract costs or losses,
if any,  are  recognized  in the period in which they are  determined.  Revenues
recognized in excess of amounts  billed are  classified as current  assets,  and
included in "Prepaid expenses and other current assets" in the Company's balance
sheets.  Amounts billed to clients in excess of revenues  recognized to date are
classified as current  liabilities under advance billings on contracts.  Changes
in  project  performance  and  conditions,  estimated  profitability,  and final
contract  settlements may result in future  revisions to  construction  contract
costs and revenue.

Inventory  Valuation.  The Company  values its  inventory at the lower of actual
cost or the current  estimated  market  value.  It regularly  reviews  inventory
quantities  on hand and records a provision  for excess and  obsolete  inventory
based primarily on historical usage for the prior twelve month period and future
sales forecasts.  Although the Company makes every effort to ensure the accuracy
of its forecasts of future product demand, any significant unanticipated changes
in demand or technological  developments  could have a significant impact on the
value of its inventory and its reported operating results.

Patent Costs.  The Company will capitalize  external legal costs incurred in the
defense of its patents where it believes that the future economic benefit of the
patent will be increased.  The Company monitors the legal costs incurred and the
anticipated  outcome of the legal  action  and,  if  changes in the  anticipated
outcome  occur,  capitalized  costs will be adjusted in the period the change is
determined. Patent costs are amortized over the remaining life of the patents.

Warranty  Reserves.  The  Company's  warranties  require it to repair or replace
defective  products  returned to it during the applicable  warranty period at no
cost to the customer. It records an estimate for warranty-related costs based on
actual  historical return rates,  anticipated  return rates, and repair costs at
the  time of  sale.  A  significant  increase  in  product  return  rates,  or a
significant  increase  in the costs to repair  products,  could  have a material
adverse  impact on future  operating  results for the period or periods in which
such returns or additional costs materialize and thereafter.

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

Significant  management  judgment is required in  determining  the provision for
income  taxes,  the  deferred  tax  assets  and  liabilities  and any  valuation
allowance recorded against deferred tax assets. The valuation allowance is based
on the  Company's  estimates  of taxable  income  and the period  over which its
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or the Company adjusts these estimates in future periods it
may need to establish an  additional  valuation  allowance or reduce its current
valuation allowance which could materially impact its tax provision.

Long-Lived  Assets.  In  accordance  with  Statement  of  Financial   Accounting
Standards  No. 144  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets",  long-lived  assets to be held and used by the Company are  reviewed to
determine  whether  any  events or changes in  circumstances  indicate  that the
carrying  value  of the  asset  may not be  recoverable.  The  conditions  to be
considered include whether or not the asset is in service,  has become obsolete,
or whether external market  circumstances  indicate that the carrying amount may
not be  recoverable.  When  appropriate  the Company  recognizes  a loss for the
difference  between  the  estimated  fair  value of the asset  and the  carrying
amount.  The fair value of the asset is measured using either  available  market
prices or estimated  discounted cash flows. The Company's analyses indicate that
there was an impairment of long-lived  assets and recognized an asset impairment
charge of $0 in 2004,  $366,788 in 2003 and  restructuring  and asset impairment
charges of $2,159,280 and $4,297,128, respectively, in 2002.

Overview

The Company's  initial  product  strategy was to develop high energy,  composite
flywheels  for back-up  powering of  telecommunications  applications.  With the
collapse of the  telecommunications  market,  which  began in 2001,  the Company
recognized  that its  Smart  Energy  flywheel  products  as  alternative  backup
solutions  to the  telecommunications  industry  were  not on a path to  produce
meaningful  revenues.  With that recognition,  the Company initiated a series of
cost cutting  measures  throughout 2002 and 2003. The focus of these efforts was
to reduce cash usage while preserving the Company's intellectual  properties and
maintaining the integrity of its public company  requirements  while  evaluating
all potential  product  markets for the Company's  technologies  and considering
acquisitions  or mergers that could lead to  increased  shareholder  value.  The
Company has:

(i)  identified promising applications for its Smart Energy Matrix design in the
     electric utility power grid  marketplace.  In the first quarter of 2005 the
     Company was awarded development contracts by CEC and NYSERDA to demonstrate
     the  viability  of  the  Company's  flywheel   technologies  for  frequency
     regulation by grid operators.  The demonstrations will be a one-tenth-power
     prototype of the Smart Energy Matrix;

(ii) pursued  additional  development  and  design  contracts  for a variety  of
     applications  by federal  agencies.  The  Company  has been  successful  in
     obtaining  two small  contracts  and is  continuing  its  efforts to obtain
     additional research and development funding; and

(iii)introduced  its Smart Power M5 inverter  system into the  renewable  energy
     market in  December  of 2003.  The Company has not been able to gain market
     share  with  this  product  and has  discontinued  development  of  further
     inverter  products but is  continuing to offer the product for sale through
     its distributor network.  Although it is continuing to support the product,
     the Company does not believe that inverters  will be a significant  portion
     of the Company's business going forward.

The Company must raise additional  equity to execute its business plan. Based on
the  Company's  rate of  expenditure  of cash  and the  additional  expenditures
expected in support of its business plan the Company has sufficient cash to fund
operations  through  approximately May, 2005. The Company will need to obtain an
equity investment as soon as practicable in 2005 to fund:

o    continuing as a going concern;
o    completion of the state demonstration contracts in California and New York;
o    ongoing research and development of the Smart Energy Matrix;
o    working capital requirements; and
o    developing new business.

In the event that the  Company  elects to begin full  scale  development  of its
Smart  Energy  Matrix  flywheel  system,  the  amount of equity  required  would
increase substantially. The Company believes that there is ample market interest
for its Smart Energy Matrix but will not begin full scale  development  until it
obtains sufficient funding.

As part of the Company's  new business  development,  it is actively  evaluating
possible  acquisitions  of  enterprises or  technologies  that it would consider
synergistic  from a  market,  technology  or  product  perspective.  Efforts  to
identify  opportunities and perform due diligence including legal and audit fees
will continue to be a use of cash in 2005 and beyond.

From inception  through  December 31, 2004,  the Company has incurred  losses of
approximately $128.9 million. The Company expects to continue to incur losses as
it expands its product development,  commercialization program, and expansion of
its manufacturing capabilities.

The Company  recognized an asset impairment charge in 2003 and restructuring and
asset  impairment  charges in 2002.  The  Company,  as required by  Statement of
Financial  Accounting  Standards  No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived Assets,"  periodically  evaluates all of its property and
equipment  in light of facts and  circumstances  and the outlook for future cash
flows.  As a result  of its  ongoing  evaluations,  in 2003 the  Company  took a
non-cash charge of  approximately  $0.4 million  representing  the impairment of
capitalized  costs  of  internally  developed  intellectual  property  including
various  patents  and  patents  pending  relating  to  the  Company's   flywheel
technology.  In 2002 the Company took a non-cash charge of $6.5 million of which
$4.3 million represented impaired capital equipment and leasehold  improvements,
$1.9 million  related to a reserve  against  future  lease  payments and related
facility  costs and $0.3 million  relating to  severance  costs.  These  charges
related to a substantial  portion of the Company's long-term assets being idled,
including  machinery and equipment,  tooling,  office furniture and fixtures and
leasehold improvements.  The portion of the reserve that relates to future lease
payments is classified  as  "Restructuring  reserve" in the current  liabilities
section of the balance sheet.

Revenues. Although the Company has shipped commercial products and has performed
development  and proof of concept  work on  several  government  contracts,  its
operations have not yet reached a level that would qualify it to emerge from the
development  stage.  Therefore it continues to be accounted for as a development
stage  company  under  Statement  of  Financial   Accounting   Standards  No.  7
"Accounting and Reporting by Development  Stage  Enterprises." The Company sells
its Smart Power M5 inverter system in the solar renewable  energy market through
domestic  distributors who in turn sell the Company's products to installers who
then make sales to residential  homeowners or commercial customers.  The Company
will  recognize  revenues  on its  inverter  products  based on the sales by its
distributors  to  their   customers.   The  Company  has  received  fixed  price
demonstration  contracts  from  government  agencies  and  is  pursuing  similar
contracts from other  government  agencies.  The Company has determined  that it
will  recognize  revenues  on  the  percentage  of  completion  basis  for  such
contracts.  The  Company is  continuing  to evaluate  markets  for its  flywheel
systems but has not  recognized  revenues from these  products.  The Company has
placed  development  prototype  flywheels with  potential  customers and shipped
pre-production  units.  These  flywheel  products  were  provided  to  potential
customers without charge or on a demonstration basis to allow the Company access
to  field  test   information   and  to  demonstrate   the  application  of  the
technologies.

Cost of Goods  Sold.  The  Company's  cost of good sold for  inverters  consists
primarily  of the cost of  manufacture  of its Smart Power M5  inverter  system,
inventory  and  warranty  reserves  and  period  costs  relating  to  production
over-capacity.  Cost of goods sold on fixed price flywheel development contracts
are being recorded on the  percentage of completion  basis and consist of direct
labor and material, subcontracting and associated overhead costs.

In 2004, the Company established a reserve for its Smart Power M5 inventory as a
result of lower than  anticipated  sales volumes of the Smart Power M5, Although
the Company is continuing to support its inverter product,  the Company does not
believe that inverters will be a significant  portion of the Company's  business
going  forward and is  uncertain  as to when or at what price it will be able to
sell  its  inventories.  The  charge  to Cost of Goods  Sold  was  approximately
$1,025,000,   which  includes  accrued  purchase  commitments  of  approximately
$45,000.

Selling,  General and Administrative Expenses. The Company's sales and marketing
expenses consist  primarily of compensation and benefits for sales and marketing
personnel and related business  development  expenses.  During 2003, the Company
increased its sales and marketing  efforts for its flywheel based  products,  to
introduce  its  concepts  for  frequency  regulation  applications.  In 2004 the
Company expanded its sales and marketing effort into the renewable energy market
for its Smart  Power M5  inverter  product.  The  Company  continues  to rely on
engineering personnel to provide technical  specifications and product overviews
to its potential customer base. The Company expects sales and marketing expenses
to  continue  to  increase  as it expands  efforts to define new markets for its
products.  General and administrative expenses consist primarily of compensation
and  benefits  related to the  Company's  corporate  staff,  professional  fees,
insurance   and  travel.   The  Company   expects  its   selling,   general  and
administrative  expenses  to  increase  in 2005 over 2004 due  primarily  to the
implementation  and  reporting  expenses  associated  with  compliance  with the
Sarbanes-Oxley  Act of 2002,  fundraising  activities,  and  marketing and sales
expenses associated with flywheel products.

Research  and  Development.  The  Company's  cost of  research  and  development
consists  primarily  of the cost of  compensation  and benefits for research and
development,  and support  staff,  as well as materials and supplies used in the
engineering design and development process. These costs are expected to increase
in 2005 as  compared  to 2004.  Although  the  Company  does not expect to incur
significant  additional  costs for its existing  flywheel  products or renewable
energy  products,  the Company  does expect to incur higher costs for design and
development  activities of the Smart Energy Matrix.  The costs of development of
the Smart Energy Matrix will be significant if the Company  initiates full scale
development.

Loss on Sales  Commitments.  The Company will establish reserves for anticipated
losses  on  sales  commitments  if,  based on cost  estimates  to  complete  the
commitment,  it is determined that a loss will be incurred.  The Company did not
accrue such losses  during 2004 or 2003.  In the second half of 2001 the Company
reversed  projected  losses  contemplated  and recognized  during 2000 and early
2001.  The  Company  is most  likely  to  recognize  probable  losses  on  sales
commitments  early in a  product's  introduction  prior to being able to realize
expected  decreases  in  cost  per  unit  through  engineering  design  changes,
operating   efficiencies,   and  volume  purchasing  discounts.   On  government
contracts,  the Company will, on a quarterly basis, evaluate its estimated costs
to complete and establish reserves when appropriate.

Restructuring  and asset impairment  charges.  The Company did not recognize any
asset impairment charges in 2004, but did record asset impairment charges during
2003. The Company's initial products were focused on the telecom industry.  As a
result of the  overall  economic  downturn  and in  particular  the  significant
decline in capital and maintenance  spending in telecom as well as the low price
of lead-acid batteries,  the Company has not been successful in selling products
into this market and therefore  recorded  non-cash asset  impairment  charges of
$0.4  million in 2003,  pursuant  to  Financial  Accounting  Standard  No.  144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."

Depreciation and  Amortization.  The Company's  depreciation and amortization is
primarily  related to depreciation on capital  expenditures and the amortization
of lease  and  leasehold  costs  related  to its  facilities.  The  Company  has
intellectual  property in the form of patents on its flywheel vacuum system, its
heat pipe cooling systems,  DC output  paralleling,  metal hub,  low-loss motor,
co-mingled rims and  earthquake-tolerant  bearings on its flywheel products, and
anti-islanding software,  drawings,  source code, and production know-how on its
Smart Power M5 inverter system,  and expects to obtain other patents during 2005
and beyond.  These  costs were being  amortized  during  2003 and 2004,  but the
Company  recorded  impairment  charges to write down these assets to zero on the
balance sheet at December 31, 2004.  These  impairment  charges were made due to
the  uncertainty of realizing any future value from this property mainly due the
lack of substantial revenues.

Interest and Other Income/Expense,  net. The Company's  non-operating income and
expenses  are  primarily  attributable  to  realized  gains  on the  sale of its
available-for-sale  securities and a warrant, the write-back resulting from loan
payments of a reserved loan to a former officer of the Company,  interest income
resulting from cash on hand, accrued dividends  receivable and the 7% conversion
premium  from the  conversion  of the  Company's  holdings of Series A Preferred
Stock of Evergreen Solar, Inc.,  partially offset by interest expense associated
with its capital leases.

RECENT ACCOUNTING PRONOUNCEMENTS

Share-Based Payments

In December 2004, the FASB issued  Statement of Financial  Accounting  Standards
No. 123 (revised  2004),  "Share-Based  Payment"  (FAS 123R) that  addresses the
accounting for share-based payment  transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise or
liabilities  that  are  based  on the  fair  value  of the  enterprise's  equity
instruments  or that may be settled by the issuance of such equity  instruments.
The statement  eliminates  the ability to account for  share-based  compensation
transactions  using the  intrinsic  value  method as  prescribed  by  Accounting
Principles  Board,  or APB,  Opinion  No. 25,  "Accounting  for Stock  Issued to
Employees," and generally requires that such transactions be accounted for using
a  fair-value-based  method and  recognized  as  expenses  in the  statement  of
operations.  The  statement  requires  companies to assess the most  appropriate
model to calculate  the value of the  options.  The Company  currently  uses the
Black-Scholes  option pricing model to value options and is currently  assessing
whether an alternative  model will be more  appropriate.  The use of a different
model  to  value  options  may  result  in  a  different  fair  value  than  the
Black-Scholes  option  pricing model.  In addition,  there are a number of other
requirements  under the new standard  that will result in  differing  accounting
treatment  than  currently  required.  These  differences  include,  but are not
limited to, the accounting for the tax benefit on employee stock options and for
stock issued under the Company's  employee  stock  purchase plan. In addition to
the appropriate  fair value model to be used for valuing  share-based  payments,
companies will also be required to determine the transition method to be used at
date of  adoption.  The  allowed  transition  methods  include  prospective  and
retroactive adoption options.  Under the retroactive options,  prior periods may
be  restated  either  as of the  beginning  of the year of  adoption  or for all
periods presented.  The prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the beginning of
the first quarter of adoption of FAS 123R,  while the retroactive  methods would
record compensation  expense for all unvested stock options and restricted stock
beginning with the first period restated. The effective date of the new standard
is as of the  beginning  of the first  interim or annual  reporting  period that
begins after June 15, 2005.

Upon  adoption,  this  statement may have a significant  impact on the Company's
consolidated  financial  statements  as it will be  required to expense the fair
value of its stock option grants and stock  purchases  under its employee  stock
purchase plan rather than disclose the impact on the Company's  consolidated net
income within the footnotes as is the current  practice (see Note 8 of the notes
of  the  consolidated   financial  statements  contained  herein).  The  amounts
disclosed within the Company's  footnotes are not necessarily  indicative of the
amounts  that will be  expensed  upon the  adoption  of FAS 123R due to possible
changes in the fair value of the Company's  common stock,  changes in the number
of options  granted or the terms of such options,  the treatment of tax benefits
and  changes in  interest  rates or the  Company  may choose to use a  different
valuation model to value the compensation expense associated with employee stock
options.

Inventory Costs

In November 2004, the FASB issued SFAS No. 151,  "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4," which  clarifies the accounting for abnormal  amounts
of  idle  facility  expense,   freight,   handling  costs  and  wasted  material
(spoilage).  Adoption of SFAS No. 151 is  required in 2006 and the Company  does
not  expect  the  adoption  to  have a  significant  impact  on its  results  of
operations or financial condition.

Results of operations.

Comparison of Year ended December 31, 2004 and 2003
<TABLE>
<CAPTION>

                                                  Year ended December 31,
                                              2004       2003  $ Change   % Change
                                         ---------- ---------- --------- ----------
                                                       (in thousands)
<S>                                        <C>        <C>       <C>        <C>
Revenues ...............................   $   325    $  --     $   325        n/a
Cost of goods sold .....................     1,458       --       1,458        n/a
Gross margin ...........................    (1,133)      --      (1,133)       n/a
Selling, general and administrative ....     4,196      4,937      (741)        15%
Research and development ...............     3,532      3,550       (18)         1%
Depreciation and amortization ..........       187        285       (98)        34%
Restructuring and impairment of assets .      --          367      (367)       100%
Interest and other income (expense), net     3,719        520     3,199        615%
Net loss ...............................     5,330      8,618    (3,288)        38%
</TABLE>

Revenue.  In 2004 the Company  recorded revenue from the sale of its Smart Power
M5  inverter  systems  and  related  products  in the  amount  of  approximately
$204,000.  Revenue from flywheel related government  contracts was approximately
$121,000.  Also in 2004, the Company provided $42,000 of engineering  consulting
services to third  parties;  these  services  were  recorded  as a reduction  to
research and  development  expense.  In 2003,  the Company  reported no revenue.
Proceeds from the sale of  demonstration  and test of 2kWh and 6kWh Smart Energy
flywheel units as well as  engineering  services  performed for other  companies
during 2003 was applied as a reduction against research and development expense.
These amounts were approximately $130,000.

Cost of Goods Sold. Cost of goods sold includes the cost of materials, labor and
overheads for inverter products sold in the amount of approximately $235,000 and
costs  incurred  in  performance  of  government  contracts  calculated  on  the
percentage of completion  method in the amount of  approximately  $170,000.  The
Company  established a reserve for its Smart Power M5 inventory of $1,025,000 as
a result of lower  than  anticipated  sales  volumes  of the Smart  Power M5 and
uncertainty as to when or at what price it will be able to sell its inventories.
In  addition  to this  charge to Cost of Goods  Sold,  the  Company  recorded an
additional reserve for future warranty  expenditures relating to the Smart Power
M5 inverter  of  approximately  $28,000.  There was no cost of goods sold during
2003.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses   (in thousands)
December 31, 2003 .............................   $ 4,937
Reductions:
Directors & officers insurance premium ........      (972)
Consultants ...................................      (109)
Reverse accruals ..............................      (216)
Increases:
Bonus expenses based on RSU plan ..............       364
Merit increases, headcount increase ...........        50
Benefits including health .....................        37
Legal & audit .................................       105
                                                  -------
December 31, 2004 .............................   $ 4,196

The  decrease  from 2003 to 2004 of  approximately  $741,000 was  primarily  the
result of significantly reduced premiums for directors and officers insurance in
the amount of  approximately  $972,000,  a  reduction  in accrued  expenses  for
contingencies  that did not  materialize of  approximately  $216,000,  and lower
spending  on  subcontractors  and  consultants  in the  amount of  approximately
$109,000 in 2004 compared to the prior year.  These  reductions  were  partially
offset  by  increases  in  stock  compensation  expense  due  to  the  Company's
restricted stock unit program of approximately $364,000,  higher legal and audit
fees of approximately  $105,000,  increases in payroll costs as a result of 2004
merit increases and changes in headcount of  approximately  $50,000 and benefits
cost  increases  of  approximately  $37,000.  The Company  expects its  selling,
general and administrative  expenses to increase in 2005 over 2004 due primarily
to the implementation and reporting expenses associated with compliance with the
Sarbanes-Oxley  Act of 2002,  fundraising  activities,  and  marketing and sales
expenses associated with flywheel products.

Research and Development Expenses.

Research and development expenses               (in thousands)
December 31, 2003 .............................   $ 3,550
Reductions:
Salaries and benefits due to reduction in force      (295)
R&D materials .................................      (205)
Other reductions ..............................       (10)
Increases:
Stock compensation based on RSU plan ..........       356
Patent legal expenses .........................        89
Subcontractors ................................        47
                                                  -------
December 31, 2004 .............................   $ 3,532

The decrease  from 2003 to 2004 of  approximately  $18,000 is  primarily  due to
reduction  in  headcount  during  2003  and  lower  purchases  of  research  and
development  materials  in 2004 and other  reductions  in 2004 of  approximately
$295,000,  $205,000  and $10,000,  respectively.  This was  partially  offset by
increases in stock compensation  expenses due to the Company's  restricted stock
unit  program,  increased  legal  expenses  relating to patents on the Company's
flywheel  systems,  and increased use of  subcontractors  while  developing  the
next-generation Smart Power M5 inverter of approximately  $356,000,  $89,000 and
$47,000,  respectively.  The Company expects cost of research and development in
2005 to be somewhat higher than 2004 due to design and development activities of
the Smart Energy Matrix.  The costs of research and  development in 2005 will be
significantly  higher if the Company begins full scale  development of the Smart
Energy Matrix.

Depreciation and  Amortization.  The decrease from 2003 to 2004 of approximately
$98,000 is  primarily  attributable  to the  write-off of the  Company's  patent
technologies at December 31, 2003, and continuing  reductions in the depreciable
base of the  Company's  assets  caused  by  budgetary  restrictions  on  capital
expenditures  during 2004.  Depreciation in 2005 will be higher than 2004 if the
Company begins full scale development of the Smart Energy Matrix.

Restructuring  and asset  impairment  charges.  The Company  recognized an asset
impairment  charge  for its  flywheel  patents  and  patents  pending in 2003 of
approximately $367,000. The Company did not recognize any restructuring or asset
impairment charges during 2004 and does not expect to recognize any like charges
in 2005.

Interest and Other Income/ (Expense), net.

Interest and Other Income (Expense), net     (in thousands)
December 31, 2003 ...........................   $   520
Reductions:
Officer loan repayments .....................      (291)
Interest from cash holdings .................      (115)
Loss on disposal of assets ..................       (25)
Increases:
Gain on sale of investment ..................     3,563
Conversion of Evergreen Preferred to common .        60
Interest expense ............................         7
                                                -------
December 31, 2004 ...........................   $ 3,719

The  increase  from  2003 to  2004  of  approximately  $3,199,000  is  primarily
attributable to gains from the sale of an investment in Evergreen Solar, Inc. of
approximately  $3,563,000,  premium received on conversion of Evergreen Series A
Preferred Stock to common of  approximately  $60,000 and lower interest  expense
associated  with capital  leases that expired  during the second half of 2003 of
approximately $7,000,  partially offset by lower officer loan repayments in 2004
of  approximately  $291,000,  a decrease in interest  income earned due to lower
cash balances in the amount of approximately $115,000 and a loss on the disposal
of capital assets of approximately $25,000.

Net Loss. As a result of the changes  discussed above, the net loss for 2004 was
approximately  $5,330,000  which compares to a net loss in 2003 of approximately
$8,618,000, a decrease of $3,288,000 or 38%.


Comparison of Year ended December 31, 2003 and 2002
<TABLE>
<CAPTION>

                                                      Year ended December 31,
                                               2003       2002   $ Change     % Change
                                         ----------- ---------- ----------     -------
                                 (in thousands)
<S>                                        <C>        <C>        <C>          <C>
Revenues ...............................   $   --     $   --     $   --           n/a
Selling, general and administrative ....      4,937      5,637       (700)         12%
Research and development ...............      3,550      7,130     (3,580)         50%
Depreciation and amortization ..........        285      1,644     (1,359)         83%
Restructuring and impairment of assets .        367      6,456     (6,089)         94%
Interest and other income (expense), net        520         28        492        1757%
Net loss ...............................      8,618     20,839    (12,221)         59%
</TABLE>

Revenue. Proceeds from the sale of demonstration and test of 2kWh and 6kWh Smart
Energy  flywheel  units as well as  engineering  services  performed  for  other
companies  has been  applied as a reduction  against  research  and  development
expense and has not been recorded as revenue.  These amounts were  approximately
$130,000  and  $79,000 for 2003 and 2002,  respectively.  The Company did record
deferred  revenue  for the first  time  during  the  fourth  quarter of 2003 for
shipments to distributors of its Smart Power M5 inverter systems.

Selling,  General and Administrative Expenses. The decrease from 2002 to 2003 of
approximately $700,000 was primarily the result of lower consulting expenditures
in 2003 than the prior year.

Research  and  Development   Expenses.   The  decrease  from  2002  to  2003  of
approximately  $3,580,000 is primarily due to decreased compensation and benefit
costs  related  to  significant  reductions  in the  number of  engineering  and
manufacturing personnel as well as lower expenditures on development materials.

Depreciation and  Amortization.  The decrease from 2002 to 2003 of approximately
$1,359,000 is primarily attributable to the reduction in the depreciable base of
the Company's assets that resulted from the  restructuring  and asset impairment
charges recorded in 2002.

Restructuring  and Asset  Impairment  Charges.  The Company  recognized an asset
impairment  charge  for its  flywheel  patents  and  patents  pending in 2003 of
approximately  $367,000.  In 2002, the Company recognized both restructuring and
asset   impairment   charges  of   approximately   $2,200,000  and   $4,300,000,
respectively.

Interest and Other  Income/  (Expense),  net. The increase  from 2002 to 2003 of
approximately  $492,000 is primarily  attributable  to the reversal of a reserve
for loans to  officers  taken in the prior year as a result of payments on those
loans being  received,  a decrease in interest  income  earned due to lower cash
balances,  accrued  dividends  on  the  Company's  investment  in the  Series  A
Preferred Stock of Evergreen Solar,  Inc., and lower interest expense associated
with smaller capital leases, which expired during the second half of 2003.

Net Loss. As a result of the changes  discussed above, the net loss for 2004 was
approximately  $8,618,000  compared  to  $20,839,000  for 2003,  a  decrease  of
$12,221,000 or 59%.

LIQUIDITY AND CAPITAL RESOURCES

                                                 Year ended December 31,
                                          -----------------------------------
                                                2004        2003        2002
                                          ----------- ----------- -----------
                                                      (in thousands)
Cash and cash equivalents ...............   $  5,097    $  8,909    $ 17,867
Working capital .........................      4,213       8,838      16,865
Cash provided by (used in)
     Operating activities ...............     (8,165)     (7,701)    (15,541)
     Investing activities ...............      4,650      (1,291)       (466)
     Financing activities ...............       (297)         35        (327)
                                            --------    --------    --------
Net decrease in cash and cash equivalents   $ (3,812)   $ (8,957)   $(16,334)
                                            ========    ========    ========
Current ratio ...........................        3.1         4.7         7.0
                                            ========    ========    ========

The  Company's  cash  requirements  depend on many  factors,  including  but not
limited  to,  research  and  development   activities,   continued   efforts  to
commercialize   its   products,   facilities   costs  as  well  as  general  and
administrative expenses. The Company expects to make significant expenditures to
fund its operations,  develop technologies and explore opportunities to find and
develop  additional  markets  to  sell  its  products.  The  Company  has  taken
significant  actions to reduce its cash  expenditures  for product  development,
infrastructure  and production  readiness by significantly  reducing  headcount,
development  spending  and  capital  expenditures  over the last two years.  The
Company has focused its activity on market analysis in terms of size of markets,
competitive aspects and advantages that its products could provide.  The Company
has continued to do preliminary  design of potential  products for markets under
consideration for its flywheel systems and has purchased intellectual properties
and incurred development costs for its products in the renewable energy market.

Net  cash  used in  operating  activities  was  approximately  ($8,165,000)  and
($7,701,000)   for  the  twelve  months  ended   December  31,  2004  and  2003,
respectively. The primary component to the negative cash flow from operations is
from  net  losses.  For  2004,  the  Company  had a net  loss  of  approximately
($5,330,000).  This  included  facility  related cash payments  charged  against
restructuring  reserves  of  approximately  ($343,000),  gain  on  the  sale  of
investments of  approximately  ($3,563,000),  reductions to the asset impairment
reserve for disposed fixed assets of  approximately  ($10,000),  a reversal of a
portion of the reserved note to its former CEO of approximately ($22,000) net of
accrued interest  reserved of $4,000,  offset by employee stock  compensation of
approximately  $701,000,  compensation  expense  from stock  options  issued for
consulting  services of approximately  $16,000,  loss on the sale or disposal of
fixed assets of approximately $25,000, a reduction in restricted cash related to
(i) the lease of the  Company's  facility  $45,000 and (ii) the  expiration of a
vendor contract of approximately  $50,000,  and depreciation and amortization of
approximately  $187,000.  Changes in operating assets and liabilities  generated
approximately  $75,000 of cash during 2004. For 2003, the Company had a net loss
of  approximately  ($8,618,000).  This  included a reversal  of a portion of the
reserved  note to its former CEO of  approximately  ($323,000)  net of  interest
reserved of  approximately  $15,000,  facility  related  cash  payments  charged
against  restructuring  reserves  of  approximately  ($344,000),  an increase in
restricted  cash from a vendor  agreement of  ($50,000),  a reserve  against the
Company's  patent  assets  of   approximately   $367,000  and  depreciation  and
amortization  of  approximately  $285,000.   Changes  in  operating  assets  and
liabilities generated approximately $967,000 of cash during 2003.

Net cash  generated/(used) in investing activities was approximately  $4,650,000
and $(1,291,000) for 2004 and 2003,  respectively.  The principal source of cash
during 2004 was proceeds from the sale of the Company's  investment in Evergreen
Solar,  Inc. of  approximately  $4,753,000 and the sale of capital  equipment of
approximately  $18,000,  partially  offset by the receipt of dividends  from the
Evergreen investment, paid in stock, of approximately $(90,000) and the purchase
of capital  equipment of  approximately  ($31,000).  The principal  uses of cash
during  2003  were   primarily   related  to  an   investment  in  Evergreen  of
($1,100,000),  increases  in other  assets  totaling  approximately  ($236,000),
purchase  of capital  equipment  of  approximately  ($8,000)  and the  principal
sources of cash were from the sale of certain  impaired  machinery and equipment
of the Company in the amount of approximately $53,000.

Net cash  generated/(used) by financing activities was approximately  ($297,000)
and  $35,000  for  2004 and  2003,  respectively.  For  2004,  the cash  used by
financing  activities  included prepaid financing costs related to the Company's
financing  activities of approximately  $(328,000),  offset by cash generated of
approximately $27,000 related to the exercise of stock options and approximately
$4,000 for shares issued under the employee  stock  purchase plan. For 2003, the
cash used in financing  activities  related to  repayment  of capital  leases of
approximately ($200,000),  offset by cash proceeds from the exercise of employee
stock  options of  approximately  $234,000  and the  issuance of stock under the
employee stock purchase plan of approximately $1,000.

The Company must raise additional  equity to execute its business plan. Based on
the  Company's  rate of  expenditure  of cash  and the  additional  expenditures
expected in support of its business  plan,  the Company has  sufficient  cash to
fund operations through approximately May, 2005. The Company will need to obtain
an equity investment as soon as practicable in 2005 to fund:

o    continuing as a going concern;
o    completion of the state demonstration contracts in California and New York;
o    ongoing research and development of the Smart Energy Matrix;
o    working capital requirements; and
o    developing new business

In the event that the  Company  elects to begin full  scale  development  of its
Smart  Energy  Matrix  flywheel  systems,  the amount of equity  required  would
increase substantially.

As part of the Company's  new business  development,  it is actively  evaluating
possible  acquisitions  of  enterprises or  technologies  that it would consider
synergistic  from a  market,  technology  or  product  perspective.  Efforts  to
identify  opportunities and perform due diligence including legal and audit fees
on  acquisition  possibilities  will  continue  to be a use of cash in 2005  and
beyond.

Inasmuch  as the  Company is not  expecting  to become  profitable  or cash flow
positive  until at least 2008,  its ability to continue as a going  concern will
depend on its ability to raise additional  capital.  The Company may not be able
to raise this capital at all, or if it is able to do so, it may be on terms that
are  adverse  to  shareholders.  The  Company  believes  that it cannot use debt
financing to meet its cash requirements.


<PAGE>

<TABLE>
<CAPTION>

                                    Cash Payments Due During the Year Ended December 31,
                               ----------------------------------------------------------------
Description of Commitment          2005            2006             2007          Thereafter          Total
---------------------------    -------------   -------------    -------------    --------------     -----------
<S>                                 <C>             <C>              <C>        <C>                  <C>
Operating leases ..........         500,359         529,413          397,059                 -       1,426,831
Purchase obligations ......         252,275               -                -                 -         252,275
                               -------------   -------------    -------------    --------------     -----------
Total Commitments                   752,634         529,413          397,059                 -       1,679,106
                               =============   =============    =============    ==============     ===========
</TABLE>

The amounts listed for operating leases represent  payments for the occupancy of
the  Company's  principal   executive  offices,   laboratory  and  manufacturing
facilities  located in Wilmington,  Massachusetts.  The Company's  commitment on
this  lease is  secured  by an  irrevocable  letter of  credit in the  amount of
$310,011.  A cash deposit  secures  this letter of credit.  The Company also has
non-cancelable  purchase  obligations  that include firm orders with vendors for
materials relating to its inverter products.

Investments

The Company may make  investments in companies for strategic  business  reasons.
Because the Company's primary  motivation in making these investments may not be
to realize a profit on the investment  itself, but rather to expand its business
prospects,  these investments may lack any financial return to the Company,  may
result in a loss of principal and may lack liquidity.

On March 24,  2003,  the Company  purchased,  for  approximately  $146,000,  the
inverter electronics technologies of Advanced Energy Systems, Inc. to strengthen
its entry into the renewable energy market.

On May 15, 2003, the Company invested  $1,000,000 in Series A Preferred Stock of
Evergreen  Solar,  Inc., a public company that  specializes in renewable  energy
sources,  in order to develop a strategic  relationship  with that company.  The
Company's  investment  was  part  of a  larger  financing  provided  by  several
investors.  The  Company  made its  investment  on the same  terms as the  other
investors in this financing, except that the Company was permitted to purchase a
three-year warrant for $100,000  exercisable for 2,400,000 shares of Evergreen's
common stock.  Evergreen's  financing was a private  placement of $29,475,000 of
Series A  Preferred  Stock and the  above  warrant.  Perseus  2000,  L.L.C.,  an
affiliate  of  one of  the  Company's  stockholders,  Perseus  Capital,  L.L.C.,
invested $3 million in Evergreen's  Series A Preferred  Stock in this financing.
Mr. Philip J. Deutch and Mr. Kenneth M. Socha, members of the Board of Directors
of  the  Company,   are  Managing   Director  and  Senior   Managing   Director,
respectively,  of Perseus, L.L.C., and Mr. Deutch led the Evergreen Solar Series
A Preferred financing and is one of four individuals from the Evergreen investor
group to be added to the Board of  Directors  of  Evergreen.  During  2004,  the
Company sold its Evergreen Solar, Inc. investment for approximately  $4,753,000.
Messrs.  Deutch and Socha  disclosed their possible  conflict  relating to these
transactions  and abstained  from voting on the purchase or sale of  Evergreen's
securities.  In  addition,  Mr.  Deutch  has not taken  part in any  discussions
concerning  the  purchase  or  sale  of  the  Evergreen   investment.   Beacon's
participation in the transaction was evaluated,  debated and approved by all the
disinterested  directors of the Company, after full disclosure of relevant facts
and circumstances.

Investments  such  as  those  made  in  Evergreen  and  the  acquisition  of the
intellectual  properties of Advanced Energy Systems may accelerate the Company's
need to raise capital. The Company may not be able to raise this capital at all,
or if it is able to do so, it may be on terms  that are  extremely  dilutive  to
shareholders.

Inflation

The Company's operations have not been materially affected by inflation.

<PAGE>

Certain Factors Which May Affect Future Results

THE COMPANY HAS A HISTORY OF LOSSES AND ANTICIPATES FUTURE LOSSES.

As  shown  in  the  consolidated  financial  statements,  the  Company  incurred
significant  losses from operations of $5,330,000,  $8,618,000,  and $20,839,000
and cash decreases of $3,812,000,  $8,957,000, and $16,379,000, during the years
ended December 31, 2004, 2003, and 2002, respectively.  The Company has incurred
net losses in each year since its inception in 1997. The Company is unsure if or
when it will become profitable. The size of its net losses will depend, in part,
on the growth rate of its revenues and the level of its expenses.

The Company expects future  revenues to come from services  related to its Smart
Energy  Matrix,  for  which it has no  revenues  to date.  The  timing of future
revenues, if any, is uncertain.

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

THE  COMPANY  WILL HAVE  LIMITED  REVENUES  IN THE NEAR  TERM.  UNLESS IT RAISES
ADDITIONAL CAPITAL TO OPERATE ITS BUSINESS,  IT MAY NOT BE ABLE TO CONTINUE AS A
GOING  CONCERN,  AS ITS CASH  BALANCES ARE  SUFFICIENT TO FUND  OPERATIONS  ONLY
THROUGH APPROXIMATELY MAY 2005.

The Company  intends to focus on further  development of the Smart Energy Matrix
to provide frequency  regulation services and this product will not be available
for revenues in the near-term. For the foreseeable future, the Company will have
limited  revenues,  if any, since the Company has not generated any revenue from
the Smart  Energy  Matrix.  The Company  has  incurred  significant  losses from
operations since its inception. The Company had approximately $5,097,000 of cash
and cash  equivalents on hand at December 31, 2004,  which the Company  believes
will be sufficient  to meet its working  capital and capital  expenditure  needs
only through May 2005.

Thereafter,  the Company will require  substantial funds to conduct research and
development  activities,  market its  products  and  services,  and increase its
sales.  The Company  anticipates  that such funds will be obtained from external
sources and intends to seek additional equity or debt to fund future operations.
However,  the Company's actual capital requirements will depend on many factors.
If the Company experiences unanticipated cash requirements,  it may need to seek
additional sources of funding, which may not be available on favorable terms, if
at all.  Such  additional  funding may only be  available on terms that may, for
example,  cause  dilution  to  common  stockholders,   and/or  have  liquidation
preferences  and/or  pre-emptive  rights.  If the  Company  does not  succeed in
raising  additional  funds on  acceptable  terms,  it may be unable to  complete
planned  development  for its products and  services.  In addition,  the Company
could be  forced  to take  unattractive  steps,  such as  discontinuing  product
development, limiting the services it can offer, reducing or foregoing sales and
marketing  efforts  and  attractive  business  opportunities,  or  discontinuing
operations entirely.

Miller  Wachman,  LLP, the  Company's  independent  auditors,  have  included an
explanatory  paragraph  related to a going  concern  uncertainty  in their audit
report on the Company's  consolidated  financial  statements for the fiscal year
ended December 31, 2004, which states that "the Company's  recurring losses from
operations and negative cash flows raise  substantial doubt about its ability to
continue as a going concern."

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

THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN MAY NEGATIVELY IMPACT THE
COMPANY'S ABILITY TO OBTAIN CUSTOMERS.

The  uncertainty  of the  Company's  ability to continue as a going  concern may
negatively  impact the Company's  ability to successfully  attract customers for
its products.  Even if customers find the Company's  products  attractive from a
performance  and price  analysis,  the warranty and support  activities that the
Company's long-life products feature may prevent customers from making purchases
in  sufficient  quantities  for the  Company to be able to  function  as a going
concern.

THE COMPANY'S STOCK MAY BE REMOVED FROM THE SMALLCAP MARKET SYSTEM OF NASDAQ.

Their can be no  assurance  that the  Company  will  continue  to meet  Nasdaq's
SmallCap  listing  requirements  in the future and therefore  would no longer be
eligible for quotation on the Nasdaq SmallCap Market. Should the Company's stock
lose its eligibility to be quoted on the SmallCap  Market,  it will seek to have
its stock  quoted on the OTCBB.  While the  Company  knows of no reason that its
stock will not be accepted for  quotation  on OTCBB,  it cannot  guarantee  that
acceptance.  If the Company's stock is not accepted for listing on the OTCBB, it
will be listed on the pink sheets.

THE COMPANY IS A DEVELOPMENT STAGE COMPANY WITH A LIMITED OPERATING HISTORY, AND
IS DEPLOYING UNPROVEN TECHNOLOGIES. IT MAY NEVER BE ABLE TO DEVELOP ANY OF ITS
PRODUCTS OR SERVICES.

The Company has no history of being able to complete development of designs into
economically competitive commercially viable products. Examples of the Company's
challenges in  developing  its  technologies  into  commercial  products are the
following:

o    it may take longer than anticipated to develop these services and products;
o    as there is a cost  associated  with the  development of these  technically
     challenging products, the economic  return may not be  adequate to  pay for
     these costs;
o    it must  reduce  manufacturing  costs  for its  products  to  increase  the
     Company's chances of achieving profitability;
o    it must use design, quality control and careful management of its suppliers
     to ensure that warranty expenses are kept to a minimum; and
o    it will not be able to develop its services and products if it cannot raise
     the necessary financing.

There can be no  assurance  that the Company will be  successful  to allow it to
offer  its  products  at  prices  that  will be  considered  competitive  by its
potential  customers  which may  prevent  widespread  market  acceptance  of its
products or services  and thereby not generate  sufficient  margins to cover its
cost of operations.

THE COMPANY MAY FAIL TO DEVELOP ITS 25KWH GENERATION FLYWHEEL SYSTEM WHICH IS A
CRITICAL REQUIREMENT FOR THE DEVELOPMENT OF THE SMART ENERGY MATRIX.

Although the Company has  successfully  developed  two high energy  systems (the
2kWH and 6kWH) that had similar technical challenges,  there can be no assurance
that the Company  will be able to  successfully  develop the 25kWH  system.  The
successful  development of the Company's new 25kWh flywheel system, which is the
flywheel  system  that  will  be  used  in the  Smart  Energy  Matrix,  involves
significant technological and cost challenges, including:

o    it may take longer to develop the software and key hardware components such
     as the rim, motor, and bearing system;
o    the Company is relying on single-source  suppliers to supply key components
     to  meet  the  Company's  engineering  requirements,  cost  objectives  and
     development and production schedules. Specifically:
     o    the  composite  rim,  which has four times more volume than the rim in
          the 6kWh flywheel product;
     o    a high speed, vacuum friendly, permanent magnet, high power motor with
          overall dimensions that will not adversely affect rotor dynamics; and
     o    an active  magnetic  bearing  system that  supports the rotor over the
          entire speed range.
o    the Company's ability to develop cost effective designs on schedule for:
     o    rotor-cooling scheme to abate overheating during operation.
     o    cost effective balance procedure to ensure acceptable vibration levels
          at all speeds.
     o    touchdown  bearing  system  to  stabilize  the rotor  during  abnormal
          conditions such as an earthquake.
o    the ability to ramp up and maintain production rates.
o    the cost of developing key components that have significant technical risk.
o    the quality and cost control from key suppliers.
o    the manufacturing  costs for the flywheel's rotor assembly (shaft, hub, and
     rim), bearing system, and related control  electronics must be cost reduced
     to increase the Company's chance of profitability.

There can be no assurance that the Company will be successful. If the Company is
not successful it will not be able to develop its Smart Energy Matrix.

THE COMPANY MAY FAIL TO DEVELOP THE SMART ENERGY MATRIX.

The Company's Smart Energy Matrix will integrate up to ten 25kWh flywheels into
a common 40 foot shipping container. This effort will pose significant
technological and cost challenges. Major risks include:

o    locating a suitable  supplier to modify the  structure of a standard  ocean
     shipping container to the Company's engineering requirements;
o    locating  contract  manufacturing  capability  to  install  the  flywheels,
     control electronics,  and ancillary equipment,  then perform final test and
     deliver completed Smart Energy Matrix to the end user;
o    containing the cost of modifying the ocean  container and assembly and test
     of components;
o    resolving flywheel vibration transference from one flywheel to another;
o    transporting  the Smart Energy Matrix safely over the open road to customer
     locations;
o    meeting the technical requirements for interconnection to the utility grid;
o    developing  a  communication  and  control  system  adequate  to  meet  the
     performance standards of the grid managers;
o    ensuring consistent quality from key suppliers;
o    designing flywheel  accessibility in the Smart Energy Matrix for repair and
     cost of field service; and
o    reducing the cost of transportation to customer site.

ALTHOUGH THE MARKET FOR FREQUENCY  REGULATION  SERVICES IS LARGE AND GROWING THE
COMPANY HAS NOT DEMONSTRATED ITS ABILITY TO SELL INTO THAT MARKET.

The Company  believes that the use of its Smart Energy Matrix will be successful
in the  frequency  regulation  market.  However,  this market is being served by
well-known  utilities and independent  service  providers that use  conventional
generators and that have far greater resources than the Company. These utilities
and independent  service  providers are primarily  focused on the sale of energy
and provide  frequency  regulation  services  as a secondary  source of revenue.
Companies that are currently  providing  frequency  regulation include Allegheny
Energy Supply Company, Commonwealth Chesapeake Company, Dominion Virginia Power,
Ingenco Wholesale Power, NRG Power Marketing and Reliant Energy Services.

Although the Company believes that the products and services it plans to provide
by using its products  offer greater  effectiveness  than  generators  and could
produce  positive   investment   returns  for  the  Company  and  perhaps  other
independent  service providers,  there can be no assurance that the Company will
be able to  establish  its  products or services in that  market.  To date,  the
Company has not  completed  any  services or product  sales of the Smart  Energy
Matrix.

THERE MAY BE ONLY A MODEST NUMBER OF POTENTIAL CUSTOMERS FOR THE COMPANY'S
PRODUCTS AND SERVICES.

There may only be a limited  number of  potential  customers  for the  Company's
products  and  services,  in which case the Company  will be subject to the risk
that the loss of, or reduced  purchases by, any single  customer could adversely
affect its business.

THE COMPANY  MAY NOT BE ABLE TO REDUCE ITS  PRODUCT  AND SERVICE  COST ENOUGH TO
MAKE ITS PRICES  COMPETITIVE  AND MAY NOT BE ABLE TO REALIZE NEEDED VOLUMES WITH
SUFFICIENT MARGINS TO COVER ITS COSTS OF OPERATIONS.

There can be no assurance  that the Company will be  successful  in lowering its
production  costs through  improved product designs or volume discounts to allow
it to offer its products at prices that will be  considered  competitive  by its
potential  customers.  If the  Company  is not able to  offer  its  products  or
services at competitive  prices this may prevent widespread market acceptance of
its products or services and thereby not  generate  sufficient  margins to cover
its cost of operations.

THE COMPANY'S STOCKHOLDERS MAY BE ADVERSELY AFFECTED IF THE COMPANY ISSUES
ADDITIONAL EQUITY SECURITIES TO OBTAIN FINANCING.

If the Company raises additional funds by issuing  additional equity securities,
existing  stockholders may be adversely  affected because new investors may have
superior  rights  than  current  shareholders  and current  shareholders  may be
diluted.

IF THE COMPANY IS UNABLE TO INCREASE ITS SALES OF INVERTER PRODUCTS, IT MAY NOT
RECOVER THE CAPITAL THAT IT HAS INVESTED IN DEVELOPING THESE PRODUCTS.

The Company has invested considerable capital in the development of its inverter
products,  including  the Smart Power M5. To date,  the  Company  has  generated
limited revenue based on low volume sales of these  products.  If the Company is
unable to increase sales of its inverter  products in the near future, it may be
forced to abandon these products,  and may  consequently  not be able to recover
the full amount of capital it has invested in developing inverter products.

THE COMPANY HAS LIMITED EXPERIENCE MANUFACTURING FLYWHEEL ENERGY STORAGE SYSTEMS
ON A COMMERCIAL BASIS. IN THE EVENT OF SIGNIFICANT SALES, THE COMPANY WILL NEED
TO DEVELOP OR OBTAIN MANUFACTURING CAPACITY FOR ITS PRODUCTS.

Should the Company  experience  significant  customer demand for its products or
services,  it will need to  develop  or obtain  manufacturing  capacity  to meet
quality, profitability and delivery schedules. The Company may need to establish
additional  manufacturing  facilities,  expand its current  facilities or expand
third-party manufacturing. The Company has limited experience in the manufacture
of flywheel or inverter  systems and there can be no  assurance  that it will be
able to accomplish these tasks, if necessary, on a timely basis to meet customer
demand or at all.  The Company  has taken  actions to  conserve  cash  including
idling its manufacturing capabilities through headcount reduction,  delaying the
development  of its  manufacturing  process  documentation  and halting  capital
build-out.  The Company will not achieve  profitability  if it cannot develop or
obtain efficient,  low-cost manufacturing capabilities and processes, and locate
suppliers that will enable the Company to meet the quality, price,  engineering,
design  and  production  standards  or  volumes  required  to meet  its  product
commercialization  schedule,  if any,  or to  satisfy  the  requirements  of its
customers or the market generally.

IT IS DIFFICULT TO EVALUATE THE COMPANY AND TO PREDICT ITS FUTURE PERFORMANCE
BECAUSE OF ITS SHORT OPERATING HISTORY AND THE FACT THAT IT IS A DEVELOPMENT
STAGE COMPANY.

The Company is a development stage entity and has a limited  operating  history.
Unless the Company can achieve  significant  market acceptance of its current or
future  products at volumes and with margins that allow it to cover its costs of
operations, the Company may never advance beyond the start-up phase.

See  "Business,"  "Selected  Financial  Data" and  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

BECAUSE THE COMPANY DEPENDS ON THIRD-PARTY SUPPLIERS FOR THE DEVELOPMENT AND
SUPPLY OF KEY COMPONENTS FOR ITS PRODUCTS, IT COULD EXPERIENCE DISRUPTIONS IN
SUPPLY THAT COULD DELAY OR DECREASE ITS REVENUES.

The Company's business, prospects, results of operations, or financial condition
could be  harmed if it is unable to  maintain  satisfactory  relationships  with
suppliers.  To accelerate  development time and reduce capital  investment,  the
Company  relies on  third-party  suppliers  for  several key  components  of its
systems.  The Company does not have  contracts with all of these  suppliers.  If
these suppliers should fail to timely deliver components that meet the Company's
quality,  quantity,  or  cost  standards,  then  the  Company  could  experience
production delays or cost increases.  Because certain key components are complex
and difficult to manufacture  and require long lead times,  the Company may have
difficulty finding alternative suppliers on a timely or cost effective basis. As
a result,  the Company could  experience  shortages in supply or be unable to be
cost competitive in the markets it is pursuing.

THE COMPANY'S FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED BY ITS NEED TO
HIRE AND RETAIN KEY SALES PERSONNEL.

Because the Company's future success depends to a large degree on the success of
its sales  organization,  the  Company's  ability to meet its business plan will
depend  significantly  on whether it can  attract  and retain  sales  personnel.
Competition  for  skilled  sales  people is intense  and the  Company may not be
successful  in attracting  and  retaining the sales talent  necessary to develop
markets and achieve sufficient sales volume to operate profitably.

THE COMPANY'S FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED IF IT IS UNABLE
TO RETAIN KEY EXECUTIVE OFFICERS.

Because the Company's future success depends to a large degree on the management
provided by the executive officers,  the Company's  competitiveness  will depend
significantly  on whether  it can retain  members  of its  executive  team.  The
Company has  employment  agreements  with  Messrs.  Spiezio,  Vice  President of
Finance, Chief Financial Officer, Treasurer and Secretary; and Lazarewicz,  Vice
President and Chief  Technical  Officer.  The employment  agreement  between the
Company  and  Mr.  Capp,  CEO and  President,  expired  on  December  31,  2004.
Negotiations  between  Mr. Capp and the  Company  are  ongoing.  There can be no
assurance that an agreement will be reached with Mr. Capp.

The Company's ability to effectively  implement its business plan depends,  to a
significant extent, on its ability to retain its executive  officers.  There can
be no assurance  that the Company  will be  successful  in  retaining  its other
executive officers.

If the Company  cannot reach  agreement with Mr. Capp and he elects to leave the
Company, pursuant to the terms of the expired employment agreement, if he ceases
to be an employee  following  December 31, 2004, the Company is obligated to pay
him a monthly amount until December 31, 2005, equal to the sum of one-twelfth of
his base salary at the time of expiration plus  one-twelfth of his bonus for the
most recent fiscal year. No monthly payment is required after December 31, 2005.
If the at-will employment continues after December 31, 2005 but then terminates,
no such monthly  amount will be paid.  As of December 31, 2004,  Mr. Capp's base
salary was $240,000  annually.  Based on the closing bid price of the  Company's
common stock as of December 31, 2004 as reported on The NASDAQ SmallCap  Market,
Mr. Capp received a bonus in the amount of $236,800, paid in the form of a grant
of 251,391 restricted stock units,  pursuant to the Company's Second Amended and
Restated 1998 Stock Incentive Plan.

THE COMPANY'S FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED BY ITS NEED TO
RETAIN AND ATTRACT TECHNICAL PERSONNEL.

The Company's  future success depends to a large degree on the technical  skills
of its  engineering  staff  and its  ability  to  attract  technical  personnel.
Competition for skilled  technical  professionals is intense and the Company may
not be successful in  attracting  and retaining the talent  necessary to design,
develop and manufacture its flywheel products.

FAILURE TO PROTECT THE COMPANY'S INTELLECTUAL PROPERTY COULD IMPAIR ITS
COMPETITIVE POSITION.

The Company cannot  provide  assurance that it has or will be able to maintain a
significant  proprietary position on the basic technologies used in its flywheel
systems.  The  Company's  ability to  compete  effectively  against  alternative
technologies will be affected by its ability to protect proprietary  technology,
systems designs and manufacturing  processes.  The Company does not know whether
any of its pending or future patent  applications under which it has rights will
issue,  or, in the case of  patents  issued  or to be  issued,  that the  claims
allowed are or will be sufficiently broad to protect the Company's technology or
processes from  competitors.  Even if all the Company's patent  applications are
issued and are sufficiently  broad,  they may be challenged or invalidated.  The
Company  could  incur  substantial  costs in  prosecuting  or  defending  patent
infringement  suits,  and such suits would divert funds and resources that could
be used in the Company's business. The Company does not know whether it has been
or will be completely successful in safeguarding and maintaining its proprietary
rights.

Further, the Company's competitors or others may independently develop or patent
technologies or processes that are substantially equivalent or superior to those
of the Company. If the Company is found to be infringing on third-party patents,
the Company does not know whether it will be able to obtain licenses to use such
patents on acceptable  terms, if at all. Failure to obtain needed licenses could
delay or prevent the development, manufacture or sale of the Company's systems.

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

THE SHARE PRICES OF COMPANIES IN THE COMPANY'S SECTOR HAVE BEEN HIGHLY VOLATILE
AND THE COMPANY'S SHARE PRICE COULD BE SUBJECT TO EXTREME PRICE FLUCTUATIONS.

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

THERE MAY BE OTHER TECHNOLOGIES UNDER DEVELOPMENT THAT COULD PREVENT THE COMPANY
FROM ACHIEVING OR SUSTAINING ITS ABILITY TO SELL PRODUCTS OR TO DO SO AT PRICES
THAT WILL YIELD PROFITS.

There are a number of  technology  companies in various  stages of  development,
there may be emerging  technologies that the Company is unaware of and there may
be combinations of technologies in the future. The Company cannot give assurance
that some or all of its target  markets and pricing  plans will not be displaced
by these emerging technologies.

THE COMPANY MAY INVEST CASH IN OTHER COMPANIES IN ITS SECTOR TO INCREASE
SHAREHOLDER VALUE THROUGH STRATEGIC ALLIANCES OR RETURN ON INVESTMENT WHICH DO
NOT CREATE GAINS AND THEREFORE REDUCE SHAREHOLDER VALUE.

Given the Company's financial position,  its ability to make cash investments in
other  companies  is very  limited at this time.  However,  in the  future,  the
Company  may make cash  investments  in other  companies  in its  sector to gain
strategic  alliances,  channels to market or appreciation in stock value.  These
investments may not increase  shareholder  value.  Given the volatility of share
prices for  companies in this sector,  general  economic  conditions  and market
fluctuations in general, the market price of investments may decrease and reduce
shareholder value.

THE COMPANY MAY MAKE ACQUISITIONS OR MERGERS THAT DO NOT PRODUCE REVENUES AND
CASH FLOW AS EXPECTED AND MAY THEREFORE FURTHER THE COMPANY'S NEED FOR ADDITION
CASH TO SUSTAIN ITS OPERATIONS.

The Company may identify  acquisitions  or mergers that it believes will provide
revenues and cash flow.  There can be no assurance  that these  acquisitions  or
mergers will be completed and if completed be successful.

THE COMPANY MAY MAKE ACQUISITIONS OR MERGERS THAT REDUCE THE COMPANY'S ABILITY
TO OBTAIN ADDITIONAL CAPITAL TO SUSTAIN THE COMBINED OPERATIONS.

The Company may make  acquisitions  or mergers  that it  believes  will  provide
improved  ability  to  obtain   additional   capital  to  sustain  the  combined
operations. There can be no assurance that these acquisitions or mergers will be
perceived  as positive by  investors  and  therefore  investments  necessary  to
sustain operations may not be realized.

THE COMPANY HAS LIMITED EXPERIENCE IN ACQUISITIONS AND MERGERS AND MAY NOT BE
SUCCESSFUL IN IDENTIFYING APPROPRIATE ACQUISITIONS OR MERGERS OR BE UNSUCCESSFUL
IN INTEGRATING THESE ENTITIES.

The  Company  and  its  management   have  limited   experience  in  evaluating,
integrating  and  coordinating  the  acquisition  or  merger  of  companies  and
therefore may not be successful in this effort.

ANY WEAKNESSES IDENTIFIED IN THE COMPANY'S INTERNAL CONTROLS AS PART OF THE
EVALUATION BEING UNDERTAKEN BY THE COMPANY AND ITS INDEPENDENT PUBLIC ACCOUNTANT
PURSUANT TO SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE AN ADVERSE
EFFECT ON THE COMPANY'S BUSINESS.

Section 404 of the  Sarbanes-Oxley  Act of 2002 requires that companies evaluate
and report on their systems of internal  control over  financial  reporting.  In
addition,  the independent  accountants must report on management's  evaluation.
The Company is in the process of documenting  and testing its system of internal
control over  financial  reporting to provide the basis for its report.  At this
time, the Company is aware that its financial reporting  information systems and
point-of-sale information systems require a significant level of manual controls
to ensure the accurate  reporting  of its results of  operations  and  financial
position.  Upon  the  completion  of its  review,  certain  deficiencies  may be
discovered  that will  require  remediation.  This  remediation  may require the
implementation  of  certain   information  systems  operating  protocols  and/or
additional  manual  controls,  the costs of which could have a material  adverse
effect on the Company's business, financial condition and results of operations.
Due to the ongoing  evaluation and testing of The Company's  internal  controls,
there can be no  assurance  that there may not be  significant  deficiencies  or
material  weaknesses  that would be required to be reported.  In  addition,  the
Company  expects  the  evaluation  process  and  any  required  remediation,  if
applicable,  to  increase  its  accounting,  legal  and other  costs and  divert
management resources from core business operations.

ONGOING COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002 MAY REQUIRE ADDITIONAL
PERSONNEL OR SYSTEMS CHANGES.

The Company's  business  plan may not have  sufficient  resources  identified to
insure ongoing compliance with the Sarbanes-Oxley Act of 2002. Given the limited
size of the Company and its cash  position  the Company may not have  sufficient
resources to satisfy the  segregation  of duties  required for  compliance  with
Section 404 of the Sarbanes-Oxley Act of 2002 or to be compliant the Company may
need to obtain  additional  funding and cash flow positive timing may need to be
extended.

GOVERNMENT REGULATION MAY IMPAIR THE COMPANY'S ABILITY TO MARKET ITS PRODUCTS.

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

TERRORIST ATTACKS HAVE CONTRIBUTED TO ECONOMIC INSTABILITY IN THE UNITED STATES;
CONTINUED TERRORIST ATTACKS, WAR OR OTHER CIVIL DISTURBANCES COULD LEAD TO
FURTHER ECONOMIC INSTABILITY AND DEPRESS THE COMPANY'S STOCK PRICE.

On September 11, 2001, the United States was the target of terrorist  attacks of
unprecedented  scope.  These  attacks  have  caused  instability  in the  global
financial  markets,  and have  contributed  to volatility in the stock prices of
United States publicly traded companies,  such as The Company. These attacks may
lead to armed hostilities or to further acts of terrorism and civil disturbances
in the United  States or  elsewhere,  which may further  contribute  to economic
instability in the United States and could have a material adverse effect on the
Company's business, financial condition and operating results.

PRODUCT LIABILITY CLAIMS AGAINST THE COMPANY COULD RESULT IN SUBSTANTIAL
EXPENSES AND NEGATIVE PUBLICITY THAT COULD IMPAIR SUCCESSFUL MARKETING OF
PRODUCTS.

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

SAFETY FAILURES BY THE COMPANY'S FLYWHEEL PRODUCTS OR THOSE OF ITS COMPETITORS
COULD REDUCE MARKET DEMAND OR ACCEPTANCE FOR FLYWHEEL SERVICES OR PRODUCTS IN
GENERAL.

A serious  accident  involving  either the Company's  flywheels or  competitors'
similar  products  could be a  significant  deterrent to market  acceptance  and
adversely affect the Company's financial  performance.  There is the possibility
of accident with any form of energy storage. In particular,  if a metal flywheel
fails and the stored  energy is released,  the  flywheel  could break apart into
fragments that could be ejected at a high rate of speed.  However, the Company's
flywheels are based on a composite design so that in the event of a failure, its
flywheel will fail in a more benign manner.


Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

The Company's cash equivalents and investments,  all of which have maturities of
less than one year,  could expose the Company to interest rate risk. At December
31, 2004, the Company had  approximately  $60,000 of cash  equivalents that were
held in a non-interest bearing checking account.  Also at December 31, 2004, the
Company  had  approximately  $5,037,000  of cash  equivalents  that were held in
interest-bearing money market accounts at high-quality  financial  institutions.
The fair value of these  investments  approximates  their cost.  A 10% change in
interest rates would change the investment income realized on an annual basis by
approximately $5,000, which the Company does not believe is material.

<PAGE>

Item 8.  Financial Statements and Supplementary Data

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

                                                                           Page

Report of Independent Registered Public Accounting Firm ...................  35

Report of Independent Registered Public Accounting Firm ...................  36

Consolidated Balance Sheets at December 31, 2004 and 2003 .................  37

Consolidated Statements of Operations for the years ended December 31,
  2004, 2003 and 2002 and for the period May 8, 1997 (date of
  inception) to December 31, 2004 .........................................  38

Consolidated Statements of Stockholders' Equity for the years ended
  December 31, 2004, 2003 and 2002 and for the period
  May 8, 1997 (date of inception) to December 31, 2004 ....................  39

Consolidated Statements of Cash Flows for the years ended December 31,
  2004, 2003 and 2002 and for the period May 8, 1997 (date of
  inception) to December 31, 2004 .........................................  43

Notes to Consolidated Financial Statements ................................  45


<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Stockholders and Board of Directors
of Beacon Power Corporation:

We have  audited the  accompanying  consolidated  balance  sheet of Beacon Power
Corporation and Subsidiaries (the "Company") (a development stage company) as of
December  31,  2004,  and the related  consolidated  statements  of  operations,
stockholders'  equity and cash flows for the year then ended and the  cumulative
statements  of operation,  stockholders'  equity and cash flows from May 8, 1997
(date of inception)  through  December 31, 2004.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements  based  on our  audit.  We did  not  audit  the  Company's  financial
statements  before 2004.  Those  statements were audited by other auditors whose
report has been  furnished to us and, our opinion,  insofar as it relates to the
cumulative  amounts  included from May 8, 1997 (the date of inception),  through
December 31, 2003 is based solely on the report of other auditors.

We conducted our audit in accordance  with the auditing  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audit includes  consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
consolidated  financial  statements.  An audit includes assessing the accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of Beacon  Power
Corporation  and  subsidiaries  as of December 31, 2004 and the results of their
operations  and  their  cash  flows  for the year  ended  December  31,  2004 in
conformity with accounting principles generally accepted in the United States of
America.

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

/s/ Miller Wachman LLP

Boston, Massachusetts
February 18, 2005

<PAGE>


INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of
Beacon Power Corporation:

We have audited the  accompanying  consolidated  balance  sheets of Beacon Power
Corporation and subsidiary  (the "Company") (a development  stage company) as of
December  31,  2003,  and the related  consolidated  statements  of  operations,
stockholders'  equity  (deficiency)  and cash flows for each of the two years in
the period ended  December 31, 2003 and for the period from May 8, 1997 (date of
inception)  through December 31, 2003. These consolidated  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of Beacon  Power
Corporation  and  subsidiary  as of  December  31, 2003 and the results of their
operations  and their cash  flows for each of the two years in the period  ended
December  31, 2003 and the period from May 8, 1997 (date of  inception)  through
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.

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

As discussed in Note 15, the  accompanying  2003 and 2002  financial  statements
have been restated.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 25, 2004
(May 12, 2004 as to Note 15)

<PAGE>

<TABLE>
<CAPTION>

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

                                                                          December 31,
                                                                       2004             2003
                                                               -------------    -------------
Assets
Current assets:
<S>                                                            <C>              <C>
     Cash and cash equivalents .............................   $   5,097,188    $   8,909,261
     Accounts receivable, trade ............................          52,105          128,133
     Inventory .............................................         222,593          238,684
     Prepaid expenses and other current assets .............         817,396          773,226
     Investments in available-for-sale securities ..........            --          1,163,758
                                                               -------------    -------------
         Total current assets ..............................       6,189,282       11,213,062

Property and equipment, net ................................         258,647          357,180
Restricted cash ............................................         310,011          405,232
Other assets and deferred financing costs ..................         327,646           91,325
                                                               -------------    -------------

Total assets ...............................................   $   7,085,586    $  12,066,799
                                                               =============    =============

Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable ......................................   $     389,189    $     148,075
     Accrued compensation and benefits .....................         130,609          156,000
     Other accrued expenses ................................         393,569          664,527
     Restructuring reserve .................................       1,062,644        1,406,191
                                                               -------------    -------------
         Total current liabilities .........................       1,976,011        2,374,793
                                                               -------------    -------------

Commitments and contingent liabilities (Note 4)

Stockholders' equity:
     Preferred Stock, $.01 par value; 10,000,000 shares
     authorized; no shares issued or outstanding ...........            --               --
     Common stock, $.01 par value; 110,000,000 shares
     authorized; 43,788,810 and 43,107,526 shares issued and
     outstanding at December 31, 2004 and 2003, respectively         437,888          431,075
     Deferred stock compensation ...........................        (707,167)        (832,639)
     Additional paid-in-capital ............................     134,411,911      133,796,667
     Deficit accumulated during the development stage ......    (128,933,397)    (123,603,437)
     Treasury stock, 132,000 shares, at cost ...............         (99,660)         (99,660)
                                                               -------------    -------------
         Total stockholders' equity ........................       5,109,575        9,692,006
                                                               -------------    -------------

Total liabilities and stockholders' equity .................   $   7,085,586    $  12,066,799
                                                               =============    =============

         See notes to consolidated financial statements.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                    BEACON POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                      Consolidated Statements of Operations
                                                                                               Cumulative from
                                                                                                  May 8, 1997
                                                                                              (date of inception)
                                                                                              through December 31,
                                                    2004             2003             2002           2004
                                             -------------    -------------    -------------    -------------
<S>                                          <C>              <C>              <C>              <C>
Revenue ..................................   $     324,694    $        --      $        --      $     875,878
Cost of goods sold .......................       1,457,869             --               --          1,457,869
                                             -------------    -------------    -------------    -------------
Gross profit .............................      (1,133,175)            --               --           (581,991)
                                             -------------    -------------    -------------    -------------

Operating expenses:
     Selling, general and administrative .       4,196,371        4,936,575        5,636,903       32,255,974
     Research and development ............       3,532,059        3,549,592        7,129,880       53,875,545
     Loss on sales commitments ...........            --               --               --            375,974
     Depreciation and amortization .......         187,230          284,733        1,644,230        4,137,966
     Restructuring charges ...............            --            366,788        2,159,280        2,159,280
     Loss on impairment of assets ........            --               --          4,297,128        4,663,916
                                             -------------    -------------    -------------    -------------
           Total operating expenses ......       7,915,660        9,137,688       20,867,421       97,468,655
                                             -------------    -------------    -------------    -------------
Loss from operations .....................      (9,048,835)      (9,137,688)     (20,867,421)     (98,050,646)
                                             -------------    -------------    -------------    -------------

Other income:
Interest income ..........................         102,908          217,964          504,034        3,882,875
Interest expense .........................            --             (6,713)         (41,932)      (1,093,703)
Gain on sale of investment ...............       3,562,582             --               --          3,562,582
Other income (expense) ...................          53,385          308,424         (433,933)        (228,311)
                                             -------------    -------------    -------------    -------------
     Total other income (expense), net ...       3,718,875          519,675           28,169        6,123,443
                                             -------------    -------------    -------------    -------------
Net loss .................................      (5,329,960)      (8,618,013)     (20,839,252)     (91,927,203)

Preferred stock dividends ................            --               --               --        (36,825,680)
Accretion of convertible preferred stock .            --               --               --           (113,014)
                                             -------------    -------------    -------------    -------------
Loss to common shareholders ..............   $  (5,329,960)   $  (8,618,013)   $ (20,839,252)   $(128,865,897)
                                             =============    =============    =============    =============

Loss per share, basic and diluted ........   $       (0.12)   $       (0.20)   $       (0.49)
                                             =============    =============    =============
Weighted-average common shares outstanding      43,452,727       42,885,675       42,797,072
                                             =============    =============    =============

              See notes to consolidated financial statements.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


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

                                                  Class A                Class C                                   Deferred
                                              Preferred Stock        Preferred Stock          Common Stock        Consulting
                                            Shares       Amount    Shares     Amount      Shares       Amount       Expense
                                          ------------ ----------- -------- ----------- ------------ ----------- --------------

<S>                                        <C>         <C>         <C>      <C>         <C>          <C>         <C>
BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION) ............................             -      $    -        -      $    -            -      $    -        $     -


Issuance of Founder's Shares ..........             -           -        -           -    6,750,000      67,500              -

Issuance of Class A preferred stock ...     1,390,000   5,662,500        -           -            -           -      (275,000)
Recapitalization ......................     3,373,313      67,466        -           -  (6,746,626)    (67,466)              -
Rounding for fractional shares ........             -           -        -           -          (2)           -              -
Issuance of Class C preferred and
common stock ..........................             -           -        6      29,866       13,476         134              -
Deferred Consulting ...................             -           -        -           -            -           -        773,284
Series A Issuance for Consulting ......             -           -        -           -      134,464       1,345      (498,284)
Repayment of subscription receivable ..             -           -        -           -            -           -              -
Issuance of Series A preferred stock
for services and interest on loans ....         4,594      11,485        -           -            -           -              -
Dividend on preferred stock ...........             -           -        -           -            -           -              -
Accretion of redeemable preferred stock
to redemption value ...................             -           -        -           -            -           -              -
Deferred Stock Compensation ...........             -           -        -           -            -           -              -
Issuance of stock options for
consulting services ...................             -           -        -           -            -           -              -
Issuance of Stock Options to settle
lawsuit ...............................             -           -        -           -            -           -              -
Amortization of Deferred Stock
Compensation ..........................             -           -        -           -            -           -              -
Issuance of warrants ..................             -           -        -           -            -           -              -
Proceeds from stock offering, net of
related expenses ......................             -           -        -           -    9,200,000      92,000              -
Conversion of Series A preferred stock    (4,767,907)  (5,741,451)       -           -    9,535,814      95,358              -
Conversion of Series C preferred stock              -           -      (6)    (29,866)           12           -              -
Conversion of convertible preferred
stock .................................             -           -        -           -   19,823,704     198,237              -
Payment of accrued dividend ...........             -           -        -           -      859,330       8,593              -
Cashless Warrant exercise .............             -           -        -           -    1,982,876      19,829              -
Exercise of Stock Options .............             -           -        -           -    1,162,852      11,629              -
Shares issued through ESPP ............             -           -        -           -       54,956         550              -
Option extension for CEO ..............             -           -        -           -            -           -              -
Option extension for severed employees              -           -        -           -            -           -              -
Net loss ..............................             -           -        -           -            -           -              -
                                          ------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2001 ............             -      $    -        -      $    -   42,770,856   $ 427,709        $     -

Deferred Stock Compensation revaluation             -           -        -           -            -           -              -
Amortization of Deferred Stock
Compensation ..........................             -           -        -           -            -           -              -
Shares issued through ESPP ............             -           -        -           -       42,041         420              -
Purchase of Treasury Stock ............             -           -        -           -            -           -              -
Net loss ..............................             -           -        -           -            -           -              -
                                          ------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2002 ............             -      $    -        -      $    -   42,812,897   $ 428,129        $     -

Deferred Stock Compensation revaluation             -           -        -           -            -           -              -
Issuance of restricted stock units for
bonus .................................             -           -        -           -            -           -              -
Shares issued through ESPP ............             -           -        -           -        5,494          54              -
Exercise of Stock Options .............             -           -        -           -      289,135       2,892              -
Net loss ..............................             -           -        -           -            -           -              -
                                          ------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2003 ............             -      $    -        -      $    -   43,107,526   $ 431,075        $     -

Deferred Stock Compensation revaluation             -           -        -           -            -           -              -
Issuance of restricted stock units for
bonus .................................             -           -        -           -            -           -              -
Amortize deferred stock compensation ..             -           -        -           -      643,160       6,431              -
Shares issued through ESPP ............             -           -        -           -        8,124          82              -
Issuance of non-employee stock options              -           -        -           -            -           -              -
Exercise of Stock Options .............             -           -        -           -       30,000         300              -
Net loss ..............................             -           -        -           -            -           -              -
                                          ------------ ----------- -------- ----------- ------------ ----------- --------------
Balance, December 31, 2004 ............             -      $    -        -      $    -   43,788,810   $ 437,888        $     -
                                          ============ =========== ======== =========== ============ =========== ==============


                                              Deferred       Additional         Stock
                                               Stock           Paid-in     Subscription        Retained        Treasury Stock
                                            Compensation       Capital       Receivable        Deficit       Shares     Amount
                                          ----------------- -------------- ---------------- --------------- --------- -----------

BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION)                                       $       -       $      -         $      -        $      -         -       $   -

Issuance of Founder's Shares ..........                  -              -                -        (67,500)         -           -
Issuance of Class A preferred stock ...                  -              -      (5,000,000)               -         -           -
Recapitalization ......................                  -              -                -               -         -           -
Rounding for fractional shares ........                  -              -                -               -         -           -
Issuance of Class C preferred and
common stock ..........................                  -              -                -               -         -           -
Deferred Consulting ...................                  -              -                -               -         -           -
Series A Issuance for Consulting ......                  -        496,939                -               -         -           -
Repayment of subscription receivable ..                  -              -        5,000,000               -         -           -
Issuance of Series A preferred stock
 for services and interest on loans ...                  -              -                -               -         -           -
Dividend on preferred stock ...........                  -              -                -     (2,245,680)         -           -
Accretion of redeemable preferred stock
  to redemption value .................                  -              -                -       (113,014)         -           -
Deferred Stock Compensation ...........        (1,443,061)      1,443,061                -               -         -           -
Issuance of stock options for
  consulting services .................           (47,892)         47,892                -               -         -           -
Issuance of Stock Options to settle
  lawsuit .............................                  -        303,160                -               -         -           -
Amortization of Deferred Stock
  Compensation ........................          1,279,389              -                -               -         -           -
Issuance of warrants ..................                  -     36,520,366                -    (34,580,000)         -           -
Proceeds from stock offering, net of
  related expenses ....................                  -     49,249,537                -               -         -           -
Conversion of Series A preferred stock                   -      5,646,093                -               -         -           -
Conversion of Series C preferred stock                   -         29,866                -               -         -           -
Conversion of convertible preferred
  stock ...............................                  -     36,496,431                -               -         -           -
Payment of accrued dividend ...........                  -      1,077,714                -               -         -           -
Cashless Warrant exercise .............                  -       (19,829)                -               -         -           -
Exercise of Stock Options .............                  -      1,164,041                -               -         -           -
Shares issued through ESPP ............                  -        109,394                -               -         -           -
Option extension for CEO ..............                  -        315,394                -               -         -           -
Option extension for severed employees                   -         31,197                -               -         -           -
Net loss ..............................                  -              -                -    (57,139,978)         -           -
                                          ----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2001 ............     $    (211,564)  $ 132,911,256         $      -   $(94,146,172)         -       $   -

Deferred Stock Compensation revaluation            173,616      (173,616)                -               -         -           -
Amortization of Deferred Stock
  Compensation ........................             19,535              -                -               -         -           -
Shares issued through ESPP ............                  -         12,885                -               -         -           -
Purchase of Treasury Stock ............                  -              -                -               -   132,000    (99,660)
Net loss ..............................                  -              -                -    (20,839,252)         -           -
                                          ----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2002 ............      $    (18,413)   $132,750,525         $      -  $(114,985,424)   132,000   $(99,660)

Deferred Stock Compensation revaluation           (87,031)         87,031                -               -         -           -
Issuance of restricted stock units for
  bonus ...............................          (727,195)        727,195                -               -         -           -
Shares issued through ESPP ............                  -            911                -               -         -           -
Exercise of Stock Options .............                  -        231,005                -               -         -           -
Net loss ..............................                  -              -                -     (8,618,013)         -           -
                                          ----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2003 ............     $    (832,639)   $133,796,667         $      -  $(123,603,437)   132,000   $(99,660)

Deferred Stock Compensation revaluation             78,083       (78,083)                -               -         -           -
Issuance of restricted stock units for
  bonus ...............................          (679,807)        679,807                -               -         -           -
Amortize deferred stock compensation ..            727,196       (33,022)                -               -         -           -
Shares issued through ESPP ............                  -          3,854                -               -         -           -
Issuance of non-employee stock options                   -         16,288                -               -         -           -
Exercise of Stock Options .............                  -         26,400                -               -         -           -
Net loss ..............................                  -              -                -     (5,329,960)         -           -
                                          ----------------- -------------- ---------------- --------------- --------- -----------
Balance, December 31, 2004 ............      $    (707,167)  $134,411,911         $      -  $(128,933,397)   132,000   $(99,660)
                                          ================= ============== ================ =============== ========= ===========
</TABLE>


                                                Total
                                            Stockholders'
                                               Equity
                                          ----------------

BALANCE AT MAY 8, 1997 (DATE OF
INCEPTION)                                  $            -

Issuance of Founder's Shares ..........                  -
Issuance of Class A preferred stock ...            387,500
Recapitalization ......................                  -
Rounding for fractional shares ........                  -
Issuance of Class C preferred and
common stock ..........................             30,000
Deferred Consulting ...................            773,284
Series A Issuance for Consulting ......                  -
Repayment of subscription receivable ..          5,000,000
Issuance of Series A preferred stock
 for services and interest on loans ...             11,485
Dividend on preferred stock ...........        (2,245,680)
Accretion of redeemable preferred stock
  to redemption value .................          (113,014)
Deferred Stock Compensation ...........                  -
Issuance of stock options for
  consulting services .................                  -
Issuance of Stock Options to settle
  lawsuit .............................            303,160
Amortization of Deferred Stock
  Compensation ........................          1,279,389
Issuance of warrants ..................          1,940,366
Proceeds from stock offering, net of
  related expenses ....................         49,341,537
Conversion of Series A preferred stock                   -
Conversion of Series C preferred stock                   -
Conversion of convertible preferred
  stock ...............................         36,694,668
Payment of accrued dividend ...........          1,086,307
Cashless Warrant exercise .............                  -
Exercise of Stock Options .............          1,175,670
Shares issued through ESPP ............            109,944
Option extension for CEO ..............            315,394
Option extension for severed employees              31,197
Net loss ..............................       (57,139,978)
                                          ----------------
Balance, December 31, 2001 ............     $  38,981,229

Deferred Stock Compensation revaluation                 -
Amortization of Deferred Stock
  Compensation ........................            19,535
Shares issued through ESPP ............            13,305
Purchase of Treasury Stock ............          (99,660)
Net loss ..............................      (20,839,252)
                                          ----------------
Balance, December 31, 2002 ............     $  18,075,157

Deferred Stock Compensation revaluation                 -
Issuance of restricted stock units for
  bonus ...............................                 -
Shares issued through ESPP ............               965
Exercise of Stock Options .............           233,897
Net loss ..............................       (8,618,013)
                                          ----------------
Balance, December 31, 2003 ............     $   9,692,006

Deferred Stock Compensation revaluation                 -
Issuance of restricted stock units for
  bonus ...............................                 -
Amortize deferred stock compensation ..           700,605
Shares issued through ESPP ............             3,936
Issuance of non-employee stock options             16,288
Exercise of Stock Options .............            26,700
Net loss ..............................       (5,329,960)
                                          ----------------
Balance, December 31, 2004 ............     $   5,109,575
                                          ================

                See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>

                    BEACON POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                      Consolidated Statement of Cash Flows
                                                                                                                   Cumulative from
                                                                                                                      May 8, 1997
                                                                                                                 (date of inception)
                                                                                                                   through December
                                                                        2004             2003            2002          31, 2004
                                                                     ------------    ------------    ------------    ------------
Cash flows from operating activities:
<S>                                                                 <C>             <C>             <C>             <C>
     Net (loss) .................................................   $ (5,329,960)   $ (8,618,013)   $(20,839,252)   $(91,927,203)
     Adjustments to reconcile net loss to net cash used in
     operating activities:
        Depreciation and amortization ...........................        187,230         284,734       1,644,230       4,137,967
        Loss on sale of fixed assets ............................         25,301            --            14,481         196,169
        Impairment of assets ....................................         (9,703)        366,788       4,297,128       4,654,213
        Restricted cash .........................................         95,221         (50,000)         45,222        (310,011)
        (Expenses paid) restructuring charge ....................       (343,547)       (343,547)      1,749,738       1,062,644
        Reserve for officers note ...............................        (17,931)       (308,423)        428,398         102,044
        Interest expense relating to issuance of warrants .......           --              --              --           371,000
        Non-cash charge for change in option terms ..............           --              --              --           346,591
        Non-cash charge for settlement of lawsuit ...............           --              --              --           303,160
        Amortization of deferred consulting expense, net ........           --              --              --         1,160,784
        Amortization of deferred stock compensation .............        700,605            --            19,534       1,990,858
        Options and warrants issued for consulting services .....         16,288            --              --         1,585,654
        Services and interest expense paid in preferred
        stock ...................................................           --              --              --            11,485
        Gain on sale of investments .............................     (3,562,582)           --              --        (3,562,582)
     Changes in operating assets and liabilities:
        Accounts receivable .....................................         76,028        (128,133)           --           (52,105)
        Inventory ...............................................         16,091        (238,684)           --          (222,593)
        Prepaid expenses and other current assets ...............        (26,239)      1,310,652      (1,172,448)     (1,019,100)
        Accounts payable ........................................        241,114          70,749        (834,139)        389,189
        Accrued compensation and benefits .......................        (25,391)        (70,623)       (494,507)        130,609
        Accrued interest ........................................           --              --              --           275,560
        Dividend receivable .....................................         63,758         (63,758)           --              --
        Due to related party ....................................           --              --           (35,532)           --
        Other accrued expenses and current liabilities ..........       (270,958)         87,646        (364,219)        402,239
                                                                     ------------    ------------    ------------    ------------
        Net cash used in operating activities ...................     (8,164,675)     (7,700,612)    (15,541,366)    (79,973,428)

Cash flows from investing activities:
     Purchase of investments ....................................        (90,352)     (1,100,000)           --        (1,190,352)
     Sale of investments ........................................      4,752,934            --              --         4,752,934
     Increase in other assets ...................................           --          (236,854)           --          (412,072)
     Purchases of property and equipment ........................        (30,845)         (7,993)       (466,081)     (8,452,553)
     Sale of property and equipment .............................         17,875          53,365            --            71,240
                                                                     ------------    ------------    ------------    ------------
        Net cash used in investing activities ...................      4,649,612      (1,291,482)       (466,081)     (5,230,803)

Cash flows from financing activities:
     Initial public stock offering, net of expenses .............           --              --              --        49,341,537
     Payment of dividends .......................................           --              --              --        (1,159,373)
     Shares issued under employee stock purchase plan ...........          3,936             965          13,305         128,150
     Exercise of employee stock options .........................         26,700         233,897            --         1,436,267
     Issuance of preferred stock ................................           --              --              --        32,868,028
     Repayment of subscription receivable .......................           --              --              --         5,000,000
     Proceeds from capital leases ...............................           --              --              --           495,851
     Repayment of capital leases ................................           --          (200,041)       (340,455)     (1,031,395)
     Prepaid financing costs ....................................       (327,646)           --              --          (327,646)
     Proceeds from notes payable issued to investors ............           --              --              --         3,550,000
                                                                     ------------    ------------    ------------    ------------
        Net cash provided by (used in) financing activities .....       (297,010)         34,821        (327,150)     90,301,419

(Decrease)increase in cash and cash equivalents .................     (3,812,073)     (8,957,273)    (16,334,597)      5,097,188

Cash and cash equivalents, beginning of period ..................      8,909,261      17,866,534      34,201,131            --
                                                                     ------------    ------------    ------------    ------------
Cash and cash equivalents, end of period ........................   $  5,097,188    $  8,909,261    $ 17,866,534    $  5,097,188
                                                                     ============    ============    ============    ============

Supplemental disclosure of non--cash transactions:
     Cash paid for interest .....................................   $       --      $      6,700    $     48,926    $    488,126
                                                                     ============    ============    ============    ============
     Cash paid for taxes ........................................   $      1,500    $      4,700    $     17,000    $     32,000
                                                                     ============    ============    ============    ============
     Assets acquired through capital lease ......................   $       --      $       --      $       --      $    535,445
                                                                     ============    ============    ============    ============
                  See notes to consolidated financial statements.

</TABLE>
<PAGE>

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

1.  Nature of Business and Operations

Nature of Business.  Beacon  Power  Corporation  (the  "Company" or "Beacon") (a
development  stage  company) was  incorporated  on May 8, 1997 as a wholly owned
subsidiary of SatCon  Technology  Corporation  ("SatCon").  Since its inception,
Beacon has been primarily  engaged in the  development  of flywheel  devices for
storing and  transmitting  kinetic  energy.  As  discussed in Note 6, during the
fourth quarter of 2000, the Company  completed an initial public offering of its
common stock and raised  approximately  $49.3 million net of offering  expenses.
Because the Company has not yet generated a  significant  amount of revenue from
its principal  operations,  it is accounted  for as a development  stage company
under  Statement  of  Financial  Accounting  Standards  No. 7. The Company has a
single operating segment,  developing  alternative power sources.  The Company's
organizational  structure has no divisions or  subsidiaries  dictated by product
lines, geography or customer type.

The Company does not expect to become  profitable or cash flow positive until at
least 2008 and must raise  additional  equity to execute its  business  plan and
continue as a going concern. Based on the Company's current cash usage rates and
additional  expenditures  expected in support of its plan,  the Company has only
enough cash to fund operations through  approximately May 2005. The Company will
need to obtain  an equity  investment  as soon as  practicable  in 2005 to cover
expenses relating to continuing operations,  working capital, flywheel prototype
development and new business  development.  In the event that the Company elects
to begin full scale  development of its Smart Energy Matrix systems,  the amount
of equity required would increase substantially.

Operations.  The Company has  experienced net losses since its inception and, as
of  December  31,  2004,  had an  accumulated  deficit of  approximately  $128.9
million. The Company is currently facing the challenge of identifying  potential
applications,  and the ongoing development and refinement of its products.  This
ongoing research and development will require substantial  additional outlays of
capital.  The Company has taken  significant  actions over the last two years to
reduce  its  cash  expenditures  for  product  development,  infrastructure  and
production readiness.  Headcount,  development spending and capital expenditures
have also been  significantly  reduced.  The Company has focused its activity on
market analysis in terms of size of markets,  competitive aspects and advantages
that the  Company's  products  could  provide.  Preliminary  design of potential
products for markets for its flywheel products has continued. Expenditures under
two  state  government  contracts  for  the  development  of  a  one-tenth-power
prototype  of  the  Company's  Smart  Energy  Matrix  have  begun,  but  further
expenditures for full scale development and ramping production capabilities will
not be made until sufficient funding to ensure that it can complete  development
of the matrix and  continue  as a going  concern is  obtained.  The  Company has
continued,  on a reduced  level,  production  of its inverter  product for solar
energy  applications.  Although it is  continuing  to support the  product,  the
Company does not believe that  inverters  will be a  significant  portion of the
Company's business going forward.  Inverter inventory valuation write-downs were
recorded during 2004 in the amount of approximately $1,025,000,  and a provision
for future  inverter  warranty  expenditures of  approximately  $28,000 was also
recorded.

2.  Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Going concern.  The  accompanying  consolidated  financial  statements have been
prepared on a going concern basis,  which contemplates the realization of assets
and the  satisfaction of liabilities in the normal course of business.  As shown
in the consolidated financial statements,  the Company had minimal revenues, and
incurred  significant  losses  from  operations  of  approximately   $5,330,000,
$8,618,000  and  $20,839,000  and cash  decreases of  approximately  $3,812,000,
$8,957,000 and  $16,335,000,  during the years ended December 31, 2004, 2003 and
2002,  respectively.  The Company has approximately  $5,097,000 of cash and cash
equivalents  on hand at December  31, 2004 which is adequate to fund  operations
through approximately May 2005. These factors,  among others,  indicate that the
Company may be unable to continue as a going concern. The consolidated financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue as a going concern.

The Company  recognizes  that its  continuation  as a going concern is dependent
upon its  ability to  generate  sufficient  cash flow to allow it to satisfy its
obligations  on a timely  basis.  The  generation  of  sufficient  cash  flow is
dependent, in the short term, on the Company's ability to obtain adequate equity
investments,  and in the long term, on the successful expansion of the Company's
share of the  market  for its  current  products  and the  establishment  of new
markets for products under development. The Company believes that the successful
achievement of these initiatives should provide it with sufficient  resources to
meet its cash  requirements.  In  addition,  the Company is also  considering  a
number of other strategic financing  alternatives,  and has incurred substantial
costs in these  efforts;  however,  no assurance can be made with respect to the
success of these efforts or the viability of the Company.

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

Consolidation.  The accompanying  consolidated  financial statements include the
accounts of the Company and its subsidiary Beacon Power Securities  Corporation.
Its other  subsidiary is inactive.  All significant  inter-company  accounts and
transactions have been eliminated in consolidation.

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

Summary of Significant Accounting Policies

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

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

Accounts  Receivable and Allowance for Doubtful Accounts.  The Company evaluates
the collectibility of its open receivables on an ongoing basis. General reserves
are  established  at the time an invoice is  generated.  In  addition,  specific
reserves for bad debt are recorded based on the age of receivables, and when the
Company is notified of a customer's  inability to satisfy its debt  obligations,
such as in the event of a bankruptcy  filing.  The Company provides an allowance
for doubtful accounts equal to the estimated  uncollectible amounts due from its
customers.  The  Company's  estimate is based on limited  historical  collection
experience  and a review of the  current  status of trade  accounts  receivable.
Accounts  receivable  are  presented in the Company's  balance  sheets net of an
allowance for doubtful accounts of $22,850 and $0 at December 31, 2004 and 2003,
respectively.

Inventories.  Inventories are stated at the lower of cost  (first-in,  first-out
method) or market and consist of raw  materials,  work in process  and  finished
goods held for resale. Inventory balances are comprised of the following amounts
as of December 31, 2004 and 2003:

                                                     2004             2003
Raw materials ..........................         $176,349         $104,362
Work in progress .......................           46,244           26,001
Finished goods .........................             --            108,321
                                                 --------         --------
Inventories ............................         $222,593         $238,684
                                                 ========         ========

Investments.  The Company sold its entire  investment in Evergreen  Solar,  Inc.
(see Note 13) during 2004 providing gross proceeds of  approximately  $4,753,000
and a net gain of approximately $3,563,000, and currently holds no investments.

Prepaid  Expenses  and Other  Current  Assets.  Included in prepaid  expenses at
December  31, 2004 and 2003 are  prepaid  insurance  premiums  of  approximately
$681,000  and  $699,000,  respectively,  primarily  relating  to  directors  and
officers liability insurance.

During 2001, the Company  advanced  approximately  $565,000 to an officer of the
Company,  Mr.  William  Stanton,  its former CEO and  President  and currently a
consultant to the Company.  This advance is interest  bearing and secured by Mr.
Stanton's  holdings of Beacon  common stock and was provided to him to allow the
exercise of stock options and the payment of related taxes. In 2004, Mr. Stanton
was paid approximately  $80,000 of consulting fees by the Company, of which, Mr.
Stanton paid the Company $20,000 to reduce his outstanding loan balance. Through
December 31, 2004,  the Company  collected  approximately  $464,000 in principal
payments on this  advance.  The balance of this loan as of December  31, 2004 is
$101,000  including  current  year  interest  of $4,008  and is fully  reserved;
however, it has not been cancelled. Mr. Stanton continues to serve as a director
of the Company.

Property  and   Equipment.   Property   and   equipment,   including   leasehold
improvements,  are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets.

Other  Assets.  Other  assets  consist  primarily  of deferred  financing  costs
relating  to the  Company's  equity  raising  activities  and due  diligence  of
possible  acquisitions and includes  expenditures for legal,  business valuation
and consulting services.  Intellectual  property relating to the Company's Smart
Power M5 inverter system purchased from Advanced Energy Systems, Inc., was fully
amortized at December 31, 2004

Loss on Sales  Commitments.  At December 31, 2004 the Company determined that it
had no sales  commitments that required  establishing a loss on sales commitment
reserve.   When  the  Company  has  sales   commitments   that  are  firm,  have
fixed-prices,  and the  direct  costs to  manufacture  products  covered  by the
Company's  firm sales  commitments  are in excess of the fixed  selling  prices,
revenue and cost of revenue on such sales commitments are recorded as deliveries
are made. Direct costs consist of materials and direct labor costs. Estimates of
costs to manufacture  products are reviewed and revised periodically and changes
in estimated losses from such revisions are recorded in the accounting period in
which the revisions are made.

Long-Lived  Assets.  In  accordance  with  Statement  of  Financial   Accounting
Standards  No. 144  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets",  long-lived  assets to be held and used by the Company are  reviewed to
determine  whether  any  events or changes in  circumstances  indicate  that the
carrying value of the asset may not be  recoverable.  The conditions  considered
include whether or not the asset is in service, has become obsolete,  or whether
external  market  circumstances  indicate  that the  carrying  amount may not be
recoverable.  The  Company  recognizes  a loss for the  difference  between  the
estimated fair value of the asset and the carrying amount. The fair value of the
asset is measured using either available  market prices or estimated  discounted
cash flows.  The  Company's  analyses  indicate  that there was an impairment of
long-lived  assets  and  recognized  an asset  impairment  charge of $0 in 2004,
$366,788 in 2003 and $4,297,128 in 2002.

Other assets and deferred  financing  costs.  The Company  will  capitalize  its
direct  costs  incurred  to raise  capital or to acquire an entity in a business
combination.  Direct costs include only  "out-of-pocket"  or  incremental  costs
directly related to the effort,  such as a finder's fee and fees paid to outside
consultants  for  accounting,   legal,  or  engineering  investigations  or  for
appraisals.  The Company has incurred approximately $328,000 of costs associated
with  potential  sources of  capital  or  acquisitions,  which are  deferred  at
December  31,  2004.  These  costs  will  be  capitalized  if  the  efforts  are
successful,  or  expensed  when  unsuccessful.  Indirect  costs are  expensed as
incurred.

Restructuring and asset impairment charges.  The Company's initial products were
focused on the telecom  industry.  As a result of the overall economic  downturn
and in particular the significant decline in capital and maintenance spending in
telecom as well as the low price of  lead-acid  batteries,  the  Company has not
been successful in selling products into this market.  Therefore, in December of
2003, the Company recorded a non-cash asset impairment charge of $0.4 million in
order to reduce the carrying amount of its flywheel  related patents and patents
pending as the estimated  future cash flows  anticipated  from these assets were
substantially  in doubt.  Also, in July 2002, in an effort to reduce its monthly
cash-spending rate, the Company implemented a number of cost-cutting measures to
ensure the availability of resources  necessary to pursue its business  strategy
for a reasonable period but at a significantly lower cash expenditure rate. As a
result,  a  substantial  portion of its long-term  assets were idled,  including
machinery and equipment,  tooling,  office furniture and fixtures, and equipment
and  leasehold  improvements.  The Company  evaluated  all of its  property  and
equipment as required by Statement of  Financial  Accounting  Standards  No. 144
"Accounting  for the Impairment or Disposal of Long-Lived  Assets" and, in 2002,
incurred a  restructuring  and  impairment  charge of $6.5 million of which $4.3
million represents  impaired capital equipment and leasehold  improvements,  $.3
million relates to severance costs and $1.9 million relates to a reserve against
future lease payments and related  facility  costs.  The reserve  against future
lease  payments  is  classified  as  "Restructuring   Reserve"  in  the  current
liabilities section of the balance sheet.

The restructuring reserves are as follows:
                                                       December 31,
                                               --------------------------
                                                   2004           2003
                                               -----------    -----------
Beginning balance ..........................   $ 1,406,191    $ 1,749,738
Payments of rent ...........................      (343,547)      (343,547)
                                               -----------    -----------
Ending balance .............................   $ 1,062,644    $ 1,406,191
                                               ===========    ===========


Revenue  Recognition.  Although the Company has shipped  products,  and recorded
contract  revenues,  its  operations  have not yet  reached a level  that  would
qualify it to emerge from the  development  stage.  Therefore it continues to be
accounted  for as a  development  stage  company  under  Statement  of Financial
Accounting  Standards  No. 7  "Accounting  and  Reporting by  Development  Stage
Enterprises."

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

Government Contract Revenue Recognized on the  Percentage-of-Completion  Method.
The Company  recognizes  contract  revenues  using the  percentage-of-completion
method,  based  primarily on contract costs incurred to date compared with total
estimated  contract costs.  Changes to total estimated contract costs or losses,
if any,  are  recognized  in the period in which they are  determined.  Revenues
recognized in excess of amounts  billed are  classified as current  assets,  and
included in "Prepaid expenses and other current assets" in the Company's balance
sheets.  Amounts billed to clients in excess of revenues  recognized to date are
classified as current  liabilities under advance billings on contracts.  Changes
in  project  performance  and  conditions,  estimated  profitability,  and final
contract  settlements may result in future  revisions to  construction  contract
costs and revenue.

Cost of Goods  Sold.  The  Company  costs its  products  at the lower of cost or
market.  Costs in excess of this measurement are expensed in the period in which
they are incurred. In addition, the Company continuously evaluates inventory and
purchase commitments to insure that levels do not exceed the expected deliveries
for the next twelve months. As the Company is in the early stages of production,
its actual  manufacturing  costs incurred currently exceed the fair market value
of its products.  The Company provides a five-year  limited product warranty for
its Smart Power M5 product line and accrues for estimated  future warranty costs
in the  period  in  which  the  revenue  is  recognized.  In 2004,  the  Company
established a reserve for its Smart Power M5 inventory as a result of lower than
anticipated  sales  volumes.,  Although the Company is continuing to support its
inverter  product,  the  Company  does  not  believe  that  inverters  will be a
significant  portion of the Company's business going forward and is uncertain as
to when or at what price it will be able to sell its inventories.  The charge to
Cost of Goods Sold was approximately $1,025,000, which includes accrued purchase
commitments of approximately $45,000.

Stock-Based  Compensation.   The  Company  accounts  for  stock  based  employee
compensation   using  the  intrinsic  value  method   prescribed  in  Accounting
Principles  Board Opinion No. 25 (Accounting  for Stock Issued to Employees) and
related  interpretations.  In 2002 the Company  implemented  FASB  Statement  of
Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition  and  Disclosure."  SFAS 148 amends  current  disclosure
requirements  and  requires  prominent  disclosures  on both  annual and interim
financial  statements  about the method of accounting for  stock-based  employee
compensation  and the  effect  of the  method  used on  reported  results.  This
statement is effective for financial reports containing financial statements for
interim  periods  beginning  after  December  15, 2002.  SFAS 148 also  provides
alternative  methods of transition  for a voluntary  change to fair-value  based
methods of accounting, which the Company has not adopted at this time.

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

No  stock-based  compensation  is reflected  in net  earnings for stock  options
granted to employees as all options granted under the plan had an exercise price
equal to or greater than the market price of the underlying stock at the date of
the grant.  The  following  table  illustrates  the effect on net  earnings  and
earnings  per  share if the  Company  had  applied  the fair  value  recognition
provisions of FASB Statement No. 123 "Accounting  for Stock-Based  Compensation"
to stock-based employee compensation.

<TABLE>
<CAPTION>

                                                         Year ended December 31,
                                                      2004            2003            2002
                                              ------------    ------------    ------------
<S>                                           <C>             <C>             <C>
Net loss to common shareholders as reported   $ (5,329,960)   $ (8,618,013)   $(20,839,251)
Pro-Forma compensation expense ............   $  2,541,263    $    400,148    $  2,998,612
Net loss--pro forma .......................   $ (7,871,223)   $ (9,018,161)   $(23,837,863)
Loss per share--as reported ...............   $      (0.12)   $      (0.20)   $      (0.49)
Loss per share--pro forma .................   $      (0.18)   $      (0.21)   $      (0.56)
</TABLE>


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

<TABLE>
<CAPTION>
                                                       2004              2003              2002
                                                 ------------------------------------------------------
<S>                                                <C>               <C>              <C>
Risk-free interest rate                            4.32% - 4.49%     1.22% - 3.56%     2.48% - 3.56%
Expected life of option                              10 years          1-3 years         1-3 years
Expected dividend payment rate, as a percentage
of the stock price on the date of grant                 0%                0%                0%
Assumed volatility                                  95% - 115%        109% - 137%       130% - 137%
</TABLE>

Management believes that the assumptions used to value the options and the model
applied  yield a reasonable  estimate of the fair value of the grants made under
the circumstances (see also Note 8).

The Company granted Restricted Stock Units to employees for service performed in
2004 and 2003 that vest  quarterly  during the  subsequent  year.  The Company's
Restricted Stock Unit Deferred  Compensation Plan is described in more detail in
Note 10.

Income Taxes. Deferred income tax assets and liabilities are determined based on
the  differences  between the  financial  reporting  and tax bases of assets and
liabilities  and tax loss and credit carry forwards using the currently  enacted
tax rates and laws. A valuation  allowance has been provided because realization
of deferred tax assets is not considered more likely than not (see Note 11).

Advertising.  Advertising expense was approximately $15,000,  $3,000 and $13,000
in 2004, 2003 and 2002 respectively, and is expensed as incurred.

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

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

Concentration of Credit Risk. Financial instruments that potentially subject the
Company to significant  concentration  of credit risk consist  primarily of cash
and  cash   equivalents.   The   Company   keeps  its  cash   investments   with
high-credit-quality  financial institutions.  At December 31, 2004 substantially
all of its cash and cash  equivalents  were held in interest bearing accounts at
financial  institutions  earning interest at varying rates. At December 31, 2004
and 2003, the Company had cash balances at a financial  institution in excess of
federally  insured  limits.  However,  the Company  does not believe  that it is
subject to unusual  credit risk beyond the normal  credit risk  associated  with
commercial banking relationships.

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

Loss Per Share - Basic and Diluted. Basic loss per share has been computed using
the  weighted-average  number of shares of common stock outstanding  during each
period.  Diluted loss per share was computed in the same manner. The calculation
of diluted net loss per common share for the years ended December 31, 2004, 2003
and 2002 does not include  10,779,498,  9,732,929  and  14,326,571  of potential
shares of common stock  equivalents  outstanding at December 31, 2004,  2003 and
2002,  respectively,  as their inclusion would be antidilutive or their exercise
price exceeded the average market price of the Company's common stock.

3.  Property and Equipment

Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                 Estimated
                                                  Useful
                                                   Lives           2004           2003
                                               -------------  -----------    -----------
<S>                                              <C>          <C>            <C>
Machinery and equipment ......................   5 years      $   571,198    $   627,406
Service vehicles .............................   5 years           16,762         62,327
Furniture and fixtures .......................   7 years          296,652        279,190
Office equipment .............................   3 years        1,396,562      1,398,835
Leasehold improvements .......................   Lease term       533,352        524,347
Equipment under capital lease obligations ....   Lease term       918,285        918,284
                                                              -----------    -----------
     Total ...................................                $ 3,732,811    $ 3,810,389
Less accumulated depreciation and amortization                 (3,474,164)    (3,453,209)
                                                              -----------    -----------
     Property and equipment, net .............                $   258,647    $   357,180
                                                              ===========    ===========
</TABLE>

4.  Commitments and Contingencies

The Company leases office and light manufacturing space under an operating lease
through  September 30, 2007. At December 31, 2004,  the Company has provided the
lessor with an irrevocable  letter of credit with a balance of $310,011 which is
reduced  annually  during the lease term.  This letter of credit is secured by a
cash  deposit,  which  is  included  in  restricted  cash  in  the  accompanying
consolidated balance sheets.

Future minimum annual lease payments under non-cancelable operating leases as of
December 31, 2004 are as follows:

                           2005                500,359
                           2006                529,413
                           2007                397,059

Rent expense was $223,031,  $215,415 and $436,083,  during 2004,  2003 and 2002,
respectively net of restructuring  reserves applied of $315,474,  $315,474,  and
$78,868, respectively.

The Company has firm non-cancelable  purchase  commitments with its suppliers to
fulfill its Smart Power M5 production  requirements  and to satisfy  contractual
obligations for its research and development  programs for 2005 in the amount of
approximately $252,000.

Legal Proceedings. The Company may be subject to various legal proceedings, many
involving  routine  litigation  incidental to its  business.  The outcome of any
legal  proceeding  is not within the complete  control of the Company,  is often
difficult to predict and is resolved over very long periods of time.  Estimating
probable   losses   associated   with  any  legal   proceedings  or  other  loss
contingencies  are  very  complex  and  require  the  analysis  of many  factors
including   assumptions   about  potential   actions  by  third  parties.   Loss
contingencies  are  recorded  as  liabilities  in  the  consolidated   financial
statements  when it is both (1)  probable  or known  that a  liability  has been
incurred  and  (2)  the  amount  of the  loss is  reasonably  estimable.  If the
reasonable  estimate of the loss is a range and no amount  within the range is a
better estimate, the minimum amount of the range is recorded as a liability.  If
a loss contingency is not probable or not reasonably  estimable,  a liability is
not recorded in the consolidated financial statements.

On August 16,  2004,  Ricardo and Gladys  Farnes,  and TLER  Associates,  Ltd. a
Bahamas corporation  ("TLER"),  delivered a complaint to the Company,  naming as
defendants,   the  Company,   John  Doherty,   Richard  Lane,  and  unidentified
individuals  and  corporations.  The case was filed in  District  Court in Clark
County,  Nevada on or about  June 1, 2004,  and later was  removed to the United
States  District  Court for the  District of Nevada,  where it is  pending.  The
complaint alleges that in 2001, defendants (a) forged the signature of plaintiff
Ricardo  Farnes (a  principal  of TLER) to a document  purporting  to extend the
performance  period on a purchase  order issued by TLER to the Company,  and (b)
thereafter,   posted  on  the  internet  defamatory  and  personal   information
concerning the  plaintiffs.  The plaintiffs do not allege any specific amount of
damages,  and  instead  assert  that  damages  exceed  $10,000.  The Company has
answered the  complaint,  denying its material  allegations,  and is  vigorously
defending.  Although  the  outcome  of this  matter  cannot  yet be  determined,
management  does not expect that the ultimate  costs to resolve this matter will
have a material adverse effect on the Company's consolidated financial position,
results of  operations  or cash flows and  accordingly,  no  liability  has been
recorded.

<PAGE>

5.  Preferred Stock

As a result of the initial public offering of the Company's common stock and the
conversion of all outstanding  shares of all classes of the preferred stock, the
Company  amended its charter and cancelled  all its classes of preferred  stock.
The Company then added a new class of preferred  stock that can be issued in the
future by filing a Certificate of Designations with the specific terms as set by
its Board of  Directors.  At December  31,  2004 and 2003,  there are 10 million
shares of $.01 par value preferred stock authorized with none outstanding.

6.  Common Stock

Initial  Public  Offering.  During the fourth  quarter of 2000, the Company sold
9,200,000  shares of its  common  stock,  inclusive  of the  underwriters'  over
allotment,  at an initial public offering price of $6 per share. Net proceeds to
the  Company  as a result  of the stock  offering  totaled  approximately  $49.3
million   reflecting   gross  proceeds  of  $55.2  million  net  of  underwriter
commissions of approximately  $3.9 million and other estimated offering costs of
approximately $2.0 million.

Shareholder Rights Agreement.  In September 2002, and amended as of December 27,
2002,the Company's Board of Directors approved a Rights Agreement,  under which,
each  holder  of  common  stock on  October  7, 2002  automatically  received  a
distribution  of one  Right for each  share of common  stock  held.  Each  Right
entitles the holder to purchase 1/100th of a share of the Company's newly issued
preferred  stock for $22.50 in the event that any  person  not  approved  by the
board  of  directors  acquires  more  than  15%  (35% in the  case of one  large
shareholder  that already owned more than 15%) of the outstanding  common stock,
or in the event that the Company is acquired by another company, $22.50 worth of
the common stock of the other company at half its market value (in each case any
rights held by the acquiring person are not exercisable and become void).

Reserved Shares.  At December 31, 2004,  11,601,803  shares of common stock were
reserved  for issuance  under the  Company's  stock option plan and  outstanding
warrants.


7.  Redeemable Convertible Preferred Stock and Stock Warrants

Warrants outstanding as of December 31, 2004:
                                             Expiration      Strike  Issued and
                              Grant Date     Date            Price   Outstanding
---------------------------   ------------   -------------   -----   ---------
Class E ...................   4/7/2000       4/7/2005       $  1.25   510,672
Class F ...................   5/23/2000      5/23/2005      $  2.25 4,555,554
F Financing (Bridge) ......   4/21/2000      4/21/2005      $  2.10    58,000
Consultants ...............   8/2/2000       8/2/2005       $  6.00    20,000
GE (CR&D) .................   10/24/2000     10/24/2005     $  2.10   120,000
---------------------------   ------------   -------------   -----   ---------
Total Warrants                                                      5,264,226

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

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

In conjunction with the Class E Stock  conversion,  warrants to purchase 315,000
shares,  issued in  conjunction  with the issuance of the Senior Notes in August
1999, were cancelled. In exchange,  warrants to purchase 306,535 shares of Class
E Stock at $2.50 per share were issued. These warrants expire April 7, 2005. The
estimated fair market value of these warrants was approximately $344,000.  Since
these warrants replaced the August 2, 1999 warrants, the amount allocated to the
August 1999 warrants  have been  reallocated  to Class E Stock  Warrants and the
remaining  $174,000 was charged to interest  expense in the year ended  December
31, 2000. As a result of the initial public stock offering by the Company in the
fourth quarter of 2000, the holders of the warrants are now entitled to purchase
613,070  shares of the Company's  common stock instead of the Class E Stock.  In
December 2000, an investor exercised its 102,398 of its warrants,  in a cashless
transaction,  to purchase  84,433  shares of the  Company's  common  stock.  The
remaining  outstanding  warrants are 510,672 at December  31,  2004,  and are to
expire on April 7, 2005.

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

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

Consultant  Warrants.  In 2000, the Company issued warrants to a consultant that
are  exercisable  for 20,000 shares of its common stock at an exercise  price of
$6.00 per share. The holder may exercise its warrant at any time prior to August
2, 2005. These warrants were fully vested upon the issuance.

On October 24, 2000, the Company  issued  240,000  warrants to an investor at an
exercise  price of  $2.10  per  share in  conjunction  with an  agreement  by an
affiliate of that investor to provide the Company with technical expertise.  One
half of the warrants vest  immediately  and the  remainder  vest as services are
utilized.  During the fourth quarter of 2000,  the Company  recorded a charge to
consulting  expense for  $1,355,505  to  recognize  the fair market value of the
vested  warrants.  The Company has  deferred  the  remaining  warrants  and will
revalue the amount and record additional expense as necessary in future quarters
as the remaining services are provided.  Deferred compensation relating to these
warrants was  approximately  $27,360 and $105,000 at December 31, 2004 and 2003,
respectively. The agreement terminates and any unvested options are forfeited on
October 24, 2005.

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

<TABLE>
<CAPTION>
                                                        April                  August     October
                                                         2000        2000       1999        1999        1997
                                                       Warrants    Warrants   Warrants    Warrants    Warrants
                                                     ------------------------------------------------------------

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

8.  Stock Options

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

Stock option activity since inception is as follows:

                                                Weighted-   Weighted-
                                                 Average     Average
                                                Number of   Exercise  Fair
                                                  Shares      Price   Value
                                                ----------    -----   ----
Outstanding at inception ....................
     Granted ................................    8,118,695     2.39   1.35
     Exercised ..............................   (1,162,852)    0.98
     Canceled, forfeited or expired .........   (2,105,942)    3.53
                                                ----------    -----

Outstanding, December 31, 2001 ..............    4,849,901     2.37
     Granted ................................    3,050,628     1.16   0.38
     Exercised ..............................         --         --
     Canceled, forfeited or expired .........   (2,513,186)    2.25
                                                ----------    -----

Outstanding, December 31, 2002 ..............    5,387,343     1.78
     Granted ................................      367,099     1.26   0.07
     Exercised ..............................     (289,135)    0.81
     Canceled, forfeited or expired .........   (2,649,378)    1.95
                                                ----------    -----

Outstanding, December 31, 2003 ..............    2,815,929     1.59
     Granted ................................    3,772,139     0.72   1.60
     Exercised ..............................      (30,000)    0.89
     Canceled, forfeited or expired .........     (340,493)    1.58
                                                ----------    -----

Outstanding, December 31, 2004 ..............    6,217,575   $ 1.06
                                                ==========

<PAGE>

The following table summarizes information about stock options outstanding at
December 31, 2004:

<TABLE>
<CAPTION>
                                                                           Vested
                                    Weighted-                   ------------------------------
                                     Average        Weighted-                     Weighted-
                      Number        Remaining       Average                        Average
                    of Options     Contractual      Exercise        Number        Exercise
 Exercise Price    Outstanding         Life          Price        of Options        Price
----------------  ---------------  -------------  -------------  --------------  -------------
<S>                   <C>                  <C>           <C>        <C>                <C>

$.255-$.74             4,341,743            9.49         $0.70       4,112,573          $0.71
$.89 - $1.05           1,172,228            6.42         $0.89       1,172,228          $0.89
$1.78 - $2.50            339,104            5.35         $2.22         339,104          $2.22
$3.00 - $4.10            190,000            5.50         $3.94         190,000          $3.94
$5.10 - $6.10            154,500            5.88         $5.67         154,500          $5.67
$6.90 - $9.31             20,000            7.00         $8.16          20,000          $8.16
</TABLE>

Included in the above schedules are grants of 25,000, 0, 45,000 and 0 options
made to non-employee consultants in 2004, 2003, 2002 and 2001 respectively.


9.  Employee Stock Purchase Plan

On October 15, 2000 the Company  adopted an Employee  Stock  Purchase  Plan (the
"Plan")  under  which  eligible  employees  are able to  purchase  shares of the
Company's  Common  Stock at 85% of the market  value at the date of the start of
each six month  option  period or the end of such  period,  whichever  is lower.
Under the provisions of the Plan up to 1,000,000  shares are authorized.  Shares
purchased under the Plan in 2004, 2003 and 2002 totaled 8,124, 5,494 and 42,041,
respectively  and the  weighted  average  grant  date fair  value of the  shares
purchased was $0.48 in 2004,  $0.18 in 2003 and $0.28 in 2002. There are 889,385
shares available under the Plan at December 31, 2004.


10.  Restricted Stock Units

During 2003 the Company put into place a long-term incentive plan (LTIP) for all
executives  and  employees  for 2003 and 2004.  Based on the  Company's  need to
conserve  cash and the  desire to retain its  professional  staff,  the  Company
determined  that it would be in the best interest of it, its employees,  and its
stockholders to implement a stock-based Deferred Compensation Plan.

The LTIP has  eliminated  the  previous  cash  bonus  structure  for  successful
performance and replaced it with a program whereby the Company establishes goals
that are  strategically  aligned to the Company's  performance  and,  therefore,
shareholder  value. The LTIP agreement is intended to provide employees deferred
compensation in the form of restricted stock units (or "RSUs") at no cost to the
recipient,  that can be converted into shares of Company's  common stock through
establishing and evaluating quarterly,  or in some cases yearly, targets for the
employee and,  following each quarter,  determining the number of RSUs to accrue
and to be granted in four equal  installments  in the fiscal year  following the
fiscal year with respect to which employee accrued the RSUs.  Employees have the
right to convert their RSUs into shares at any time after such grant, subject to
a quarterly vesting schedule. The Company's employees earned 738,921 and 667,151
RSUs for the fiscal years ended December 31, 2004 and 2003, respectively,  which
are not  available for exercise  until  satisfaction  of the  quarterly  vesting
period during the following  calendar  year. The grants are recorded as deferred
stock  compensation  until they are earned over the vesting  schedule,  at which
time,  the value of the RSUs will be  recorded  as  compensation  expense in the
Company's  Income  Statement.  Accordingly,  no  compensation  expense  has been
recorded for 2003.  Compensation  expense  recorded during the vesting period in
2004 for the 2003 RSU program was $700,605.

11.  Income Taxes

The  components  of the provision  (benefit)  for income taxes  consisted of the
following:
<TABLE>
<CAPTION>
                                                                                                Cumulative from
                                                                                                  May 8, 1997
                                                                                                    (Date of
                                  Year ended           Year ended           Year ended           Inception) to
                                 December 31,         December 31,         December 31,           December 31,
                                     2004                 2003                 2002                   2004
                               -----------------    ------------------   ------------------    -------------------
<S>                                    <C>                  <C>                   <C>                  <C>
State - current ..............         $    750             $   1,956             $      -             $   19,862
Federal--deferred ............       (1,974,627)           (5,807,539)          (7,377,177)           (34,822,401)
State--deferred ..............         (325,553)           (1,169,696)            (824,557)            (5,809,036)
Increase in valuation
allowance ....................        2,300,179             6,977,235            8,201,734             40,631,436
                               -----------------    ------------------   ------------------    -------------------
Provision (benefit) for
income taxes .................         $    750             $   1,956             $      -             $   19,861
                               =================    ==================   ==================    ===================
</TABLE>

A reconciliation of the statutory federal rate to the effective rate for all
periods is as follows:

         Statutory federal rate benefit                            (34) %
         State, net of federal effect                               (6)
         Valuation allowance provided                                40
                                                                -------
         Effective rate                                             --%
                                                                 ======

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

                                                            2004           2003
                                                    ------------   ------------
Long-term assets:
Net operating loss carryforwards .................  $ 31,862,096   $ 29,965,300
Research and development credits .................     2,701,000      2,577,524
Restructuring reserves ...........................     2,232,298      2,373,598
Other ............................................       557,174        135,966
                                                    ------------   ------------
Net deferred tax assets before valuation allowance    37,352,568     35,052,388
Less valuation allowance .........................   (37,352,568)   (35,052,388)
                                                    ------------   ------------
Net deferred tax assets ..........................  $       --     $       --
                                                    ============   ============

The valuation  allowance increased by $2,300,179 in 2004 and $6,977,235 in 2003,
primarily due to the generation of net operating loss carry forwards and credits
for which realization is not reasonably assured.

The Company has available for future  periods net operating  loss carry forwards
for federal and state tax purposes of approximately $80,532,923 and $77,631,443,
respectively,  as of December  31, 2004.  In addition,  the Company has business
credits of approximately $1,804,111 and $896,889 for federal and state purposes,
respectively  as of December 31, 2004.  The net  operating  loss carry  forwards
begin to expire in 2012 for federal and 2002 for state tax purposes. The federal
research and  development  credits begin to expire in 2012.  The Company did not
pay any income taxes from inception to December 31, 2004.

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


12.  Retirement Savings Plan

In 1998, the Company created a 401(k)  Retirement  Savings Plan (the "Plan") for
its full-time employees.  Each participant in the Plan may elect to contribute a
percentage of his or her annual  compensation  to the Plan on a pre-tax basis up
to the annual limit  established by the Internal  Revenue  Service.  The Company
matches  employee  contributions  at a rate  of 50%  up to the  first  6% of the
employee's  contributions.  The Company may also elect to make a  profit-sharing
contribution at the discretion of the Board of Directors. Employee contributions
are fully vested.  Company  matching and profit sharing  contributions  vest 20%
after two years of service  consisting of at least 1,000 hours per calendar year
and 20%  annually  thereafter.  Company  matching  contributions  were  $61,213,
$63,671 and $113,257  during 2004, 2003 and 2002  respectively.  The Company has
not made any profit sharing contributions since the plan's inception.

13.  Related Party Transactions

Strategic  Investment.  On May 15, 2003, the Company invested  $1,000,000 in the
Series A Preferred  Stock of  Evergreen  Solar,  Inc., a public  company,  which
specializes  in  renewable  energy  sources,  in order to  develop  a  strategic
relationship  with that company.  This investment was part of a larger financing
provided by several investors. The Company made its investment on the same terms
as the other investors in this financing.  The Company  purchased 892,857 shares
of the Series A Preferred Stock of Evergreen,  for $1.12 per share. The Series A
Preferred  Stock is  convertible  into  common  stock on a one to one  basis and
accrues  dividends  at a rate of 10%.  The common  stock  market  value on an as
converted  basis at December  31, 2003 was  $1,595,637.  In addition the Company
purchased a three-year  warrant  exercisable for 2,400,000 shares of Evergreen's
common stock.  The warrant has a purchase  price of $100,000 and a cash exercise
price of $3.37 per share. The Company sold its holdings in Evergreen,  including
the warrant,  during 2004 in order to help finance its  operations  and received
cash  proceeds  of  approximately  $4,753,000,   representing  a  gain  on  this
investment of $3,562,582.

Evergreen's financing was a private placement of $29.475 million of its Series A
Preferred Stock and the above warrant. Perseus 2000, L.L.C., an affiliate of one
of the Company's stockholders,  Perseus Capital,  L.L.C., invested $3 million in
Evergreen's  Series  A  Preferred  Stock,  and led the  investor  group  in this
financing.  Mr. Philip J. Deutch and Mr. Kenneth M. Socha,  members of the Board
of Directors of the Company, are Managing Director and Senior Managing Director,
respectively, of Perseus, L.L.C., and Mr. Deutch is one of four individuals from
the  Evergreen  investor  group  that was  added to the  Board of  Directors  of
Evergreen when the investment closed.  Messrs.  Deutch and Socha disclosed their
possible conflict relating to this transaction, and abstained from voting on the
matter. In addition, Mr. Deutch did not taken part in any discussions concerning
this  investment.  Beacon's  participation  in the  transaction  was  evaluated,
debated and approved by all the  disinterested  directors of the Company,  after
full disclosure of relevant facts and circumstances.

Loan to Officer.  During 2001, the Company advanced approximately $565,000 to an
officer of the Company,  Mr. William  Stanton,  its former CEO and President and
currently a  consultant  to the Company.  This  advance is interest  bearing and
secured by Mr. Stanton's holdings of Beacon common stock and was provided to him
to allow the  exercise of stock  options and the  payment of related  taxes.  In
2004,  Mr.  Stanton was paid  approximately  $80,000 of  consulting  fees by the
Company,  of  which,  Mr.  Stanton  paid  the  Company  $20,000  to  reduce  his
outstanding  loan  balance.  Through  December 31, 2004,  the Company  collected
approximately  $464,000 in principal  payments on this  advance.  The balance of
this loan as of December 31, 2004 is $101,000 including current year interest of
$4,008 and is fully reserved;  however,  it has not been cancelled.  Mr. Stanton
continues to serve as a director of the Company.

<PAGE>

14.  Quarterly Results (Unaudited)

In management's  opinion,  this unaudited  information includes all adjustments,
consisting  only  of  normal  recurring   adjustments,   necessary  for  a  fair
presentation  of the  information  for the  quarters  presented.  The  operating
results for any quarter are not necessarily indicative of results for any future
quarters.

<TABLE>
<CAPTION>

                                                                         2004
                                            ---------------------------------------------------------------
                                                  First           Second          Third           Fourth
                                                 Quarter         Quarter         Quarter         Quarter
                                            --------------- --------------- --------------- ---------------
<S>                                           <C>             <C>             <C>             <C>
Revenue ...................................   $     57,408    $    126,484    $     80,902    $     59,900
Gross profit (loss) .......................   $    (18,371)   $   (181,604)   $   (898,802)   $    (34,398)
Loss from operations ......................   $ (2,189,460)   $ (2,358,497)   $ (2,751,782)   $ (1,749,096)
Net (loss) income .........................   $ (2,148,727)   $ (2,266,205)   $ (1,854,795)   $    939,767
Income (loss) per share - basic and diluted   $      (0.05)   $      (0.05)   $      (0.04)   $       0.02
Weighted-average common shares outstanding      43,121,702      43,273,817      43,538,541      43,702,485


                                                                         2003
                                           ---------------------------------------------------------------
                                                First           Second          Third           Fourth
                                               Quarter         Quarter         Quarter         Quarter
                                           --------------- --------------- --------------- ---------------
Revenue ..................................   $       --      $       --      $       --      $       --
Loss from operations .....................   $ (2,277,244)   $ (2,256,698)   $ (2,056,258)   $ (2,547,488)
Net loss .................................   $ (2,229,375)   $ (2,218,750)   $ (1,708,861)   $ (2,461,027)
Loss per share - basic and diluted .......   $      (0.05)   $      (0.05)   $      (0.04)   $      (0.06)
Weighted-average common shares outstanding     42,812,897      42,814,929      42,883,762      43,028,761
</TABLE>


15. Restatement

Subsequent  to the issuance of the  Company's  2003  financial  statements,  the
Company's  management  determined  that its  liabilities had been overstated and
additional paid in capital  understated due to a bookkeeping  error in recording
the  Restricted  Stock  Units  (Note 10).  As a result,  the  balance  sheet and
statement of changes in equity have been  restated  from the amounts  previously
reported  to correct  the error.  Additionally,  the  Company  has  reclassified
certain cash deposits securing letters of credit from cash and cash equivalents,
as previously  reported,  into restricted cash as of December 31, 2003 and 2002.
Furthermore,  the Company  determined  that the  investment  in Evergreen  Solar
should  have been  recorded at cost (see Note 13).  The  Company had  previously
recorded its investment in Evergreen as  available-for-sale  with the unrealized
gain recorded as a separate component of accumulated other comprehensive income,
net of tax.

A summary of the effects of the  restatements on previously  reported  financial
position as of December 31, 2003 and 2002 is as follows:

                                                   As previously
At December 31, 2003                                    reported    As restated
--------------------                                ------------   ------------

Cash ............................................   $  9,314,493   $  8,909,261
Restricted cash .................................           --          405,232
Investments .....................................      1,695,638      1,163,758
Accrued compensation and benefits ...............        883,195        156,000
Other comprehensive income ......................        531,880           --
Additional paid in capital ......................    133,069,472    133,796,667


                                                  As previously
At December 31, 2002 ............................      reported    As restated
                                                    -----------    -----------
Cash ............................................   $18,221,766    $17,866,534
Restricted cash .................................          --          355,232


The Company has also restated the disclosures in Note 3 Property and Equipment,
to reflect the adjusted cost basis net of impairment by asset class.

16.  Subsequent Event

California Energy Commission contract

On February 14, 2005 the Company  executed a contract with the California  State
Energy  Resources  Conservation  and  Development  Commission  ("CEC")  entitled
"Flywheel Energy Storage System for Grid Frequency Regulation," to demonstrate a
one-tenth  power  prototype  version of its Smart Energy Matrix  advanced energy
storage  solution  for  frequency  regulation  and  grid  stability.  Under  the
contract,  the Company will develop and install a one-tenth  scale  prototype of
the Company's  megawatt-level  system to demonstrate  the potential  benefits of
using  flywheel  energy storage to provide  frequency  regulation of the grid. A
successful  demonstration of frequency regulation will also serve to demonstrate
the system's technical and market feasibility in the grid stabilization  market.
The contract requires the system to be delivered and installed during the second
half of 2005. The contract is expected to produce  approximately $1.2 million of
revenue, with the majority of it in 2005.

New York State Energy Research and Development Authority contract.

On February 10, 2005 the Company  received a research and  development  contract
from the New York State Energy  Research  and  Development  Authority  (NYSERDA)
under a joint  initiative  between the U.S.  Department  of Energy  (DOE) Energy
Storage  Research  Program and NYSERDA,  entitled "Grid Frequency  Regulation by
Recycling  Energy in  Flywheels,"  to  demonstrate  an advanced  energy  storage
solution for  frequency  regulation  and grid  stability in New York State.  The
contract  requires the system to be delivered  and  installed  during the second
half of 2005.  The  contract is expected  to produce  approximately  $645,000 of
revenue,  nearly  all of it in  2005.  Under  the  contract,  the  Company  will
demonstrate a one-tenth-power  prototype of the Company's planned megawatt-level
system,  known as the Smart Energy Matrix.  The demonstration will integrate the
Company's flywheels and associated power electronics into the distribution power
grid.


<PAGE>

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

Effective August 27, 2004, the Company's former  independent  registered  public
accounting firm, Deloitte & Touche LLP ("Deloitte"), resigned as the independent
registered public accounting firm Deloitte performed the review and audit of the
Company's  books and accounts for the fiscal years ending  December 31, 2003 and
2002 and the interim  quarterly reviews through the quarter ended June 30, 2004.
The resignation was the decision of Deloitte. There were no disagreements during
the past two fiscal years and the  subsequent  interim  periods  ending June 30,
2004 and through  August 27, 2004 between  Deloitte and management on any matter
of  accounting  principles  or  practices,  financial  statement  disclosure  or
auditing  scope  or  procedure,  which  disagreement,  if  not  resolved  to the
satisfaction of Deloitte,  would have caused it to make reference thereto in its
reports on the financial statements for such years.

On October  29,  2004,  the audit  committee  of the board of  directors  of the
Registrant  approved the engagement of Miller Wachman LLP ("Miller  Wachman") as
the Registrant's new independent registered public accounting firm.

Item 9A.  Controls and Procedures

Mr. F. William Capp, the Company's  Chief  Executive  Officer,  and Mr. James M.
Spiezio, the Company's Chief Financial Officer, have evaluated the effectiveness
of the  Company's  disclosure  controls and  procedures as of December 31, 2004.
Based upon that evaluation, they have concluded that the Company had in place on
that date  controls  and  other  procedures  that are  designed  to ensure  that
information required to be disclosed by the Company in the reports that it files
or submits  under the  Securities  Exchange Act of 1934 is recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Since the date of the evaluation,  there have been no significant changes
in the Company's internal controls or in other factors that could  significantly
affect these  controls.  During the quarter ended on the date of the evaluation,
there was no change in the Company's  internal control over financial  reporting
that materially  affected,  or is reasonably  likely to materially  affect,  the
Company's internal control over financial reporting.

Item 9B.  Other Information

Not applicable.

<PAGE>
                                    PART III


Item 10.  Directors and Executive Officers of the Registrant

Information  concerning  executive officers of the Company that responds to this
Item is  incorporated by reference from Item 4A contained in Part 1 of this Form
10-K.

Members of the current board of directors are as follows:

Stephen P. Adik, age 61 (director since 2004)
     Audit committee
     Compensation committee
     Nominating committee
Mr. Adik served as Vice  Chairman at NiSource  Inc.,  (NYSE:  NI), a Fortune 500
electric,  natural  gas and  pipeline  company,  from  December  2000  until his
retirement in December  2003. He joined  NiSource in 1987 as Vice  President and
general  manager,  Corporate  Support Group,  and later held positions of Senior
Executive Vice President and Chief  Financial  Officer.  At NiSource,  he helped
grow the company's market  capitalization from $600 million to the current value
of approximately  $5.6 billion.  Before joining the energy industry in 1983, Mr.
Adik also had more than 20 years of operating  and  financial  experience in the
transportation  industry.  His industry  affiliations have included the American
Gas Association,  Edison Electric Institute and the Midwest Gas Association.  He
is currently a member of the boards of NiSource,  and the Chicago SouthShore and
South  Bend  Railroad.  He was also  recently  nominated  to the  board of North
Western Corp, an electric and natural gas company serving Montana,  South Dakota
and Nebraska. Mr. Adik holds a degree in mechanical engineering from the Stevens
Institute  of  Technology,  and an  MBA  degree  in  finance  from  Northwestern
University. Mr. Adik's term of office expires in 2007.

F. William Capp, age 56 (director since 2001)

Mr. Capp has served as the  Company's  President,  Chief  Executive  Officer and
Board member since December 1, 2001 when he joined the Company. Prior to joining
Beacon  Power,  Mr. Capp was the  President of the  Telecommunications  group of
Bracknell   Corporation,   a  company  that  provided   infrastructure  for  the
telecommunications  industry  with annual  sales of $350 million and 30 regional
offices in the US and Canada.  From 1997-2000,  Mr. Capp served as the President
of a division of York  International.  From  1978-1997,  Mr. Capp held  numerous
positions at Ingersoll Rand including Vice President and General  Manager of its
Compressor Division, Vice President of Technology for a wholly owned subsidiary,
the  Torrington  Company.  as  well as  numerous  engineering  positions  within
Ingersoll  Rand.  Prior to joining  Ingersoll Rand in 1978, he worked for Ford's
Truck Division in such positions as project engineering,  supervisor and product
planning. Mr. Capp received his Bachelor of Science in Aeronautical  Engineering
from Purdue University,  a Master of Business Administration and a Master Degree
in Mechanical Engineering from the University of Michigan. He also has his Black
Belt Training Program from the American Society for Quality.  Mr. Capp's term of
office expires in 2005.


Philip J. Deutch, age 40 (director since 1998)

Mr. Deutch has served as a Managing  Director of Perseus  L.L.C.  since 1997. In
this  position,  Mr.  Deutch has led  Perseus'  investments  in numerous  energy
technology  companies.  Prior to joining Perseus,  Mr. Deutch was an attorney at
Williams & Connolly LLP. and worked in the Mergers and  Acquisitions  Department
of Morgan  Stanley & Co. in New York City.  In this  position,  Mr. Deutch was a
member of execution teams for acquisitions, divestitures, and leveraged buyouts.
Mr.  Deutch is a  graduate,  with  distinction,  of  Stanford  Law School and of
Amherst  College  where he was  elected a member of Phi Beta Kappa.  Mr.  Deutch
serves on the board of  directors  of Evergreen  Solar,  Inc.(NASDAQ-ESLR).  Mr.
Deutch's term of office expires in 2005.

Jack P. Smith, age 56 (director since 2001)
     Audit committee
     Compensation committee
Mr. Smith is Chairman,  Director and co-owner of SilverSmith  Inc, a producer of
natural gas well metering and automated  data reporting  systems.  With partner,
Mr. David Silvers,  Smith founded SilverSmith Inc. in 2003. Prior to his current
connection  with  SilverSmith,  Smith was President and CEO of More Space Place,
Inc., a leading producer and retailer of furniture system  solutions.  Currently
located  mainly in Florida,  the company has several  retail  locations in other
states as well.  Prior to More Space Place,  Inc., Mr. Smith served as President
and  Chief  Executive  Officer  of  Holland  Neway  International  in  Muskegon,
Michigan,  a leading designer and  manufacturer of suspension  systems and brake
actuators for the commercial  vehicle market.  In 2000, this 650-person  company
had worldwide  sales of $200 million.  During his tenure,  Smith was responsible
for growing sales of Holland Neway (formerly Neway Anchorlok International) from
$70 million to $200 million.  In 1995, Smith led a successful  management buyout
of the company with equity partner  Kohlberg Kravis Roberts.  From 1992 to 1999,
this and an earlier buyout  transaction  generated an equity return of over $110
million.  Smith also held the  positions of Vice  President of  Engineering  and
Quality Assurance at Neway Anchorlok  International and directed the engineering
and quality assurance departments.  Earlier, he was Chief Engineer. From 1972 to
1982,  Smith was Design  Group  Leader at the Ford Motor  Company - Heavy  Truck
Division,  in  Dearborn,  Michigan,  where he also  held  positions  as  project
engineer,  and  product  planning  analyst.  Smith  also  serves on the board of
directors of Bissell Corporation in Grand Rapids,  Michigan, SRAM Corporation in
Chicago and Weasler  Engineering  in Wisconsin.  He is a Trustee of Grand Valley
State  University  Foundation.  A  resident  of Grand  Rapids,  Michigan,  Smith
attended  the  University  of  Michigan  where he earned  bachelor's  (1970) and
master's (1971) degrees in mechanical engineering and an MBA (1979.) Mr. Smith's
term of office expires in 2007.

Kenneth M. Socha, age 58 (director since 1998)
     Audit Committee
     Compensation Committee
     Nominating committee
Mr. Socha has served as Senior Managing  Director of Perseus L.L.C.  since 1996.
From 1985 to June 1988,  he practiced law as a Partner in the New York office of
Lane & Edson. He became a partner of Dewey  Ballantine in New York City in 1988.
Mr. Socha left Dewey Ballantine in February 1992 to join Rappahannock Investment
Company,  the predecessor of Perseus L.L.C. on a full-time basis. Mr. Socha is a
director of five private  companies in which  Perseus has  investments.  He is a
graduate of the University of Notre Dame and the Duke University  School of Law.
Mr. Socha's term of office expires in 2007.

William E. Stanton, age 61 (director since 1997)
Mr.  Stanton has been a director of the Company  since its formation in 1997. He
served  as the  President  and CEO of the  Company  from  January  1998  through
December of 2001.  Prior to joining Beacon,  Mr. Stanton was the Chief Operating
Officer of SatCon Technology  Corporation  ("SatCon") from September 1995 to May
1997, where he managed  operations and the strategy  development to shift SatCon
from a  contract  research  and  development  company  to a  commercial  product
organization.  This strategy  included the  formation of Beacon Power.  Prior to
joining  SatCon,  Mr.  Stanton,  in his 26 years  at the  Charles  Stark  Draper
Laboratory,  held the positions of Vice President of Operations,  Vice President
of  Corporate  Development  ,  Director  of New  Programs,  Director of Avionics
Programs,   Avionics  Program  Manager,  Director  of  Electronics  Engineering,
Principal Engineer, and Electronics Engineer. Mr. Stanton is on the board of his
home owners association,  was a founder and director of an in-school  child-care
center,  and owned and  operated  residential  rental  property.  He  received a
Bachelor's  Degree in Electrical  Engineering  from the  University of Maine,  a
Master's Degree in Instrumentation and Control from the Massachusetts  Institute
of  Technology,  and a Master's  in  Business  Administration  from the  Harvard
Business School. Mr. Stanton's term of office expires in 2006.

There  are no  family  relationships  among any of the  Company's  directors  or
executive  officers.  The Board has determined that Messrs. Capp and Stanton are
the only members of the Board that are not independent under Nasdaq Rule 4200.

Audit Committee.  The Audit Committee members are Messrs. Adik, Smith and Socha.
Under  NASDAQ audit  committee  rules and SEC rules for Small  Business  filers,
Beacon's audit committee must have at least three members,  of which two must be
"independent."  These rules applicable to audit committees are more difficult to
satisfy than the rules related to the Board as a whole and its other committees.
Both,  Messrs.  Smith and Adik qualify as "independent" as defined in the Nasdaq
and SEC standards. Mr. Socha is an affiliated person and therefore does not meet
the "independent" requirement. Beginning July 31, 2005, all three members of the
audit  committee  must be  "independent."  No present  board  members other than
Messrs.  Smith and Adik  qualify as  "independent."  Mr. Adik is qualified as an
Audit Committee  Financial Expert.  The Committee is appointed by and reports to
the Board of Directors.  Its  responsibilities  include, but are not limited to,
the appointment,  compensation and dismissal of the independent auditors, review
of  the  scope  and  results  of the  independent  auditors'  audit  activities,
evaluation of the  independence of the independent  auditors,  and review of the
Company's  accounting  controls and policies,  financial reporting practices and
the internal audit control procedures and related reports of the Company. During
the last fiscal year, the Audit Committee held seven meetings that were not part
of a full  meeting of the board of  directors.  The  Company's  audit  committee
charter can be found on its website at www.beaconpower.com.

Compensation  Committee.  The current Compensation Committee members are Messrs.
Adik, Smith and Socha.  The Compensation  Committee has the authority to set the
compensation of Beacon's Chief Executive Officer and all executive  officers and
has the responsibility to review the design, administration and effectiveness of
all programs and policies concerning executive compensation and establishing and
reviewing  general policies  relating to compensation and benefits of employees.
The  Committee  administers  Beacon's  Second  Amended and  Restated  1998 Stock
Incentive Plan, Employee Stock Purchase Plan and Restricted Stock Unit Incentive
Plan.  Messrs.  Adik,  Smith and Socha are  non-employee  directors  who have no
interlocking relationships as defined by the Securities and Exchange Commission.
They are all independent  pursuant to the Nasdaq rules  applicable to members of
this committee.  The  Compensation  Committee held no formal meetings during the
last fiscal year that were not part of a full meeting of the board of directors.

Nominating  Committee.  The members of the Nominating  Committee are responsible
for  recommending  nominee  directors to the Company's  board of directors.  The
board as a whole  then  reviews  the  qualifications  of nominee  directors  and
recommends to the stockholders the election of its directors.  A stockholder may
nominate a person for  election as a director by  complying  with Section 2.2 of
the Company's  By-Laws,  which provides that advance notice of a nomination must
be  delivered  to  Beacon  and must  contain  the name and  certain  information
concerning the nominee and the stockholders who support the nominee's  election.
A copy of this  By-Law  provision  may be  obtained  by writing to Beacon  Power
Corporation,   Attn:  James  M.  Spiezio,  Secretary,  234  Ballardvale  Street,
Wilmington,  MA 01887.  Director  nominees  submitted  by  shareholders  will be
considered  on the same  terms as other  nominees.  The  current  members of the
nominating  committee are Messrs. Adik and Socha. The Nominating  Committee held
no meetings  during the last fiscal year that were not part of a full meeting of
the board of directors. The charter for the nominating committee can be found on
the Company's web site at www.beaconpower.com.

Executive Officers of the Company

The Company's executive officers, positions and their ages as of February 28,
2005, are as follows:

Name                       Age   Position

F. William Capp             56   President and Chief Executive Officer, Director

Matthew L. Lazarewicz       54   Vice President and Chief Technical Officer

James M. Spiezio            57   Vice President of Finance, Chief Financial
                                 Officer, Treasurer and Secretary


F. William Capp. Mr. Capp has served as the Company's President, Chief Executive
Officer and Board  member  since  December  1, 2001 when he joined the  Company.
Prior  to  joining   the   Company,   Mr.   Capp  was  the   President   of  the
Telecommunications  group of  Bracknell  Corporation,  a company  that  provided
infrastructure  for the  telecommunications  industry  with annual sales of $350
million and 30 regional offices in the US and Canada.  From 1997-2000,  Mr. Capp
served as the President of a division of York International. From 1978-1997, Mr.
Capp held numerous  positions at Ingersoll  Rand  including  Vice  President and
General Manager of its Compressor  Division,  Vice President of Technology for a
wholly owned subsidiary, the Torrington Company. as well as numerous engineering
positions  within  Ingersoll Rand.  Prior to joining  Ingersoll Rand in 1978, he
worked for Ford's  Truck  Division  in such  positions  as project  engineering,
supervisor  and product  planning.  Mr. Capp received his Bachelor of Science in
Aeronautical   Engineering  from  Purdue   University,   a  Master  of  Business
Administration and a Master Degree in Mechanical Engineering from the University
of  Michigan.  He also has his Black Belt  Training  Program  from the  American
Society for Quality.


Matthew L. Lazarewicz. Mr. Lazarewicz has served as the Company's Vice President
of Engineering  since February  1999, and was named Chief  Technical  Officer in
September of 2001.  Prior to joining the Company,  Mr.  Lazarewicz had a 25-year
career  with  General   Electric  Company  and  served  as  manager  of  program
independent analysis from 1996 to 1999, and he was the mechanical design manager
for the F414 engine used in the Navy front line F/A18  fighter from 1991 to 1996
which included  development through production phases, in addition he progressed
through a variety of positions in design, manufacturing, quality, marketing, and
product support in both military and commercial applications.  He was recognized
as the GE Aircraft Engines "Engineer of the Year" and received the Department of
Defense  "Excellence in  Acquisition"  Award for his leadership of this project.
Mr.  Lazarewicz is a Registered  Professional  Engineer in the  Commonwealth  of
Massachusetts  and received both  Bachelor's and Master's  Degrees in Mechanical
Engineering from the Massachusetts Institute of Technology.  Mr. Lazarewicz also
completed his Master's  Degree in Management at the  Massachusetts  Institute of
Technology Sloan School of Management.


James M. Spiezio.  Mr.  Spiezio joined the Company in May 2000. He has served as
Vice  President of Finance,  Chief  Financial  Officer and Treasurer  since July
2000,  Secretary since March 2001, and the Company's  Corporate  Controller from
May  2000  to  July  2000.  He  has  over   twenty-five   years  of  diversified
manufacturing and financial management  experience.  Mr. Spiezio served as Chief
Financial   Officer  at  Starmet   Corporation,   a  diversified   metallurgical
manufacturing  company  engaged in both the commercial  and government  sectors,
from 1993 to 1999.  While at Starmet  he also  served as  President  of a wholly
owned  chemical  and  manufacturing  facility  for five  years and held  several
financial  management  positions  including  Corporate  Controller  and  Manager
Planning and Analysis.  Prior to joining  Starmet,  Mr.  Spiezio held  financial
management  positions  with  United  Technologies  Corporation,  Pratt & Whitney
Aircraft Group in accounting, cost control and business analysis. Prior to Pratt
& Whitney, Mr. Spiezio held financial management positions with General Electric
Company in both the Power Systems and Apparatus  Services  business groups.  Mr.
Spiezio is a graduate of the Indiana University School of Business.

Code of Ethics.  A copy of the Company's  corporate code of conduct may be found
on the  Internet  at the  Company's  website  www.beaconpower.com.  The  Company
intends to disclose on its website  any  amendments  to the Code,  or any waiver
from a provision of the code.


Section 16(a) Beneficial Ownership Reporting Compliance

Section  16(a) of the  Securities  Exchange  Act of 1934  requires  officers and
directors,  and  persons  who own  more  than 10% of a  registered  class of the
Company's  equity  securities  ("Insiders"),  to file reports of  ownership  and
changes in ownership  with the SEC.  Insiders are required by SEC  regulation to
furnish the Company  with  copies of all  Section  16(a) forms they file.  Based
solely on review of the copies of such forms  furnished  to the  Company  and on
written representations from its Insiders, the Company believes that during 2004
all of its Insiders met their Section 16(a) filing requirements.

<PAGE>

Item 11.  Executive Compensation
<TABLE>
<CAPTION>
                                                Annual Compensation                                Long Term Compensation
                              -------------------------------------------------------    ------------------------------------------
                                                                                                  Awards                 Payouts
                                                                                         ----------------------------    ----------
                                                                                          Restricted      Securities
                                                                      All Other (2)         Stock        Underlying        LTIP
Name and Principal Position    Year       Salary         Bonus         Compensation        Awards          Options        Payouts
----------------------------- -------    ----------    -----------    ---------------    ------------    ------------    ----------
<S>             <C>            <C>       <C>            <C>              <C>              <C>               <C>          <C>
F. William Capp (3)            2004      $240,000       $ 55,000         $   68,032       $ 236,800         600,000      $ 78,053
President and Chief            2003      $220,000       $      -         $   71,335       $ 225,217               -      $      -
Executive Officer              2002      $220,000       $      -         $  212,685       $       -               -      $      -

Matthew L. Lazarewicz (4)      2004      $167,000       $      -         $   18,783       $  98,716         350,000      $ 37,580
Vice  President and Chief      2003      $157,500       $ 20,000         $    1,077       $ 108,422               -      $      -
Technical Officer              2002      $157,500       $ 32,573         $    1,073       $       -          80,000      $      -

James M. Spiezio (5)           2004      $178,400       $      -         $   24,908       $ 108,588         450,000      $ 43,406
Vice President of Finance,     2003      $168,000       $ 25,200         $    3,103       $ 125,183               -      $      -
Chief Financial Officer,       2002      $168,000       $ 51,094         $    3,094       $       -          80,000      $      -
Treasurer and Secretary

James Arseneaux (6)            2004      $110,024       $      -         $    1,170       $  28,060         200,000      $  8,346
Program Manager                2003      $103,824       $  5,000         $        -       $  24,100               -      $      -
                               2002      $103,824       $      -         $        -       $       -          25,000      $      -

Richard L. Hockney (7)         2004      $121,500       $      -         $    1,347       $  25,254         125,000      $   9,604
Chief Engineer                 2003      $114,400       $  2,500         $        -       $  27,706               -      $       -
                               2002      $ 97,223       $      -         $        -       $       -          25,000      $       -

</TABLE>

(1)  Columns  required  by the  rules  and  regulations  of the  Securities  and
     Exchange Commission that contain no entries have been omitted.

(2)  Amounts  represent term life insurance  premiums paid by the executives and
     reimbursed  by Beacon plus an amount to reimburse  the  executive for taxes
     paid on the amount of the premium and payment of  employee's  taxes related
     to Restricted  Stock Unit grants during 2004.  Mr. Capp also received other
     compensation  relating to realtor  expenses and temporary  living costs and
     the related taxes on these items. For 2004, Mr. Capp's temporary living and
     relocation expenses were $29,939, Company paid life insurance premiums were
     $2,480, RSU taxes of $11,658,  and the related taxes were $23,955. For 2003
     Mr. Capp's temporary living and relocation  expenses were $40,499,  Company
     paid life  insurance  premiums  were  $2,480,  and the  related  taxes were
     $28,356.  For 2002 Mr. Capp's temporary living and relocation expenses were
     $32,361, realtor expenses were $83,763, life insurance premiums were $2,480
     and the related taxes were $94,081.

(3)  The Company hired Mr. Capp in December 2001. At the time of his employment,
     Mr.  Capp  received  900,000  stock  options  with a strike  price of $.89.
     One-third of these options vested  immediately  with the remainder  vesting
     over a two year  period.  These  options  expire ten years from the date of
     issuance.  On October 13, 2004,  Mr. Capp received  600,000  options with a
     strike price of $.74 vesting over an 80 day period.  These  options  expire
     ten years from date of issuance.

(4)  The Company hired Mr.  Lazarewicz  in February  1999. On March 15, 2002 Mr.
     Lazarewicz  received  80,000  stock  options  with a strike  price of $.70.
     One-third of these options vested  immediately  with the remainder  vesting
     over a two year  period.  These  options  expire ten years from the date of
     issuance. On October 13, 2004, Mr. Lazarewicz received 350,000 options with
     a strike price of $.74 vesting over an 80 day period.  These options expire
     ten years from date of issuance.

(5)  The Company hired Mr.  Spiezio in May 2000.  On March 15, 2002 Mr.  Spiezio
     received  80,000 stock  options  with a strike price of $.70.  One-third of
     these options vested immediately with the remainder vesting over a two year
     period.  On October 13, 2004, Mr. Spiezio  received  450,000 options with a
     strike  price of $.74  vesting  over an 80 day period.  Both option  grants
     expire ten years from the date of issuance.

(6)  Mr.  Arseneaux  has been an employee of Beacon since  August 30,  2000.  On
     March 15, 2002 Mr.  Arseneaux  received  25,000 stock options with a strike
     price of $.70.  One-third  of these  options  vested  immediately  with the
     remainder  vesting  over a two  year  period.  On  October  13,  2004,  Mr.
     Arseneaux received 200,000 options with a strike price of $.74 vesting over
     an 80 day  period.  All  option  grants  expire  ten years from the date of
     issuance.

(7)  Mr. Hockney has been an employee of the Company from its incorporation.  On
     March 15, 2002 Mr.  Hockney  received  25,000  stock  options with a strike
     price of $.70.  One-third  of these  options  vested  immediately  with the
     remainder  vesting over a two year period. On October 13, 2004, Mr. Hockney
     received 125,000 options with a strike price of $.74 vesting over an 80 day
     period. Both option grants expire ten years from the date of issuance.
-----------------------

Option grants in last fiscal year:

<TABLE>
<CAPTION>
                                                 Individual Grants
                           -------------------------------------------------------------
                            Number of      Percent of                                      Potential Realizable Value
                            Securities   Total Options                                       at Assumed Annual Rates
                            Underlying     Granted to     Exercise                         of Stock Price Appreciation
                             Options      Employees in     Price                               for Option Term (1)
                                                                                        ---------------------------------
           Name              Granted      Fiscal Year    ($/Share)    Expiration Date        5% ($)          10% ($)
-----------------------    ------------- --------------- ----------- ------------------ ----------------- ---------------
<S>                             <C>               <C>        <C>            <C>                <C>             <C>
F. William Capp .......         600,000           20.0%      $ 0.74         10/12/2014         $ 269,454       $ 692,041
Matthew L. Lazarewicz .         350,000           11.7%      $ 0.74         10/12/2014         $ 157,181       $ 403,690
James M. Spiezio ......         450,000           15.0%      $ 0.74         10/12/2014         $ 202,090       $ 519,030
James Arseneaux .......         200,000            6.7%      $ 0.74         10/12/2014         $  89,818       $ 230,680
Richard L. Hockney ....         125,000            4.2%      $ 0.74         10/12/2014         $  56,136       $ 144,175
</TABLE>

Aggregated Option Exercises in Last Fiscal Year and FY End Option Values:

<TABLE>
<CAPTION>
                             Shares                     Number of Securities Underlying  Value of Unexercised in-the-money
                           Acquired on      Value       Unexercised Options at Year End        Options at Year End
                                                        -------------------------------  ----------------------------------
                            Exercise       Realized      Exercisable     Unexercisable      Exercisable      Unexercisable
                          --------------  -----------   --------------  ---------------  ---------------  -----------------
<S>                           <C>           <C>            <C>                 <C>         <C>                   <C>
F. William Capp ........            --      $    --        1,500,000               --      $ 135,000             $      --
Matthew L. Lazarewicz ..            --      $    --          646,666               --      $  85,600             $      --
James M. Spiezio .......            --      $    --          683,333               --      $  98,600             $      --
James Arseneaux ........            --      $    --          266,250               --      $  41,500             $      --
Richard L. Hockney .....            --      $    --          153,000               --      $  28,000             $      --
</TABLE>

Long-Term Incentive Plans - Awards in Last Fiscal Year

<TABLE>
<CAPTION>
                                  Performance or            Estimated Future Payouts
                                  Period Until         Under Non-Stock Price Based Plans
                         Number                        ---------------------------------
        Name            of Units  Payout                  Threshold   Target    Maximum
---------------------   -------   ---------------------   --------   --------   --------
<S>                     <C>       <C>                         <C>        <C>        <C>
F. William Capp .....   257,391   Quarterly during 2005       100%       100%       100%
Matthew L. Lazarewicz   107,300   Quarterly during 2005       100%       100%       100%
James M. Spiezio ....   118,030   Quarterly during 2005       100%       100%       100%
James Arseneaux .....    30,500   Quarterly during 2005       100%       100%       100%
Richard L. Hockney ..    27,450   Quarterly during 2005       100%       100%       100%
</TABLE>

See Note 10 to the financial statements for a full description of the Company's
long-term incentive plan.

<PAGE>

Executive Employment Agreements.

The Company has employment arrangements with Messrs. Capp, Lazarewicz,  Spiezio,
Arseneaux  and Hockney as  described  below.  In  addition  to the  arrangements
described  below,  each executive is entitled to receive group health and dental
benefits,  group long and short term disability insurance coverage,  401(k) plan
and stock plan participation, paid vacation and life insurance.

Mr. Capp

The  Company's  written  agreement  with Mr. Capp  expired on December 31, 2004.
Following  such  expiration,  Mr.  Capp has been an  "at-will"  employee  of the
Company and is currently paid a salary at an annual rate of $240,000.

Mr. Lazarewicz

The Company's  written  agreement with Mr. Lazarewicz will terminate on December
31, 2005,  unless the parties agree to extend the term.  In 2004 Mr.  Lazarewicz
was paid a salary at an annual  rate of $167,000  and was  entitled to receive a
bonus at the discretion of the Board. Mr. Lazarewicz  received a bonus for 2004,
paid in the form of a grant of 107,300  restricted stock units,  pursuant to the
Company's  Second  Amended  and  Restated  1998  Stock  Incentive  Plan.  If the
employment  agreement  is  terminated  by Mr.  Lazarewicz  without  good  reason
(generally,  a diminution of his duties or title,  a breach of this agreement by
the Company,  a change of the Company's location or a sale of the Company) or by
the  Company  for cause  (generally,  fraud or  embezzlement,  failure to cure a
breach of this  agreement  within 30 days after notice,  a material  breach of a
material  Company policy or willful  misconduct),  then Mr.  Lazarewicz  will be
entitled  to his  salary  up to the date of  termination.  If the  agreement  is
terminated by the Company  without cause or by Mr.  Lazarewicz  for good reason,
then Mr.  Lazarewicz  will be entitled to one years'  salary and a bonus  amount
equal to his  bonus  for the  prior  year on a  pro-rata  basis  with a  maximum
termination  amount of 50% of his prior year's base salary.  In the event of Mr.
Lazarewicz's  death or  disability,  he or his estate shall be entitled to three
months'  salary.  In  addition,  in the  event  of  Mr.  Lazarewicz's  death  or
disability or the termination by the Company without cause or by Mr.  Lazarewicz
for good reason,  the vesting of his stock options  accelerates.  If the Company
fails to offer Mr. Lazarewicz a new employment agreement by the end of the term,
or if he continues thereafter as an  employee-at-will,  then he will be entitled
to receive the same amount in 2006 as he received in 2005.

Mr. Spiezio

The term of the agreement  began on October 25, 2002 and  continues  until it is
terminated. In 2004 Mr. Spiezio was entitled to salary of $178,400 per year and,
at the discretion of the Board,  a bonus.  If the agreement is terminated by Mr.
Spiezio  without good reason  (generally,  the Company's  material breach of the
agreement  or a change of the  Company's  location)  or by the Company for cause
(having the same meaning as in Mr. Capp's  agreement)  then Mr.  Spiezio will be
entitled  to his  salary  up to the date of  termination.  If the  agreement  is
terminated by the Company without cause or by Mr. Spiezio for good reason,  then
Mr. Spiezio will be entitled to 48 weeks' salary.  In the event of Mr. Spiezio's
death or disability, he or his estate shall be entitled to three months' salary.

Mr. Arseneaux

Mr.  Arseneaux is an "at-will"  employee of the Company and was paid a salary at
an annual rate of $110,024 in 2004.

Mr. Hockney

Mr.  Hockey is an "at-will"  employee of the Company and was paid a salary at an
annual rate of $121,500 in 2004.


Director Compensation.

The Company's  directors are  compensated  with a package that consists of both,
stock  options  and cash,  designed  for  board  members  who are not  employees
("non-employee  directors").  All non-employee directors serving on the board of
directors received a one-time grant of options to purchase 100,000 shares of the
Company's  common stock that vested daily over an 80 day period with an exercise
price equal to the fair market  value of the common  stock on the date of grant.
Options  under this  program  were  granted on October 13, 2004 and  November 2,
2004.  On a yearly basis each  non-employee  director  will  receive  additional
options  to  purchase  50,000  shares of the  Company's  common  stock that vest
monthly  over a 12-month  period and have an  exercise  price  equal to the fair
market value of the common stock on the date of grant.  Prior to September 2004,
all non-employee  directors serving on the board of directors received,  yearly,
options  to  purchase  10,000  shares of the  Company's  common  stock that vest
monthly  over a 12-month  period and an exercise  price equal to the fair market
value of the common stock on the date of grant.

For 2004 and 2005, non-employee directors receive an annual retainer of $10,000,
payable  quarterly,  plus $2,000 for each board of directors meeting attended in
person and $500 for each meeting attended by telephone.  Audit committee members
receive an additional  annual retainer of $30,000 payable  quarterly,  plus $500
per meeting. The board of directors will establish audit committee retainers for
years  subsequent to 2005 during 2005. All other committee  members receive $500
per meeting.  Directors are  reimbursed for  reasonable  out-of-pocket  expenses
incurred  in the  performance  of their  duties.  Messrs.  Socha and Deutch have
elected not to accept retainers or meeting fees for their participation as board
and committee members.

One of the Company's directors,  Mr. Stanton, also serves as a consultant to the
Company for services  relating to the Company's  acquisition due diligence.  The
aggregate compensation paid to Mr. Stanton in 2004 was approximately $80,000, of
which,  Mr.  Stanton  paid the Company  $20,000 to reduce his  outstanding  loan
balance.


Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters

The following  table sets forth,  as of February 18, 2005,  certain  information
concerning  the  ownership of shares of the  Company's  common stock by (i) each
person or group that it knows owns  beneficially  more than five  percent of the
issued and outstanding shares of the Company's common stock, (ii) each director,
(iii)  certain  named  executive  officers  below,  and (iv) all  directors  and
executive officers as a group. Except as otherwise indicated,  each person named
has sole investment and voting power with respect to his or its shares of common
stock shown.


<PAGE>



                                             Number of    Percentage of
                                              Shares       Common Stock
Name and Address of                        Beneficially    Beneficially
Beneficial Owner (1)                       Owned (2) (3)  Owned (2) (3)
-----------------------------------------  ------------  --------------
F. William Capp .........................   1,686,265          3.7%
James Arseneaux .........................     285,775           *
Richard Hockney .........................     282,991           *
Matthew L. Lazarewicz ...................     857,861          1.9%
James M. Spiezio ........................     789,819          1.8%
Stephen P. Adik .........................     116,667           *
Philip J. Deutch (8) ....................     126,667           *
Jack P. Smith (4) .......................     151,473           *
Kenneth M. Socha (8) ....................     126,667           *
William E. Stanton (5) ..................     137,667           *
Perseus Capital, L.L.C. (6) .............   8,859,684         19.6%
The Beacon Group Energy Investment Fund
II, L.P. (7) ............................   3,055,856          6.8%
All directors and executive officers as a
group (8 persons) .......................   3,993,086          8.4%

(1)  The address for all  executive  officers and  directors is c/o Beacon Power
     Corporation,  234 Ballardvale Street,  Wilmington,  MA 01887. Messrs. Capp,
     Lazarewicz,  and Spiezio are executive  officers of Beacon.  Messrs.  Capp,
     Adik, Deutch, Smith, Socha and Stanton are directors of Beacon.

(2)  The number of shares  beneficially  owned by each stockholder is determined
     under rules issued by the Securities  and Exchange  Commission and includes
     voting or investment  power with respect to those  securities.  Under these
     rules,  beneficial ownership includes any shares as to which the individual
     or entity has sole or shared voting power or investment  power and includes
     any  shares as to which the  individual  or entity has the right to acquire
     beneficial  ownership  within 60 days after  February  18, 2005 through the
     exercise of any warrant, stock option or other right. The inclusion in this
     proxy statement of these shares,  however, does not constitute an admission
     that the named  stockholder  is a direct or  indirect  beneficial  owner of
     those  shares.  The number of shares of common  stock  outstanding  used in
     calculating  the percentage  for each listed person  includes the shares of
     common  stock  underlying  warrants or options held by that person that are
     exercisable  or  convertible  within  60 days of  February  18,  2005,  but
     excludes shares of common stock underlying  warrants or options held by any
     other person.

(3)  Includes the following  number of shares of common stock  issuable upon the
     exercise of stock options which may be exercised on or before  February 18,
     2005: Mr. Capp, 1,500,000; Mr. Spiezio,  683,333; Mr. Lazarewicz,  646,666;
     Mr. Hockney,  153,000;  Mr.  Arseneaux,  266,250;  Mr. Adik,  116,667;  Mr.
     Deutch,  126,667; Mr. Smith, 149,973; Mr. Stanton,  136,667; and Mr. Socha,
     126,667.

(4)  Includes  500 shares of common  stock held by Mr.  Smith's  son.  Mr. Smith
     disclaims beneficial ownership over these shares.

(5)  Includes  1,000  shares of common  stock held by Mr.  Stanton's  wife.  Mr.
     Stanton disclaims beneficial ownership over these shares.

(6)  Perseus  L.L.C.'s  address is 2099  Pennsylvania  Avenue,  N.W., Suite 900,
     Washington,  DC 20006.  Mr.  Philip J.  Deutch and Mr.  Kenneth  M.  Socha,
     members of the Company's Board of Directors, are also Managing Director and
     Senior Managing Director,  respectively,  of Perseus L.L.C. Messrs.  Deutch
     and Socha disclaim  beneficial  ownership of all the shares of common stock
     held by Perseus L.L.C. other than shares in which they may have a pecuniary
     interest.

(7)  Includes  shares of common  stock  issuable  upon  exercise  of warrants to
     purchase  1,018,000  shares of common stock.  Beacon Group's address is 399
     Park Avenue, New York, NY 10022.

(8)  Includes  126,667  shares of common  stock  issuable  upon the  exercise of
     options held by Perseus L.L.C. Messrs. Deutch and Socha disclaim beneficial
     ownership of all the shares of common stock held by Perseus,  L.L.C., other
     than shares in which both have a pecuniary interest.
------------------

Equity Compensation Plan Information

The following  table gives  information  about equity awards under the Company's
stock option plan and employee stock purchase plan, as of December 31, 2004.

<TABLE>
<CAPTION>
------------------------------------- ------------------------- -------------------------- -------------------------
                                      Number of securities to       Weighted average
                                      be issued upon exercise       exercise price of        Number of securities
                                      of outstanding options,     outstanding options,     remaining available for
           Plan category                warrants and rights        warrants and rights         future issuance
------------------------------------- ------------------------- -------------------------- -------------------------
                                                (a)                        (b)                       (c)
------------------------------------- ------------------------- -------------------------- -------------------------
<S>                                                  <C>                       <C>                   <C>
Equity compensation plans approved                           -                 $        -                         -
by security holders
------------------------------------- ------------------------- -------------------------- -------------------------
Equity compensation plans not                        6,217,575                 $     1.06                         -
approved by security holders
------------------------------------- ------------------------- -------------------------- -------------------------
Total                                                6,217,575                 $     1.06                         -
------------------------------------- ------------------------- -------------------------- -------------------------
</TABLE>

For additional  information  concerning the Company's equity compensation plans,
see discussion in footnotes 8, 9 and 10 to the Company's  consolidated financial
statements,  Stock Options,  Employee  Stock Purchase Plan and Restricted  Stock
Units.


Item 13.  Certain Relationships and Related Transactions

Strategic Investment. On May 15, 2003, the Company invested $1,000,000 in Series
A Preferred Stock of Evergreen Solar, Inc., a public company that specializes in
renewable energy sources, in order to develop a strategic relationship with that
company.  This  investment  was part of a larger  financing  provided by several
investors.  The  Company  made its  investment  on the same  terms as the  other
investors in this financing.  The Company  purchased  892,857 shares of Series A
Preferred Stock of Evergreen,  for $1.12 per share. In addition the Company also
purchased a three-year  warrant  exercisable for 2,400,000 shares of Evergreen's
common stock.  The warrant has a purchase  price of $100,000 and a cash exercise
price of $3.37 per  share.  Evergreen's  financing  was a private  placement  of
$29.475 million of its Series A Preferred  Stock and the above warrant.  Perseus
2000,  L.L.C.,  an  affiliate  of  one of the  Company's  stockholders,  Perseus
Capital,  L.L.C.,  invested $3 million in Evergreen's  Series A Preferred Stock,
and led the  investor  group in this  financing.  Mr.  Philip J.  Deutch and Mr.
Kenneth M. Socha, members of the Board of Directors of the Company, are Managing
Director and Senior Managing  Director,  respectively,  of Perseus,  L.L.C.  Mr.
Deutch led the Evergreen  Solar Series A Preferred  financing and is one of four
individuals  from the  Evergreen  investor  group  to be  added to the  Board of
Directors  of  Evergreen.  Messrs.  Deutch and Socha  disclosed  their  possible
conflict relating to this transaction,  and abstained from voting on the matter.
Beacon's participation in the transaction was evaluated, debated and approved by
all the  disinterested  directors  of the  Company,  after  full  disclosure  of
relevant facts and circumstances. Mr. Deutch does not participate in discussions
concerning this strategic investment. The Company sold its holdings in Evergreen
during 2004 in order to help finance its ongoing  operations  and received  cash
proceeds of approximately $4,753,000,  representing a gain on this investment of
approximately $3,563,000.

Advance to Officer - During 2001, the Company advanced approximately $565,000 to
an officer of the Company,  Mr. William  Stanton,  its former CEO and President.
This advance is interest bearing and secured by Mr. Stanton's holdings of Beacon
common stock and was paid to him to allow the exercise of stock  options and the
payment of related  taxes.  Through  December  31, 2004,  the Company  collected
approximately  $464,000 in principal  payments on this  advance.  The balance of
this loan as of December 31, 2004 is $101,000 including current year interest of
$4,008 and is fully reserved;  however,  it has not been cancelled.  Mr. Stanton
continues  to serve as a director of the Company.  Mr.  Stanton also serves as a
consultant to the Company for services relating to the Company's acquisition due
diligence.   The  aggregate  compensation  paid  to  Mr.  Stanton  in  2004  was
approximately  $80,000, of which, Mr. Stanton paid the Company $20,000 to reduce
his outstanding loan balance.

Agreement  with GE  Corporation  Research and  Development  - As a result of the
investment in Beacon by GE Capital  Equity  Investments,  Inc.,  the Company has
entered  into an  agreement  with GE Corporate  Research  and  Development  ("GE
CR&D"), under which GE CR&D will provide the Company with technical expertise in
controls and materials. Under the terms of that agreement, GE CR&D has agreed to
make  available  to  Beacon up to  $2,000,000  of its  services  at cost and the
Company has issued GE Equity a warrant to purchase  240,000 shares of its common
stock at an exercise price of $2.10 per share. Of these warrants, 120,000 vested
immediately  and 120,000 will vest ratably to the extent to which Beacon uses GE
CR&D's  services.  This  agreement  terminates,  and any  unvested  options  are
forfeited,  on October 24, 2005.  Beacon did not engage GE CR&D for any services
during 2003; thus no other warrants were vested during 2003.

<PAGE>

Item 14. Principal Accountant Fees and Services

The  Company  has  engaged  Miller  Wachman,   LLP  ("Miller  Wachman")  as  its
independent  registered  public  accounting firm since October 29, 2004, and had
engaged  Deloitte & Touche,  LLP  ("Deloitte")  since before its initial  public
offering in November  2000  through  the date of their  resignation,  August 27,
2004.  All work on the  Company's  most recent  fiscal  audit was  performed  by
members of each respective firm's staff.

Principal accounting fees billed during 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                                Miller Wachman         Deloitte               Total
                                              -----------------  -------------------  --------------------
                                                  2004    2003       2004       2003       2004       2003
                                              --------   -----   --------   --------   --------   --------
<S>                                           <C>        <C>     <C>        <C>        <C>        <C>
Audit Fees ................................   $ 20,000   $--     $136,040   $145,460   $156,040   $145,460
Audit-Related Fees ........................       --      --         --         --         --         --
Tax Fees ..................................       --      --       25,980     69,000     25,980     69,000
All Other Fees ............................       --      --         --         --         --         --
                                              --------   -----   --------   --------   --------   --------
Total Fees ................................   $ 20,000   $--     $162,020   $214,460   $182,020   $214,460
                                              ========   =====   ========   ========   ========   ========
</TABLE>


Audit Fees

The  aggregate  audit fees billed by Deloitte and Miller  Wachman for the fiscal
years ended December 31, 2004 and 2003 were $156,040 and $145,460, respectively.
These fees include  amounts for the audit of the Company's  consolidated  annual
financial  statements and the reviews of the consolidated  financial  statements
included in the Company's  Quarterly  Reports on Form 10-Q,  including  services
related thereto such as attest  services,  consents and review of publicly filed
documents.

Audit-Related Fees

There were no  audit-related  fees billed during the fiscal years ended December
31, 2004 and 2003.

Tax Fees

The aggregate  fees billed by Deloitte for tax services  rendered for the fiscal
years 2004 and 2003 were $25,980 and $69,000, respectively.  These fees were for
the  preparation  and filing of the 2002 and 2003 income tax return,  developing
estimated  payments  for  2004  income  taxes,  and tax  advice  related  to the
Company's restricted stock unit bonus program.

All Other Fees

Other than the  services  performed  above,  there were no other fees billed for
2004 and 2003.

Audit Committee Pre-Approval Requirements

The Audit Committee's  charter 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 and Deloitte during fiscal 2004 were pre-approved pursuant to the
procedures outlined above.

<PAGE>

                                     PART IV

Item 15.  Exhibits and Financial Statement Schedules

         (a)      1.  Financial Statements

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

                  2.  Financial Statement Schedules

Schedules for which provision is made in the applicable regulations of the
Securities and Exchange Commission have been omitted because the information is
disclosed in the Consolidated Financial Statements or because such schedules are
not required or not applicable.

                  3.  Exhibits

The exhibits are listed below under Part IV, Item 15(c) of this report.

         (c )     Exhibits

    Exhibit
    Number       Description of Document
   ------------  -------------------------
         3.1(1)  Sixth Amended and Restated Certificate of Incorporation of the
                 Company.

         3.2(1)  Amended and Restated Bylaws of the Company.

         4.1(2)  Rights Agreement dated September 25, 2002 between the Company
                 and EquiServe Trust Company, N.A.

         4.2(3)  Amendment No. 1 to Rights Agreement dated December 27, 2002
                 between the Company and EquiServe Trust Company, N.A.

      10.1.1(1)  Securities Purchase Agreement dated May 28, 1997 among the
                 Company, SatCon Technology Corporation and Duquesne Enterprises
                 (n/k/a DQE Enterprises, Inc.).

      10.1.2(1)  Securities Purchase Agreement dated April 7, 2000 among the
                 Company, Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a
                 DQE Enterprises, Inc.), Micro-Generation Technology Fund,
                 L.L.C. and SatCon Technology Corporation.

      10.1.3(1)  Securities Purchase Agreement dated April 21, 2000 among the
                 Company, Perseus Capital, L.L.C., Micro-Generation Technology
                 Fund, L.L.C., Mechanical Technology Incorporated, The Beacon
                 Group Energy Investment Fund II, L.P. and Penske Corporation.

      10.1.4(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.

      10.1.5(1)  Investor Rights 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., Penske Corporation,
                 SatCon Technology Corporation, James S. Bezreh, Russel S.
                 Jackson, Russell A. Kelley, Stephen J. O'Connor, Jane E.
                 O'Sullivan and Robert G. Wilkinson.

      10.1.6(1)  Form of Warrant of the Company issued pursuant to Class E
                 financing and list of holders thereof.

      10.1.7(1)  Form of Warrant of the Company issued pursuant to Class F
                 bridge financing and list of holders thereof.

      10.1.8(1)  Form of Warrant of the Company issued pursuant to Class F
                 financing and list of holders thereof.

      10.1.9(1)  Warrant of the Company dated August 2, 2000 issued to
                 Kaufman-Peters Company.

     10.1.10(1)  Warrant of the Company dated October 24, 2000 issued to GE
                 Capital Equity Investments, Inc.

     10.1.11(1)  Second Amended and Restated 1998 Stock Incentive Plan of the
                 Company.

     10.1.12(1)  Form of Incentive Stock Option Agreement of the Company.

     10.1.13(1)  Form of Non-Qualified Stock Option Agreement of the Company.

     10.1.14(1)  Form of Non-Qualified Stock Option Agreement of the Company
                 issued to certain consultants on July 24, 2000 and list of
                 holders thereof.

     10.1.15(1)  Amended and Restated License Agreement dated October 23, 1998
                 between the Company and SatCon Technology Corporation.

     10.1.16(1)  Lease dated July 14, 2000 between the Company and BCIA New
                 England Holdings LLC.

     10.1.17(1)  Letter Agreement dated October 24, 2000 among the Company, GE
                 Capital Equity Investments, Inc. and GE Corporate Research and
                 Development.

     10.1.18(1)  Form of Director and Officer Indemnification Agreement of the
                 Company.

     10.1.19(4)  Employment Agreement dated December 1, 2003 between the Company
                 and F. William Capp.

       10.1.20+  Employment Agreement dated April 25, 2004 between the Company
                 and Matthew L. Lazarewicz.

     10.1.21(3)  Employment Agreement dated October 25, 2002 between the Company
                 and James M. Spiezio.

     10.1.22(4)  Form of Restricted Stock Unit Agreement of the Company.

     10.1.23(5)  Assignment dated December 27, 2004 between the Company and CRT
                 Capital Group LLC.

     10.1.24(6)  Agreement dated January 31, 2005 between the Company and the
                 New York State Energy Research and Development Authority.

     10.1.25(7)  Agreement dated January 31, 2005 between the Company and
                 California State Energy Resources Conservation and Development
                 Commission.

       10.1.26+  Amendment to employment agreement between the Company and
                 Matthew L. Lazarewicz.

          14.1+  Corporate Code of Conduct of the Company.

        16.1(8)  Letter dated October 20, 2004 from Deloitte & Touche LLP to the
                 Company.

          21.1+  Subsidiaries of the Company.

          23.1+  Consent of Miller Wachman LLP

          23.2+  Consent of Deloitte & Touche LLP

          31.1+  Principal Executive Officer--Certification pursuant to Section
                 302 of the Sarbanes-Oxley Act of 2002.

          31.2+  Principal Financial Officer--Certification pursuant to Section
                 302 of the Sarbanes-Oxley Act of 2002.

          32.1+  Principal Executive Officer--Certification pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002.

          32.2+  Principal Financial Officer--Certification 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 10-K/A filed on May 17, 2004 (File
     No. 001-16171).
(5)  Incorporated  by  reference  from the Form 8-K filed on  December  30, 2004
     (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/A  filed on November 2, 2004
     (File No. 001-16171).
+    Filed herewith.

<PAGE>



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                       BEACON POWER CORPORATION

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

                                       Date: March 31, 2005

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

Signature                     Title                                  Date

/s/ F. William Capp        President and Chief Executive
--------------------       Officer, and Director
F. William Capp            (Principal Executive Officer)       March 31, 2005

/s/ James M. Spiezio       Vice President of Finance, Chief
--------------------       Financial Officer, Treasurer and
James M. Spiezio           Secretary (Principal Financial      March 31, 2005
                           Officer)

/s/ Stephen P. Adik
-----------------------
Stephen P. Adik            Director                            March 31, 2005

/s/ Philip J. Deutch
-----------------------
Philip J. Deutch           Director                            March 31, 2005

/s/ Jack P. Smith
-----------------------
Jack P. Smith              Director                            March 31, 2005

/s/ Kenneth M. Socha
-----------------------
Kenneth M. Socha           Director                            March 31, 2005

/s/ William E. Stanton
-----------------------
William E. Stanton         Director                            March 31, 2005