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

FORM 10-Q


[ X ] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2003,

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
(For the transition period from to ).


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



Delaware 04-3372365
(State or other jurisdiction (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)
------------------------

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes ____ No __X__

The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of August 10, 2003 was 42,815,928.



BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Table of Contents

Page
PART I. Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets at June 30, 2003 and December 31, 2002. 1

Unaudited Consolidated Statements of Operations for the three and six
months ended June 30, 2003 and 2002 and for the Period May 8, 1997
(date of inception) to June 30, 2003. 2

Unaudited Consolidated Statements of Cash Flows for six months ended
June 30, 2003 and 2002 and for the Period May 8, 1997 (date of
inception) to June 30, 2003. 3

Notes to Unaudited Consolidated Financial Statements. 5-9

Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations. 9-21

Item 3. Quantitative and Qualitative Disclosures about Market Risk 21

Item 4. Controls and Procedures 21

PART II. Other Information

Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults on Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits, Financial Statements Schedules and Reports on
Form 8-K 23

Signatures 24

Certifications 25-28




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




June 30, December 31,
2003 2002
--------------------- ---------------------
Assets
Current assets:
Cash and cash equivalents $ 13,211,755 $ 18,221,766
Prepaid expenses and other current assets 828,585 1,775,455
Assets held for sale 53,715 53,715
--------------------- ---------------------
Total current assets 14,094,055 20,050,936

Property and equipment, net (Note 3) 407,981 562,929
Investments (Note 5) 1,296,428 -
Other assets 480,232 291,901
--------------------- ---------------------

Total assets $ 16,278,696 $ 20,905,766
===================== =====================

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 114,021 $ 77,326
Accrued compensation and benefits 269,067 226,623
Other accrued expenses 421,351 576,881
Restructuring reserve 1,577,965 1,749,738
Current portion of capital lease obligations 72,369 200,041
--------------------- ---------------------
Total current liabilities 2,454,773 2,830,609

Capital lease obligations, net of current portion - -
Commitments (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;
42,815,928 and 42,812,897 shares issued and outstanding at
June 30, 2003 and December 31, 2002, respectively 428,159 428,129
Deferred stock compensation (14,314) (18,413)
Additional paid-in-capital 132,746,859 132,750,525
Other comprehensive income 196,428 -
Deficit accumulated during the development stage (119,433,549) (114,985,424)
Treasury stock, at cost (99,660) (99,660)
--------------------- ---------------------
Total stockholders' equity 13,823,923 18,075,157

Total liabilities and stockholders' equity $ 16,278,696 $ 20,905,766
===================== =====================

See notes to unaudited consolidated financial statements.




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



Cumulative from
May 8, 1997
(date of inception)
Three months ended June 30, Six months ended June 30, through June 30,
2003 2002 2003 2002 2003
---------------- ---------------- ---------------- ---------------- --------------------


Revenue $ - $ - $ - $ - $ 551,184

Operating expenses:
Selling, general and administrative 1,261,019 1,469,986 2,479,668 3,505,747 25,602,695
Research and development 952,098 1,770,370 1,911,004 4,910,124 48,704,899
Loss on sales commitments - - - - 375,974
Depreciation and amortization 43,581 506,144 143,270 1,012,235 3,809,273
Restructuring charges - - - - 2,159,280
Loss on impairment of assets - - - - 4,297,128
---------------- ---------------- ---------------- ---------------- --------------------
Total operating expenses 2,256,698 3,746,500 4,533,942 9,428,106 84,949,249
---------------- ---------------- ---------------- ---------------- --------------------

Loss from operations (2,256,698) (3,746,500) (4,533,942) (9,428,106) (84,398,065)

Other income (expense):
Interest income 43,716 148,786 101,755 302,738 3,663,758
Interest expense (1,757) (13,320) (5,987) (28,187) (1,092,977)
Other expense (4,011) (426,150) (9,951) (434,524) (600,071)
---------------- ---------------- ---------------- ---------------- --------------------
Total other income (expense), net 37,948 (290,684) 85,817 (159,973) 1,970,710
---------------- ---------------- ---------------- ---------------- --------------------
Net loss (2,218,750) (4,037,184) (4,448,125) (9,588,079) (82,427,355)

Preferred stock dividends - - - - (36,825,680)
Accretion of convertible preferred stock - - - - (113,014)
---------------- ---------------- ---------------- ---------------- --------------------
Loss to common shareholders $ (2,218,750) $ (4,037,184) $ (4,448,125) $ (9,588,079) $(119,366,049)
================ ================ ================ ================ ====================

Loss per share, basic and diluted $ (0.05) $ (0.09) $ (0.10) $ (0.22)
================ ================ ================ ================
Weighted-average common shares outstanding 42,814,929 42,795,821 42,813,918 42,783,407
================ ================ ================ ================

See notes to unaudited consolidated financial statements.



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


Cumulative from
May 8, 1997
(date of inception)
Six months ended June 30, through June
2003 2002 30, 2003
------------------------------------------------------
Cash flows from operating activities:

Net loss $ (4,448,125) $ (9,588,079) $ (82,427,355)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 143,270 1,012,235 3,809,273
Loss on sale of fixed assets - - 170,868
Gain on sale of fixed assets (6,276) - (6,276)
Impairment of assets - - 4,297,128
Restructuring charge net of expenses paid (171,773) - 1,577,965
Reserve for officers note 9,951 426,149 438,349
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 - 19,294 1,290,253
Warrants issued for consulting services - - 1,569,366
Services and interest expense paid in preferred stock - - 11,485
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 936,919 164,570 (1,366,594)
Accounts payable 36,695 (824,017) 114,021
Accrued compensation and benefits 42,444 (434,703) 269,067
Accrued interest - - 275,560
Due to related party - (35,532) -
Other accrued expenses and current liabilities (155,530) (301,484) 430,021
------------------------------------------------------

Net cash used in operating activities (3,612,425) (9,561,567) (67,365,334)

Cash flows from investing activities:
Purchase of investments (1,100,000) - (1,100,000)
Increase in other assets (194,102) (81,700) (369,320)
Purchases of property and equipment (5,916) (293,454) (8,419,631)
Sale of property and equipment 29,641 - 29,641
------------------------------------------------------

Net cash used in investing activities (1,270,377) (375,154) (9,859,310)

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 463 12,765 123,712
Exercise of employee stock options - - 1,175,670
Issuance of preferred stock - - 32,868,028
Repayment of subscription receivable - - 5,000,000
Proceeds from capital leases - - 495,851
Repayment of capital leases (127,672) (180,492) (959,026)
Proceeds from notes payable issued to investors - - 3,550,000
------------------------------------------------------

Net cash (used) provided by financing activities (127,209) (167,727) 90,436,399

(Decrease) increase in cash and cash equivalents (5,010,011) (10,104,448) 13,211,755

Cash and cash equivalents, beginning of period 18,221,766 34,601,585 -
------------------------------------------------------

Cash and cash equivalents, end of period $ 13,211,755 $ 24,497,137 $ 13,211,755
======================================================

Supplemental disclosure of non--cash transactions:
Cash paid for interest $ 6,000 $ 34,000 $ 487,426
======================================================
Cash paid for taxes $ 4,500 $ 17,000 $ 30,300
======================================================
Assets acquired through capital lease $ - $ - $ 535,445
======================================================

See notes to unaudited consolidated financial statements.



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


Note 1. Nature of Business and Operations

Nature of Business. Beacon Power Corporation is a development stage company that
was incorporated on May 8, 1997. The Corporation, and its subsidiary
(collectively "Beacon" or "the Company") designs, develops, configures and
offers for sale, power conversion and energy storage systems that provide highly
reliable, high-quality, environmentally friendly, uninterruptible electric power
employing both proprietary and third-party solutions for a number of potential
applications. The Company has segmented the potential markets for its products
into four broad categories: (1) power conversion systems for renewable
applications (such as the recently introduced M5 product) (2) high energy
flywheel-based energy storage systems for telecom and renewable energy
applications, (3) flywheel-based high-power and energy systems for utility and
distributed generation (specifically frequency and voltage regulation)
applications, and (4) high-power uninterruptible flywheel-based power systems
(UPS) for both short (12-30 sec) and long (5-15 min) duration applications.

The Company believes its near-term opportunities are in the development and
marketing of its M5 Power Conditioning System based on recently acquired
intellectual property. This system converts DC power generated by renewable
sources from solar or wind to the AC power required by residential and
commercial users. The Company expects to have commercial sales of its M5 Power
Conditioning System for solar applications by the end of this year.

The Company believes that its next generation high-energy 25kWh flywheel
product, which is based on existing field proven products, will be well suited
for renewable energy uses in both photovoltaic and wind turbine applications as
well as telecom energy storage. The Company believes that its current and
anticipated flywheel-based products offer life-cycle cost advantages and
significant performance improvements over conventional, battery-based back-up
power and UPS systems. The Company will not make significant expenditures beyond
the design level for this product until those markets express a tangible
interest in its products.

In the area of utility grid and distributed generation applications, the Company
believes grid frequency regulation represents the most promising opportunity for
its flywheel technology. Transmission and distribution reliability and
efficiency are dependent on frequency control of the grid. Frequency imbalances
occur when generators cannot follow load changes quickly enough. The Company
believes that a "Smart Energy Matrix", an array of high power / high-energy
flywheels, can provide this service at costs that would be attractive to
customers. However, the Company will not make significant expenditures beyond
the design level for this product until those markets express a tangible
interest in its products.

Of the four market categories outlined above, only the power conversion systems
for renewable applications is proceeding to production. Although the Company has
designs for flywheel-based solutions for a number of applications, we would need
to complete the development and test phase prior to the beginning of actual
production. It is uncertain if or to what extent the remaining segments of our
potential business will materialize. The Company will not make significant
expenditures beyond the design level until it has identified markets in which
its products will be successful, and those markets express a tangible interest
in its products. The Company may not have sufficient cash available to complete
prototype development and production of products unless additional equity or
debt financing is available.

Because the Company has not yet generated a significant amount of revenue from
its operations, it is continuing to be accounted for as a development stage
company under Statement of Financial Accounting Standards No. 7.

Operations. The Company has experienced net losses since its inception and, as
of June 30, 2003, had an accumulated deficit of approximately $119.4 million.
The Company's business strategy is to create near-term revenues and gross
margins from the sale of solar power inverters, while building a reputation for
excellent performance from its equipment and its sales and service organization.
The Company will then use the relationships it is developing to gain market
access for the Company's future products for the renewable energy industry. For
the Company's current and contemplated flywheel-based systems, it is continuing
to evaluate products in terms of the market size and growth potential,
competitive advantages that its products could provide and probable market
penetration. The Company will not make the additional expenditures that would be
required for prototype development or production capabilities until it has
defined the specific markets to be served and the marketplace has expressed
tangible interest. If markets are identified in which the Company believes its
flywheel products will be successful, and those markets express a tangible
interest in its products, the Company may not have sufficient cash available to
complete prototype development and production of its products unless additional
equity or debt financing is available.

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

The accompanying unaudited consolidated financial statements have been prepared
using accounting principles generally accepted in the United States of America
for interim financial information and with Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals considered
necessary for a fair presentation, have been included in the accompanying
unaudited financial statements. Operating results for the three and six months
ended June 30, 2003 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2003. Certain information and
footnote disclosure normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements presented herein be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K, for the year ended December 31, 2002.

There have been no significant additions to or changes in accounting policies of
the Company since December 31, 2002. For a complete description of the Company's
accounting policies, see Note 2 to Consolidated Financial Statements in the
Company's 2002 Annual Report on Form 10-K.






Note 3. Property and Equipment

Property and equipment consist of the following:



Estimated
Useful June 30, December 31,
Lives 2003 2002
-------------------------------------------------

Machinery and equipment 5 years $1,996,259 $1,998,631
Service vehicles 5 years 63,792 63,792
Furniture and fixtures 7 years 686,572 717,293
Office equipment 3 years 1,908,500 1,914,195
Leasehold improvements Lease term 2,072,577 2,072,577
Equipment under capital lease obligations Lease term 1,008,985 1,081,726
-------------------------------------

Total $7,736,685 $7,848,214

Less accumulated depreciation and amortization (3,045,775) (2,996,079)
-------------------------------------

Property and equipment, before impairment $4,690,910 $4,852,135
-------------------------------------

Less Impairment Reserve (4,282,929) (4,289,206)
-------------------------------------

Property and equipment, net $ 407,981 $ 562,929
=====================================



Note 4. Commitments

The Company leases office and light manufacturing space under an operating lease
through September 30, 2007 and has various operating short-term leases for
certain office and manufacturing equipment expiring through December 2003. Under
the terms of the facility lease, the Company provided the lessor with an
irrevocable letter of credit. At June 30, 2003 the balance of the letter of
credit totaled $355,232. A cash deposit secures this letter of credit.


Note 5. Investments

On May 12, 2003, the Company, as part of a larger financing with other
investors, made an investment of $1,000,000 in Series A Preferred Stock of
Evergreen Solar, Inc., a Nasdaq traded, public company that specializes in
renewable energy systems manufacturing. The equivalent share price for this
investment was $1.12. This investment was made for the potential market
valuation gains of this recognized market leader in photovoltaic systems; to
develop a strategic relationship with that company and further demonstrate our
commitment to renewable energy that began with our announcement of our intention
to provide inverters for photovoltaic and wind turbine applications. This
investment was made on the same terms as the other investors in this financing.
In addition, the Company also purchased for $100,000, a three-year warrant that
is exercisable for 2,400,000 shares of Evergreen's common stock at $3.37 per
share.

This investment in equity securities is classified as available for sale and is,
therefore, carried on the balance sheet at fair market value, with changes in
carrying value being recorded in Accumulated Other Comprehensive Income/(Loss)
until the investments are sold, in accordance with the provisions of Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Fair market value is determined using period-end
sales prices on U.S. or foreign stock exchanges.


Note 6. Common Stock

Reserved Shares. At June 30, 2003 and December 31, 2002, 13,595,240 and
14,493,238 shares of common stock were reserved for issuance under the Company's
stock option plan and outstanding warrants, respectively.

Note 7. Related Party Transactions

Advance to Officers. During 2001, the Company advanced approximately $785,000 to
three officers of the Company. These advances are interest bearing and secured
by the officers' holdings of the Company's common stock and were provided to the
officers to allow them to exercise stock options and in one case, to pay the
related taxes. Through June 30, 2003, the Company has collected approximately
$323,000 in payments on these advances. In June 2002, due to the current market
value of the pledged securities and the uncertainty of collection of the
advance, the Company took a charge in the amount of $426,148 to reserve the
remaining balance of the advance to Mr. William Stanton, its former CEO and
president. This loan, however, has not been cancelled, and is partially secured
by 308,318 shares of the Company's stock. Mr. Stanton continues to be a director
of the Company. This charge is included in other expenses in the accompanying
consolidated statement of operations. The remaining advance balance of
approximately $55,000 at June 30, 2003 is included in prepaid and other assets
in the accompanying consolidated balance sheet.

Note 8. Restructuring 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 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 have been idled, including
machinery and equipment, tooling, office furniture and fixtures, and equipment
and leasehold improvements. The Company has 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, as a
result, has taken 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 assets held for
sale have been grouped together and classified as "Assets held for sale" in the
current assets section of the balance sheet. Assets held for sale have been
written down to their fair value based on quotes from vendors and other market
factors. The reserve against future lease payments is classified as
"Restructuring reserve" in the current liabilities section of the balance sheet.

A summary of the restructuring reserves is as follows:



Facility related Asset impairment

Beginning balance at December 31, 2002 $ 1,749,738 $ 4,289,206
Charges for the period - -
Other - (6,277)
Payments (171,773) -
------------------------------------------------
Ending balance at June 30, 2003 $ 1,577,965 $ 4,282,929
================================================


Note 9. Stock-Based Compensation

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 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 have not been adopted at
this time. Compensation expense associated with awards of stock or options to
employees is measured using the intrinsic-value method. Deferred compensation
expense associated with awards to non-employees is measured using the fair-value
method and is amortized over the vesting period of three years using a
calculation under FASB Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans."

No stock-based compensation is reflected in net earnings for 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.



Three months ended Three months ended Six months ended Six months ended
30-Jun-03 30-Jun-02 30-Jun-03 30-Jun-02



Net loss to common shareholders as reported ($2,218,750) ($4,037,184) ($4,251,696) ($9,588,079)

Pro forma compensation expense 114,330 825,472 223,000 1,650,944
Net loss--pro forma ($2,333,080) ($4,862,656) ($4,474,696) ($11,239,023)
Loss per share--as reported ($0.05) ($0.09) ($0.10) ($0.22)
Loss per share--pro forma ($0.05) ($0.11) ($0.10) ($0.26)




Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Note Regarding Forward Looking Statements:

This Quarterly Report on Form 10-Q contains forward-looking statements
concerning, among other things, the Company's expected future revenues,
operations and expenditures and estimates of the potential markets for the
Company's services. Such statements made by the Company fall within the meaning
of the Private Securities Litigation Reform act of 1995, as amended. All such
forward-looking statements are necessarily only estimates of future results and
the actual results achieved by the Company may differ materially from these
projections due to a number of factors as discussed in the section entitled
"Certain Factors Affecting Future Operating Results" of this Form 10-Q.

Overview

The Company designs, develops, configures and offers for sale, power conversion
and energy storage systems that provide highly reliable, high-quality,
environmentally friendly, uninterruptible electric power employing both
proprietary and third-party solutions for a number of potential applications.
The Company has segmented the potential markets for its products into three
broad categories: (1) low power conversion systems (also known as inverters) and
low power, high energy flywheel-based energy storage systems for renewable
energy applications, (2) flywheel-based high-power and energy systems for
utility and distributed generation (specifically frequency and voltage
regulation) applications, and (3) high-power uninterruptible flywheel-based
power systems (UPS) for both short (12-30 sec) and long (5-15 min) duration
applications.

The Company believes its near-term opportunities are in the development and
marketing of its M5 Power Conditioning System and similar systems for renewable
energy applications in both photovoltaic and wind turbine systems. These systems
convert DC power generated by renewable sources from solar or wind to the AC
power required by residential and commercial users. The Company successfully
acquired the intellectual property of Advanced Energy Systems (AES) in March of
2003, and immediately started a process of evaluating the design of the former
AES MM-5000 inverter. The Company has now reviewed both the software and
hardware of the MM-5000 product, and has made design improvements that are being
incorporated into its M5 Power Conditioning System that will be introduced into
the solar power marketplace this fall. The Company expects to have commercial
sales of its M5 Power Conditioning System by the end of this year.

The Company's business strategy is to create immediate revenues and gross
margins with the M5 Power Conditioning System while building a reputation for
excellence from the performance of its equipment and from its sales and service
organization. The Company has hired key personnel from AES in the sales and
service area, and is developing a training and certification program to insure
the highest reliability in its equipment being installed. The Company will then
use the relationships it is developing to gain market access for the Company's
future products for the renewable energy industry.

The Company also believes that its next generation high-energy 25kWh flywheel
product, which is based on existing field proven products, will be well suited
for renewable energy uses in both photovoltaic and wind turbine applications as
well as telecom energy storage. The Company's flywheel-based storage systems are
an alternative to the battery storage used today, and offer a number of
advantages in comparison to batteries. These performance advantages include
improved certainty of operations, more reliable monitoring, higher reliability,
significantly longer life, improved recharging capability, significantly reduced
scheduled maintenance, greater environmental friendliness and favorable
life-cycle costs. The near-term telecom market has not led to orders due to
customer preferences for first-cost comparisons over longer life-cycle costs. It
is uncertain when or to what extent this segment of our potential business will
materialize. However, the Company believes that customers in the renewable
energy market are more likely to purchase products on a life-cycle cost basis
and therefore represent the more immediate potential for orders. However, the
Company will not make significant expenditures beyond the design level for this
product until those markets express a tangible interest in its products.


The Company believes that it may have long-term opportunities for growth in
flywheel-based high-power and energy systems for utility and distributed
generation (specifically frequency and voltage regulation) applications, and
high-power uninterruptible flywheel-based power systems (UPS) for both short
(12-30 sec) and long (5-15 min) duration applications.

In the area of utility grid and distributed generation applications, the Company
believes grid frequency regulation represents the most promising opportunity for
its flywheel technology. Transmission and distribution reliability and
efficiency are dependent on frequency control of the grid. Frequency imbalances
occur when generators cannot follow load changes quickly enough. Today, this
control is done by cycling generator output to match the constantly changing
load. This cycling has a negative impact on generator life, and results in
additional maintenance costs for the generators that provide this service. The
Company believes that a "Smart Energy Matrix", an array of high-power /
high-energy flywheels, can provide this service without incurring the high
maintenance costs of generators. The Company's matrix design would provide a
significant amount of stored energy (one megawatt for 15 minutes) to address a
requirement of every utility system; that of maintaining a constant frequency
alternating current. Frequency regulation is unique among the ancillary services
that are sold into Regional Transmission Operators such as PJM in that it is
nominally a zero energy service; the down regulation and up regulation are close
to being in balance. Because this is the case, frequency regulation appears to
be especially well suited to the characteristics of the Company's matrix design.
The Company believes that today, no other energy storage system exists that can
cost effectively offer the combination of required cyclic life, fast response,
ease of connecting to the grid, and simple operation. At today's prices for
frequency regulation services, the Company has concluded that its matrix design
could result in very attractive financial returns. The Company believes its
Smart Energy Matrix can be introduced using today's market mechanisms to
participate directly as an independent regulation service provider. This
approach bypasses the traditionally long adoption period of new technology by
the utility industry. The Company is seeking appropriate partners to fund and
demonstrate this potential application. The Company will not make significant
expenditures beyond the design level for this product until it has formed a
partner relationship.

For UPS applications, the Company believes that its current and anticipated
flywheel-based products offer life-cycle cost advantages and significant
performance advantages over conventional, battery-based back-up power and UPS
systems. Users of electricity can experience significant losses in their
operations if their electricity supply is partially or wholly interrupted, such
as by sags, surges and temporary interruptions. The highest level of power
quality required for today's sophisticated electronic and industrial
applications requires an uninterruptible power system (UPS) close to the place
of use. Today's UPS systems typically use short duration (12-30 sec) energy
storage to start fast responding diesel generators. The Company offers such a
product today through its relationship with other companies. In addition, the
Company's unique smart energy matrix design for high energy flywheels could
deliver power for up to 15 minutes ride through and provide excellent load
following for the slower responding natural gas generators and gas turbines.
Again, the Company will not make significant expenditures beyond the design
level for this product until those markets express a tangible interest in its
products.

Of the four market categories outlined above, only the power conversion systems
for renewable systems is proceeding to production. Although the Company has
designs for flywheel-based solutions for a number of applications, the Company
would need to complete the development and test phase prior to the beginning of
actual production. It is uncertain if or to what extent the remaining segments
of our potential business will materialize. The Company will not make
significant expenditures beyond the design level until it has identified markets
in which its products will be successful, and those markets express a tangible
interest in our products. The Company may not have sufficient cash available to
complete prototype development and production of products unless additional
equity or debt financing is available.

The Company is marketing its M5 Power Conditioning System in the photovoltaic
market and expects to begin shipments in the fourth quarter of this year. In
addition, the Company has available for sale high-energy products that deliver a
low level of power over a long period of time (typically measured in hours).
These products are tailored to the telecommunications, cable systems, computer
networks, and Internet markets. The Company also has UPS products available for
sale to provide short-term (typically measured in seconds) power until a
generator or other long-term power source can be activated for commercial and
industrial facilities that are high-power applications. Additionally, the
Company has designed a high-energy product (25kWh) for potential applications in
the renewable energy market for both photovoltaic and wind turbine uses. The
Company may not have sufficient cash available to complete prototype development
and production of products unless we raise additional equity or obtain debt
financing.

From its inception through June 30, 2003 the Company has incurred losses of
approximately $119.4 million. The Company does not expect to become profitable
or obtain positive cash flow before 2006 and may not achieve positive cash flow
even at that point or beyond. Also, the Company's losses and uses of cash may
fluctuate significantly from quarter to quarter as its costs of development,
production and marketing fluctuate. In addition, the Company may make
investments that it consider strategic.

Results of operations:

Comparison of three months ended June 30, 2003 and 2002

Revenues. The Company continues to evaluate markets for its current products and
other future products but did not recognize revenues for the three months ended
June 30, 2003 or 2002

Selling, General and Administrative Expenses. The Company's sales and marketing
expenses consist primarily of compensation and benefits for our sales and
marketing personnel and related business development expenses. The Company's
general and administrative expenses consist primarily of compensation and
benefits related to its corporate staff, professional fees, insurance costs and
travel. Selling, general and administrative expenses totaled approximately
$1,261,000 and $1,470,000 for the three months ended June 30, 2003 and 2002,
respectively. The decrease of approximately $209,000 or 14.2% is primarily the
result of a reduction in headcount.

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 process. These costs were reduced significantly during 2002
as the Company reduced its headcount on March 12 and July 19, 2002. The Company
is incurring costs for emerging inverter product development but is not doing
significant development work on its flywheel family of products. While the
Company does not expect to incur any significant additional development costs
for its existing flywheel or inverter products, it may incur significant costs
for the development of new flywheel design prototypes or staffing the
manufacturing function and establishing required processes for commercial
production of its products. The Company will begin prototype development and
establishing production capabilities only after it has defined the specific
markets to be served and the marketplace has expressed tangible interest. While
the Company will continue to undertake modest design efforts on new high-powered
flywheel products, it expects its cost of research and development in 2003 to be
reduced compared to 2002. Research and development expenses totaled
approximately $952,000 and $1,770,000 for the three months ended June 30, 2003
and 2002, respectively. The decrease of $818,000 or 46.2% is primarily the
result of lower headcount and lower development costs in 2003 compared to 2002
as the Company performs limited development work while working to identify
markets for our flywheel products.

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 our facilities. The Company also has
intellectual property in the form of a patent on its vacuum system that it began
to amortize in 2002. Depreciation and amortization totaled approximately $44,000
and $506,000 for the three months ended June 30, 2003 and 2002, respectively.
The decrease of $462,000 or 91.3% is attributable to the decrease in the
remaining net book values of our assets.

Interest and Other Income/Expense, net. The Company's non-operating income and
expenses are primarily attributable to interest income resulting from cash on
hand, partially offset by interest expense associated with its capital leases.
Interest income for the three months ended June 30, 2003 was approximately
$44,000, compared to $149,000 for the same period in 2002. The decrease in 2003
compared to the prior year is the result of lower cash balances and lower
interest rates.

Interest expense decreased to approximately $2,000 for the three months ended
June 30, 2003 from approximately $13,000 for the same period in 2002. Interest
expense relates to assets leased under capital leases.

Other expense of approximately $4,000 for the three months ended June 30, 2003
relates to the write-off of capitalized interest on the reserved loan of our
former CEO.

Liquidity and Capital Resources

The Company's cash requirements depend on many factors, including its research
and development activities, continued efforts to commercialize products and
additional market development. The Company expects to make significant
expenditures to fund its working capital, develop technologies and explore
opportunities to find and develop other markets to sell its products. However,
the Company has taken significant actions over the last 21 months to reduce its
cash expenditures for product development, infrastructure and production
readiness. The Company has significantly reduced spending on headcount,
development work and capital expenditures. 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 and development of potential products for markets under
consideration. The Company is not making expenditures for prototype development
or production capabilities until it has defined the specific markets to be
served.

Net cash used in operating activities was approximately ($3,612,000) and
($9,562,000) for the six months ended June 30, 2003 and 2002, respectively. The
primary component to the negative cash flow from operations is from net losses.
For the first six months of 2003, the Company had a net loss of approximately
($4,448,000). This included non-cash charges of approximately $10,000 for the
reserve of interest capitalized on a reserved note due from its former CEO,
facility related cash payments charged against restructuring reserves of
approximately ($172,000), gain on the sale of assets of ($6,000) and
depreciation and amortization of approximately $143,000. Changes in operating
assets and liabilities generated approximately $861,000 of cash during the first
six months of 2003. The primary components were increases in accounts payable
and accrued compensation and benefits of approximately $37,000 and 42,000
respectively, and decreases in prepaid expenses of approximately $937,000. These
were offset by accrued expenses and other current liabilities of approximately
($156,000). For the first six months of 2002, the Company had a net loss of
approximately ($9,588,000). This included non-cash charges of approximately
$1,457,000 including a reserve taken against a note receivable from a former
officer of $426,000; approximately $19,000 related to stock options issued for
consulting services and depreciation and amortization of approximately
$1,012,000. Changes in operating assets and liabilities used approximately
($1,431,000) of cash during the first six months of 2002. The primary components
were a decrease in accounts payable of approximately ($824,000), a decrease in
accrued compensation and benefits of approximately ($435,000), a decrease in
amounts due to a related party of approximately ($36,000) and a decrease in
other accruals and current liabilities of ($301,000), these were offset by a
decrease in prepaid expense and other current assets of approximately $165,000.

Net cash used in investing activities was approximately ($1,270,000) and
($375,000) for the six months ended June 30, 2003 and 2002, respectively. The
principal uses of cash during the first six months of 2003 were primarily
related to the investment in Evergreen Solar of ($1,100,000), increases in other
assets totaling ($194,000), purchase of capital equipment of ($6,000) and the
principal sources of cash were from the sale of certain impaired machinery and
equipment of the Company of approximately $30,000. The principal uses of cash
during the first six months of 2002 were related to purchases of machinery and
equipment totaling approximately ($293,000) and other assets of ($82,000.)

Net cash used by financing activities was approximately ($127,000) and
($168,000) for the six months ended June 30, 2003 and 2002, respectively. For
the first six months of 2003, the cash used for financing activities related to
repayment of capital leases of ($128,000), offset by cash proceeds from the
employee stock purchase plan of approximately $1,000, and for the first six
months of 2002 the cash used for financing activities related to repayment of
capital leases of approximately ($181,000) offset by cash proceeds from the
employee stock purchase plan of approximately $13,000.

Based on the Company's Business Plan, which includes the cash flow benefits of
significantly reduced headcount, development spending and capital expenditures
as well as the revenues and margins associated with its emerging inverter
electronics business, the Company believes that its cash and cash equivalents
and future cash flow from operations will satisfy the Company's working capital
needs through 2004. However, this belief assumes no expenditures for prototype
development or production capabilities for flywheel products, which could
require significant amounts of cash. In the event that the Company is not able
to obtain development contracts from customers to fund prototype development,
these expenditures, if made, could significantly reduce the number of months its
cash and cash equivalents and future cash flow from operations will satisfy
working capital needs. In as much as the Company does not expect to become
profitable or cash flow positive until at least 2006, its ability to continue as
a going concern will depend on being able to raise additional capital or obtain
debt financing. 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 its
shareholders.

Certain Factors Affecting Future Operating Results

The following factors, as well as others mentioned in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (filed March 31, 2003),
could cause actual results to differ materially from those indicated by
forward-looking statements made in this Quarterly Report on Form 10-Q:

The Value Proposition of our Inverter Power Conditioning Systems May Not Be
Recognized.

There can be no assurance that the Company will be able to compete
successfully against other suppliers of inverters. To compete successfully
the Company must establish the value proposition of its products based upon
dependability, operational benefits, and maintenance-free life, or it must
develop other strategic alternatives.

We May Not be Able to Establish a Distribution Structure to Sell Our Inverter
Power Conditioning Systems.

The Company expects to market its Power Conditioning Systems through
distributor channels. The Company does not have experience in these
distribution channels or the photovoltaic markets and may not be successful
in establishing adequate channels to market. Even if the Company is able to
establish these channels to market there can be no assurances that adequate
distribution volumes can be achieved to sustain operations.

We Acquired the Intellectual Properties for the Inverter Power Conditioning
Systems from a Company in Bankruptcy and Distributors and Their Retail Customers
may not Purchase Our Products.

The Company purchased the intellectual property that its Inverter Power
Conditioning Systems are based on from a company in bankruptcy which had
fielded units that are not supported by warranties and in some cases these
units are not functioning as expected. While the Company has made the
changes to its emerging product to provide reliable performance and the
Company will provide warranties for its products, there can no assurance
that the distributors and their customers will purchase the Company's
product.

We Face Intense Competition from other Inverter Manufacturers.

The performance of other inverter manufacturers may improve to rival what
the Company considers to be superior performance characteristics of its
product. This could affect the Company's ability to maintain pricing that
is expected to provide sufficient cash flow to continue operations.

The Renewable Energy Market may not Maintain the Market Growth Upon Which our
Business Plan is Based, Which Could Adversely Affected Our Financial
Performance.

While this industry has continued to grow at solid compound annual growth
rates, there can be no assurances that these rates of growth will continue,
which could significantly reduce the revenues that the Company could
realize and therefore adversely affect its financial performance.

The Value Proposition of our High-Energy Flywheel Products May Not Be
Recognized.

There can be no assurance that the Company will be able to compete
successfully against batteries. To compete successfully the Company must
establish the value proposition of its products based upon their
dependability, environmental benefits, and long maintenance-free life, or
it must develop other strategic alternatives.

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

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

The Telecommunications Industry Has Experienced a Sharp Decline, Which has
Adversely Affected Our Financial Performance.

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

We May Not Be Able to Reduce Our Product Cost for Inverter Products or
High-Energy Flywheel Enough to Make Our Prices Competitive.

There can be no assurance that the Company will be successful in lowering
its production costs through lower cost designs or volume discounts, which
may prevent market acceptance of its products.

We Have No Experience Manufacturing Inverter Power Conditioning Systems or
Flywheel Energy Storage Systems on a Commercial Basis. In the Event of
Significant Sales We Will Need to Develop or Obtain Manufacturing Capacity for
Our Products. There Can be No Assurance That We Will be Able to Accomplish These
Tasks, and if We do not We Will Not Become Profitable.

Should the Company experience customer demand for its inverter or flywheel
products, 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 no
experience in the volume manufacture of inverter or flywheel 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. In fact,
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 the capital
build-out. The Company may not achieve profitability if it cannot develop
or obtain efficient, low-cost manufacturing capability, processes and
suppliers that will enable the Company to meet the quality, price,
engineering, design and production standards or production volumes required
to meet its product commercialization schedule, if any, or to satisfy the
requirements of its customers or the market generally.

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

The Company will need to secure additional financing in the future to carry
out its Business Plan. While the Company believes its cash balances will
fund operations through 2004, it may also need additional financing for a
variety of reasons including:

o expanding research and development;

o achieving manufacturing capability;

o funding additional working capital; or

o acquiring complementary products, businesses or technologies.

The Company cannot be certain that it will be able to raise additional
funds on terms acceptable to or at all. If future financing is not
available or is not available on acceptable terms, the Company's business,
results of operations and financial condition would be materially adversely
affected. See "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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

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

Our Stock May be Disqualified from the SmallCap Market System of NASDAQ.

The Company has been granted an extension until October 6, 2003 to achieve
compliance of the listing requirement to maintain a minimum closing bid
price of one dollar for ten consecutive trading days. In the event that the
Company is unable to meet this listing requirement, and appeals for
additional time to achieve compliance are unsuccessful, the Company's stock
could 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 acceptance on the OTCBB, it will be listed on the
pink sheets.

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

The Company has a limited operating history. The Company was formed in May
1997 to commercialize electrical power systems based on flywheel energy
storage. The Company is a development stage company attempting to make the
transition to the manufacturing of new products in a new and developing
sector. Unless the Company can achieve significant market acceptance of its
current or future products at volumes and with margins that allow it to
cover costs of operations, the Company may never advance beyond the
start-up phase. In light of the foregoing, it is difficult or impossible
for the Company to predict when and if the Company will have future revenue
growth.

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

We Have Incurred Losses Since Our Inception and Anticipate Continued Losses
Through at Least 2006.

The Company has incurred net losses to common shareholders and negative
cash flows since its inception in May 1997. The Company had net losses to
common shareholders of approximately ($4,448,000) through June 30, 2003,
($20,839,000) in 2002, ($26,146,000) in 2001, ($53,279,000) in 2000 and
($6,630,000) in 1999. Since its inception in May 1997, the Company has had
net losses to common shareholders totaling ($119,366,000). The Company
expects to continue to incur net losses through at least 2006. Although the
Company is looking for additional ways to economize and reduce costs, its
efforts may prove even more expensive than anticipated. Revenue must grow
substantially if the Company is to offset these higher expenses and become
profitable. Even if the Company does achieve profitability, it may be
unable to sustain or increase profitability in the future.

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

We Might Fail to Develop Successful Products for the Market Opportunities in
Power Conditioning or Flywheel Systems.

The successful development of the Company's products involves significant
technological and cost challenges and will require additional financing to
complete. Major risks include:

o maintaining the development schedule, as such development could take
substantially longer than anticipated;

o the cost of developing key components of our systems that have
significant technical risk and which may not be economically feasible
for a competitive product in the high-power market;

o reducing manufacturing costs for the flywheel's shaft, hub and rim,
bearings and related electronics to increase our chances of achieving
profitability;

o ensuring minimal warranty expenses through design and quality
control;

o ensuring quality and cost control from our suppliers;

o raising the necessary financing to provide sufficient funding for
completion of development;

o extending the product to new applications.


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

The Company's business, prospects, results of operations, or financial
condition could be harmed if the Company 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 and
its financial performance could be adversely affected. Because the
components with limited sources are key components that are complex,
difficult to manufacture and may 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 being pursued.

We Face Intense Competition and We May Be Unable to Compete Successfully in the
Inverter or Flywheel Market.

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

Technological advances in alternative energy products or other alternative
energy technologies may render the Company's systems obsolete. The Company
does not have any products or technologies other than electronic inverters
or flywheel systems under development. The Company's electronic inverters
and flywheel systems are, however, competing with a number of alternative
energy products, as well as other products being developed by potential
competitors that have potential commercial applications, including ultra
capacitors, fuel cells, advanced batteries, and other alternative energy
technologies.

Government Regulation May Impair Our Ability to Market Our Product.

Government regulation of the Company's product, whether at the federal,
state or local level, including any regulations, product buy downs or tax
rebates relating to purchase and installation of our products, may increase
our costs and the price of 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, pipeline connections 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 and distributing its systems
begin to early target markets, federal, state or local government entities
or competitors may seek to impose regulations.

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

The Company's business exposes it to potential product liability claims
that are inherent in the manufacturing, 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 our 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 our
ability to market and sell our products.

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

A serious accident involving either our inverters or flywheels or our
competitors' similar products could be a significant deterrent to customer
acceptance and adversely affect the Company's financial performance. With
any form of energy storage, including machinery, chemicals, fuel or other
means of energy storage, there is the possibility of accident. In
particular, if a metal flywheel fails and the energy stored is released,
the flywheel could break apart and the pieces could be ejected at a high
rate of speed. However, the Company's flywheels are based on a composite
designed so that in the event of a failure, the Company's flywheel would
shut down rather than disintegrate. To date, the Company's testing
validates this design conclusion. Also, the Company believes that one of
the advantages of composite flywheels over metal flywheels is that in the
event of a flywheel failure, the flywheel tends to delaminate rather than
(as in the case of metal) to break into a small number of large fragments
that have a greater possibility of bursting a containment vessel and
causing injury. A consortium of government, academic, and industry
representatives has been formed to address containment flywheel safety in
the event of this kind of flywheel failure. At this early stage of
commercialization, there are differing approaches to containment safety
with disagreement in the community on the most effective means. On
inverters, the potential for personal injury or property damage from faulty
electronics exists. However, the Company's inverters have been tested and
quality standards established to insure safe operation.

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

Because the Company's future success depends to a large degree on the
success of its technology, the Company's competitiveness will depend
significantly on whether it can attract and retain skilled technical
personnel, especially engineers, and can retain members of our executive
team. The Company has employment agreements that include non-compete
clauses with Messrs. Capp, CEO and President; Spiezio, Vice President of
Finance, Chief Financial Officer, Treasurer and Secretary; and Lazarewicz,
Vice President and Chief Technical Officer.

In the fourth quarter of 2001, the first quarter of 2002 and in July 2002,
the Company substantially reduced its workforce. Competition for skilled
personnel is intense, and as the Company seeks to determine the right size
for its workforce, it may not be successful in attracting and retaining the
personnel or executive talent necessary to develop products and operate
profitably.

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

There may only be a limited number of potential customers for the Company's
products, 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
our business.

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

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

Any Failure to Protect Our Intellectual Property Could Seriously Impair Our
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 power conditioning and 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, or will protect it 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, thereby harming its business prospects.

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

Stockholders who owned the Company prior to its initial public offering own
approximately 52.7% of our outstanding stock as of June 30, 2002. If a
sufficient number of these stockholders were to vote together as a group,
they would have the ability to control the Company's board of directors and
its policies. For instance, these stockholders would be able to control the
outcome of all stockholder votes, including votes concerning director
elections, charter and by-law amendments and possible mergers, corporate
control contests and other significant corporate transactions. These
stockholders may use their influence to approve actions that are adverse to
the interest of other investors, which could depress our stock price.

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

The markets for equity securities of high technology companies, including
companies in the power reliability and power quality markets, have been
highly volatile recently and the market price of our common stock has been
and may continue to be subject to significant fluctuations. This could be
in response to operating results, announcements of technological
innovations or new products by us, or our competitors, patent or
proprietary rights developments and market conditions for high technology
stocks in general. In addition, stock markets in 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.

We May not Be Able to Obtain Financing to Continue Operations and will Need to
Enter into A Merger or Acquisition and Our Shareholders may Suffer Substantial
Dilution.

In the event of a merger or acquisition, given the volatility of the
sector, the Company's inability to sell products to date and the asset
impairments it has recognized; the Company's shareholders may suffer
substantial dilution. The dilutive effect may increase substantially if the
Company's intellectual property is not recognized as an asset in the
transaction.

We May make Investments in Other Energy Companies in Our Sector to Increase
Shareholder Values Through Strategic Alliance or Return on Investment Which do
Not Create Gains and therefore Reduce Shareholder Value.

The Company may make investments in other energy companies in its sector to
gain strategic alliances, channels to market or appreciation in stock
value. These investments may not provide alliances or channels to market
that would 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 the investments may decrease
and reduce shareholder value.

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

Provisions in the Company's certificate of incorporation and by-laws and in
the Delaware corporate law, and the shareholder rights plan adopted in
September 2002, may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt that is
opposed by the Company's management and board of directors. Public
stockholders who might desire to participate in such a transaction may not
have an opportunity to do so. Beginning with the Company's annual
stockholder meeting in 2001, it implemented a staggered board of directors
that will make it difficult for stockholders to change the composition of
the board of directors in any one-year. Pursuant to a shareholder rights
plan adopted in September 2002, the Company issued rights as a dividend on
common stock on October 7, 2002 each of which entitles the holder to
purchase 1/100th of a share of newly issued preferred stock for $22.50 in
the event that any person not approved by the board of directors acquires
more than 15% (30% in the case of one large shareholder that already owned
more than 15%) of our outstanding common stock, or in the event that we are
acquired by another company $22.50 worth of the common stock of the other
company at half its market value (in each case the rights held by the
acquiring person are not exercisable and become void). The shareholder
rights plan was modified by rights plan amendment 1 dated December 27,
2002. The amendment increased the beneficial ownership approved by the
board of directors from 30% to 35% for one large shareholder. Additionally,
the Company's board of directors may authorize issuances of "blank check"
preferred stock that could be used to increase the number of outstanding
shares and discourage a takeover attempt. These anti-takeover provisions
could substantially impede the ability of public stockholders to benefit
from a change in control or change in the Company's management and board of
directors.

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 our 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 Beacon
Power. 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.


Subsequent Event

The Company, on August 5, 2003 was notified by the Nasdaq Stock Market that the
Nasdaq Listing Qualifications Panel had determined that a continuation of the
listing of the Company's securities on the Nasdaq SmallCap Market had been
granted and that its stock will continue to be listed on the SmallCap Market
until October 6, 2003. As previously announced, on June 6, 2003, the staff of
the Nasdaq Stock Market notified the Company that its stock would be removed
from the SmallCap Market due to its failure to satisfy the $1.00 bid price
requirement, and on July 18, 2003 the Company requested a hearing before the
Nasdaq Listing Qualifications Panel to appeal the Company's delisting. The Panel
exercised its discretionary authority and granted the Company an extension in
light of a proposal that Nasdaq has made to the Securities and Exchange
Commission that, if approved by the SEC, would provide two 180-day periods in
which to satisfy the bid price requirement (in addition to the two 180-day
periods currently provided by Nasdaq) for issuers, such as the Company, that
meet core initial-listing criteria. There is no way to predict what action, if
any, the SEC will take on this matter before October 6, 2003, and there is no
assurance that the Company's stock will continue to be listed on the Nasdaq
SmallCap Market after that date. If the SEC rejects the Nasdaq proposal and the
Company is unable to satisfy the $1.00 bid price requirement, then the Nasdaq
may cause the Company's stock to be removed from the SmallCap Market.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company's cash equivalents and investments, all of which have maturities of
less than one year, may expose the Company to interest rate risk. At June 30,
2003, the Company had approximately $60,000 of cash equivalents that were held
in non-interest bearing accounts. Also at June 30, 2003, the Company had
approximately $651,000 of cash equivalents that were held in interest bearing
checking accounts and $12,501,000 invested in interest-bearing money market
accounts. A 10% change in interest rates would change the investment income
realized on an annual basis by approximately $13,000, which the Company does not
believe is material.

Item 4. 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 a date within 90 days
before the filing date of this quarterly report. Based upon that evaluation,
they have concluded that the Company has in place 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.




PART II

Item 1. Legal Proceedings

On June 30, 2003, Vlado Ostovic, an independent engineer who resides in Germany,
commenced a lawsuit against the Company in Middlesex Superior Court in
Cambridge, Massachusetts. Mr. Ostovic alleges that the Company owes him $36,700
for engineering consulting services performed under a written agreement with the
Company. Mr. Ostovic's Complaint was served on the Company on or about July 16,
2003. The Complaint alleges that the Company terminated Mr. Ostovic's consulting
project earlier than he expected and, as a result, he is entitled to charge a
rate for his services higher than the agreed upon rate set forth in the parties'
contract. The Company has agreed to pay to Mr. Ostovic for hours worked pursuant
to the contract rate, which amounts to approximately $18,000. Mr. Ostovic is
unwilling to accept the contract rate given his claim that he was told the
project would be a long-term venture and the Company terminated it prematurely.
Mr. Ostovic is requesting a payment of an additional $18,000. The Company has
refused to pay Mr. Ostovic's charges in excess of the agreed upon rate based, in
part, on the contractual language expressly allowing the Company to terminate
the project at any phase upon payment for the task under development. Should Mr.
Ostovic continue to refuse to accept payment at the contract rate as payment in
full, the Company intends to aggressively defend against his claim to be
entitled to additional amounts.

Item 2. Changes in Securities

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

From November 16, 2000 to June 30, 2003, the Company spent approximately $9.8
million for inventory and materials used in research and development and $7.2
million for property and equipment, including the build-out of our facility at
234 Ballardvale Street in Wilmington, MA. In addition, the Company spent
approximately $1.2 million to pay dividends on our preferred stock that accrued
through the date of its initial public offering. The Company has spent
approximately $36 million for other working capital needs. In addition to the
above, the Company advanced funds totaling approximately $785,000 to three
officers of the Company. The officers have repaid approximately $323,000 of
these advances through June 30, 2003. In June 2002, due to the current market
value of the pledged securities and the uncertainty of collection of the
advance, the Company took a charge in the amount of $426,148 to reserve the
remaining balance of the advance to Mr. William Stanton, its former CEO and
president. This, however, has not been cancelled, and is partially secured by
308,318 shares of the Company's stock. Mr. Stanton continues to be a director of
the Company. This charge is included in other expenses in the accompanying
consolidated statement of operations. The remaining advance balance of
approximately $55,000 at June 30, 2003 is included in prepaid and other assets
in the accompanying consolidated balance sheet. Other than as disclosed above,
none of these amounts were direct or indirect payments to directors or officers
of the issuer or their associates or to persons owning 10% or more of the
Company's common stock or to any of our affiliates.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Exhibits
31.1 Certification of Chief Executive Officer required by 13a-14(a)
31.2 Certification of Chief Financial Officer required by 13a-14(a)
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer


(b) Reports on Form 8-K

None



SIGNATURES

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

BEACON POWER CORPORATION

Date: August 14, 2003 By: /s/ F. William Capp
-------------------
F. William Capp
President and Chief Executive Officer


August 14, 2003 By: /s/ James M. Spiezio
-------------------
James M. Spiezio
Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
Principal Financial Officer





Exhibit 31.1


CERTIFICATION

I, F. William Capp, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Beacon Power
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of June 30,
2003 based upon such evaluation; and

c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.

Date: August 14, 2003
/s/ F. William Capp
--------------------
F. William Capp
Chief Executive Officer




Exhibit 31.2

CERTIFICATION

I, James M. Spiezio, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Beacon Power
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of June 30,
2003 based upon such evaluation; and

c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.

Date: August 14, 2003
/s/ James M. Spiezio
---------------------
James M. Spiezio
Chief Financial Officer




Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Beacon Power
Corporation. (the "Company") on Form 10-Q for the period ended June 30, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, F. William Capp, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and (2) The information contained
in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.

August 14, 2003



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





Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Beacon Power
Corporation. (the "Company") on Form 10-Q for the period ended June 30, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, James M. Spiezio, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and (2) The information contained
in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.


August 14, 2003


By: /s/James M. Spiezio
---------------------
Chief Financial Officer