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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 March 31, 2004,

or

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

Commission File Number: 001-16171

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




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



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

(978) 694-9121
(Registrant's telephone number, including area code)
------------------------

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 May 10, 2004 was 43,141,582.



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 March 31, 2004 and December 31, 2003. 1

Unaudited Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 and for the Period May 8, 1997
(date of inception) to March 31, 2004. 2

Unaudited Consolidated Statements of Cash Flows for three months
ended March 31, 2004 and 2003 and for the Period May 8, 1997
(date of inception) to March 31, 2004. 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 22

Item 4. Controls and Procedures 22

PART II. Other Information

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

Signatures 25

Certifications 26-29




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

March 31, December 31,
2004 2003
--------------------- ---------------------
Assets
Current assets:

Cash and cash equivalents $ 7,096,242 $ 8,909,261
Accounts receivable, trade 97,972 128,133
Inventory 606,786 238,684
Prepaid expenses and other current assets 594,339 773,226
Investments (Note 5) 1,187,500 1,163,758
--------------------- ---------------------
Total current assets 9,582,839 11,213,062

Property and equipment, net (Note 3) 342,940 357,180
Restricted cash 405,232 405,232
Other assets 73,060 91,325
--------------------- ---------------------

Total assets $ 10,404,071 $ 12,066,799
===================== =====================

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 365,159 $ 148,075
Accrued compensation and benefits 216,563 156,000
Other accrued expenses 582,664 664,527
Restructuring reserve 1,320,305 1,406,191
--------------------- ---------------------
Total current liabilities 2,484,691 2,374,793

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;
43,137,526 and 43,107,526 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively 431,375 431,075
Deferred stock compensation (451,669) (832,639)
Additional paid-in-capital 133,791,498 133,796,667
Deficit accumulated during the development stage (125,752,164) (123,603,437)
Treasury stock, at cost (99,660) (99,660)
--------------------- ---------------------
Total stockholders' equity 7,919,380 9,692,006

Total liabilities and stockholders' equity $ 10,404,071 $ 12,066,799
===================== =====================
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 March 31, through March 31,
2004 2003 2004
---------------- ---------------- -------------------

Revenue $ 57,408 $ - $ 608,592
Cost of goods sold 75,779 - 75,779
---------------- ---------------- -------------------
Gross profit (18,371) - 532,813

Operating expenses:
Selling, general and administrative 1,076,262 1,218,648 29,135,865
Research and development 1,048,240 958,907 51,391,726
Loss on sales commitments - - 375,974
Depreciation and amortization 46,587 99,689 3,997,323
Restructuring charges - - 2,159,280
Loss on impairment of assets - - 4,663,916
---------------- ---------------- -------------------
Total operating expenses 2,171,089 2,277,244 91,724,084
---------------- ---------------- -------------------

Loss from operations (2,189,460) (2,277,244) (91,191,271)

Other income (expense):
Interest income 40,583 58,039 3,820,550
Interest expense - (4,230) (1,093,703)
Other income (expense) 150 (5,940) (281,546)
---------------- ---------------- -------------------
Total other income (expense), net 40,733 47,869 2,445,301
---------------- ---------------- -------------------
Net loss (2,148,727) (2,229,375) (88,745,970)

Preferred stock dividends - - (36,825,680)
Accretion of convertible preferred stock - - (113,014)
---------------- ---------------- -------------------
Loss to common shareholders $(2,148,727) $(2,229,375) $ (125,684,664)
================ ================ ===================
Loss per share, basic and diluted $ (0.05) $ (0.05)
================ ================
Weighted-average common shares outstanding 43,121,702 42,812,897
================ ================

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)
Three months ended March 31, through March
2004 2003 31, 2004
--------------- --------------- -------------------
Cash flows from operating activities:

Net loss $ (2,148,727) $ (2,229,375) $ (88,745,970)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 46,587 99,689 3,997,324
Loss on sale of fixed assets - (5,693) 170,868
Impairment of assets - - 4,663,916
Changes in restricted cash - - (405,232)
Restructuring charge net of expenses paid (85,886) (85,887) 1,320,305
Reserve for officers note - 5,940 119,975
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 349,401 - 1,639,654
Warrants issued for consulting services - - 1,569,366
Services and interest expense paid in preferred
stock - - 11,485
Changes in operating assets and liabilities:
Accounts receivable 30,161 - (97,972)
Inventory (368,102) - (606,786)
Prepaid expenses and other current assets 178,887 440,686 (813,974)
Accounts payable 217,084 70,194 365,159
Accrued compensation and benefits 60,563 (72,955) 216,563
Accrued interest - - 275,560
Dividend receivable (23,742) - (87,500)
Due to related party - - -
Other accrued expenses and current liabilities (81,863) (160,995) 591,334
--------------- --------------- -------------------
Net cash used in operating activities (1,825,637) (1,938,396) (73,634,390)

Cash flows from investing activities:
Purchase of investments - - (1,100,000)
Increase in other assets - (149,600) (412,072)
Purchases of property and equipment (14,082) - (8,435,790)
Sale of property and equipment - 28,878 53,365
--------------- --------------- -------------------
Net cash used in investing activities (14,082) (120,722) (9,894,497)

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 - - 124,214
Exercise of employee stock options 26,700 - 1,436,267
Issuance of preferred stock - - 32,868,028
Repayment of subscription receivable - - 5,000,000
Proceeds from capital leases - - 495,851
Repayment of capital leases - (76,013) (1,031,395)
Proceeds from notes payable issued to investors - - 3,550,000
--------------- --------------- -------------------
Net cash provided by (used in) financing
activities 26,700 (76,013) 90,625,129

(Decrease)increase in cash and cash equivalents (1,813,019) (2,135,131) 7,096,242

Cash and cash equivalents, beginning of period 8,909,261 17,866,534 -
--------------- --------------- -------------------
Cash and cash equivalents, end of period $7,096,242 $15,731,403 $ 7,096,242
=============== =============== ===================

Supplemental disclosure of non--cash transactions:
Cash paid for interest $ - $ 4,230 $ 488,126
=============== =============== ===================
Cash paid for taxes $ 1,956 $ 4,456 $ 32,456
=============== =============== ===================
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") design, develop, configure and offer
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 technology and components for a
number of applications and potential applications. The Company has the following
products, which are in varying stages of development:

o Smart Energy(TM) Matrix - A high-power, flywheel-based system,
that continuously regulates the frequency of electricity on the
power grid, and could be used by independent system operators and
regional transmission operators to regulate electrical power;
o The Smart Energy Matrix could also continuously regulate the
frequency of electricity produced by a distributed generation
facility and compensate for temporary differences between the
demand for electricity and the amount being produced by that
facility;
o Smart Power(TM) 250 - A high-power, flywheel-based system that
could provide electricity until a longer-term backup power source
comes on-line;
o Smart Power M5 inverter system - An electronic system that
converts direct current electricity produced by photovoltaic
panels into alternating current electricity for residential and
commercial use; and
o Smart Energy system - A high-energy flywheel-based system that
stores electricity for telecommunications, cable systems, computer
networks, and Internet markets applications.

Smart Energy Matrix

The Company has identified an application for its Smart Energy Matrix in a
well-established market with attractive pricing characteristics. This market is
frequency regulation for the power grid. Using the Company's Smart Energy
Matrix, frequency regulation can, for the first time, be provided separately
with higher performance and lower operating costs. The Smart Energy Matrix is
the first product that would specifically addresses this application. The
Company has identified an additional application for its Smart Energy Matrix.
That application is providing a high-power, flywheel-based system that
continuously regulates the frequency of electricity produced by a distributed
generation facility and compensates for temporary differences between the demand
for electricity and the amount being produced.

Although the Company has finished the preliminary designs for the Smart
Energy Matrix, it will not begin significant design or development until the
market has expressed a more tangible interest in this product and the Company
has sufficient funds to complete development. Once begun, the development cycle
for completion of this product is expected to be 18 to 24 months, and achieving
significant volume production capability will take an additional six to 12
months. Therefore, the Company will not receive revenues from this product for
approximately two to three years after development has commenced.

Smart Power 250

For uninterrupted power supply applications the Company has available it's
Smart Power 250 for short (10 to 60 seconds) duration. When grid power is
interrupted, the Company's Smart Power 250 provides power for a short time while
a diesel generator can be activated. This application would typically be for
commercial and industrial facilities. The Company does not produce the short
duration Smart Power 250, but has domestic distribution agreements in place for
the flywheel and the required electronics with their manufacturers. The Company
does not believe that the market for this product is significant at the present
time. The Company believes that as power quality and distributed generation
become more widely used, the market demand for the Smart Power 250 could grow
substantially.

Smart Power M5

The Smart Power M5 inverter system for the photovoltaic energy market
converts the direct current generated by solar cells from sunlight into
alternating current required by residential and commercial users for operating
electrical devices and reducing the amount of purchased power when it is
connected to a power grid. The Company's Smart Energy M5 inverter system has the
capacity to convert direct current electricity into up to 5,000 watts of
alternating current. The Company began delivering its Underwriters Laboratory
approved Smart Power M5 inverter systems in December 2003. The Smart Power M5
has been designed for use in North American grid-connected solar power
applications. The Company intends to develop on and off grid inverters for use
throughout the world. The Company also plans to develop inverters for use in low
power wind turbine applications.

Smart Energy

The Company has available for sale its Smart Energy products, which deliver
a low level of power for a long period of time (typically measured in hours).
These products include the 2kWh and 6kWh Smart Energy systems, which have
demonstrated quality performance and reliability at numerous sites. The Smart
Energy products are tailored to the telecommunications, cable systems, computer
networks, and Internet markets. The Company believes that its Smart Energy
products offer life cycle cost advantages and significant performance
improvements over conventional, battery-based back-up power sources. The
Company's Smart Energy systems have approximately 350,000 hours of operation in
customer sites without failure of their mechanical system, which the Company
believes verifies the reliability of their technologies. The Company believes
that its Smart Energy technology is an excellent base to begin development of a
higher energy 25kWh flywheel system for renewable applications when the Company
determines that the market interest is sufficient to justify that product's
development.

Although the Company has begun shipment of if its Smart Power M5 product,
operations have not yet reached a level that would qualify the company to emerge
from the development stage. Therefore it continues to be accounted for as a
development stage company under Statement of Financial Accounting Standards No.
7 "Accounting and Reporting by Development Stage Enterprises."

Operations. The Company has experienced net losses since its inception and,
as of March 31, 2004, had an accumulated deficit of approximately $125.8
million. The Company's business strategy is to continue to create near-term
revenues from the sale of its Smart Power M5 inverter for solar power
applications, while building a reputation for excellent performance from its
equipment and its sales and service organization. The Company expects to 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 including its Energy Matrix, Smart Power 250
and Smart Energy products, the Company is continuing to evaluate market size,
growth potential and competitive advantages that its products could provide and
the probable market penetration that could be achieved. 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
obtained. 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.


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. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to applicable rules and
regulations of the Securities and Exchange Commission. 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 months ended
March 31, 2004 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2004. 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, 2003.

There have been no significant additions to or changes in accounting
policies of the Company since December 31, 2003. For a complete description of
the Company's accounting policies, see Note 2 to Consolidated Financial
Statements in the Company's 2003 Annual Report on Form 10-K/A.


Note 3. Property and Equipment

Property and equipment consist of the following:



Estimated
Useful March 31, December 31,
Lives 2004 2003
------------- -------------------- --------------------

Machinery and equipment 5 years $ 627,406 $ 627,406
Service vehicles 5 years 62,327 62,327
Furniture and fixtures 7 years 279,190 279,190
Office equipment 3 years 1,398,835 1,398,835
Leasehold improvements Lease term 538,428 524,347
Equipment under capital lease obligations Lease term 918,284 918,284
-------------------- --------------------
Total $ 3,824,470 $ 3,810,389
Less accumulated depreciation and amortization (3,481,530) (3,453,209)
-------------------- --------------------
Property and equipment, net $ 342,940 $ 357,180
==================== ====================



Note 4. Commitments

The Company leases office and light manufacturing space under an operating
lease through September 30, 2007. Under the terms of this lease, the Company
provided the lessor with an irrevocable letter of credit. At March 31, 2004 the
balance of that letter of credit totaled $355,232. A cash deposit secures this
letter of credit.

Note 5. Investments

On May 15, 2003 the Company invested $1,000,000 in Series A Preferred Stock
of Evergreen Solar, Inc., a public company that specializes in renewable energy
sources, in order to develop a strategic relationship with that company. The
Company believes that this investment may provide significant financial returns
on investment. The Company's investment was part of a larger financing provided
by several investors. The Company made its investment on the same terms as the
other investors in this financing, except that the Company was permitted to
purchase a three-year warrant for $100,000 that is exercisable for 2,400,000
shares of Evergreen's common stock at $3.37 per share. Evergreen's financing was
a private placement of $29,475,000 of Series A Preferred Stock and the above
warrant. Perseus 2000, L.L.C., an affiliate of one of the Company's
stockholders, Perseus Capital, L.L.C., invested $3 million in Evergreen's Series
A Preferred Stock in this financing. Mr. Philip J. Deutch and Mr. Kenneth M.
Socha, members of the Board of Directors of the Company, are Managing Director
and Senior Managing Director, respectively, of Perseus, L.L.C., and Mr. Deutch
led the Evergreen Solar Series A Preferred financing and is one of four
individuals from the Evergreen investor group to be added to the Board of
Directors of Evergreen. Messrs. Deutch and Socha disclosed their possible
conflict relating to this transaction, and abstained from voting on the matter.
In addition, Mr. Deutch has not taken part in any discussions concerning this
investment. Beacon's participation in the transaction was evaluated, debated and
approved by all the disinterested directors of the Company, after full
disclosure of relevant facts and circumstances.

This investment in equity securities is carried on the balance sheet at
cost, plus accrued dividends. The Series A Preferred Stock is convertible into
common stock on a one to one basis and accrues dividends at a rate of 10%. The
common stock market value on an as converted basis at March 31, 2004 was
$2,359,486.

Note 6. Common Stock

Reserved Shares. At March 31, 2004 and December 31, 2003, 11,725,157 and
11,755,157 shares of common stock were reserved for issuance under the Company's
stock option plan and for outstanding warrants, respectively.

Note 7. Related Party Transactions

Advance to Officers. During 2001, the Company advanced approximately
$565,000 to an officer of the Company, Mr. William Stanton, its former CEO and
President. This advance is interest bearing and secured by the officers'
holdings of Beacon Power Corporation common stock and was provided to the
officer to allow him to exercise stock options and to pay the related taxes.
Through March 31, 2004, the Company had collected approximately $447,000 in
principal payments on these advances. The balance of this loan is $118,000 and
has been reserved, however, it has not been cancelled. Mr. Stanton continues to
be a director of the Company.

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
flywheel-based products into this market. Therefore, beginning 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:

March 31,
-----------------------------------
2004 2003
-----------------------------------
Beginning balance $ 1,406,191 $ 1,749,738
Charges for the period - -
Payments (85,886) (85,887)
-----------------------------------
Ending balance $ 1,320,305 $ 1,663,851
===================================


Note 9. Stock-Based Compensation

The Company accounts for its stock based compensation using 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."

The Company implemented a long term stock incentive plan to provide
employees deferred compensation in the form of restricted stock units (or
"RSUs") at no cost to the recipient, that can be converted into shares of
Company's common stock through establishing and evaluating quarterly, or in some
cases yearly, targets for the employee and, following each quarter, determining
the number of RSUs to accrue and to be granted in four equal installments in the
fiscal year following the fiscal year with respect to which employee accrued the
RSUs. Employees have the right to convert their RSUs into shares at any time
after such grant, subject to a quarterly vesting schedule. The Company's
employees earned 667,151 RSUs for the fiscal year ended December 31, 2003, which
are not available for exercise until satisfaction of the vesting periods during
2004. The grants are recorded as deferred stock compensation until they are
earned over the vesting schedule, at which time, the value of the RSUs will be
recorded as compensation expense in the Company's Income Statement. At the end
of the first quarter the Company recorded compensation expense in the amount of
$349,401.

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



Three months ended March 31,
2004 2003
----------------------------------------------


Net loss to common shareholders as reported $ (2,148,727) $ (2,229,375)
Pro forma compensation expense 92,867 -
---------------------- -----------------------
Net loss--pro forma $ (2,241,594) $ (2,229,375)
Loss per share--as reported $ (0.05) $ (0.05)
Loss per share--pro forma $ (0.05) $ (0.05)



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

When the Company recognized that its Smart Energy products as alternative
backup solutions to the telecommunications industry were not on a path to
produce meaningful revenues, the Company initiated a series of cost cutting
measures throughout 2002 and 2003. The focus of these efforts was to reduce cash
usage while preserving the Company's intellectual properties and maintaining the
integrity of its public company requirements while evaluating all potential
product markets for the Company's technologies and considering acquisitions or
mergers that could lead to increased shareholder value. Based on this
evaluation, which is ongoing, the Company (i) believes that it has identified
two promising applications for its Smart Energy Matrix product and (ii) has
introduced its Smart Energy M5 inverter system into the renewable energy market
and delivered 31 units in 2003 and an additional 10 during the first quarter of
2004.

The Company must raise additional equity to execute its business plan.
Based on the Company's rate of expenditure of cash and the additional
expenditures expected in support of its business plan, the Company will need to
obtain an equity investment by early 2005 to fund:

o continuing as a going concern;
o ongoing research and development of inverter products;
o manufacturing capability;
o working capital requirements; and
o new business development,

In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially.

Results of operations:

Comparison of three months ended March 31, 2004 and 2003




Three months ended March 31,
2004 2003 $ Change % Change
-------------------------------------------
(in thousands)

Revenues $ 57 $ - $ 57 n/a
Selling, general and administrative 1,076 1,219 (143) 12%
Research and development 1,048 959 89 9%
Depreciation and amortization 47 100 (53) 53%
Interest and other income (expense), net 41 48 (7) 15%


Revenues. The Company recorded its first revenues from the sale of its
Smart Power M5 power conditioning system during the quarter. For its other
products, the Company continues to evaluate markets but did not recognize
revenues for the three months ended March 31, 2004 or 2003.

Selling, General and Administrative Expenses. The Company's sales and
marketing expenses consist primarily of compensation and benefits for its 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
$1,076,000 and $1,219,000 for the three months ended March 31, 2004 and 2003,
respectively. The decrease of approximately $143,000 or 12% is primarily the
result of decreases in the cost of Directors and Officers Liability Insurance
premiums partially offset by higher compensation expenses due to the Company's
long term incentive stock plan and increased marketing efforts for its Smart
Power M5 and Energy Matrix Products.

Research and Development. The Company's cost of research and development
consists primarily of the cost of compensation and benefits for research and
development and support staff, as well as materials and supplies used in the
engineering design process. These costs increased for the first quarter of 2004
over the same quarter of 2003 due primarily to increased product development for
products for the photovoltaic market. While the Company does not expect to incur
significant additional costs for its existing flywheel products, the Company
does expect to incur costs for the design and development of additional products
for renewable energy applications. The costs of development of its flywheel
systems will be significant if the Company determines there is sufficient market
validation to initiate development of these products and it has funding to
complete this work. The Company expects its cost of research and development for
the remainder of 2004 to continue to be slightly higher compared to 2003.
Research and development expenses totaled approximately $1,048,000 and $959,000
for the three months ended March 31, 2004 and 2003, respectively. The increase
of $89,000 or 9% is primarily the result of higher development costs relating to
the Company's Smart Power M5.

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
is also amortizing the Smart Power M5 intellectual property it acquired from
Advanced Energy Systems in 2003. Depreciation and amortization totaled
approximately $47,000 and $100,000 for the three months ended March 31, 2004 and
2003, respectively. The decrease of $53,000 or 53% is attributable to the
decrease in the remaining net book values of the Company's 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 and accrued dividends receivable from Evergreen Series A Preferred Stock
holdings, partially offset by interest expense associated with its capital
leases. Interest and dividend income for the three months ended March 31, 2004
was approximately $41,000, compared to $48,000 for the same period in 2003. The
decrease in 2004 compared to the prior year is the result of lower cash
balances.

Interest expense decreased to zero for the three months ended March 31,
2004 from approximately $4,000 for the same period in 2003. Interest expense
relates to assets leased under capital leases.




Liquidity and Capital Resources

Quarter ending March 31,
-------------------------------
2004 2003
-------------------------------
(in thousands)
Cash and cash equivalents $ 7,096 $ 15,732
Working capital 7,098 14,609
Cash provided by (used in)
Operating activities (1,826) (1,938)
Investing activities (14) (121)
Financing activities 27 (76)
-------------------------------
Net decrease in cash and cash equivalents $ (1,813) $ (2,135)
===============================
Current ratio 3.9 6.8
===============================


The Company's cash requirements depend on many factors, including but not
limited to research and development activities, continued efforts to
commercialize products, facilities costs, and general and administrative
expenses. The Company expects to make significant expenditures to fund its
operations, develop technologies and explore opportunities to find and develop
additional markets to sell its products. The Company has taken significant
actions to reduce its cash expenditures for product development, infrastructure
and production readiness by reducing headcount, development spending and capital
expenditures over the past 3 years. The Company has focused its activity on
market analysis in terms of size of markets, competitive aspects and advantages
that its products could provide. It has continued to do preliminary design of
products for markets under consideration for its flywheel systems and has
purchased intellectual properties and incurred development costs for its newest
product in the renewable energy market. The Company must raise additional equity
to execute its business plan. Based on the Company's rate of expenditure of cash
and the additional expenditures expected in support of its business plan, the
Company will need to obtain an equity investment by early 2005 to fund:

o continuing as a going concern;
o ongoing research and development of inverter products;
o manufacturing operations;
o working capital requirements; and
o new business development,

In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially.

Net cash used in operating activities was approximately ($1,826,000) and
($1,938,000) for the three months ended March 31, 2004 and 2003, respectively.
The primary component to the negative cash flow from operations is from net
losses. For the first three months of 2004, the Company had a net loss of
approximately ($2,149,000). This included employee stock compensation of
$349,000, facility related cash payments charged against restructuring reserves
of approximately ($86,000), and depreciation and amortization of approximately
$47,000. Changes in operating assets and liabilities generated approximately
$13,000 of cash during the first three months of 2004. For the first three
months of 2003, the Company had a net loss of approximately ($2,229,000). This
included non-cash charges of approximately $14,000 primarily attributable to
depreciation and amortization of approximately $100,000, a reserve against
accrued interest on a note receivable from the Company's former CEO of $6,000;
partially offset by facility related cash payments charged against restructuring
reserves of approximately ($86,000), and a loss on the sale of capital equipment
of ($6,000). Changes in operating assets and liabilities generated approximately
$277,000 of cash during the first three months of 2003.

Net cash used in investing activities was approximately ($14,000) and
($121,000) for the three months ended March 31, 2004 and 2003, respectively. The
principal use of cash during the first three months of 2004 was the purchase of
capital equipment of ($14,000). The principal use of cash during the first three
months of 2003 was the purchase of intellectual property of Advanced Energy
Systems, Inc. of ($149,600), partially offset by the sale of machinery and
equipment totaling approximately $29,000.

Net cash generated/(used) by financing activities was approximately $27,000
and ($76,000) for the three months ended March 31, 2004 and 2003, respectively.
For the first three months of 2004, the cash generated by financing activities
related to the exercise of stock options in the amount of $27,000. For the first
three months of 2003 the cash used for financing activities related to repayment
of capital leases of approximately ($76,000).

In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially. In as much as the Company is not
expecting 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. The Company may not be able to raise this capital at all, or
if it is able to do so, it may be on terms that are adverse to shareholders. The
Company believes that it cannot use debt financing to meet its cash
requirements.


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, 2003 (filed March 30, 2004),
could cause actual results to differ materially from those indicated by
forward-looking statements made in this Quarterly Report on Form 10-Q:


The Company May Not Be Able to Continue as a Going Concern, as its Cash Balances
Are Sufficient to Fund Operations Only Through Approximately April 2005.

As shown in the consolidated financial statements, the Company incurred
significant losses from continuing operations of $8,618,000, $20,839,000,
and $26,146,000 and cash decreases of $8,957,000, $16,335,000 and
$27,850,000, during the years ended December 31, 2003, 2002 and 2001,
respectively. The Company has $7,096,000 of cash and cash equivalents on
hand at March 31, 2004. The Company has recorded limited revenue from sales
of its products. These factors, among others, indicate that the Company may
be unable to continue as a going concern.

Deloitte & Touche LLP, the Company's independent auditors, have included an
explanatory paragraph related to a going concern uncertainty in their audit
report on the Company's consolidated financial statements for the fiscal
year ended December 31, 2003, which states that "the Company's recurring
losses from operations and negative cash flows raise substantial doubt
about its ability to continue as a going concern."

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

The Company expects its cash position to fund operations approximately
through April 2005 according to its business plan. The Company is exploring
opportunities to raise additional capital through equity offerings,
strategic alliances and other financing vehicles, but it does not make any
assurances that sufficient funds will be available to it on terms that it
deems acceptable, if they are available at all.

The Company Needs Additional Financing.

The Company will need additional financing to execute its business plan.
The Company cannot be certain that it will be able to raise additional
funds on terms acceptable to the Company or at all. If future financing is
not available or is not available on acceptable terms, the Company would
not be able to continue as a going concern.. See "Selected Historical
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

The Company's Stockholders may be Adversely Affected if the Company Issues
Additional Equity to Obtain Financing.

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

The Company May Not Be Able to Reduce Its Product Cost Enough to Make The
Company's Prices Competitive.

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

The Company Has No Experience Manufacturing Inverter Systems or Flywheel Energy
Storage Systems on a Commercial Basis. In the Event of Significant Sales, the
Company Will Need to Develop or Obtain Manufacturing Capacity for Its Products.

Should the Company experience significant customer demand for its 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. 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 will 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.

It Is Difficult to Evaluate the Company and to Predict Its Future Performance
Because of Its Short Operating History and the Fact that It is a Development
Stage Company.

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

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

The Company Has Incurred Losses Since Its Inception and Anticipates Continued
Losses Through at Least 2006.

The Company has incurred net losses and negative cash flows since its
inception in May 1997. The Company had net losses of approximately
($8,618,000) in 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, the
Company has had net losses totaling ($125,685,000). 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. The Company's revenue must grow
substantially to offset these higher expenses and become profitable. Even
if the Company does achieve profitability, it may be unable to sustain or
increase its profitability in the future.

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

Because the Company Depends on Third-Party Suppliers for the Development and
Supply of Key Components for Its Products, It Could Experience Disruptions in
Supply that Could Delay or Decrease Its Revenues.

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

The Company's Financial Performance Could Be Adversely Affected by its Need to
Hire and Retain Key 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 its executive
team. The Company has employment agreements 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.

The Company may not be successful in attracting and retaining the personnel
or executive talent necessary to develop products and operate profitably.

The Company's Financial Performance Could be Adversely Affected by Needs to Hire
and Retain Key Sales Personnel.

Because the Company's future success depends to a large degree on the
success of its sales organization, the Company's ability to meet its
business plan will depend significantly on whether it can attract and
retain sales personnel. The current sales organization has been impacted by
both health issues and a resignation. Competition for skilled sales is
intense 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 the Company's
Products.

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
its business.

If the Company is Unable to Successfully Market, Distribute and Service Its
Products Internationally it May Experience a Shortfall in Expected Revenues and
Profitability.

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 ultimately market, distribute
and service 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.

Any Failure to Protect the Company's Intellectual Property Could Seriously
Impair Its Competitive Position.

The Company cannot provide assurance that it has or will be able to
maintain a significant proprietary position on the basic technologies used
in its inverter 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.

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

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

There may be Other Technologies Under Development That Could Prevent the Company
from Achieving or Sustaining Its Ability to Sell Products or to Do So at Prices
that will Yield Profits.

There are number of technology companies in various stages of development.
The Company cannot give assurance that some or all of its target markets
and pricing plans could not be displaced by emerging technologies.

The Company Has an Investment in Other Companies in Its Sector to Increase
Shareholder Value Through Strategic Alliance or Return on Investment Which do
Not Create Gains and therefore Reduce Shareholder Value.

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

Provisions of Delaware Law and of the Company's 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 the Company's outstanding common stock, or in the event
of an acquisition by another company, $22.50 worth of the common stock of
the other company at half its market value (in each case the rights held by
the acquiring person are not exercisable and become void). 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 the Company's Stock Price.

On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. These attacks have caused instability in
the global financial markets, and have contributed to volatility in the
stock prices of United States publicly traded companies, such as 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.

Government Regulation May Impair the Company's Ability to Market Products.

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

Product Liability Claims Against the Company Could Result in Substantial
Expenses and Negative Publicity Which Could Impair Successful Marketing of
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 its business, financial condition or the price of its
common stock. In addition, negative publicity in connection with the faulty
design or manufacture of the Company's products would adversely affect its
ability to market and sell its products.

Safety Failures by the Company's Flywheel Products or Those of The Company's
Competitors Could Reduce Market Demand or Acceptance for Flywheels in General.

A serious accident involving either flywheels or competitors' similar
products could be a significant deterrent to customer acceptance and
adversely affect the Company's financial performance. There is the
possibility of accident with any form of energy storage. In particular, if
a metal flywheel fails and the stored energy is released, the flywheel
could break apart into fragments that could be ejected at a high rate of
speed. However, the Company's flywheels are based on a composite design so
that in the event of a failure, 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 and shut down rather than (as in
the case of metal) to break into a number of large fragments that have a
greater possibility of bursting a containment vessel and causing injury. At
this early stage of commercialization, there are differing approaches to
containment safety with disagreement in the community on the most effective
means.

The Market for Using the Company's Smart Energy Matrix to Provide Frequency
Regulation has not been Established.

The Company believes that the use of its Smart Energy Matrix will be
successful in the frequency regulation market. However, this market is
currently being served by using generators and, while the Company believes
its product offers greater efficiencies than generators, and produces
positive investment returns for the independent service providers, there
can be no assurance that the Company will be able to establish its product
in that market.

The Value Proposition of the Company's Smart Energy 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. The
performance of batteries has improved while battery prices have declined
due to lower 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
even more difficult for the Company to establish the value proposition of
its Smart Energy products.

The Company Might Fail to Develop Successful Flywheel Products.

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

o maintaining the development schedule and achieve technical
success, as such development could take substantially longer than
anticipated;
o the cost of developing key components of the Company's systems
that have significant technical risk and which may not be
economically feasible for a competitive product;
o ensuring long-life and maintenance free performance through design
and quality control;
o ensuring quality and cost control from suppliers; and
o raising the necessary financing.

The Company's Sales Efforts may be Adversely Affected by the Reputation of the
Bankrupt Company from which The Company Acquired the Intellectual Properties for
the Smart Power M5 Inverter System.

The Company purchased the intellectual property that its Smart Power M5
inverter system are based on from Advanced Energy Systems, Inc., a company
in bankruptcy, which had sold units that are not supported by warranties.
And in some cases these units are not functioning as expected. Although the
Company will provided warranties for its products and it has made
engineering changes to provide reliable performance, there can be no
assurance that the Company's sales efforts will not be adversely affected
by the performance of the unwarranted products in the field.

The Value Proposition of the Company's Inverter Systems May Not Be Recognized.

There can be no assurance that the Company will be able to compete
successfully and gain market share in the renewable energy market. To
compete successfully the Company must establish its value proposition as
cost effective for end users based upon its product's price, dependability,
operational benefits, and long life.

The Company May Not be Able to Establish a Distribution Channel to Sell Its
Inverter Systems.

The Company expects to market its Smart Power M5 inverter system as well as
future inverter products through distributor channels. The Company does not
have experience in these distribution channels or in the photovoltaic
markets, and may not be successful in establishing adequate market volume
through this distribution strategy. Even if the Company were able to
establish sufficient sales volumes, there can be no assurance that these
channels will continue to provide adequate volumes for the Company's
products in the future.

The Channels to Market for Photovoltaic Products are Not Stable and have Changed
Substantially in the Last Year.

The photovoltaic market is growing rapidly, but the sales and distribution
channels are not stable. In the last year, the cross section of these
distributors has changed as some photovoltaic module manufacturers have
left the market for "balance of systems" products such as the Company's
Smart Power M5 inverter system, and other distributors have been merged. In
particular, several of the large volume distributors have reduced their
product offerings to only solar panels. When these types of change take
place, it often results in a period of uncertainty in the sales and
distribution channels, leading to fewer and smaller orders being placed.
The Company is using a strategy of selling through full-service, wholesale
distributors and there can be no assurance that this strategy will be
successful in the channel structure that continues to be restructured.

Inverter Sales may Not be Achieved.

If the value proposition that the Company offers to the market is not
accepted, or if the market does not continue to grow, or if the sales
channels to market continue to be in a state of change, then the Company
may not achieve sales of inverters. If sales are not achieved, then profits
will not be realized, resulting in further need for additional investor
funding which may not be available on acceptable terms, or at all.

The Company Faces Intense Competition in the Inverter Markets.

There are a number of companies located in the United States, Canada, and
abroad that are offering electronic inverters into the photovoltaic market
and the number of products being offered is increasing. Many of these
companies have more substantial manufacturing, marketing, and sales
capabilities as well as brand recognition and established market positions.
They may also have greater research, development and commercialization
capabilities. There can be no assurance that the Company will be able to
compete or be able to adapt as quickly to changing customer needs.

The Company Might Fail to Develop Successful Additional Inverter Products.

The successful development of additional inverter products involves
technological and cost challenges and will require additional financing to
complete. Major risks include:

o maintaining the development schedule for these products, as such
development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems
that have technical risk and which may not be economically
feasible for a competitive product in the renewable energy market;
o reducing manufacturing and assembly costs to increase the
Company's chances of achieving profitability;
o ensuring minimal warranty expenses through design and quality
control;
o ensuring quality and cost control from suppliers;
o raising the necessary financing; and
o extending each product design into as many applications and
markets as possible.

The Photovoltaic Energy Market may not Maintain the Market Growth Upon Which the
Company's Business Plan is Based.

Although photovoltaic installations have continued to grow at solid
compound annual growth rates of greater than 20%, there can be no assurance
that these rates of growth will continue.

The Company's High-Energy Flywheels Face Intensified Competition from Batteries
Due to Batteries' Declining Prices and Improved Life. As a Consequence Customers
are Less Likely to Accept the Value Proposition of the Company's High-Energy
Flywheel Products.

The performance of batteries has improved while battery prices have
declined due to lower 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 have made
it very difficult for the Company to establish the value proposition of its
high-energy flywheel products.

The Telecommunications Industry Continues to Experience lower rates of Build-Out
and Maintenance Spending.

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 which began in 2000
and has continued and there can be no certainty of when or if this market
will recover. Significant reductions in both maintenance budgets and
capital build-out budgets at telecommunications companies caused these
potential customers to be more conservative with their spending and
expenditure analysis and less willing to try new technology solutions, such
as the Company's flywheel systems.

The Company Might Fail to Develop Successful Additional High-Energy Flywheel
Products.

The successful development of additional high-energy flywheel products
involves significant technological and cost challenges and will require
additional financing to complete. Major risks include:

o maintaining the development schedule for these products, as such
development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems
that have significant technical risk and which may not be
economically feasible for a competitive product in the high-energy
market;
o reducing manufacturing costs for the flywheel's shaft, hub and
rim, bearings and related electronics to increase the Company's
chances of achieving profitability;
o ensuring minimal warranty expenses through design and quality
control;
o ensuring quality and cost control from suppliers;
o raising the necessary financing; and
o extending the product to new applications.

The Company Faces Intense Competition and May Be Unable to Compete Successfully
in the High-Energy Flywheel Markets.

The markets for uninterruptible electric power are intensely competitive.
There are a number of companies located in the United States, Canada, and
abroad that are offering battery based energy storage options. 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. 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.


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 March 31, 2004, the Company had approximately $60,000 of cash equivalents
that were held in non-interest bearing accounts. Also at March 31, 2004, the
Company had approximately $636,000 of cash equivalents that were held in
interest bearing checking accounts and $6,805,000 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 $7,000, 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 the end
of the period covered by this quarterly report. Based upon that evaluation, they
have concluded that at that time the Company had in place controls and other
procedures that were 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 that time,
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

None

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 March 31, 2004, the Company spent approximately
$10.7 million for inventory and materials used in research and development and
$7.2 million for property and equipment, including the build-out of its 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 $40.9 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. Through March 31, 2004, the Company has collected
approximately $667,000 in payments on these advances and two of the three loans
have been paid in full. The remaining loan is to Mr. William Stanton, who serves
on the board of directors for the Company and was its former CEO and president.
The outstanding balance on Mr. Stanton's loan at March 31, 2004 was
approximately $118,000. 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 approximately $426,000 to reserve the remaining
balance of this advance. In August 2003, Mr. Stanton sold all of the stock that
secured the loan and in the fourth quarter of 2003, he reduced the loan balance
by $323,000. The remaining loan balance of $118,000 has not been forgiven and
remains outstanding, even though all stock held as security under the loan
agreement has been sold.

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 its
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: May 13, 2004 By: /s/ F. William Capp
-------------------
F. William Capp
President and Chief Executive Officer


May 13, 2004 By: /s/ James M. Spiezio
-------------------
James M. Spiezio
Vice President of Finance,
Chief Financial Officer,
Treasurer and Secretary
Principal Financial Officer