BEACON POWER CORP, 424B4, 2000-11-17

BEACON POWER CORP
424B4, 2000-11-17
ELECTRIC SERVICES

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<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration File No. 333-43386

PROSPECTUS

8,000,000 SHARES

[LOGO]

BEACON POWER CORPORATION

COMMON STOCK

$6.00 PER SHARE
---------

We are selling 8,000,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 1,200,000 additional shares of common
stock from us to cover over-allotments.

This is an initial public offering of our common stock. Our common stock has
been approved for quotation on the Nasdaq National Market under the symbol
"BCON."

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 5.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Initial Public Offering Price $6.00 $48,000,000
Underwriting Discount $0.42 $ 3,360,000
Proceeds to Beacon (before expenses) $5.58 $44,640,000
</TABLE>

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
November 22, 2000.

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

SALOMON SMITH BARNEY

BANC OF AMERICA SECURITIES LLC

CIBC WORLD MARKETS

November 16, 2000
<PAGE>
[The figure consists of a cutaway of the Beacon flywheel in the center and
surrounded by potential market applications of Communications, Industrial
Manufacturing, Commercial Facilities, Distributed Generation, and Computer
Networks. Communications is the initial market and the other applications are
future markets.]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THIS PROSPECTUS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Special Note Regarding Forward-Looking Statements........... 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 24
Management.................................................. 36
Certain Relationships and Related Transactions.............. 44
Principal Stockholders...................................... 50
Description of Capital Stock................................ 53
Shares Eligible for Future Sale............................. 58
Underwriting................................................ 60
Legal Matters............................................... 63
Experts..................................................... 63
Where You Can Find More Information......................... 63
Index to Financial Statements............................... F-1
</TABLE>

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

In this prospectus, "Beacon," the "company," "we," "us" and "our" each
refers to Beacon Power Corporation and its subsidiaries.

Until December 11, 2000, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

i
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED
"RISK FACTORS."

BEACON POWER CORPORATION

OVERVIEW

Flywheel systems draw electrical energy from a primary power source such as
the electric grid or a fuel cell, store that energy, and then convert that
energy to immediately provide uninterruptible electric power when the primary
power source fails or is disrupted. We believe our flywheels will offer
significant advantages over conventional back-up power systems that primarily
use lead-acid batteries. The expected advantages include higher reliability,
longer life, lower life-cycle cost, improved recharging capability, reduced
maintenance, more reliable monitoring, and environmental friendliness. We also
believe that our flywheel systems will be used in conjunction with distributed
power products such as gasoline or diesel generators, fuel cells, microturbines
and other distributed power generators to provide benefits that are not
available from these products alone, such as an instant-on capability and the
ability to manage sudden changes in power.

OUR PRODUCTS

We have designed our initial products to specifically address the back-up
powering needs of the communications markets. We believe we are the only company
to have developed a proprietary composite flywheel that can store and deliver
the requisite energy demanded by communications customers and can efficiently
provide back-up power for long periods of time. In addition, our flywheel
systems can be installed in the ground to address cost, permit, environmental
and aesthetic concerns and our commercial product will have a built-in,
long-life, low-cost vacuum system that will automatically restart if power is
lost.

Bell Atlantic, now part of Verizon Communications, WinDBreak Cable and
Telcordia Technologies Inc. have provided us with application requirements that
have helped us with the definition, development and testing of our 2
kilowatt-hour (kWh) product. Our field trials have provided back-up power for
operating sites at Verizon Communications, Century Communications Corporation,
now part of Adelphia Communications, and WinDBreak Cable, and we have
demonstrated our product at our plant to AT&T Broadband, Cox
Communications, Inc., Asea Brown Boveri, Kobe Steel and GTE, now part of Verizon
Communications, among others. We have not entered into any agreements with, or
sold any units to, any of these parties. We have sales commitments for 117 of
our 2kWh commercial units, with deliveries expected to begin in early 2001, and
expect that our product demonstrations will lead to additional, significant
orders. We are a development stage company that has not yet begun to manufacture
flywheels in large quantities and to date have not received any revenue from our
existing sales commitments.

INDUSTRY DYNAMICS

The growing use of digital electronics and computers and the proliferation
of telecommunications networks is causing a dramatic increase in the demand for
more reliable, higher quality power. For example, Internet related power
requires a much higher level of reliability than that provided by the electric
grid. At the same time, deregulation and aging transmission and distribution
lines are leading to reduced reliability in electric power that is supplied
through the grid. Lead-acid battery and generator back-up power is proving to be
inadequate to meet the high power quality and reliability

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<PAGE>
needs of technology-oriented applications. In addition to deregulation of the
utility industry, we expect these trends to accelerate the adoption of
alternative power technology products such as flywheels.

MARKET OPPORTUNITIES FOR OUR FLYWHEEL PRODUCTS

The Electric Power Research Institute estimated that electric power
reliability problems cost the U.S. more than $50 billion annually. Approximately
$12 billion was spent worldwide in 1999 on power quality and reliability
equipment to address these problems. Mark Mills, one of the authors of THE HUBER
MILLS POWER REPORT, has estimated that sales of power reliability products will
expand at a market growth rate of approximately 30% per year for the next
15 years. We believe that significant growth in demand for our flywheels will
come from our targeted markets, including:

COMMUNICATIONS MARKETS. The SKYLINE MARKETING GROUP estimated that power
quality and reliability equipment sold into the communications markets in 1999
totaled $4 billion globally. If flywheels completely displaced batteries in the
North American communications powering market, that market would require
approximately 2 million 2kWh-flywheels per year.

OTHER MARKET OPPORTUNITIES. Over the longer term, we intend to capitalize
on our strengths in the communications market to expand into other markets.
These markets include products that would be designed to:

- address the high-quality power and reliability needs of the growing
Internet and computer markets;

- be used in industrial manufacturing facilities to protect against downtime
caused by power quality and reliability problems;

- provide higher quality and more reliable and cost-effective back-up power
at commercial facilities such as data processing centers, call centers,
telecommunications switching facilities, emergency services, hospitals,
hotels and universities; and

- be used in conjunction with distributed generation products such as diesel
generators, fuel cells and microturbines to provide operational advantages
that cannot be delivered by these products alone.

OUR STRATEGY

Our goal is to become the leading provider of flywheel energy storage
systems. To accomplish our objective, we are pursuing the following key
strategies:

- initially target communications markets with superior product offerings;

- over the longer term, expand into other segments of the power quality and
reliability markets;

- leverage key customer and strategic relationships with General Electric
and others to enhance our product development and reduce product costs;

- establish key strategic relationships to aid in our marketing and
distribution efforts; and

- protect our intellectual property.

2
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common stock offered......................... 8,000,000 shares
Common stock to be outstanding after the
offering................................... 38,565,974 shares
Use of proceeds.............................. For general corporate purposes, including
research and product development, sales and
marketing expenses, working capital, capital
expenditures and potential acquisitions. See
"Use of Proceeds."
Nasdaq National Market symbol................ BCON
</TABLE>

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

Unless otherwise indicated, all information in this prospectus, including the
outstanding share information above, is based on the number of shares
outstanding as of October 24, 2000 and:

- assumes no exercise of the underwriters' option to purchase up to
1,200,000 additional shares of common stock to cover over-allotments;

- excludes 4,769,540 shares of common stock which may be issued at a
weighted average exercise price of $2.57 per share upon exercise of
options outstanding as of October 24, 2000 under our stock incentive plan;

- excludes 5,366,070 shares of common stock which may be issued at a
weighted average exercise price of $2.21 per share upon exercise of
outstanding warrants and 70,000 shares of common stock which may be issued
at an exercise price equal to the initial offering price upon exercise of
outstanding warrants;

- excludes 6,333,333 shares of common stock which may be issued at an
exercise price of $2.25 upon exercise of warrants issued as part of our
class F financing;

- reflects the automatic conversion of all of our outstanding preferred
stock into 29,359,530 shares of common stock upon the completion of the
offering;

- reflects the issuance of 820,162 shares of common stock upon consummation
of the offering as a dividend on our class D preferred stock;

- reflects the issuance of 39,168 shares of common stock upon consummation
of the offering as a dividend on our class E preferred stock;

- reflects the issuance of 60,000 shares of class A preferred stock issued
in payment of consulting fees accrued through October 31, 2000 which will
convert into 120,000 shares of common stock upon consummation of the
offering; and

- gives effect to a 1.125-for-1 stock split of our common stock effective in
October 1998 and a 2-for-1 stock split effective immediately prior to
consummation of this offering.

CORPORATE INFORMATION

We are incorporated in Delaware. Our executive offices are located at 6D
Gill Street, Woburn, Massachusetts 01801 and our telephone number is (781)
938-9400.

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<PAGE>
SUMMARY FINANCIAL DATA

The following tables set forth our summary financial data. You should read
this information together with our financial statements and the notes to those
statements beginning on page F-1 of this prospectus, the information under
"Capitalization," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The pro forma basic and diluted net loss per share gives effect to the
conversion at the beginning of the period of each share of class A, C and D
preferred stock into two shares of common stock for all periods presented and
the conversion into two shares of common stock on January 1, 2000 of each share
of class E and F preferred stock for the period ended September 30, 2000,
including in each case shares payable for consulting services, as though they
were common stock in all periods for which such shares were outstanding, the
issuance upon conversion of our class D preferred stock of 820,162 shares of
common stock as payment of accrued dividends on the class D preferred stock and
the issuance of 39,168 shares of common stock upon consummation of the offering
as a dividend on the class E preferred stock.

<TABLE>
<CAPTION>
PERIOD FROM DATE NINE MONTHS ENDED
OF INCEPTION YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(MAY 8, 1997) TO ----------------------- ----------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- --------- ----------- ----------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 232 $ -- $ 269 $ 66 $ --
Loss from operations.............. (3,228) (4,790) (5,340) (3,559) (9,772)
Net loss.......................... $ (3,111) $ (4,793) $ (5,672) $ (3,787) $ (9,793)
======== ======== ========== ======== ========
Loss to common shareholders....... $ (3,111) $ (4,912) $ (6,630) $ (4,241) $(12,297)
======== ======== ========== ======== ========
Pro forma net loss per share,
basic and diluted............... $ (0.42) $ (0.45)
========== ========
Shares used in computing pro forma
net loss per share, basic and
diluted......................... 13,493 22,017
</TABLE>

The balance sheet data on a pro forma as adjusted basis reflect the
conversion of our preferred stock upon consummation of this offering, the
issuance upon conversion of our class D preferred stock of 820,162 shares of
common stock as a dividend payable on the class D preferred stock, the issuance
of 39,168 shares of common stock to be issued upon consummation of the offering
as a dividend on the class E preferred stock, issuance of shares payable for
consulting services, and the sale of 8,000,000 shares of common stock in this
offering at an initial public offering price of $6.00 per share, after deducting
the estimated underwriting discounts and commissions and our estimated offering
expenses.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
----------------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 21,347 $ 64,811
Working capital.................................... 18,721 62,185
Total assets....................................... 24,159 67,623
Redeemable convertible preferred stock............. 36,682 --
Total stockholders' (deficit) equity............... (18,400) 63,176
</TABLE>

4
<PAGE>
RISK FACTORS

INVESTING IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF
ANY OF THE FOLLOWING RISKS OCCUR, THE MARKET PRICE OF OUR SHARES OF COMMON STOCK
COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

BECAUSE OUR SHORT OPERATING HISTORY MAKES YOUR BASIS FOR EVALUATING US LIMITED,
OUR FUTURE FINANCIAL PERFORMANCE MAY DISAPPOINT INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE.

We have a limited operating history and you should not rely on our recent
results as an indication of our future results in making your investment
decision. We were formed in May 1997 to commercialize electrical power systems
based on flywheel energy storage. We are a development stage company making the
transition to the manufacturing of new products in a new and developing sector.
We have only recently begun to market our products. Unless we can achieve
significant increases in market acceptance of our product, we may never advance
beyond our start-up phase. In light of the foregoing, it is difficult or
impossible for us to predict future results and you should not expect future
revenue growth based on our recent results. Our future results may disappoint
investors and cause our stock price to decline. 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 2002.

We have incurred operating losses and negative cash flows since our
inception in May 1997. We had net losses of $4,793,398 in 1998, $5,671,493 in
1999 and $9,792,715 for the first nine months of 2000. We expect to continue to
incur net losses through at least 2002. We also anticipate that our expenses
will continue to increase substantially in the foreseeable future as we expand
our sales and marketing, research and development and general and administrative
operations. Our efforts may prove even more expensive than we currently
anticipate. Our revenue must grow substantially if we are to offset these higher
expenses and become profitable. Even if we do achieve profitability, we may be
unable to sustain or increase our profitability in the future. See "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

WE HAVE LIMITED EXPERIENCE MANUFACTURING FLYWHEEL ENERGY STORAGE SYSTEMS ON A
COMMERCIAL BASIS, AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY.

We may not achieve profitability if we cannot develop efficient, low-cost
manufacturing capability, processes and suppliers that will enable us to meet
the quality, price, engineering, design and production standards or production
volumes required to timely meet our product commercialization schedule or to
satisfy the requirements of our distributors or customers. To date, we have
focused primarily on research and development and have limited experience
manufacturing flywheel energy storage systems on a commercial basis. See
"Business--Our Products," "--Our Technology" and "--Manufacturing."

IF WE ARE UNABLE TO MEET OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION
MILESTONES, WE COULD LOSE SALES.

Failure to meet product development and commercialization milestones could
impair our relationships with our potential customers, cause us to lose business
and/or cause the capital markets to devalue our common stock. We have
established internal product development and commercialization milestones and
dates for achieving our goals. If we experience delays in meeting our goals or
if our systems exhibit technical defects or are unable to meet cost or
performance goals, including energy output, useful life and reliability, our
commercialization schedule could be delayed. In that event, potential purchasers
of our commercial systems may choose competing products or alternative

5
<PAGE>
technologies. We cannot guarantee that we will successfully achieve our future
milestones. See "Business--Product Milestones."

WE CANNOT ASSURE COMMERCIAL VIABILITY OF OUR PRODUCTS, AND IF THEY ARE NOT
ACCEPTED COMMERCIALLY, OUR COMPETITIVE POSITION AND PROFITABILITY WOULD DECLINE.

Our future success is dependent upon our ability to develop and market a
commercially acceptable product. The market for highly reliable, uninterruptible
electric power is rapidly evolving and it is difficult to predict its potential
size or future growth rate. We cannot assure you that our flywheel energy
storage based products will achieve market acceptance, that they will meet the
technical demands of our potential communications customers or that they will
offer cost-effective advantages over competing technologies. Most of the
organizations that may purchase our products have invested substantial resources
in their existing power systems and, as a result, may be reluctant or slow to
adopt a new approach. Moreover, our products are alternatives to existing power
back-up systems and may not be accepted by our potential customers. To date we
have only had field trials of our products in commercial applications. We have
received only 117 commercial orders for our products and have made no commercial
deliveries to date. See "Business--Sales and Marketing" and "--Competition."

OUR FAILURE TO MEET THE SIGNIFICANT TECHNOLOGICAL CHALLENGES TO DEVELOP A
COMMERCIALLY VIABLE PRODUCT COULD CAUSE US TO LOSE REVENUES.

The successful development of a commercially viable flywheel energy storage
system for an uninterruptible power supply involves significant technological
challenges including:

- reducing manufacturing costs for the wheel shaft, hub and rim, and
bearings to achieve commercial viability for our current products; and

- developing new products with increased energy storage capacity to expand
our market share.

We cannot assure you that our technologies will be suitable for specific
commercial applications, including communications applications. Design
modifications may be required or demanded by our potential customers, and we may
be unable to make those adjustments at all or to make them as well or as
cost-effectively as our competitors. See "Business--Our Technology" and
"Business--Manufacturing."

BECAUSE WE DEPEND ON THIRD PARTY SUPPLIERS FOR THE DEVELOPMENT AND SUPPLY OF KEY
COMPONENTS FOR OUR PRODUCTS, AND BECAUSE WE DO NOT HAVE CONTRACTS WITH THESE
SUPPLIERS, WE COULD EXPERIENCE DISRUPTIONS IN SUPPLY THAT COULD DELAY OR
DECREASE OUR REVENUES.

Our business, prospects, results of operations, or financial condition could
be harmed if we are unable to maintain satisfactory relationships with
suppliers. To accelerate development time and reduce capital investment, we rely
on third party suppliers for several of our key components. We do not have any
contracts with these suppliers. If these suppliers should fail to timely deliver
components that meet our quality, quantity, or cost standards, then we could
experience production delays or cost increases and our financial performance
could be adversely affected. Because the components with limited sources are key
components that are complex, difficult to manufacture and require long lead
times, we may have difficulty finding alternative suppliers on a timely basis.
As a result, we could experience shortages in supply. See
"Business--Manufacturing."

WE FACE INTENSE COMPETITION AND OUR REVENUE COULD DECLINE IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY.

The markets for highly reliable, uninterruptible electric power are
intensely competitive. There are a number of companies located in the United
States, Canada, and abroad that are developing flywheel energy storage
technology. We also compete with companies that are developing applications
using other types of alternative energy storage. In addition, if large,
established companies decide to focus on

6
<PAGE>
the development of flywheel energy storage systems for sale to communications
service providers, they may have the manufacturing, marketing, and sales
capabilities to complete research, development and commercialization of
commercially viable alternative energy storage systems that could be more
competitive than our systems and could be brought to market more quickly than
ours. To the extent they already have name recognition, their products may enjoy
greater initial market acceptance among our potential customers. These
competitors may also be better able than ourselves to adapt quickly to
customers' changing demands and to changes in technology. See
"Business--Competition."

Technological advances in alternative energy products or other alternative
energy technologies may render our systems obsolete and could therefore cause
your investment in our company to suffer. We do not presently have any products
or technologies other than flywheel systems under development, nor do we have
any plans to pursue other products or technologies either through internal
development or through acquisitions. Our system is, however, only one of a
number of alternative energy products being developed by potential competitors
as supplements to the electric grid that have potential commercial applications,
including microturbines, solar power and wind power, advanced batteries, fuel
cells and other types of alternative energy technologies. See "Business--Our
Product" and "--Our Technology."

GOVERNMENT REGULATION MAY IMPAIR OUR ABILITY TO MARKET OUR PRODUCT.

Government regulation of our product, whether at the federal, state or local
level, including any regulations relating to installation and servicing of our
products, may increase our costs and the price of our systems, and may have a
negative impact on our revenue and profitability. We cannot assure you that our
products will not be subject to existing or future federal and state regulations
governing traditional electric utilities and other regulated entities. We expect
that our products and their installation will be subject to oversight and
regulation at the local level in accordance with state and local ordinances
relating to building codes, safety, pipeline connections and related matters. We
do not know the extent to which any existing or new regulations may impact our
ability to distribute, install and service our products. Once our products reach
the commercialization stage and we begin distributing our systems to our early
target markets, federal, state or local government entities or competitors may
seek to impose regulations.

PRODUCT LIABILITY CLAIMS AGAINST US COULD RESULT IN SUBSTANTIAL EXPENSES AND
NEGATIVE PUBLICITY WHICH COULD IMPAIR SUCCESSFUL MARKETING OF OUR PRODUCTS.

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

SAFETY FAILURES BY OUR PRODUCTS OR THOSE OF OUR COMPETITORS COULD REDUCE MARKET
DEMAND OR ACCEPTANCE FOR FLYWHEELS IN GENERAL.

A serious accident involving either our flywheels or our competitors'
flywheels could be a significant deterrent to customer acceptance and adversely
affect our financial performance. With any form of energy storage, including
machinery, chemicals, fuel or other means of energy storage, there is the
possibility of accident. If a flywheel fails and the energy stored is released,
the flywheel could break apart and the pieces could be ejected at a high rate of
speed. A consortium of government, academic, and industry representatives has
been formed to address containment in the event of this kind of

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flywheel failure. At this early stage of commercialization, there are differing
approaches to containment with disagreement in the community on the most
effective means.

WE EXPECT TO NEED ADDITIONAL FINANCING THAT MAY NOT BE AVAILABLE TO US ON
ACCEPTABLE TERMS OR AT ALL, WHICH COULD CAUSE US TO FAIL TO REACH OUR FUTURE
GOALS.

We expect to require additional financing in the future in order to carry
out our business plan. We believe that the proceeds of this offering, together
with our cash balances, will fund our operations for approximately 24 months. We
may also need additional financing for a variety of reasons including:

- expanding research and development;

- expanding manufacturing equipment and facilities faster than currently
planned;

- funding additional working capital; or

- acquiring complementary products, businesses or technologies.

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

THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE IN THE EVENT THAT WE OBTAIN
ADDITIONAL FINANCING.

If we raise additional funds by issuing additional equity securities, our
existing stockholders will experience dilution which may dilute the value of the
common stock outstanding if the equity is sold at a price less than you paid.
Furthermore, the newly issued securities could have rights superior to the
rights of the common stock sold in this offering.

WE MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF OUR OPERATIONS AND OUR BUSINESS
OPERATIONS COULD BE INTERRUPTED.

Our business, prospects, results of operations or financial condition could
be harmed if we encounter difficulties in effectively managing our rapid
expansion. We are undergoing rapid growth in the number of our employees, the
size of our physical plant and the scope of our operations. Rapid expansion is
difficult to maintain and is likely to place a significant strain on our senior
management team and other resources. In addition, if we are successful in
obtaining rapid market penetration of our products, we will be required to
continue to expand and improve our operational, management and financial systems
and controls to meet anticipated growth. See "Business--Employees."

OUR FINANCIAL PERFORMANCE COULD BE ADVERSELY AFFECTED BY OUR NEED TO HIRE AND
RETAIN KEY EXECUTIVE OFFICERS AND SKILLED TECHNICAL PERSONNEL.

Because our future success depends largely on the success of our technology,
our competitiveness will depend significantly on whether we can attract and
retain skilled technical personnel, especially engineers, and can retain members
of our executive team. We currently have employment agreements only with
Messrs. Stanton, Spiezio, Lazarewicz and French and Ms. Lister. Based on our
planned expansion, we will require a significant increase in the number of
employees, including skilled personnel. Competition for skilled personnel is
intense, and we may not be successful in attracting and retaining the personnel
or executive managers necessary to develop our product and operate profitably.
Because a large portion of our expenses relates to skilled technical personnel
that cannot be easily reduced without adversely affecting our business prospects
and strategic plan, we may not be able to effectively adjust spending to
compensate for revenue shortfalls. Accordingly, any significant shortfall in
revenues in relation to our planned expenditures would reduce, and possibly
eliminate, operating income and could materially adversely affect our business,
operating results and financial condition.

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<PAGE>
WE WILL RELY ON A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR BUSINESS MAY BE
ADVERSELY AFFECTED BY THE LOSS OF, OR REDUCED PURCHASES BY, ANY ONE OF THOSE
CUSTOMERS.

Our initial intent is to focus on selling directly to a small number of
large communications companies and to original equipment manufacturers that
serve the communications markets. If we are successful in this strategy, the
loss of, or reduced purchases by, one customer could have a material adverse
effect on our operating results. In addition, if we do not perform
satisfactorily for a customer, that customer could further harm our future
business if the customer communicates its dissatisfaction or does not recommend
our services to other communications customers.

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.

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

ANY FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD SERIOUSLY IMPAIR OUR
COMPETITIVE POSITION.

We cannot assure you that we have or will be able to maintain a significant
proprietary position on the basic technologies used in our flywheel systems. Our
ability to compete effectively against alternative technologies will depend on
our ability to protect our proprietary technology, systems designs and
manufacturing processes. We do not know whether any of our pending or future
patent applications under which we have rights will issue or, in the case of
patents issued or to be issued, that the claims allowed are or will be
sufficiently broad to protect our technology or processes, or will protect us
from competitors. Even if all our patent applications are issued and are
sufficiently broad, they may be challenged or invalidated. We could incur
substantial costs in prosecuting or defending patent infringement suits, and
such suits would divert funds and resources that could be used in our business.
We do not know whether we have been or will be completely successful in
safeguarding and maintaining our proprietary rights.

Further, our competitors may independently develop or patent technologies or
processes that are substantially equivalent or superior to ours. If we are found
to be infringing on third party patents, we do not know whether we will be able
to obtain licenses to use such patents on acceptable terms, if at all. Failure
to obtain needed licenses could delay or prevent the development, manufacture or
sale of our systems.

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

9
<PAGE>
and prevent us from being the first company to commercialize highly reliable
electrical power products, thereby harming our business prospects. See
"Business--Intellectual Property."

OUR EXISTING STOCKHOLDERS WILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER VOTE,
WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF MATTERS REQUIRING
STOCKHOLDER APPROVAL.

Upon the completion of this offering, our existing stockholders will retain
approximately 79.3% of our outstanding stock. If a sufficient number of these
stockholders were to vote together as a group, they would have the ability to
control our board of directors and its policies. For instance, these
stockholders would be able to control the outcome of all stockholder votes,
including votes concerning director elections, charter and by-law amendments and
possible mergers, corporate control contests and other significant corporate
transactions. These stockholders may use their influence to approve actions that
are adverse to your interest, which could depress our stock price. See "Certain
Relationships and Related Transactions," "Principal Stockholders" and
"Description of Capital Stock."

THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK.

Before this offering, there has been no public market for our common stock.
Although our common stock will be quoted on the Nasdaq National Market, an
active trading market for our shares may not develop or may not be sustained
following this offering. Purchasers in this offering may not be able to resell
their shares at prices equal to or greater than the initial public offering
price. The initial public offering price will be determined through negotiations
between us and the underwriters and may not be indicative of the market price
for these shares following this offering. See "Underwriting."

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 may be subject to
significant fluctuations. This could be in response to operating results,
announcements of technological innovations or new products by us or our
competitors, patent or proprietary rights developments and market conditions for
high technology stocks in general. In addition, stock markets, in particular the
Nasdaq National Market, in recent years have experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. These market fluctuations, as
well as general economic conditions, may adversely affect the market price of
our common stock. There can be no assurance that the trading price of our common
stock will remain at or near the initial public offering price.

OUR INITIAL TARGET MARKET, THE COMMUNICATIONS INDUSTRY, MAY NOT BE ABLE TO
SUSTAIN ITS CURRENT GROWTH RATE, WHICH MAY AFFECT INVESTORS' EXPECTATIONS
REGARDING OUR FINANCIAL PERFORMANCE AND ADVERSELY AFFECT OUR STOCK PRICE.

We are initially targeting the communications markets for the sale of our
products. The communications industry recently has sustained high rates of
infrastructure build-out that expands the need for new power technologies such
as our flywheel product. We cannot assure you that these rates will be
maintained. If the growth rates in these markets are not maintained, the demand
for our products could be significantly reduced which would have a material
adverse effect on our business, operating results and financial condition.

PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY INHIBIT A TAKEOVER
THAT STOCKHOLDERS CONSIDER FAVORABLE.

Provisions in our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover

10
<PAGE>
attempt that is opposed by our management and board of directors. Public
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. Beginning with our annual meeting in 2001, we will have
a staggered board of directors that will make it difficult for stockholders to
change the composition of the board of directors in any one year. Additionally,
our board of directors may authorize issuances of "blank check" preferred stock
that could be used to increase the number of outstanding shares and discourage a
takeover attempt. These anti-takeover provisions could substantially impede the
ability of public stockholders to benefit from a change in control or change our
management and board of directors. See "Description of Capital Stock."

YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION AND, AS A RESULT, YOU MAY NOT
RECEIVE THE FULL AMOUNT OF YOUR INVESTMENT IF WE ARE LIQUIDATED.

The initial public offering price per share will be substantially higher
than the net tangible book value per share immediately after the offering. If
you purchase common stock in this offering, you will incur dilution of $5.47 per
share from the price per share you would have paid based on our net book value
at September 30, 2000. We also have a large number of outstanding warrants and
stock options to purchase our common stock with exercise prices significantly
below the initial public offering price of our common stock. To the extent these
warrants and options are exercised, you will be further diluted. See "Dilution,"
"Certain Relationships and Related Transactions" and "Principal Stockholders."

FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.

Substantial sales of our common stock in the public market following this
offering, or the perception by the market that such sales could occur, could
lower our stock price or make it difficult for us to raise additional equity
capital in the future. After this offering, we will have 38,565,974 shares of
common stock outstanding. Of these shares, 7,760,000 of the shares sold in this
offering and an additional 13,488 shares owned by seven investors will be freely
tradable. The 240,000 shares sold in this offering through the directed share
program are subject to 30-day lock-up agreements. 30,366,220 of the remaining
shares of common stock are subject to 180-day lock-up agreements with the
underwriters. Up to 102,932 and 30,366,220 shares may be available for sale in
the public market 90 and 180 days after the date of this prospectus,
respectively, subject, in some cases, to the holding period, volume limitations
and other requirements of Rule 144 under the Securities Act.

We have outstanding warrants to purchase 11,769,403 shares of our common
stock. The shares purchased upon exercise of these warrants may be sold
180 days after the date of this prospectus, subject to the holding period,
volume limitation and other requirements of Rule 144 under the Securities Act.

Beginning 180 days after the closing of this offering, the holders of
approximately 30,366,220 shares of our common stock and warrants to purchase
11,699,403 shares of our common stock, or their transferees, will be entitled to
cause us to register those shares. In addition, after this offering, we also
intend to register 9,000,000 shares of common stock for issuance under our stock
incentive plan. As of October 24, 2000, options to purchase 4,769,540 shares of
common stock were issued and outstanding, of which options to purchase 1,119,890
shares have vested.

We cannot predict if future sales of our common stock, or the availability
of our common stock for sale, will harm the market price for our common stock or
our ability to raise capital by offering equity securities.

See "Shares Eligible for Future Sale" and "Underwriting."

11
<PAGE>
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE
AND AS A RESULT STOCKHOLDERS WILL NEED TO SELL SHARES IN ORDER TO REALIZE A
RETURN ON THEIR INVESTMENTS IN US.

We have not paid dividends to the holders of our common stock since our
inception and do not anticipate paying cash dividends in the foreseeable future.
We intend to reinvest earnings, if any, in the development and expansion of our
business. Declaration of dividends on our common stock will depend upon, among
other things, future earnings, our operating and financial condition, our
capital requirements and general business conditions. See "Dividend Policy" and
"Description of Capital Stock."

12
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" contains forward-looking information. This
forward-looking information is subject to risks and uncertainties including the
factors listed under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue," or the negative of these terms or other comparable terminology.
These statements are only predictions and may be inaccurate. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.

13
<PAGE>
USE OF PROCEEDS

We estimate our net proceeds from the sale of 8,000,000 shares of our common
stock in this offering will be $43.5 million, at an initial public offering
price of $6.00 per share, after deducting the estimated underwriting discounts
and commissions and our estimated offering expenses. If the underwriters
exercise their over-allotment option in full, our net proceeds will be
approximately $50.2 million.

The principal purposes of this offering are to increase our equity capital,
create a public market for our common stock under market conditions that we
believe are favorable, facilitate future access by us to public equity markets
and provide us with increased credibility with our customers and suppliers. We
will use $33 million of the net proceeds of the offering, together with cash on
hand, for product research and development and expanding manufacturing capacity
and $13 million for capital expenditures. Although we have no specific plans for
any remaining net proceeds of the offering, we expect to use the remainder for
general corporate purposes, working capital and potential acquisitions. While we
have from time to time engaged in acquisition discussions with other parties, we
are not party to any agreement or letter of intent with respect to a potential
acquisition.

Our management will have significant flexibility in applying the net
proceeds of this offering. For example, we may use a portion of the net proceeds
to acquire businesses, products or technologies that complement our current or
future business and product lines.

Pending their use, we will invest the proceeds in government securities and
other short-term, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid cash dividends on shares of our common stock.
We expect to retain any future earnings to finance the expansion of our
business, and therefore we do not expect to pay cash dividends in the
foreseeable future.

Payment of future cash dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion.

14
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2000:

- on an actual basis (giving effect to the 2-for-1 split of our common stock
effected immediately prior to the consummation of this offering); and

- on an as adjusted basis to reflect the conversion of each share of our
outstanding preferred stock upon consummation of this offering into two
shares of common stock, the issuance upon conversion of our class D
preferred stock of 820,162 shares of common stock as a dividend payable on
the class D preferred stock, the issuance of 39,168 shares of common stock
to be issued upon consummation of the offering as a dividend on the
class E preferred stock, a charge of $33,000,000 representing the value of
the warrants issued as part of our class F financing at a $6.00 initial
offering price, the issuance of shares payable for consulting services and
the sale of 8,000,000 shares of common stock in this offering at an
initial public offering price of $6.00 per share.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Cash and cash equivalents (1)............................... $ 21,347 $ 64,811
======== =========
Dividends payable (2)....................................... 1,086 --
Capital lease obligations................................... 51 51
Redeemable convertible preferred stock:
Class D Preferred Stock, $0.01 par value per share;
6,000,000 shares authorized, 1,900,000 shares issued and
outstanding............................................. 4,566 --
Class E Preferred Stock, $0.01 par value per share;
2,000,000 shares authorized, 1,226,141 shares issued and
outstanding............................................. 3,704 --
Class F Preferred Stock, $0.01 par value per share;
7,500,000 shares authorized, 6,785,711 shares issued and
outstanding............................................. 28,412 --
Redeemable preferred stock warrants......................... 344 --
Stockholders' (deficit) equity:
Class A Preferred Stock, $0.01 par value per share;
6,000,000 shares authorized, 4,767,907 shares issued and
outstanding............................................. 5,741 --
Class C Preferred Stock, $0.01 par value per share; six
shares authorized, six shares issued and outstanding.... 30 --
Common Stock, $0.01 par value per share; 110,000,000
shares authorized, 198,182 shares issued and
outstanding, actual; and 38,517,050 shares issued and
outstanding, as adjusted................................ 2 385
Deferred prepaid consulting expense, net.................. 339 (10)
Deferred stock compensation............................... (1,257) (1,257)
Paid-in capital........................................... 3,763 124,076
Deficit accumulated during the development stage.......... (27,018) (60,018)
-------- ---------
Total stockholders' (deficit) equity.................... (18,400) 63,176
-------- ---------
Total capitalization.................................. $ 19,763 $ 63,227
======== =========
</TABLE>

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

(1) We estimate that we had cash and cash equivalents of $18,567,000 at
October 31, 2000.

(2) Represents dividends payable in shares of class D preferred stock and
class E preferred stock accrued through May 23, 2000.

15
<PAGE>
DILUTION

Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of our common stock in this offering and the
net tangible book value per share as adjusted of our common stock immediately
after completion of the offering. Net tangible book value per share, on a pro
forma basis, represents the amount of our total assets less total liabilities,
divided by 39,658,103 shares of common stock outstanding as of September 30,
2000, determined on a pro forma basis assuming conversion on that date of each
share of our outstanding preferred stock into two shares of common stock, giving
effect to the issuance upon conversion of our class D preferred stock of 820,162
shares of common stock as a dividend payable on the class D preferred stock,
39,168 shares of common stock to be issued upon consummation of the offering as
a dividend on the class E preferred stock, the issuance of 60,000 shares of
class A preferred stock issued in payment of consulting fees accrued through
October 31, 2000 which, upon the consummation of the offering, will convert into
120,000 shares of common stock, the issuance of 10,910,029 shares of common
stock issuable to our executive officers, directors and other affiliates upon
the exercise of options and warrants exercisable within 60 days of the date of
this prospectus.

As of September 30, 2000, on a pro forma basis, we had a net tangible book
value of $(18,399,767), or $(0.46) per share of common stock. After giving
effect to the sale of the 8,000,000 shares of common stock offered by this
prospectus at an initial public offering price of $6.00 per share, and after
deducting the estimated underwriting discounts and commissions and our estimated
offering expenses, our net tangible book value on a pro forma as adjusted basis,
as of September 30, 2000, would have been $25,064,373, or $0.53 per share of
common stock on a pro forma as adjusted basis. This represents an immediate
increase in net tangible book value on a pro forma as adjusted basis of $0.99
per share to our existing stockholders and an immediate dilution of $5.47 per
share to new investors in this offering. The following table illustrates this
per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 6.00
Pro forma net tangible book value per share at
September 30, 2000...................................... $(0.46)
Increase in pro forma net tangible book value per share
attributable to this offering........................... 0.99
------
Pro forma net tangible book value per share after this
offering.................................................. 0.53
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 5.47
======
</TABLE>

The following table sets forth, as of September 30, 2000 after giving effect
to the offering, the number of shares of common stock issued by us, the total
consideration paid in cash or other consideration for those shares and the
average price per share paid in cash or other consideration by existing
stockholders and by new investors. The table is presented assuming that all of
the transactions described in the first paragraph of this section occurred on
September 30, 2000.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 39,658,103 83.2% $ 66,193,830 58.0% $ 1.67
New investors........................... 8,000,000 16.8 48,000,000 42.0 6.00
---------- ---- ------------ ----
Total............................... 47,658,103 100% $114,193,830 100%
========== ==== ============ ====
</TABLE>

16
<PAGE>
Each of the above tables excludes:

- up to 1,200,000 shares that may be issued by us pursuant to the
underwriters' over-allotment option;

- 4,438,206 shares of common stock issuable upon exercise of stock options
outstanding as of October 24, 2000 at a weighted average exercise price of
$2.69 per share (other than those held by our executive officers that are
exercisable within 60 days of the date of this prospectus);

- an aggregate of 2,849,596 shares of common stock issuable upon exercise of
outstanding warrants held by stockholders other than our affiliates which
include those held by GE Capital Equity Investments, Inc. that are not
exercisable within 60 days of the date of this prospectus; and

- 4,004,194 shares of common stock available as of October 24, 2000 for
future grant under our stock incentive plan.

To the extent these shares are issued, you will be further diluted. See
"Management" and the notes to our financial statements included elsewhere in
this prospectus.

17
<PAGE>
SELECTED FINANCIAL DATA

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

The following tables present selected historical financial data for the
period from May 8, 1997, the date of our inception, through December 31, 1997,
the years ended December 31, 1998 and 1999 and the nine month periods ended
September 30, 1999 and 2000. The balance sheet data as of December 31, 1997,
1998 and 1999 and September 30, 2000 and the statement of operations data for
the period from inception through December 31, 1997 and for the years ended
December 31, 1998 and 1999 and the nine months ended September 30, 2000 have
been derived from our financial statements that have been audited by Deloitte &
Touche LLP, our independent auditors, which are included elsewhere in this
prospectus. The statement of operations data for the nine month period ended
September 30, 1999 is derived from our unaudited financial statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our results of
operations and financial condition for those periods. Results for any interim
period are not necessarily indicative of the results that may be expected for
any other interim period or for a full year.

The pro forma basic and diluted net loss per share gives effect to the
conversion at the beginning of the period of all shares of class A, C and D
preferred stock into two shares of common stock for all periods presented and
the conversion into two shares of common stock on January 1, 2000 of all shares
of class E and F preferred stock for the period ended September 30, 2000,
including in each case shares payable for dividends and consulting services, as
though they were common stock in all periods for which such shares were
outstanding.

<TABLE>
<CAPTION>
PERIOD FROM DATE YEAR ENDED NINE MONTHS ENDED
OF INCEPTION DECEMBER 31, SEPTEMBER 30,
(MAY 8, 1997) TO --------------------- -------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- -------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 232 $ -- $ 269 $ 66 $ --
Operating expenses:
Selling, general and administrative............... 1,168 1,188 1,559 1,084 2,866
Research and development.......................... 2,292 3,524 3,506 2,386 5,775
Loss on sales commitments......................... -- -- 325 -- 880
Depreciation and amortization..................... -- 78 219 155 251
-------- -------- ---------- -------- --------
Total operating expenses............................ 3,460 4,790 5,609 3,625 9,772
-------- -------- ---------- -------- --------
Loss from operations................................ (3,228) (4,790) (5,340) (3,559) (9,772)
Interest and other income (expense), net............ 117 (3) (331) (228) (21)
-------- -------- ---------- -------- --------
Net loss............................................ (3,111) (4,793) (5,671) (3,787) (9,793)
Preferred stock dividends........................... -- (112) (917) (422) (2,452)
Accretion of redeemable convertible preferred
stock............................................. -- (7) (42) (31) (52)
-------- -------- ---------- -------- --------
Loss to common shareholders......................... $ (3,111) $ (4,912) $ (6,630) $ (4,240) $(12,297)
======== ======== ========== ======== ========
Net loss per share, basic and diluted............... $(184.67) $(291.58) $ (393.52) $(251.71) $(401.09)
======== ======== ========== ======== ========
Shares used in computing net loss per share, basic
and diluted....................................... 17 17 17 17 31
Pro forma net loss per share, basic and diluted..... $ (0.42) $ (0.45)
========== ========
Shares used in computing pro forma net loss per
share, basic and diluted.......................... 13,493 22,017
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------ AS OF SEPTEMBER 30,
1997 1998 1999 2000
-------- -------- -------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 30 $ 2,491 $ 234 $ 21,347
Working capital............................................. (29) 1,481 (878) 18,721
Total assets................................................ 112 2,992 974 24,159
Redeemable convertible preferred stock...................... -- 4,493 4,535 36,682
Total stockholders' (deficit) equity........................ (1) (2,720) (8,591) (18,400)
</TABLE>

18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements, the
notes to those financial statements and other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
statements that reflect our plans, estimates, intentions, expectations and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements." Factors that could cause or contribute to such differences include,
but are not limited to, those set forth in the "Risk Factors" section and
contained elsewhere in this prospectus.

OVERVIEW

As a former division of SatCon Technology Corporation, we were founded in
May 1997. Since our inception, we have raised $41,800,000 in private equity.
These investments allowed us to develop and test field-trial flywheel units and
to continue development of our first commercial product. These funds, plus the
proceeds from this offering of common stock, will allow us to complete our
product design, increase manufacturing capacity and begin commercial production.

From our inception through September 30, 2000 we have incurred losses of
approximately $27.0 million. We expect to continue to incur losses as we expand
our product development and commercialization program and prepare for the
commencement of full manufacturing operations. We expect that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial
as a result of, among other factors, the number of systems we produce and sell
to our customers.

REVENUES

To date our revenues have been the result of development contracts with
government entities focused on the design of flywheel technologies. We have
placed several development prototypes with potential customers and are currently
shipping pre-production units. These products have been provided to potential
customers without charge to allow us access to field test information and to
demonstrate the application of our technologies. We believe that through the
performance of these field units we will obtain commercial orders.

OPERATING EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our sales and marketing
expenses consist primarily of compensation and benefits for our sales and
marketing personnel and related business development expenses. We are emerging
from research and development to introduction of commercial products through
manufacturing. To date, our historical sales and marketing expenses have not
been material. We have relied on engineering personnel to provide technical
specifications and product overviews to our potential customer base. We expect
sales and marketing expenses to increase significantly as we continue to grow.

Our general and administrative expenses consist primarily of compensation
and benefits related to our corporate staff, professional fees, and related
travel. We expect our general and administrative expenses to increase
significantly as we continue to grow.

RESEARCH AND DEVELOPMENT. Our cost of research and development consists
primarily of the cost of compensation and benefits for research and development,
manufacturing and support staff, as well

19
<PAGE>
as materials and supplies used in the engineering design process. We expect our
cost of research and development to continue to increase as we develop
additional product designs, refine existing products and expand our analytic
capabilities. We will be significantly expanding our research and manufacturing
capacity as we begin our relocation to a new facility during the fourth quarter
of 2000. Additionally, as a result of 120,000 warrants issued to an investor in
October 2000, we will incur a charge of approximately $1,300,000 in the fourth
quarter of 2000. There are an additional 120,000 warrants contingently issuable
to this investor which will be fair-valued and charged to expense as services
are utilized and the warrants are vested.

LOSS ON SALES COMMITMENTS. We have sales commitments for a limited number
of units. We have established reserves for anticipated loss on these commitments
when our cost estimates indicate a loss will be incurred. We expect our losses
to continue until we are able to expand unit volumes and achieve planned product
cost reductions. We expect to decrease our cost per unit through engineering
design changes, operating efficiencies, and volume purchasing discounts.

DEPRECIATION AND AMORTIZATION. Our depreciation and amortization is
primarily related to depreciation on capital expenditures and the amortization
of lease and leasehold costs related to our facilities.

INTEREST AND OTHER INCOME/EXPENSE, NET

Our non-operating income and expenses are primarily attributable to interest
income attributable to cash on hand from our private financings and interest
expense associated with our notes payable to investors.

RESULTS OF OPERATIONS

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000

REVENUE

We recorded no revenues for the nine months ended September 30, 2000
compared to approximately $66,000 for the nine months ended September 30, 1999.
In the first nine months of 1999 we recorded revenues for work performed on
research contracts to demonstrate applications of our technologies.

OPERATING EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 2000 were
approximately $2,866,000, compared to approximately $1,084,000 for the nine
months ended September 30, 1999. This increase of $1,782,000 is primarily the
result of increased compensation and benefit costs.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the nine months ended September 30, 2000 were approximately $5,775,000, compared
to approximately $2,386,000 for the nine months ended September 30, 1999. This
increase of $3,389,000 is primarily the result of increased compensation and
benefit costs related to an increase in the number of engineering personnel and
the amount of materials used for product development.

LOSS ON SALES COMMITMENTS. Loss on sales commitments for the nine months
ended September 30, 2000 was approximately $880,000 compared to no sales
commitment losses for the nine months ended September 30, 1999. We have accrued
these losses based on our estimated costs to complete delivery commitments
entered into during the first two quarters of this fiscal year.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the nine
months ended September 30, 2000 were approximately $251,000 compared to
approximately $155,000 for the nine

20
<PAGE>
months ended September 30, 1999. This increase of $96,000 is attributable to
increases in capital lease costs and capital equipment expenditures.

INTEREST AND OTHER INCOME/EXPENSE, NET

Our net non-operating expenses for the nine months ended September 30, 2000
were approximately $21,000, compared to net non-operating expense of
approximately $228,000 for the nine months ended September 30, 1999. This
decrease of $207,000 is attributable to interest income associated with cash
balances resulting from our class F preferred stock financing.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999

REVENUE

Revenues were approximately $269,000 in 1999 while we did not record
revenues in the prior year. These revenues resulted from work performed on
research contracts to demonstrate applications of our technologies.

OPERATING EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were approximately $1,559,000 in 1999 compared to
approximately $1,188,000 for 1998. This increase of approximately $371,000
reflects the expansion of our infrastructure to support sales growth and the
commercialization of our products.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
1999 were approximately $3,506,000, compared to approximately $3,524,000 in
1998. Research and development expenses, while essentially flat over the
two-year period, is indicative of our ongoing efforts to develop and improve our
technologies and product potentials.

LOSS ON SALES COMMITMENTS. Loss on sales commitments of approximately
$325,000 were recorded in 1999 compared to no sales commitment losses in 1998.
We accrued these losses in 1999 based on estimates of costs to complete these
delivery commitments.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization were
approximately $219,000 in 1999 compared to approximately $78,000 in 1998. This
increase of approximately $141,000 reflects increased capital expenditures for
development and production equipment as well as increased facilities related
lease costs.

INTEREST AND OTHER INCOME/EXPENSE, NET

Other expenses were approximately $332,000 for 1999 compared to
approximately $3,000 in 1998. This increase is related to a higher level of
indebtedness in 1999.

COMPARISON OF PERIOD FROM MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND YEAR ENDED DECEMBER 31, 1998

REVENUE

We recorded no revenues in 1998 compared to approximately $232,000 in 1997.
The 1997 revenues resulted from a contract to demonstrate applications of our
technologies.

21
<PAGE>
OPERATING EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses of $1,188,000 and $1,168,000 in 1998 and 1997,
respectively were essentially equal as we focused our expenditures on furthering
our technology development efforts.

RESEARCH AND DEVELOPMENT. Research and development expenses were
approximately $3,524,000 in 1998, compared to approximately $2,292,000 in 1997.
The increase in expenditures of approximately $1,232,000 reflects our increased
developmental effort on our emerging flywheel technologies.

LOSS ON SALES COMMITMENTS. There were no sales commitments in 1998 or 1997.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization were
approximately $78,000 in 1998 compared to zero in 1997. This was primarily
attributable to lease expenditures as we established our own facilities in 1998.
In 1997, we were located in SatCon's facilities.

INTEREST AND OTHER INCOME/EXPENSE, NET

Interest and other income/expenses in 1998 totaled approximately $3,000 of
expense compared to approximately $117,000 of interest income in 1997. This
decrease was primarily due to lower cash balances in reduced interest income in
1998 and an increase in interest expense related to new capital leases in 1998.

LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements depend on many factors, including our research and
development activities, expansion of our manufacturing facilities and efforts to
commercialize our products. Over the next two years we expect to make
significant expenditures to develop our technologies and expand manufacturing
capabilities. Our total facilities will more than double in the fourth quarter
of 2000 and the first quarter of 2001 growing to over 52,000 square feet of
space with options to more than double this square footage during the remainder
of 2001. During 2001 and 2002 the lease and utilities on this new facility will
total approximately $1,200,000 and leasehold improvements will be approximately
$1,100,000. We expect to expand our square footage in 2001 by approximately
20,000 square feet to accommodate expanded development activities which will
require additional lease and utilities and leasehold improvements of
approximately $600,000. Capital investments for equipment and tooling will be
approximately $17,000,000. In conjunction with these investments, we expect to
incur costs for salaries, benefits, consultants and other overhead for
development of our technologies and expanding manufacturing capabilities of
approximately $27,000,000. We also expect to spend approximately $6,000,000 on
materials and supplies used in the engineering design process. We believe that
our current cash balances and the net proceeds from this offering will provide
us with sufficient capital to fund our operations through the next 24 months.

Historically, we have financed our operations primarily through cash from
private offerings. We have raised approximately $41.8 million through the sale
of our capital stock. Our primary cash requirements have been to fund research
and development, establish low rate production capabilities, make capital
expenditures and fund infrastructure costs. Net cash used in operating
activities was approximately $4,840,000 and $3,722,000 for 1999 and 1998,
respectively and approximately $6,434,000 for the nine months ended
September 30, 2000. Net cash used in investing activities was approximately
$461,000 and $237,000 for 1999 and 1998, respectively and approximately $677,000
for the nine months ended September 30, 2000, and was primarily used for the
purchase of property and equipment, the payment of security deposits pursuant to
obtaining additional facility space and the payment of costs associated with
fund raising activities. Proceeds from the sales of preferred shares are
currently held in short-term, interest-bearing investment grade securities to
provide liquidity for operations. Our capital requirements will be affected by
many factors, including the success of our product offerings, the ability

22
<PAGE>
to enhance our products and our ability to develop and introduce new products
that keep pace with technological developments in the marketplace. We intend to
use the proceeds of this offering, together with our cash balances, for general
corporate purposes including continued research and product development, capital
expenditures and infrastructure to support our business plan. Additionally, we
may use a portion of the net proceeds to fund acquisitions of, or investments
in, businesses, products or technologies that expand, complement or are
otherwise related to our current business. Pending our use of proceeds as
described above, we intend to invest the proceeds of this offering in
short-term, interest-bearing investment grade securities.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET IMPLEMENTED

For United States generally accepted accounting principles reporting
purposes we will be required to adopt Statement of Financial Accounting
Standards ("SFAS") 133 "Accounting for Derivative Instruments and Hedging
Activities" for the 2001 fiscal year. We have not yet determined the impact that
the adoption of SFAS 133 will have on our financial reporting. However, as we do
not use derivative financial instruments for trading purposes and do not have
any current intention to enter into any hedging transactions, we expect that any
such impact would not be material.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
established guidelines for revenue recognition and is effective for periods
beginning no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. We do not expect that the adoption of SAB 101 will have
a material impact on our financial condition or results of operations.

DISCLOSURE ABOUT MARKET RISK

Our cash equivalents and investments, all of which have maturities of less
than one year, may expose us to interest rate risk. At the end of our most
recent fiscal year, we had approximately $234,000 of cash equivalents which were
held in a non-interest bearing checking account. At September 30, 2000, we had
approximately $20,845,000 invested in interest-bearing money market accounts.
The fair value of these investments approximate their cost. We believe that the
effect, if any, of near-term changes in interest rates on our financial
position, results of operations and cash flows will not be material.

23
<PAGE>
BUSINESS

OVERVIEW

We design and develop flywheel energy storage systems that we believe will
provide highly reliable, high-quality, uninterruptible electric power for
communications networks, computers, the Internet, industrial manufacturing,
commercial facilities and distributed generation products that allow the user to
generate power locally by converting fuel to electricity. The broad use of
digital electronics and computers throughout the information economy is causing
a dramatic increase in the demand for more reliable, higher quality power.
Alternative powering technologies, including flywheel energy storage, are
emerging to meet this need.

Flywheel systems draw electrical energy from a primary power source such as
the electric grid or fuel cells, store that energy, and then convert that energy
to immediately provide uninterruptible electric power when the primary power
source fails or is disrupted. We believe our flywheels will offer significant
advantages over conventional back-up power systems that primarily use lead-acid
batteries. The expected advantages include higher reliability, longer life,
lower life-cycle cost, improved recharging capability, reduced maintenance, more
reliable monitoring, and greater environmental friendliness.

We have designed our initial products to specifically address the back-up
powering needs of the communications markets. Bell Atlantic, now part of Verizon
Communications, WinDBreak Cable and Telcordia Technologies Inc. have provided us
with application requirements that have helped with the definition, development
and testing of our 2kWh product. We have not entered into any agreements with,
or sold any units to, any of these parties. We have sales commitments for 117 of
our 2kWh commercial units, with deliveries expected to begin in early 2001, and
expect that our product demonstrations will lead to additional, significant
orders.

Over the longer term, we intend to capitalize on our strengths in the
communications markets to expand into other markets such as back-up power for
computers, the Internet, industrial manufacturing and commercial facilities. We
will also target our future products toward enhancing the performance of
distributed generation products, such as gasoline or diesel generators, fuel
cells and microturbines. We believe that our flywheel systems will be used in
conjunction with these generators to provide benefits that are not available
from these products alone, such as an instant-on capability and the ability to
manage sudden changes in power.

Since our inception, we have raised $41,800,000 in cash from third-party
investors, including GE Capital Equity Investments, Inc., Penske Corporation,
Mechanical Technology Incorporated, SatCon Technology Corporation, DQE
Enterprises, Inc., Perseus Capital, L.L.C., Micro-Generation Technology Fund,
LLC and The Beacon Group Energy Investment Fund II, L.P. Through these
relationships, we expect to improve our technology, operations and manufacturing
practices, as well as our marketing, sales and distribution capabilities. As
part of the investment by GE Equity, we have entered into an agreement with GE
Corporate Research and Development under which GE CR&D will provide us with
technical expertise in controls and materials.

INDUSTRY DYNAMICS

INCREASING DEMANDS FOR MORE RELIABLE, HIGHER QUALITY POWER

Decentralized communications networks, the Internet and the information
economy are driving the increased demand for electricity, particularly the need
for electricity that is of higher quality, meaning fewer variations in voltage
and current, and reliability. THE HUBER MILLS POWER REPORT describes this kind
of power as that requiring reliability of 99.99999999%, or ten nines, which is
equivalent to outages of 3/1000 of a second per year. To put this into
perspective, the electric grid provides power at roughly 99.9%, or three nines,
of reliability, or equivalent to outages of about eight hours per year. The
traditional approach to providing high reliability power is to use batteries to
provide back-up powering

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<PAGE>
when the utility power is lost either partially (brown-outs) or completely
(black-outs). For many applications, particularly outdoor uses by communications
providers, this approach does not meet the reliability requirements, is costly,
and is subject to the environmental hazards of lead and acid contamination of
soil and water.

DISADVANTAGES OF CONVENTIONAL LEAD-ACID BATTERY-BASED SYSTEMS

Lead-acid batteries provide back-up energy for most high reliability power
applications, including those in communications, and are viewed as the weakest
component of conventional power quality and reliability products. Lead-acid
batteries have numerous problems, including:

LIMITED BATTERY LIFE AND CAPACITY

- TEMPERATURE SENSITIVITY: Battery life rapidly degrades when batteries are
exposed to extreme cold or heat. Batteries used for communications
applications typically are not placed in climate-controlled environments
and are therefore subject to extreme temperatures.

- USAGE AND ENVIRONMENTAL SENSITIVITY: The capacity of a battery to store
and supply energy is reduced by frequent discharging and recharging and
exposure to hot and cold temperatures.

LOW RELIABILITY

- RELATIVELY HIGH FAILURE RATE: Batteries exposed to the environment,
particularly hot climates, are prone to high failure rates.

- INCREASED UNCERTAINTY BASED ON USAGE: When batteries are repeatedly
discharged, their energy capacity can rapidly decrease, increasing the
uncertainty that batteries can provide power when needed.

HIGHER COST

- HIGH MAINTENANCE: Batteries require regular inspections and periodic
testing to determine problems and power output capacity, which lessens
over time. Remote and decentralized powering has made the performance of
maintenance and inspection very difficult, if not impossible.

- FREQUENT REPLACEMENT REQUIRED: Batteries have a limited useful life and
must be replaced every two to six years, on average, regardless of usage.
Batteries that are used in non-controlled environments may need to be
replaced more frequently. For example, in southern regions, where
batteries are exposed to extreme, prolonged heat, some communications
companies replace batteries within a year.

ENVIRONMENTAL ISSUES

- TOXICITY: Batteries contain chemicals of varying degrees of toxicity.

- DISPOSAL: Disposal of dead batteries is governed by state and federal
environmental regulations which are becoming increasingly rigorous and
costly.

- PERMITTING: State and local governments are increasingly requiring
distributed equipment to be installed in the ground. However, most state
and local governments do not permit in-ground installation of batteries
because of concerns about spills of toxic substances.

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<PAGE>
MARKET OPPORTUNITIES FOR OUR FLYWHEEL PRODUCTS

The Electric Power Research Institute estimated that electric power
reliability problems cost the U.S. more than $50 billion annually. Approximately
$12 billion was spent worldwide in 1999 on power quality and reliability
equipment to address these problems. Mark Mills, one of the authors of THE HUBER
MILLS POWER REPORT, has estimated that sales of power reliability products will
expand at a market growth rate of approximately 30% per year for the next
15 years. We believe that significant growth in demand for power quality and
reliability equipment will come from our targeted markets, including:

COMMUNICATIONS MARKETS

Communications systems, which include telephony, broadband, cable and
wireless networks, must remain functional even during power outages or
disruptions. Most wire-line telephony providers design and equip their systems
to meet a goal of 100% reliability. Until recently, power was often provided
from central stations where lead-acid batteries typically provided back-up power
until a generator could be engaged. With the onset of the Internet and the
increased demand for telephone lines came an expanding demand for communications
bandwidth by customers. Recently, as fiber cables were used to provide the
increased bandwidth, powering began to be decentralized into suburban and rural
areas where the batteries are unattended and exposed to the environment. Because
batteries are less reliable and have a dramatically reduced life when used in a
non-climate controlled environment, the large-scale deployment of lead-acid
batteries in these areas is proving to be unsatisfactory.

The SKYLINE MARKETING GROUP estimated that power quality and reliability
equipment sold into the North American communications markets in 1999 totaled
$1.6 billion. They further estimated that the North American market is 40% of
the global market. According to the SKYLINE MARKETING GROUP, the North American
communications powering market grew at a 19% annual rate in 1999 and is
projected to grow at a 13% to 14% compound annual rate over the next five years.

According to THE ADVANCED LEAD-ACID BATTERY CONSORTIUM, in excess of
4 billion watt-hours of valve-regulated lead-acid batteries were sold to the
communications markets in the U.S. in 1997. At this rate, if flywheels displaced
these batteries, the U.S. communications powering market would require at least
2 million 2kWh-flywheels per year.

COMPUTERS AND THE INTERNET MARKET

To support the growth in the Internet economy, Internet service providers,
or ISPs, are building new computer and communication system facilities. As
24-hour operations have become a necessity, ISPs must be able to provide their
customers with continuous, uninterrupted operations. To meet this goal, ISPs are
adding power quality and power reliability equipment to protect these systems.
We will develop products to address the high power quality and reliability needs
of the new technology economy.

INDUSTRIAL MANUFACTURING

The growing reliance on automation equipment means that even a split-second
deviation in the voltage of electricity serving a manufacturing plant can cause
sensitive equipment to fail. This downtime can damage equipment and cause missed
deliveries and lost production, which can result in significant costs.

COMMERCIAL FACILITIES

Power instabilities are a threat to data processing centers, call centers,
telecommunication switching facilities, emergency services, hospitals and other
mission critical commercial facilities. Also, many commercial facilities such as
office buildings, hotels and universities have extensive computer,

26
<PAGE>
server and data center operations to maintain corporate records and information.
Flywheel storage systems create the opportunity to provide more reliable and
cost-effective back-up power at these facilities.

DISTRIBUTED GENERATION

The combination of the reduction in the reliability of grid-provided
electricity, the need for higher reliability electrical power for the
information economy, and the demand for off-grid powering is expected to result
in a significant market for distributed generation products, including gasoline
or diesel generators, fuel cells and microturbines. Whether distributed
generation technologies are connected to the grid or are used off-grid, we
believe these technologies represent a significant potential market for our
next-generation flywheel energy storage products. For grid connected systems,
our flywheel systems will be designed to eliminate the inherent lag in
transferring a customer from utility power to fuel cell or microturbine stand-by
power in the event of a utility outage. For off-grid applications, our systems
will be designed to maintain power and voltage constancy.

OUR STRATEGY

Our goal is to become the leading provider of flywheel energy storage
systems. To accomplish our objective, we are pursuing the following key
strategies:

INITIALLY TARGET COMMUNICATIONS MARKETS WITH SUPERIOR PRODUCT OFFERINGS. We
believe we are the only company to have designed, demonstrated and received
orders for a flywheel product for distributed communications sites. Our products
are specifically designed for the needs of the communications markets because
they store and deliver larger amounts of energy than other available flywheel
systems, have integrated low-cost vacuum systems, have bearings designed for
long life without maintenance, can be buried in the ground, and have reliable,
easy monitoring. We will similarly design our future products and solutions for
specific market applications.

OVER THE LONGER TERM, EXPAND INTO OTHER SEGMENTS OF THE POWER QUALITY AND
RELIABILITY MARKETS. We believe we can leverage our design, development and
manufacturing expertise in the communications markets to expand into other
markets, including back-up power flywheel systems for computers, the Internet,
industrial manufacturing, commercial facilities and distributed generation
products.

LEVERAGE KEY CUSTOMER AND STRATEGIC RELATIONSHIPS WITH GENERAL ELECTRIC AND
OTHERS TO ENHANCE OUR PRODUCT DEVELOPMENT AND REDUCE PRODUCT COSTS. We intend
to leverage the relationships we developed with potential customers including
Bell Atlantic, now part of Verizon Communications, WinDBreak Cable and
Telcordia, during the definition, development and testing of our 2kWh product.
As a result of the investment in our company by GE Capital Equity Investments,
Inc., an affiliate of General Electric Company, we have entered into an
agreement with GE Corporate Research and Development under which GE CR&D will
provide us with technical expertise in controls and materials.

ESTABLISH KEY STRATEGIC RELATIONSHIPS TO AID IN OUR MARKETING AND
DISTRIBUTION EFFORTS. We intend to expand our alliances with potential
distributors for installation and support throughout North America and the rest
of the world. We have an agreement with DQE Enterprises, Inc., one of our
investors, to act as a distributor of our flywheel products in certain
mid-Atlantic states. DQE Enterprises, Inc. is a subsidiary of DQE, Inc., one of
the leading utilities engaged in the development and commercialization of new
energy technologies. We intend to explore possible relationships with other
potential strategic partners.

PROTECT OUR INTELLECTUAL PROPERTY. We hold a perpetual, exclusive,
royalty-free, worldwide right and license to use SatCon's existing flywheel
technologies and patents for stationary terrestrial flywheel applications. Those
rights include 8 issued U.S. patents and 13 U.S. and foreign patent applications
that expire on various dates between 2012 and 2018. We also have one pending
U.S. patent application and

27
<PAGE>
10 other applications being prepared for filing. Our patent and trade secret
rights are of material importance to us, and to our future prospects. We are
actively pursuing both national and foreign patent protection. At the direction
of our board of directors, our management has formed a patent committee that is
charged with identifying and seeking patent protection for our intellectual
property. We also aggressively protect our trade secrets and technical know-how.

OUR COMPETITIVE ADVANTAGES

We intend to capitalize on our competitive advantages, including:

PRODUCTS UNIQUELY DESIGNED FOR THE COMMUNICATIONS MARKETS. We believe that
we are the only flywheel energy storage company focusing on the needs of
communications customers, particularly for remote and distributed applications.
We believe that our flywheel products are a unique fit to be used for back-up
powering for distributed locations in the communications markets for a number of
reasons, including:

- We believe that we are the only company to have developed a product with
an adequate level of energy storage to meet the needs for back-up powering
of communications sites. Our composite flywheels provide a minimum of 2kWh
of energy. Most communications sites require at least that level of
energy.

- Our flywheels have very low operating power losses which make it possible
to efficiently provide back-up power for long periods of time.

- Our flywheel units can be installed in the ground. State and local
governments, as well as customers, increasingly are requiring
communications and other equipment to be installed in the ground for cost,
environmental and aesthetic reasons. However, most governmental entities
do not permit in-ground installation of batteries because of the
potentially harmful releases of substances into the environment.

- Our systems have a built-in, long-life, low-cost vacuum system that
automatically restarts if the power is completely lost.

- We expect our units to operate for many years, possibly for more than a
decade, without planned maintenance.

SUCCESSFUL PRODUCT DEMONSTRATIONS. We believe that our field trial
demonstrations at Verizon Communications, Century Communications, now part of
Adelphia Communications, WinDBreak Cable and Telcordia were the first to
demonstrate the potential effectiveness of flywheel energy storage systems as an
alternative to lead-acid batteries in the communications industry. We expect
that these and future on-site demonstrations will lead to additional,
significant commercial orders from those and other customers.

TECHNOLOGICAL LEADER. We believe that our flywheels store and deliver more
energy than those of other flywheel companies. Compared to other flywheel
systems, our flywheel systems also have integrated vacuum systems, very low
stand-by operating losses, and bearing systems designed for long life without
maintenance. We believe that we have assembled a superior engineering team that
will expand our technical know-how, patents, and trade secrets that in turn will
provide us with the following significant advantages over our competition:

- expertise in the design of high-speed rotating machinery, in the analysis
and synthesis of structural and rotational mechanical components, and in
the design and manufacture of composite technology that we believe will
lead to low-cost flywheels;

- unique bearing technology that we believe will result in very low-cost,
long-life bearing systems;

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<PAGE>
- applications for patents on our vacuum apparatus that our test results
indicate will provide a vacuum life of up to 20 years;

- engineering and manufacturing team skilled in aircraft engine safety
design which we utilize in development of our flywheels; and

- our composite flywheels have significant advantages over flywheels made of
other materials such as steel.

EXPERTISE IN DESIGN AND MANUFACTURING PROCESSES. We have recruited and
attracted experienced, top quality manufacturing management and engineering
personnel to develop low-cost, high quality manufacturing processes. In
addition, we have supply relationships with established companies and are
working closely with them to provide design drawings and processes in order to
maintain tight control over the manufacturing process.

STRONG AND EXPERIENCED MANAGEMENT TEAM. We have a very capable and
experienced management team. Our management and engineering personnel
collectively have extensive experience working for high technology companies,
including The Charles Stark Draper Laboratory, Inc., General Electric Company,
International Business Machines Corporation, Textron Inc. and United
Technologies Corporation. We believe that this managerial and technical
knowledge and expertise gives us advantages over our competition.

WE DESIGN AND TEST OUR SYSTEMS WITH SAFETY IN MIND. All storage of energy
and the operation of any machinery involves some risk. In order to efficiently
store energy, a flywheel rotates at high speeds. To assure safe operation of our
flywheels, we have developed proprietary technology designed to ensure that the
flywheel will never spin faster than intended. In addition, we take special
design and manufacturing precautions to assure that failure of the composite rim
within operating speed is very improbable. In the very unlikely event of a
rotating metal component failure, we have designed our flywheel system to slowly
release energy in rotation in a manner analogous to the crumpling of a car in an
accident. We use a design, fabricate, test and redesign program to assure that
our flywheels meet the most stringent safety criteria. Our flywheel safety
concept has been successfully demonstrated in failure testing. In addition,
during the early years of installation, our flywheels will be installed in the
ground. There, even the extremely low probability of failure of the rotating
elements will be contained by the earth.

OUR FLYWHEEL SYSTEMS HAVE ADVANTAGES OVER OTHER TECHNOLOGIES. We believe
our flywheels will offer significant advantages over conventional back-up power
systems used by communications service providers, such as those with lead-acid
batteries. We expect these technological advantages to include higher
reliability, longer life, lower life-cycle cost, improved recharging capability,
reduced maintenance, more reliable monitoring and greater environmental
friendliness. We also believe that our flywheel systems will be used in
conjunction with gasoline and diesel generators, fuel cells, microturbines and
other distributed power generators to provide benefits that are not available
from these products alone, such as an instant-on capability and the ability to
manage sudden changes in power.

OUR PRODUCTS

Our initial product will provide 2kWh of energy at up to 1 kW of power. Our
2kWh flywheel would provide back-up power for 10 hours to a telecommunications
site that requires 200 watts of power. For a site using the full 1 kW capacity
of the conversion electronics, the flywheel would back-up a site for two hours.
At Verizon Communications, Century Communications, now part of Adelphia
Communications, and WinDBreak Cable, we have successfully maintained power
during loss of utility power with no degradation of service in planned and
unplanned tests. The amount of power and time can be increased by paralleling
flywheels as was done at the Verizon Communications site.

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<PAGE>
To meet a broad set of applications, we intend to build a set of powering
modules ranging from 20W to 250kW of power and a set of flywheel modules ranging
from 200W to 20kWh of energy. By combining a relatively small set of powering
modules with a similarly small set of energy modules, we intend to create a
broad set of products to meet a variety of application requirements. We are
currently developing a 4kWh flywheel product and intend to deliver our first
demonstration units in 2001. Beyond that we intend to produce an 8kWh flywheel
and then a 20kWh flywheel. We developed a laboratory version of a 30kW system
for the U.S. Marine Corps on our 2kWh flywheel that provides four minutes of
back-up power. The intended future application of that product is to maintain
power until the diesel generator starts and to meet peak power requirements that
exceed the capability of the generator. Our product vision also includes a 200
watt-hour unit to maintain the powering interface device for fiber or wireless
to the home and a 250kW, 2kWh device that will provide power for generator
starts and short-term transient protection. The following table indicates the
expected characteristics and the potential applications for each of these
products:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
POWER RELIABILITY AND POWER QUALITY FLYWHEEL PRODUCTS

<CAPTION>
-------------------------------------------------------------------------------------------------------------------
MAXIMUM
ENERGY OUTPUT POWER OUTPUT MINIMUM BACK-UP TIME TARGET MARKETS
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2kWh 1kW 2 hours Communications

-------------------------------------------------------------------------------------------------------------------
4kWh 1kW 4 hours Communications

-------------------------------------------------------------------------------------------------------------------
8kWh 1kW 8 hours Communications

-------------------------------------------------------------------------------------------------------------------
20kWh 10kW 2 hours Communications
Computers and the Internet
Commercial Facilities
Industrial Manufacturing
Distributed Generation

-------------------------------------------------------------------------------------------------------------------
200 watt- 25 watts 8 hours Communications
hours

-------------------------------------------------------------------------------------------------------------------
2kWh 30kW 4 minutes Computers and the Internet
Industrial Manufacturing
Commercial Facilities
Distributed Generation
Communications

-------------------------------------------------------------------------------------------------------------------
2kWh 250kW 30 seconds Computers and the Internet
Industrial Manufacturing
Commercial Facilities
Communications

-------------------------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE>
PRODUCT MILESTONES

We plan to continue to refine our product design and assembly processes over
the remainder of 2000. To do this, we intend to produce and test approximately
25 of our 2kWh flywheel energy storage systems during 2000. We have achieved and
intend to achieve the following major milestones:

<TABLE>
<CAPTION>
DATE MILESTONE
---- ---------
<S> <C>
June 1997............................ Began developing 2kWh demonstration units

September 1997....................... Received first order for two demonstration units from San
Diego Gas & Electric Company

September 1998....................... Installed first demonstration unit at WinDBreak Cable

December 1998........................ Operated a demonstration unit via the Internet at Century
Communications, now part of Adelphia Communications, for the
Western Cable show

January 1999......................... Installed two units at Verizon Communications

December 1999-June 2000.............. Received orders from TLER Associates, Ltd., Cox, and
Electric Power Research Institute for 115 commercial units

June 2000............................ Began development of 4kWh system

Fourth quarter of 2000............... Begin relocation to new facility and received a letter of
preliminary intent, subject to certain testing and
certification conditions for an additional 300 to 500
commercial units from Petroleos Mexicanos

2001................................. Begin production in new facility

Begin deliveries to TLER and other customers

Deliver prototype 4kWh systems
</TABLE>

As discussed under "Our Products" on the prior pages, our business plan
contemplates the development of higher and lower energy products and of higher
power products. We may experience delays in the development and
commercialization of those products if our systems exhibit technical defects or
are unable to meet cost or performance goals, which could have a material
adverse effect on the success of our business.

OUR TECHNOLOGY

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

31
<PAGE>
[This figure shows how a flywheel fits into the process of delivering
electricity from a power source to an end-user. Specifically, the figure shows
electricity being generated by a power source, the elimination of the power
source due to a catastrophic environmental event, the immediate conversion of
kinetic energy into electrical energy by the flywheel and the continuous
delivery of electricity to an end user.]

Flywheels have been used in commercial applications since the industrial
revolution. Recent attempts at commercializing flywheel systems have been based
on technology developed for aerospace applications that attempt to maximize the
amount of stored energy with the minimum system weight. Compact high-energy
flywheels that can be commercially cost competitive are a recent development. We
are using new enabling materials and products such as high-strength fiber,
efficient electric drives, and high performance magnetic bearings to create new
generations of flywheel products. Our flywheels are fabricated from
high-strength, lightweight fiber composites, such as graphite and fiberglass,
which allow the flywheel to rotate at high speeds and store large amounts of
energy relative to similar size and weight machines made from metals. For
example, a 600-pound steel flywheel running at 8,000 revolutions per minute, or
RPM, will store approximately 900 watt-hours of energy. In contrast, our
150-pound, composite flywheel running at 22,500 RPM stores 2,700 watt-hours of
energy and delivers 2,000 watt-hours of energy to the load. On a per pound
basis, storing more energy with steel flywheels is difficult. We believe we can,
over time, nearly double the speed of our composite flywheel product.
Composites, which already have superior energy storage per pound to steel, have
the potential for significant increases in energy storage per pound.

RESEARCH AND DEVELOPMENT

We believe that our research and development efforts are essential to our
ability to successfully deliver our products to our targeted communications
customers, as well as our next generation of products to customers in the
computer, Internet, industrial manufacturing, commercial facilities and
distributed generation markets. Our research and development team has worked
closely with potential communications customers to define product features and
performance to address specific needs. Our research and development expenses,
including engineering expenses, were $3,523,572 in 1998, $3,506,031 in 1999 and
$5,774,505 in the first nine months of 2000. We anticipate maintaining

32
<PAGE>
significant levels of research and development expenditures in the future. At
September 30, 2000, we employed 40 engineers and technicians who were engaged in
research and development.

MANUFACTURING

We will initially have most components of our flywheel systems contract
manufactured to our design drawings and processes in order to facilitate more
rapid growth by taking advantage of installed manufacturing capacity. For a
limited number of non-proprietary components, we will generate performance
specifications and obtain either standard or custom components. We will perform
the final assembly and testing. Many of our manufacturing staff have been
trained in and are skilled in six sigma quality control techniques. Six sigma is
a strategic implementation of total quality management principles. We expect to
make these skills a key element of our manufacturing strategy to develop and
maintain production processes that result in high-quality, low-cost products.

The energy storage portion of our flywheels, the rim, is made from
composites, a combination of fibers and resins, as an alternative to
conventional metals. The rim is the most expensive component in our system.
While we outsource the manufacture of the composite rims, we will continuously
evaluate whether to continue this outsourcing or to manufacture the rims
ourselves. To this end, we are building a state-of-the-art composite
flywheel-manufacturing laboratory to:

- accelerate the rate of cost reduction;

- assume increased control over composites, intellectual property and the
associated manufacturing processes; and

- enable us to manufacture the rim if that proves to be the most efficient
course.

To manage cost and supplier risk, we are positioning ourselves so that we
will be able to manufacture composite rims beginning in 2002. To accomplish
this, we have hired personnel skilled in business management, design, and the
manufacturing of composites. These people, using our composite laboratory and
suppliers, are evaluating manufacturing processes and developing both the
equipment and personnel skills required to manufacture the rims ourselves.

We currently rely on outside suppliers for the supply of several of the key
components for our products, including the composite rim, the electronics and
housing. We have not entered into any formal or informal agreements with any of
our suppliers. While the loss of supply from any one of our suppliers could
impact our ability to produce and sell our systems and thus our financial
results, we believe that we can replace any supplier with a new supplier. As
timing and volume merit, we will develop long-term supply contracts with certain
of our suppliers.

SALES AND MARKETING

We intend to market our products as highly reliable power systems that
exceed our customers' requirements. By combining superior products with
excellent customer service, we intend to become the market leader in the
communications markets for flywheel energy storage products.

In the communications markets, we expect to sell directly to our customers.
Our initial sales and marketing strategy is to identify key prospects in the
communications markets, and to work with those companies to formulate our
product plan, pricing, initial installation and service strategies. We have
conducted on-site demonstration testing at four of these companies, Verizon
Communications, Century Communications, now part of Adelphia Communications,
WinDBreak Cable and Telcordia, in order to begin the buying cycle and to
accelerate sales volume. We plan to expand these activities with other potential
customers beginning in the fourth quarter of 2000. We have sales commitments for
100 units to TLER, 10 units to Cox Communications, five units to Electric Power
Research Institute and two units to San Diego Gas & Electric Company.
Additionally, we have received a letter of preliminary

33
<PAGE>
intent, subject to certain testing and certification conditions from Petroleos
Mexicanos to purchase 300 to 500 units.

Since the communications markets consist of a relatively small number of
customers, initial sales will be made directly by means of our sales force. As
sales volume expands, this sales force will be expanded as appropriate. We will
also consider the use of manufacturer's representative organizations and
strategic alliances with original equipment manufacturers.

CUSTOMER SERVICE

We intend to use customer service to meet and exceed our customers'
requirements. We will intensively support installation and operation of our
flywheel systems. We intend to develop superior installation, operation, and
maintenance manuals for our customers and to provide them with excellent
training in all aspects of using flywheel systems. During the first few years we
will perform monitoring and diagnostics on our installed systems.

COMPETITION

Back-up power is provided today by lead-acid batteries or generators. We may
compete with:

- manufacturers and developers of battery technologies, such as Exide
Corporation, C&D Technologies Inc., Yuasa, Inc. and Fiamm;

- developers of flywheel technology such as Active Power, Inc., Trinity
Flywheel Power, U.S. Flywheel Systems and Acumentrics;

- developers of fuel cell products such as Ballard Power Systems, Inc., Plug
Power, Inc., Hydrogenics Corporation, H Power Corporation and Proton
Energy Systems, Inc.;

- manufacturers of internal combustion generators such as
Caterpillar, Inc., Cummins, Inc. and Generac Power Systems, Inc.; and

- developers of microturbine products such as Capstone Turbine Corporation
and Honeywell Inc.

The power quality and power reliability markets are intensely competitive,
with the principal bases for competition being system reliability and quality,
price, including the initial cost of the system to the customer and the total
cost of ownership, and brand recognition.

INTELLECTUAL PROPERTY

Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright law and contract restrictions to
protect the proprietary aspects of our technology. We seek to limit disclosure
of our intellectual property by requiring employees, consultants, and any third
parties with access to our proprietary information to execute confidentiality
agreements and by restricting access to that information. These legal
protections afford only limited protection for our technology.

We hold a perpetual, exclusive, royalty-free, worldwide right and license to
use SatCon's flywheel technologies and patents for stationary terrestrial
flywheel applications. Those rights include eight issued U.S. patents and 13
U.S. and foreign patent applications that expire on various dates between 2012
and 2018. This license covers SatCon's technologies and patents and all
improvements made by SatCon through the date of this offering. We will not be
entitled to any future improvements to its flywheel technology that SatCon
develops after the offering. We own all technology improvements that are based
on the technology licensed by us to SatCon. We have granted SatCon a perpetual,
worldwide, royalty-free, exclusive right and license to use any improvements
upon the flywheel energy storage

34
<PAGE>
technology for any applications made by us other than stationary terrestrial
applications. SatCon's rights to further improvements made by us in our flywheel
technology terminate upon the consummation of this offering. We also have one
pending U.S. patent application, and 10 other applications being prepared for
filing. Our patent and trade secret rights are of material importance to us, and
to our future prospects. We are actively pursuing both national and foreign
patent protection. At the direction of our board of directors, management has
established a patent committee that is charged with pursuing the protection of
intellectual property.

GOVERNMENT REGULATION

We do not believe that we will be subject to existing federal and state
regulatory commissions governing traditional electric utilities and other
regulated entities. We do believe that our products and their installation will
be subject to oversight and regulation at the local level in accordance with
state and local ordinances relating to building codes, safety, pipeline
connections and related matters. We intend to encourage the standardization of
industry codes to avoid having to comply with differing regulations on a
state-by-state or locality-by-locality basis.

FACILITIES

Our principal executive offices, laboratory and manufacturing facilities are
located at a single location in Woburn, Massachusetts. These three facilities,
that in combination are approximately 20,000 square feet, operate under leases
that expire on January 31, 2001. We have signed a lease and expect to begin
relocation to a larger, approximately 52,000-square foot facility in the
Wilmington, Massachusetts area in the fourth quarter of 2000 in order to house
our growing engineering, research and development, sales and marketing, and
management personnel and to provide adequate space for manufacturing and the
composites laboratory. If our production growth meets our expectations, we will
not require additional space until 2003. At that time, we could require an
additional 50,000 to 70,000 square feet in order to expand our production
capacity for assembly and testing of units.

EMPLOYEES

As of September 30, 2000, we had a total staff of 80 full-time employees and
one independent contractor, of which approximately 60 were engineers,
scientists, and other degreed professionals. Our plan is to add another 20 to
30 employees by the end of 2000. None of our employees are represented by a
union. We consider our relations with our employees to be excellent.

LEGAL PROCEEDINGS

One of our former employees has commenced litigation against us based on our
refusal to allow him to exercise as of November 2, 2000 a stock option for
112,500 shares of common stock which he had held under a January 30, 1998 stock
option agreement. His employment with us terminated as of December 31, 1998. We
believe that this claim is without merit and we intend to contest this matter
vigorously.

Other than the action described above, we may from time to time be involved
in legal proceedings in the ordinary course of our business. We have not been
and are not currently involved in any other legal proceedings.

35
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors, their positions and their ages as of
September 30, 2000, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
William E. Stanton................... 57 President and Chief Executive Officer, Director
Matthew L. Lazarewicz................ 50 Vice President of Engineering
Maureen A. Lister.................... 38 Vice President of Operations Management and Chief
Administrative Officer
Robert D. French..................... 60 Vice President of Manufacturing
James M. Spiezio..................... 52 Vice President of Finance and Chief Financial Officer
Kenneth M. Socha(1).................. 54 Director
Philip J. Deutch..................... 35 Director
David B. Eisenhaure.................. 54 Director
Eric R. Stoltz(1).................... 42 Director
Hans Kobler(2)....................... 35 Director
Alan P. Goldberg(2).................. 55 Director
</TABLE>

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

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

EXECUTIVE OFFICERS

WILLIAM E. STANTON. Mr. Stanton has served as our President and Chief
Executive Officer since January 1998 and a director since 1997. Prior to January
1998, he served as our general manager. Prior to joining Beacon, Mr. Stanton was
the Chief Operating Officer of SatCon from September 1995 to May 1997, where he
managed operations and the strategy development to convert SatCon from a
contract research and development company to a commercial product organization.
This strategy included the formation of Beacon Power. Prior to joining SatCon,
Mr. Stanton was one of two Vice Presidents of Operations at the Charles Stark
Draper Laboratory where he managed between $50,000,000 and $75,000,000 of
contract research and development annually. At Draper, he had also served as the
Vice President of Corporate Development, where he led strategic planning,
developed and managed a $25,000,000 annual corporate research and development
program, and helped create new business units that were generating over
$30,000,000 in software and avionics products annually. Mr. Stanton received a
Bachelor's Degree in Electrical Engineering from the University of Maine, a
Master's Degree in Instrumentation and Control from the Massachusetts Institute
of Technology, and an Master's in Business Administration from the Harvard
Business School. Mr. Stanton's term of office as director expires in 2001.

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

36
<PAGE>
Mr. Lazarewicz is a Registered Professional Engineer in the Commonwealth of
Massachusetts and received both Bachelor's and Master's Degrees in Mechanical
Engineering from the Massachusetts Institute of Technology. Mr. Lazarewicz also
completed his Master's Degree in Management at the Massachusetts Institute of
Technology Sloan School of Management.

MAUREEN A. LISTER. Ms. Lister serves as our Vice President of Operations
Management and Chief Administrative Officer. She joined us as Vice President,
Chief Financial Officer, Treasurer and Secretary, in March 1998 responsible for
all aspects of finance including fund raising and investor relations. Prior to
joining us, Ms. Lister was Vice President and Chief Financial Officer at
Priscilla of Boston, Inc., a manufacturing and retail operation with $10,000,000
in annual revenues, from November 1996 to February 1998, where she was
responsible for all aspects of financial and treasury management. Prior to
joining Priscilla of Boston, Inc., Ms. Lister served as Chief Financial Officer
at Cahners Direct Marketing Systems, a $35,000,000 direct mail business, from
August 1995 to November 1996, where she was responsible for all aspects of the
business including financial reporting and mergers and acquisitions. Prior to
Cahners, she held the position of Vice President of Finance and Operations with
Rigby, a $32,000,000 publisher and distributor, from August 1991 to August 1995,
where Ms. Lister was responsible for joint venture activity, warehouse and
distribution as well as the establishment of an employee run retail store.
Ms. Lister holds a Bachelor of Science in Finance (with Honors) from
Northeastern University and a Master's of Business Administration from DePaul
University.

ROBERT D. FRENCH. Mr. French joined us in April 2000 as Vice President of
Manufacturing at Beacon and is responsible for the definition and growth of all
phases of production. His most recent position was with General Electric
Aircraft Engines, where he worked from 1995 to 2000, and involved transitioning
the U.S. Navy's newest fighter engine, the F414, from development to full
production. Prior to this, Mr. French was part of GE Aircraft Engines in the
building and operating of an automated factory for jet engine components and
held positions as Manager of Engine Assembly and Flight Support and as
Manufacturing Program Manager for several engine product lines. His professional
career began with the U.S. Army Materials and Mechanics Research Center,
progressing from Metallurgist to Director of the Metals and Ceramics Laboratory
and transitioning technology from basic research through manufacturing process
development. Dr. French received his Bachelor's and Master's Degrees in
Mechanical Engineering from Northeastern University and his Ph.D. in
Engineering, with a major in Materials Science, from Brown University.

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

NON-MANAGEMENT DIRECTORS

KENNETH M. SOCHA. Mr. Socha has served as Senior Managing Director of
Perseus Capital since 1992. He practiced corporate and securities law from 1970
to 1992, and was one of the founders of The Clarion Securities Group
Incorporated, a registered broker-dealer and a NASD member. He resigned

37
<PAGE>
as President of Clarion Securities in 1985 to return to the practice of law full
time as a partner of the New York office of Lane & Edson, and became a partner
of Dewey Ballantine LLP in New York City in 1988. Mr. Socha left Dewey
Ballantine LLP in February 1992 to devote additional time to Rappahannock
Investment Company, which he had joined in May 1991 as Executive Vice President.
Mr. Socha serves on the board of directors of MGI Software. Mr. Socha is a
graduate of the University of Notre Dame and the Duke University School of Law.
Mr. Socha has served as a director since October 1998 and serves as Chairman of
our compensation committee. Mr. Socha's term of office expires in 2001.

PHILIP J. DEUTCH. Mr. Deutch has served as a Managing Director of Perseus
since 1997. In this position, Mr. Deutch has led Perseus' investments in
numerous energy technology companies. From 1991 to 1997, Mr. Deutch was an
attorney at Williams & Connolly LLP. Mr. Deutch worked in the Mergers and
Acquisitions Department of Morgan Stanley Dean Witter & Co. in New York City. In
this position, Mr. Deutch was a member of execution teams for acquisitions,
divestitures, and leveraged buyouts. Mr. Deutch is a graduate, with distinction,
of Stanford Law School and of Amherst College where he was elected a member of
Phi Beta Kappa. Mr. Deutch is a term member of the Council of Foreign Relations
and a Trustee of the Washington Performing Arts Society. Mr. Deutch has served
as a director since October 1998. Mr. Deutch's term of office expires in 2001.

DAVID B. EISENHAURE. Mr. Eisenhaure has served as President, Chief
Executive Officer, and Chairman of the board of directors of SatCon since 1985.
Prior to founding SatCon, Mr. Eisenhaure was associated with the Charles Stark
Draper Laboratory from 1974 to 1985, and with its predecessor, the Massachusetts
Institute of Technology's Instrumentation Laboratory, from 1967 to 1974.
Mr. Eisenhaure holds S.B. and S.M. degrees in Mechanical Engineering, as well as
a Mechanical Engineering degree, from the Massachusetts Institute of Technology.
In addition to his duties at SatCon, Mr. Eisenhaure holds an academic position
at M.I.T., serving as a lecturer in the Department of Mechanical Engineering.
Mr. Eisenhaure also has served on the board of directors of Mechanical
Technology, Incorporated since 1997. Mr. Eisenhaure has served as a director
since our inception in May 1997. Mr. Eisenhaure's term of office expires in
2001.

ERIC R. STOLTZ. Mr. Stoltz serves as a Vice President and as Treasurer of
DQE Enterprises, Inc., a wholly owned subsidiary of DQE, Inc., which acquires
and develops businesses involved in energy services and technologies,
communications and electronic commerce. Mr. Stoltz is responsible for
identifying and managing strategic investment opportunities. Mr. Stoltz has
served in various management positions within DQE since 1988, including business
development, marketing and real estate. Mr. Stoltz has served as Vice President
of DQE Enterprises, Inc. since February 1999 and as Treasurer of DQE
Enterprises, Inc. since July 1999. He has also served as President of Property
Ventures Ltd., a wholly owned subsidiary of DQE Enterprises, Inc., since
February 1999. Previously, he had served as Vice President of Property Ventures
Ltd. and as a Director of DQE Enterprises, Inc. from January 1998 to January
1999. He also served as a Director of Property Ventures Ltd. from January 1994
to December 1997. Mr. Stoltz holds a Master's in Business Administration from
Carnegie Mellon University. Mr. Stoltz has served as a director since
October 1999 and currently serves as a member of the compensation committee.
Mr. Stoltz's term of office expires in 2001.

HANS KOBLER. Mr. Kobler has served as Vice President at GE Equity since
February 1999. As head of the Energy Technology Group, he oversees GE Equity's
investment efforts in New Energy Technologies. Before that, Mr. Kobler served as
Chief Quality Officer for GE Equity from July 1997 to January 1999. From July
1993 to July 1997 Mr. Kobler was a strategy consultant with Bain & Company in
their Boston, Munich and Sydney offices. Mr. Kobler holds a Master's degree in
Aerospace Engineering from the Technical University of Munich as well as a
Master's in Business Administration from the University of Texas at Austin and
the I.N.S.E.A.D. in Fontainebleau. Mr. Kobler has served as

38
<PAGE>
a director since June 2000 and currently serves as a member of the audit
committee. Mr. Kobler's term of office expires in 2001.

ALAN P. GOLDBERG. Mr. Goldberg joined us as a director in June 2000.
Mr. Goldberg has served as President and Co-Chief Executive Officer of First
Albany Companies Inc., an investment bank, since 1993 and as a Director of First
Albany Companies Inc. since 1985. Mr. Goldberg also has served on the board of
directors of Mechanical Technology, Incorporated since 1996 and of SatCon since
1999. Mr. Goldberg is active in industry and civic organizations and serves on
the board of several non-profit institutions. He received a B.A. degree in
Government from Tufts University. Mr. Goldberg has served as a director since
June 2000 and currently serves as a member of the audit committee.
Mr. Goldberg's term of office expires in 2001.

BOARD COMPOSITION

Our board of directors currently consists of seven members, six of whom are
outside directors. By agreement of our stockholders, two members are currently
designated by Perseus Capital, one member is designated by DQE Enterprises, one
member is designated by SatCon, one member is designated by GE Equity and one
member is designated by Mechanical Technology. The seventh member of our board
of directors is Mr. Stanton, our President and Chief Executive Officer. The
agreement among stockholders to vote for these directors terminates upon
consummation of the offering.

Beginning with the annual meeting in 2001, our directors will be divided,
with respect to the time for which they severally hold office, into three
classes, as nearly equal in number as possible, with the term of office of the
first class to expire at the 2002 annual meeting of our stockholders, the term
of office of the second class to expire at the 2003 annual meeting of our
stockholders and the term of office of the third class to expire at the 2004
annual meeting of our stockholders, with each director to hold office until his
or her successor shall have been duly elected and qualified or until his or her
earlier removal or resignation. At each annual meeting of our stockholders,
commencing with the 2002 annual meeting, directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of our stockholders after their
election.

There are no family relationships among any of our directors or executive
officers.

BOARD COMMITTEES

The members of the audit committee are responsible for recommending to the
board of directors the engagement of our independent auditors and reviewing our
accounting controls and the results and scope of audits and other services
provided by our auditors. The current members of the audit committee are
Messrs. Kobler and Goldberg.

The compensation committee is responsible for reviewing and recommending to
the board of directors the amount and type of non-stock and stock compensation
to be paid to senior management and establishing and reviewing general policies
relating to compensation and benefits of employees. The current members of the
compensation committee are Messrs. Socha and Stoltz.

DIRECTOR COMPENSATION

We have adopted a compensation package to be effective as of the initial
public offering that consists of stock options and cash designed to compensate
board members who are not our employees ("non-employee directors"). Existing
non-employee directors serving on our board of directors will receive options to
purchase 10,000 shares of our common stock. These options will be fully vested
with an exercise price equal to the initial public offering price. Non-employee
directors who join our board of directors after September 22, 2000 will receive
options to purchase 10,000 shares of our common

39
<PAGE>
stock that vest monthly over a 12-month period and have an exercise price equal
to the fair market value of the common stock on the date of grant. On the
anniversary date of each particular non-employee director's appointment to our
board, each non-employee director will receive options to purchase 10,000 shares
of our common stock that vest monthly over a 12-month period and have an
exercise price equal to the fair market value of the common stock on the date of
grant.

Non-employee directors will also receive an annual retainer of $10,000,
payable quarterly, plus $2,000 for each board of directors meeting attended and
$500 for each telephonic meeting attended. Committee members receive $500 per
meeting. We also reimburse members of our board of directors for reasonable
out-of-pocket expenses.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our certificate of incorporation limits the liability of our directors,
officers and various other parties whom we have requested to serve as directors,
officers, trustees or in similar capacities with other entities to us or our
stockholders for any liability arising from an action to which such persons were
party by reason of the fact that they were serving us or at our request to the
fullest extent not prohibited by the Delaware General Corporation Law.

We intend to enter into indemnification agreements with our directors and
officers. Subject to certain limited exceptions, under these agreements, we will
be obligated, to the fullest extent not prohibited by the Delaware General
Corporation Law, to indemnify such directors and officers against all expenses,
judgments, fines and penalties incurred in connection with the defense or
settlement of any actions brought against them by reason of the fact that they
were our directors or officers. We also maintain liability insurance for our
directors and officers in order to limit our exposure to liability for
indemnification of our directors and officers.

TERM OF OFFICE FOR OUR EXECUTIVE OFFICERS

Our officers serve until their successors are appointed by our board of
directors.

EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid in the years
ended December 31, 1999 and 1998 and for the period beginning on the date of our
inception through December 31, 1997 to our chief executive officer and our other
executive officers whose aggregate compensation exceeded $100,000 in 1999.

SUMMARY COMPENSATION TABLE (1)

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING OPTIONS
--------------------------- -------- --------- -------- ------------------
<S> <C> <C> <C> <C>
William E. Stanton................................ 1999 $157,769 $ -- 190,000
President and Chief Executive Officer 1998 157,500 -- -0-
1997 105,000 -- 180,000
Matthew L. Lazarewicz(2).......................... 1999 $113,723 $ -- 250,000
Vice President of Engineering
</TABLE>

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

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

(2) We hired Mr. Lazarewicz in February 1999.

40
<PAGE>
EMPLOYMENT AGREEMENTS

We have entered into employment agreements with Messrs. Stanton, Spiezio,
Lazarewicz, French and Ms. Lister for, in the case of our chief executive
officer, three years, and, in the case of all other executive officers, two
years, at a base salary of $210,000 in the case of Mr. Stanton; $135,000 in the
case of Mr. Spiezio; $125,000 in the case of Ms. Lister; and $150,000 in the
case of Mr. Lazarewicz. In the event of the termination of an employment
agreement by us without cause or resignation by the executive for good reason,
we must pay the executive a severance payment equal to between one and two years
of the executive's base salary depending on the duration of the executive's
employment. Additionally, in the event of such a termination or resignation, we
are obligated to continue to provide benefits to the executive for one year, pay
the executive a prorated bonus to the date of termination and accelerate the
executive's vesting of his or her stock options by up to 66% depending on the
duration of the executive's employment. In the event that the executive's
employment is terminated as a result of death or disability, we are obligated to
pay the executive or his or her estate severance equal to three months salary,
provide benefits for one year from the date of termination and accelerate the
vesting of the executive's stock options by up to 66%. If, in connection with a
payment under an employment agreement, an executive incurs any excise tax
liability on the receipt of "excess parachute payments" as defined in Section
280G of the Internal Revenue Code of 1986, as amended, the employee agreements
provide for gross-up payments to return them to the after-tax position they
would have been in if no excise tax had been imposed. As used in the employment
agreements, "cause" means an act constituting fraud, embezzlement or other
felony committed by the executive, a material breach of the executive's
obligations to us or of our policies or the engagement by the executive in
willful misconduct. As used in the employment agreements, "for good reason"
means a material dimunition of the executive's duties, a material breach by us
of our obligations to the executive, a breach by us of the requirement that the
executive provide primary services in a location that is no more than fifty
miles from Wilmington, Massachusetts, a sale of us or, in the case of our chief
executive officer, the failure to appoint him as a member of our board of
directors or the removal of him from our board of directors without cause.

STOCK INCENTIVE PLAN

SECOND AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN

Our Second Amended and Restated 1998 Stock Incentive Plan was adopted by our
board of directors and shareholders on June 5, 2000 as an amendment and
restatement of our Amended and Restated 1998 Stock Incentive Plan. A total of
9,000,000 shares of our common stock are authorized and reserved for issuance
under the stock incentive plan.

The stock incentive plan was adopted to advance the interests of our
shareholders by enhancing our ability to attract, retain and motivate employees,
officers, directors, consultants and advisors who make important contributions
to us by providing such persons with equity ownership. The plan permits our
board of directors or a committee of the board of directors to make various
long-term incentive awards as described below, generally equity-based, to
eligible persons.

Our board of directors or a committee of our board of directors administers
the stock incentive plan. The administrator has the authority, consistent with
the terms of the plan, to determine the persons to whom awards are granted and
all the terms and conditions of those awards. The administrator has the
authority to construe and interpret the terms of the plan and the awards granted
under it, and has the power to amend and terminate the plan at any time without
shareholder approval except to the extent that the law requires shareholder
approval. Unless terminated sooner by the board of directors, the stock
incentive plan will terminate automatically in 2008, on the tenth anniversary of
its adoption by our shareholders.

41
<PAGE>
The stock incentive plan authorizes the administrator to grant awards in the
form of incentive stock options, within the meaning of Section 422 of the United
States tax code, nonstatutory stock options, restricted stock purchase rights
and other awards of our common stock having such terms and conditions as the
board of directors determines, including grants of shares of our common stock
upon certain conditions, grants of securities convertible into shares of common
stock and grants of stock appreciation rights. While incentive stock options may
be granted only to employees, including officers and employee directors, all
other awards may be granted to employees, consultants and non-employee
directors. No participant will be granted an award to purchase more than 900,000
shares of common stock per calendar year.

The exercise price per share of incentive stock options granted under the
stock incentive plan must be at least equal to the fair market value of a share
of our common stock on the date of grant, while the exercise price per share of
non-qualified stock options will be determined by our board of directors.
However, the exercise price per share of an incentive stock option granted to
any participant who owns stock possessing more than 10% of the voting power of
all classes of our outstanding capital stock or that of any subsidiary
corporation must equal at least 110% of the fair market value of a share of our
common stock on the grant date, and the term of that incentive stock option must
not exceed five years. The terms of all other options granted under the stock
incentive plan may not exceed ten years. The aggregate fair market value
(determined as of the date of grant) of our common stock for which incentive
stock options may become exercisable for the first time by any optionee may not
exceed $100,000 in any calendar year. The administrator has the discretion to
determine the vesting provisions and exercise requirements, if any, of all
options granted under the plan.

Unless longer periods are authorized by the administrator, options granted
under the equity incentive plan generally must be exercised, if at all, within
one year after an optionee's termination of service due to death or disability
and otherwise within three months after an optionee's termination of service,
but in no event later than the expiration of the option's term. Options granted
under the plan generally are not transferable by an optionee other than by will
or the laws of descent and distribution, except that, with the consent of the
administrator, an optionee may transfer a nonstatutory stock option to certain
entities established for the benefit of family members.

In the case of restricted stock purchase rights, unless the administrator
determines otherwise, the restricted stock purchase agreement will grant us a
repurchase option exercisable in the event that the conditions specified in the
award are not satisfied prior to the end of the restriction period. Awards of
restricted stock may be made subject to vesting restrictions and other
conditions as established by the administrator and are not transferable by the
participant until vested.

The stock incentive plan provides that in the event of our merger or
consolidation with or into another entity, a sale of all or substantially all of
our assets or our complete liquidation, the board of directors may take any one
or more of the following actions with respect to the options, restricted stock
purchase rights and other awards:

- provide that all outstanding options, restricted stock purchase rights and
other stock based awards will be assumed, or equivalent options be
substituted for, by the successor corporation;

- provide, with written notice to participants, that all unexercised options
will become exercisable in full as of a specified time and will terminate
immediately prior to the consummation of the merger, consolidation, sale
of assets or liquidation unless otherwise exercised by the participant;

- provide that, in the event of a merger, consolidation, sale of assets or
liquidation in which holders of our common stock will receive a cash
payment for each share of our common stock surrendered ("Acquisition
Price"), all options will terminate and each participant will receive, in
exchange, a cash payment equal to the amount (if any) by which (1) the
Acquisition Price

42
<PAGE>
multiplied by the number of shares of our common stock subject to such
outstanding options (whether or not exercisable) exceeds (2) the aggregate
exercise price of such options; and

- provide that all restricted stock purchase rights become free of all
restrictions and that all other stock-based awards shall become
exercisable, realizable or vested in full, or be free of all conditions or
restrictions.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding stock options granted
during 1999 to our executive officers listed in the Summary Compensation Table.
During 1999, we granted options to purchase an aggregate of 1,305,000 shares of
common stock to employees and 162,000 shares of common stock to consultants. The
exercise price per share for these options was equal to the fair market value of
the common stock as of the grant date as determined by our board of directors.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TO TERM(1)
OPTIONS EMPLOYEES IN FISCAL EXERCISE PRICE ------------------------
NAME GRANTED YEAR ($/SHARE) EXPIRATION DATE 5%($) 10%($)
---- ---------- ------------------- -------------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
William E. Stanton..... 190,000 14.6% $0.89 10/19/09 $275,446 $438,601
Matthew L.
Lazarewicz........... 250,000 19.1 0.89 10/19/09 362,429 577,108
</TABLE>

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

(1) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of our stock appreciates
from the date of grant to the expiration of the option at annualized rated
of 5% and 10%. These assumed rates of appreciation have been specified by
the SEC for illustrative purposes only and are not intended to forecast
future financial performance or possible future appreciation in the price of
our stock. The actual amount the executive officer may realize will depend
on the extent to which the stock price exceeds the exercise price of the
options on the date the option is exercised.

FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held as of December 31, 1999 by
our executive officers listed in the Summary Compensation Table. There was no
public trading market for our common stock as of December 31, 1999. Accordingly,
the values of the unexercised in-the-money options have been calculated on the
basis of an initial public offering price of $6.00 per share less the applicable
exercise price multiplied by the number of shares that may be acquired on
exercise. None of the executive officers listed in the Summary Compensation
Table exercised any stock options in 1999.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
FISCAL YEAR-END(#) OPTIONS AT FISCAL YEAR-END($)
------------------------------- ----------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
William E. Stanton................... 120,000 250,000 $ 613,200 $1,277,500
Matthew L. Lazarewicz................ 0 250,000 0 1,277,500
</TABLE>

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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

GENERAL

We have effected a 2-for-1 stock split of our common stock immediately prior
to the consummation of this offering. Each outstanding share of our preferred
stock will be converted simultaneously with the consummation of this offering
into two shares of common stock as a result of this split. The issued and
outstanding preferred stock referred to in this section is not adjusted for this
conversion.

AGREEMENT WITH GE CORPORATE RESEARCH AND DEVELOPMENT

As a result of the investment in our company by GE Capital Equity
Investments, Inc., we have entered into an agreement with GE Corporate Research
and Development, under which GE CR&D will provide us with technical expertise in
controls and materials. Under the terms of that agreement, GE CR&D has agreed to
make available to us up to $2,000,000 of its services at cost and we have issued
GE Equity a warrant to purchase 240,000 shares of our common stock at an
exercise price of $2.10 per share. Of these warrants, 120,000 will vest
immediately and 120,000 will vest ratably to the extent to which we use GE
CR&D's services. This agreement terminates, and any unvested options are
forfeited, on November 1, 2003. GE Equity is a shareholder in our company. Hans
Kobler, a Vice President of GE Equity, serves as a member of our board of
directors.

DQE ENTERPRISES DISTRIBUTION AGREEMENT

In connection with our May 1997 formation, DQE Enterprises, a subsidiary of
DQE, Inc., entered into a letter agreement with us pursuant to which, among
other things, we have agreed to appoint DQE Enterprises or one of its affiliates
as our exclusive distributor of our flywheel products for stationary energy
storage applications in the states of Pennsylvania, New York, Ohio, West
Virginia, Maryland, Delaware, Virginia and the District of Columbia. Under this
agreement, we retained the right to make sales in this territory to cable and
telephone companies and to electric utilities for their internal use. DQE
Enterprises also has a nonexclusive right to distribute the products outside
this territory, which we have the right to terminate at any time. The
distribution rights have a term of 20 years from the commencement of commercial
production of our products, provided that the rights may be terminated earlier
if DQE Enterprises does not meet sales targets to be agreed upon in the future.
We have agreed to sell our products to DQE Enterprises at the lower of (i) cost
of goods sold (including certain overhead expenses) plus 30% and (ii) the lowest
price at which the products are sold to others. DQE Enterprises is a shareholder
in our company. Eric Stoltz, a Vice-President of DQE Enterprises, serves as a
member of our board of directors. The terms of the license agreement were
determined on the basis of arms-length negotiations.

LICENSES WITH SATCON

SatCon has granted us a perpetual, exclusive, royalty-free, worldwide right
and license to all patents, patent applications, technical knowledge,
information and know-how in existence in May 1997 and any improvements on that
intellectual property developed by SatCon prior to the completion of this
offering which relate to the field of flywheel energy storage products, systems
and processes for stationary terrestrial (in or on ground or affixed to
structures on ground) applications, but not for satellite or other
non-terrestrial, stationary applications. We do not have the right to sublicense
this technology other than in connection with our manufacturing and distribution
operations. We will not have any rights to future improvements to its flywheel
technology that SatCon develops after the offering. We have granted SatCon a
perpetual, worldwide, royalty-free, exclusive right and license to use any
improvements upon the flywheel energy storage technology for any applications
made by us other than stationary terrestrial applications. SatCon's rights to
further improvements made by us in our flywheel technology terminate upon the
consummation of this offering. The license from SatCon is

44
<PAGE>
terminable by SatCon in certain limited circumstances, including our bankruptcy,
upon the material breach of our obligations under the license, the exercise of
certain put rights granted by SatCon to certain of our investors and upon notice
by SatCon that the license agreement infringes upon the rights of a third party.
SatCon is a shareholder in our company. David Eisenhaure, SatCon's president,
serves as a member of our board of directors. See "Risk Factors--Any failure to
protect our intellectual property could seriously impair our competitive
position."

INITIAL FORMATION

SatCon formed us on May 8, 1997 and funded our initial operations on
May 28, 1997, using an investment in SatCon of $5,000,000 made by DQE
Enterprises. Pursuant to the terms of a securities purchase agreement dated
May 28, 1997 among us, SatCon and DQE Enterprises, DQE Enterprises made an
initial investment in SatCon totaling $5,000,000 in cash to fund flywheel
product development and received a warrant to purchase 1,125,500 shares of our
common stock, at a purchase price of $2.67 per share. These warrants expired
unexercised on May 28, 1999. We granted DQE Enterprises registration rights
which were terminated by the registration rights agreement entered into in
connection with the class E preferred stock financing described below. As part
of the agreement, SatCon invested $5,000,000 in cash in us and received
6,750,000 shares of our common stock and 1,125,000 shares of our class A
preferred stock and granted us the perpetual, exclusive, royalty-free right and
license described above.

1997 RECAPITALIZATION

On December 19, 1997, we issued 13,476 shares of our common stock and six
shares of our class C preferred stock to six individuals, none of whom were or
are affiliates of our company. In connection with this investment, SatCon
exchanged 6,746,626 shares of our common stock for 3,373,313 shares of our
class A preferred stock.

In connection with that transaction, the six investors and SatCon entered
into a voting agreement under which the stockholders agreed to vote to elect
designated directors and as to certain other matters. This agreement, as
amended, will terminate upon consummation of this offering.

CLASS D PREFERRED STOCK SECURITIES PURCHASE AGREEMENT

Pursuant to the terms of a securities purchase agreement dated October 23,
1998, among us, Perseus Capital, DQE Enterprises, Micro-Generation and SatCon:

- the purchasers purchased from us 1,900,000 shares of our class D preferred
stock at a purchase price of $2.50 per share; and

- we were contractually obligated to issue to the purchasers warrants to
purchase in the aggregate 4,455,000 shares of our common stock if we did
not meet certain financing goals by October 23, 1999 and April 23, 2000.

The aggregate consideration we received was $4,750,000. The terms of the
securities purchase agreement were determined on the basis of arms-length
negotiations. Prior to the execution of the securities purchase agreement,
neither we nor SatCon had any material relationship with Perseus Capital or
Micro-Generation. Perseus Capital and Micro-Generation are shareholders in our
company. Philip Deutch, a Managing Director of Perseus Capital, and Kenneth
Socha, Senior Managing Partner of Perseus, serve as members of our board of
directors.

CLASS E BRIDGE LOANS

On June 22, 1999, SatCon, Perseus Capital, DQE Enterprises and
Micro-Generation made bridge loans to us in the respective principal amounts of
$250,000, $250,000, $50,000 and $50,000. These loans

45
<PAGE>
accrued interest at a rate of 12.5% per annum increasing to 15% per annum in the
event the loans went into default or were not paid in full by September 23,
1999.

On August 2, 1999, SatCon, Perseus Capital, DQE Enterprises and
Micro-Generation committed to make, and on or subsequent to that date made,
bridge loans to us in the respective principal amounts of $1,000,000,
$1,350,000, $500,000 and $300,000. As consideration for these loans, we received
$2,550,000 in cash and cancelled the loans in the principal amount of $600,000
made to us on June 22, 1999 by the same participants. These loans accrued
interest at a rate of 12.5% per annum, increasing to 15% per annum in the event
we had not sold $5,000,000 or more of our class E preferred stock by
February 2, 2000.

On January 7, 2000, SatCon, Perseus Capital, DQE Enterprises and Micro
Generation made similar bridge loans to us in the respective principal amounts
of $200,000, $250,000, $90,000 and $60,000. These loans accrued interest at a
rate of 12.5% per annum, increasing to 15% per annum in the event we had not
sold $5,000,000 or more of our class E preferred stock by May 7, 2000. The
principal and interest on these loans was payable in cash or, in the event the
bridge loans were converted into shares of class E preferred stock, in shares of
class E preferred stock at the price per share at which the class E preferred
stock was issued.

As part of these transactions, SatCon, Perseus Capital, DQE Enterprises and
Micro-Generation received warrants to purchase shares of our class E preferred
stock. In the August bridge financing, these investors received warrants to
purchase shares in an aggregate amount equal to $787,500 divided by the per
share price equal to the price we sold at least $5,000,000 of our class E
preferred stock, or, if such transaction was not consummated within 6 months,
$2.50 per share. No such transaction was consummated and as a result these
warrants were exercisable for an aggregate of 315,000 shares of our class E
preferred stock at an exercise price of $2.50 per share. In the January bridge
financing, these investors received the right to be issued a warrant under their
notes in the event there was a sale of at least $5,000,000 of our class E
preferred stock by February 2, 2000 and the investors demanded that either the
notes be paid in full or the investors purchased class E preferred stock. No
such sale occurred and these warrants were never issued.

All of these bridge loans and warrants were converted into the class E
preferred stock and class E warrants described below, except for the principal
and interest accrued on the SatCon $200,000 loan made on January 7, 2000 which
was repaid in full prior to the consummation of the class E preferred stock
financing.

The terms of the bridge loan agreements were determined on the basis of
arms-length negotiations.

CLASS E PREFERRED STOCK SECURITIES PURCHASE AGREEMENT

Pursuant to the terms of a securities purchase agreement, dated April 7,
2000, by and among us, SatCon, Perseus Capital, DQE Enterprises and
Micro-Generation:

- the purchasers purchased from us 1,226,141 shares of our class E preferred
stock at a purchase price of $3.12 per share; and

- we issued warrants to purchase 306,535 shares of our class E preferred
stock at an exercise price of $2.50 per share.

The class E preferred stock and these warrants were issued in consideration
of the cancellation of $3,550,000 principal amount of the bridge loans and
$275,559 accrued interest on those bridge loans and cancellation of the warrants
issued in connection with the bridge loans. The terms of the securities purchase
agreement were determined on the basis of arms-length negotiations.

46
<PAGE>
FEBRUARY AND MARCH, 2000 INTERIM FINANCINGS

During February and March, 2000 we borrowed $600,000 from Perseus Capital,
$300,000 from SatCon, $300,000 from DQE Enterprises and $200,000 from
Micro-Generation under demand promissory notes convertible into our class F
preferred stock. The loans accrued interest at a rate of 6% per annum.

The principal on the Perseus Capital, DQE Enterprises and Micro-Generation
notes was converted into class F preferred stock upon consummation of the
class F preferred stock financing and accrued interest paid in cash. The
principal and interest accrued on the SatCon note was repaid in full prior to
the consummation of the class F preferred stock financing.

The terms of these interim financings were determined on the basis of
arms-length negotiations.

CLASS F BRIDGE LOAN

On April 21, 2000, Perseus Capital, Micro-Generation, Mechanical Technology
Incorporated, The Beacon Group Energy Investment Fund II, L.P. and Penske
Corporation made bridge loans to us in the respective principal amounts of
$1,200,000, $400,000, $1,200,000, $900,000 and $400,000. These loans accrued
interest at a rate of 6% per annum. The principal and interest on these loans
were payable in cash or, in the event the bridge loan was converted into shares
of class F preferred stock, in shares of class F preferred stock at the price
per share at which the class F preferred stock was issued.

As part of these transactions, Perseus Capital, Micro-Generation, Mechanical
Technology, Beacon Group and Penske Corporation received warrants to purchase in
the aggregate 82,000 shares of our common stock. These bridge warrants expire on
April 21, 2005 and have an exercise price of $2.10 per share.

The principal and interest accrued on these bridge loans were converted into
the class F preferred stock described below. Mechanical Technology and Penske
Company LLC, an affiliate of Penske Corporation, are shareholders of our
company. Alan Goldberg, a representative of Mechanical Technology, serves as a
member of our board of directors.

The terms of the class F bridge loan were determined on the basis of
arms-length negotiations.

CLASS F PREFERRED STOCK SECURITIES PURCHASE AGREEMENT

Pursuant to the terms of a securities purchase agreement, dated May 23,
2000, by and among us, Perseus Capital, DQE Enterprises, Micro-Generation,
Mechanical Technology, Beacon Group, Penske Corporation and GE Capital Equity
Investments, Inc.:

- the purchasers purchased from us 6,785,711 shares of our class F preferred
stock at a purchase price of $4.20 per share; and

- we issued warrants to purchase a number of shares of our common stock
equal to $14,250,000 divided by 37.5% of the initial offering price at an
exercise price of 37.5% of the initial offering price.

The class F preferred stock and these warrants were issued in consideration
of an aggregate of $23,300,000 in cash and the cancellation of $5,200,000
principal amount of the bridge loans. We also repaid the interest on the bridge
loans at the closing of the class F preferred stock financing. The terms of the
securities purchase agreement were determined on the basis of arms-length
negotiations.

In connection with the class F preferred stock financing, we entered into an
investors rights agreement. Also as part of this financing, we granted the
purchasers and SatCon rights to demand registration of their shares of our
capital stock under certain circumstances and to participate as selling
stockholders in any offering registered by us. See "Description of Capital
Stock--Registration Rights

47
<PAGE>
Agreement." The shareholders have waived the right to participate as selling
stockholders in this offering.

CONSULTING AGREEMENTS

We are party to Amended/Restated Consulting Agreements with each of DQE
Enterprises, Micro-Generation and Perseus, each dated as of November 1, 1999
under which they act as independent contractors and provide us with consulting
and advisory services with respect to:

- Flywheel applications in utility and related markets;

- Economic analysis of product opportunities in utility and related markets;

- Energy market trends and developments; and

- Other matters relating to our business that we shall reasonably request.

The terms of these consulting agreements were determined on the basis of
arms-length negotiations.

DQE ENTERPRISES CONSULTING AGREEMENT. Our Amended/Restated Consulting
Agreement with DQE Enterprises replaced a consulting agreement with them entered
into in 1997.

Under this agreement, we issued DQE Enterprises 60,000 shares of our
class A preferred stock as of May 1998, 60,000 shares of our class A preferred
stock as of May 1999, 25,000 shares of our class A preferred stock as of
November 1999 and 60,000 shares of our class A preferred stock on October 31,
2000. This agreement terminates by its terms immediately prior to the effective
date of this offering. Upon termination, we will be required to issue
DQE Enterprises shares of our Class A preferred stock prorated to the date of
termination. Each of these shares will convert into two shares of common stock
upon consummation of this offering.

MICRO-GENERATION CONSULTING AGREEMENT. Our Amended/Restated Consulting
Agreement with Micro-Generation replaced a consulting agreement with them
entered into in 1998.

Under this agreement, we issued Micro-Generation 24,000 shares of our
class A preferred stock in November 1999 in replacement of common stock to which
they were entitled as of October 1998 and October 1999. In addition, if not
terminated prior to issuance, we would be obligated to issue 12,000 shares of
class A preferred stock on October 31 of each year, commencing October 31, 2001.
This agreement terminates by its terms immediately prior to the effective date
of this offering. Upon termination, we will not be required to issue
Micro-Generation any additional shares of our class A preferred stock. Each of
these shares will convert into two shares of common stock upon consummation of
this offering.

PERSEUS CAPITAL CONSULTING AGREEMENT. Our Amended/Restated Consulting
Agreement with Perseus replaced a consulting agreement with them entered into in
1998.

Under this agreement, we issued Perseus 96,000 shares of our class A
preferred stock in November 1999 in replacement of common stock to which they
were entitled as of October 1998 and October 1999. In addition, if not
terminated prior to issuance, we would be obligated to issue 48,000 shares of
class A preferred stock on October 31 of each year, commencing October 31, 2001.
This agreement terminates by its terms immediately prior to the effective date
of this offering. Upon termination, we will not be required to issue Perseus
Capital any additional shares of our class A preferred stock. Each of these
shares will convert into two shares of common stock upon consummation of this
offering.

48
<PAGE>
SATCON SERVICES

During 1997, 1998, 1999 and 2000, SatCon performed research and development,
administrative and other services on our behalf. Amounts paid to SatCon for
these services amounted to approximately $1,351,000, $443,000, $59,000 and
$478,000 during the period from inception to December 31, 1997, the year ended
December 31, 1998, the year ended December 31, 1999 and to September 30, 2000,
respectively.

INDEMNIFICATION AND INSURANCE

We intend to enter into indemnification agreements with all of our directors
and executive officers and have purchased directors' and officers' liability
insurance. In addition, our certificate of incorporation limits the personal
liability of our directors, officers and various other parties with whom we have
requested to serve as directors, officers, trustees or in similar capacities
with other entities to us or our stockholders for any liability arising from an
action to which such persons were party by reason of the fact that they were
serving us or at our request to the fullest extent not prohibited by the
Delaware General Corporation Law.

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<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock (1) prior to the offering, assuming the issuance
of 29,359,530 shares of common stock upon consummation of this offering upon
conversion of our preferred stock, and (2) after the offering, assuming the
issuance of 820,162 shares of common stock to be issued upon consummation of
this offering as a dividend on the class D preferred stock, 39,168 shares of
common stock to be issued upon consummation of this offering as a dividend on
the class E preferred stock, 60,000 shares of class A preferred stock issued in
payment of consulting fees accrued through October 31, 2000, which, upon
consummation of the offering, will convert into 120,000 shares of common stock,
and the sale of 8,000,000 shares of common stock in this offering, by:

- our institutional stockholders and all other persons known by us to own
beneficially 5% or more of our voting securities;

- each of our directors;

- the executive officers listed in the Summary Compensation Table; and

- all directors and executive officers as a group.

Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the voting securities beneficially owned by the
stockholder.

<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
NUMBER OF BENEFICIALLY OWNED(2)(3)(4)
SHARES ---------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2)(3)(4) OFFERING OFFERING
--------------------------------------- -------------- ------------ ------------
<S> <C> <C> <C>
William E. Stanton................................... 243,334 * *
Matthew L. Lazarewicz................................ 83,334 * *
Philip J. Deutch(5).................................. 10,000 * *
David B. Eisenhaure(6)............................... 9,889,614 33.2% 25.5%
Alan P. Goldberg(7).................................. 4,224,475 13.7% 10.6%
Hans Kobler(8)....................................... 0 -- --
Kenneth M. Socha(9).................................. 10,000 * *
Eric R. Stoltz(10)................................... 10,000 * *
SatCon Technology Corporation(11).................... 9,879,614 33.2% 25.5%
Perseus Capital, L.L.C.(12).......................... 11,598,361 33.5% 26.9%
DQE Enterprises, Inc.(13)............................ 4,207,212 13.5% 10.5%
Mechanical Technology, Incorporated(14).............. 4,214,475 13.6% 10.6%
GE Capital Equity Investments, Inc.(15).............. 4,320,475 13.9% 10.8%
Micro-Generation Technology Fund, L.L.C.(16)......... 3,169,804 10.3% 8.0%
The Beacon Group Energy Investment Fund II,
L.P.(17)........................................... 3,160,855 10.3% 8.0%
Penske Company LLC(18)............................... 1,404,824 4.7% 3.6%
All directors and executive officers as a group
(12 persons)....................................... 14,475,423 46.0% 35.8%
</TABLE>

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

* Less than 1%.

(1) The address for all executive officers and directors is c/o Beacon Power
Corporation, 6D Gill Street, Woburn, Massachusetts 01801.

(2) The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission and includes
voting or investment power with respect to those securities. Under these
rules, beneficial ownership includes any shares as to which the

50
<PAGE>
individual or entity has sole or shared voting power or investment power and
includes any shares as to which the individual or entity has the right to
acquire beneficial ownership within 60 days after October 24, 2000 through
the exercise of any warrant, stock option or other right. The inclusion in
this prospectus of these shares, however, does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of those
shares. The number of shares of common stock outstanding used in calculating
the percentage for each listed person includes the shares of common stock
underlying warrants, options or convertible preferred stock held by that
person that are exercisable or convertible within 60 days of October 24,
2000, but excludes shares of common stock underlying warrants, options or
convertible preferred stock held by any other person. Percentage of
beneficial ownership prior to the offering is based on 29,586,644 shares of
common stock outstanding as of October 24, 2000 after giving effect to the
conversion of our preferred stock, plus, after the offering, 820,162 shares
of common stock to be issued upon consummation of this offering as a
dividend on the class D preferred stock, 39,168 shares of common stock to be
issued upon consummation of this offering as a dividend on the class E
preferred stock, 120,000 shares accrued as of October 31, 2000 issued under
a consulting agreement, and the 8,000,000 shares of common stock being sold
in this offering assuming no exercise of the underwriters' overallotment
option.

(3) Includes the following number of shares of common stock issuable upon the
exercise of stock options which may be exercised on or before December 23,
2000: Mr. Stanton, 13,334; Mr. Lazarewicz, 0; Ms. Lister, 88,000;
Mr. French, 0; Mr. Spiezio, 0; Mr. Deutch, 10,000; Mr. Eisenhaure, 10,000;
Mr. Goldberg, 10,000; GE Equity, 10,000; Mr. Socha, 10,000; and Mr. Stoltz,
10,000.

(4) Assumes conversion of all shares of preferred stock into common stock upon
consummation of this offering. The percentage of common stock beneficially
owned after the offering also assumes that the underwriters have not
exercised their over-allotment option.

(5) Mr. Deutch is a Director of Beacon.

(6) Mr. Eisenhaure is a Director of Beacon. Includes the shares and warrants
held by SatCon of which Mr. Eisenhaure is the President, Chief Executive
Officer and Chairman of the Board of Directors. Mr. Eisenhaure disclaims
beneficial ownership of these shares.

(7) Mr. Goldberg is a Director of Beacon. Includes the shares and warrants held
by Mechanical Technology of which Mr. Goldberg is a member of the Board of
Directors. Mr. Goldberg disclaims beneficial ownership of these shares.

(8) Mr. Kobler is a Director of Beacon.

(9) Mr. Socha is a Director of Beacon.

(10) Mr. Stoltz is a Director of Beacon.

(11) Includes shares of common stock issuable upon exercise of warrants to
purchase 173,704 shares of common stock. SatCon's address is 161 First
Street, Cambridge, MA 02142.

(12) Includes shares of common stock issuable upon exercise of warrants to
purchase 4,512,593 shares of common stock and 535,586 shares of common stock
to be issued upon consummation of this offering as dividends on the class D
and E preferred stock. Perseus Capital's address is The Army and Navy Club
Building, 1627 I Street, N.W., Suite 610, Washington, DC 20006.

(13) Includes shares of common stock issuable upon exercise of warrants to
purchase 1,446,842 shares of common stock, 179,208 shares of common stock to
be issued upon consummation of this offering as dividends on the class D and
E preferred stock and 120,000 shares accrued through

51
<PAGE>
October 31, 2000 issued in payment of consulting fees. DQE Enterprises'
address is One Northshore Center, Suite 100, 12 Federal Street, Pittsburgh,
PA 15212.

(14) Includes shares of common stock issuable upon exercise of warrants to
purchase 1,333,333 shares of common stock. Mechanical Technology's address
is 30 South Pearl Street, Albany, NY 12207.

(15) Includes shares of common stock issuable upon exercise of warrants to
purchase 1,573,333 shares of common stock. GE Equity's address is 120 Long
Ridge Road, Stamford, CT 06927.

(16) Includes shares of common stock issuable upon exercise of warrants to
purchase 1,189,152 shares of common stock and 133,438 shares of common stock
to be issued upon consummation of this offering as dividends on the class D
and E preferred stock. Micro-Generation's address is c/o Arete Corporation,
P.O. Box 1299, Center Harbor, NH 03226.

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

(18) Includes shares of common stock issuable upon exercise of warrants to
purchase 452,444 shares of common stock. Penske's address is 13400 Outer
Drive West, B41, Detroit, MI 48239.

52
<PAGE>
DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

We are authorized to issue 110,000,000 shares of common stock. As of
October 24, 2000, 227,114 shares were issued and outstanding. The following
summary description of the common stock is qualified in its entirety by
reference to our certificate of incorporation.

VOTING RIGHTS

The holders of our common stock have one vote per share. Holders of our
common stock are not entitled to vote cumulatively for the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority, or, in the case of election of directors, by a
plurality, of the votes entitled to be cast at a meeting at which a quorum is
present by all shares of common stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any then outstanding preferred stock.

DIVIDENDS

Holders of common stock will share ratably in any dividends declared by our
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock.

OTHER RIGHTS

All holders of common stock are entitled to share ratably in any assets
available for distribution to holders of shares of common stock upon our
liquidation, dissolution or winding up. No shares of common stock are subject to
redemption or have preemptive rights to purchase additional shares of common
stock. The outstanding common stock is, and the common stock to be outstanding
upon completion of the offering will be, validly issued, fully paid and
nonassessable.

WARRANTS

We have outstanding five series of warrants to purchase our common stock
that were issued in connection with our class D and F preferred stock
financings, to GE Capital Equity Investments, Inc. and to certain of our
consultants. We also issued a series of warrants to purchase our class E
preferred stock in connection with our class E preferred stock financing. Upon
consummation of this offering, these warrants will be exercisable for shares of
our common stock.

The exercise price and the number of shares of common stock to be issued
upon exercise of the warrants will be adjusted under certain circumstances,
including:

- subdivisions, stock dividends or combinations of our common stock;

- reclassifications, exchanges, substitutions, or in-kind distributions that
results in a change in the number and/or class of the securities issuable
upon exercise of the warrants;

- reorganizations, mergers and similar transactions; and

- the issuance of additional common stock or securities convertible into
common stock at a price per share less than the exercise price in effect
immediately prior to the issuance of the additional securities.

Holders of the warrants are not entitled to receive dividends, vote, receive
notice of any meetings of stockholders or otherwise have any right as
stockholders.

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<PAGE>
CLASS D PREFERRED STOCK FINANCING WARRANTS. Of the 4,455,000 warrants
issued in connection with the class D preferred stock financing, one-third have
an exercise price of $1.67 per share, one-third have an exercise price of $2.25
per share and one-third have an exercise price of $3.00 per share. Holders of
these warrants may exercise their warrants at any time prior to their expiration
on December 31, 2004.

CLASS E PREFERRED STOCK FINANCING WARRANTS. The warrants issued in
connection with the class E preferred stock financing are exercisable for
306,535 shares of our class E preferred stock at an exercise price of $2.50 per
share. The warrants will convert upon consummation of this offering into
warrants to receive shares of our common stock on a 2-for-1 basis at an exercise
price of $1.25 per share. Holders of these warrants may exercise their warrants
at any time prior to their expiration on April 7, 2005.

CLASS F PREFERRED STOCK BRIDGE LOAN WARRANTS. The warrants issued in
connection with the class F preferred stock bridge loan are exercisable for
58,000 shares of our common stock at an exercise price of $2.10 per share.
Holders of these warrants may exercise their warrants at any time prior to their
expiration on April 21, 2005.

CLASS F PREFERRED STOCK WARRANTS. The warrants issued in connection with
the class F preferred stock financing are exercisable for 6,333,333 shares of
our common stock at an exercise price of $2.25 per share. Holders of these
warrants may exercise their warrants at any time after this offering prior to
their expiration on May 23, 2005.

CORPORATE RESEARCH AND DEVELOPMENT WARRANTS. As a result of the investment
in our company by GE Capital Equity Investments, Inc., we have entered into an
agreement with GE Corporate Research and Development, under which GE CR&D will
provide us with technical expertise in controls and materials. Under the terms
of that agreement, GE CR&D has agreed to make available to us up to $2,000,000
of its services at cost and we have issued GE Equity a warrant to purchase
240,000 shares of our common stock at an exercise price of $2.10 per share. Of
these warrants, 120,000 will vest immediately and 120,000 will vest ratably to
the extent to which we use GE CR&D's services. This agreement terminates, and
any unvested options are forfeited, on November 1, 2003.

CONSULTANT WARRANTS. The warrants issued to two of our consultants are
exercisable for an aggregate of 70,000 shares of our common stock at an exercise
price equal to the initial public offering price. The holder of one of these
warrants exercisable for 50,000 shares of common stock may exercise its warrant
at any time prior to January 31, 2002. The holder of the other warrant
exercisable for 20,000 shares of common stock may exercise its warrant at any
time prior to August 2, 2005.

PREFERRED STOCK

We are authorized to issue 31,500,007 shares of preferred stock. No
description of any of our outstanding classes of preferred stock is included
because all outstanding shares of preferred stock will automatically convert
into shares of common stock upon consummation of this offering and our
certificate of incorporation will be amended to remove these classes of stock.

10,000,000 shares of our preferred stock may be issued in one or more
classes, the terms of which may be determined at the time of issuance by our
board of directors, without further action by stockholders and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights.
The issuance of preferred stock could reduce the rights, including voting
rights, of the holders of common stock, and, therefore, reduce the value of your
common stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with or sell our
assets to a third party, thereby preserving the control of us by our existing
stockholders.

54
<PAGE>
REGISTRATION RIGHTS AGREEMENT

Beginning 180 days after the closing of this offering, Perseus Capital,
DQE Enterprises, Micro-Generation, Mechanical Technology, Beacon Group, Penske,
SatCon and GE Capital Equity Investments, Inc., who will hold in the aggregate
approximately 30,366,220 shares of our common stock and outstanding warrants to
purchase 11,699,403 shares of common stock, or their transferees, will have the
right to demand that we register their shares on up to two occasions, provided
the anticipated aggregate offering is at least $500,000. In addition, these
holders may require us to file additional registration statements on Form S-3.
These holders will also have the right to include the shares of common stock
they hold or acquire upon the exercise of the warrants in any registration
statements we file with the Securities Exchange Commission, other than
registration statements filed with respect to employee benefit plans or in
connection with an acquisition. We are not required to file more than one
registration statement in any six-month period. We are required to bear the
costs of the exercise of these registration rights.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us as described
above, we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. At present, there is no pending
material litigation or proceeding involving any of our directors, officers,
employees or agents in which indemnification will be required or permitted.

PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS WHICH MAY HAVE
ANTI-TAKEOVER EFFECT

A number of provisions of our certificate of incorporation and by-laws which
will be effective upon completion of this offering concern matters of corporate
governance and the rights of stockholders. These provisions, as well as the
ability of our board of directors to issue shares of preferred stock and to set
the voting rights, preferences and other terms, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
our board of directors, including takeovers which stockholders may deem to be in
their best interests. If takeover attempts are discouraged, temporary
fluctuations in the market price of our common stock, which may result from
actual or rumored takeover attempts, may be inhibited. These provisions,
together with our staggered board of directors and the ability of our board of
directors to issue preferred stock without further stockholder action, also
could delay or frustrate the removal of incumbent directors or the assumption of
control by stockholders, even if the removal or assumption would be beneficial
to our stockholders. These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even if favorable to the
interests of stockholders, and could depress the market price of our common
stock.

55
<PAGE>
Our board of directors believes that these provisions are appropriate to protect
our interests and those of our stockholders. Our board of directors has no
present plans to adopt any further measures or devices which may be deemed to
have an "anti-takeover effect."

MEETINGS OF STOCKHOLDERS

Our by-laws provide that a special meeting of stockholders may be called
only by our President or our board of directors unless otherwise required by
law. Our by-laws provide that only those matters included in the notice of the
special meeting may be considered or acted upon at that special meeting unless
otherwise provided by law. In addition, our by-laws include notice and
informational requirements and time limitations on any director nomination or
any new proposal which a stockholder wishes to make at an annual meeting of
stockholders.

DIRECTOR VACANCIES AND REMOVAL

Our by-laws provide that vacancies in our board of directors may be filled
only by the affirmative vote of a majority of the remaining directors. Our
by-laws provide that directors may be removed from office with or without cause
and only by the affirmative vote of holders of a majority of the shares then
entitled to vote at an election of directors.

ABILITY TO ADOPT STOCKHOLDER RIGHTS PLAN

Our board of directors may in the future resolve to issue shares of
preferred stock or rights to acquire such shares in order to implement a
stockholder rights plan. A stockholder rights plan typically creates voting or
other impediments to discourage persons seeking to gain control of our company
by means of a merger, tender offer, proxy contest or otherwise if our board of
directors determines that such change in control is not in our best interests
and our stockholders. Our board of directors has no present intention of
adopting a stockholder rights plan and is not aware of any attempt to effect a
change in control of our company.

AMENDMENT OF BY-LAWS

Our certificate of incorporation and by-laws provide that our by-laws may be
amended or repealed by our board of directors or by the stockholders. Such
action by the board of directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at an annual meeting of stockholders or a special meeting
called for such purpose unless our board of directors recommends that the
stockholders approve such amendment or repeal at such meeting, in which case
such amendment or repeal shall only require the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting.

STATUTORY BUSINESS COMBINATION PROVISION

Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:

- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;

- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the

56
<PAGE>
corporation outstanding at the time the transaction commenced, excluding
shares held by directors who are also officers of the corporation and
shares held by employee stock plans; or

- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.

The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of a least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contains any such exclusion.

TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "BCON."

TRANSFER AGENT AND REGISTRAR

The name and address of the transfer agent and registrar for our common
stock is EquiServe Trust Company, 150 Royall Street, Canton, Massachusetts
02021.

57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Before this offering, there has been no public market for our common stock,
and no prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market price
of our common stock prevailing from time to time. Nonetheless, substantial sales
of common stock in the public market following this offering, or the perception
that sales could occur, could lower the market price of our common stock or make
it difficult for us to raise additional equity capital in the future.

SALES OF RESTRICTED SHARES

Following this offering, there will be 38,565,974 shares of our common stock
outstanding. Of these shares, the 8,000,000 shares which are being sold in this
offering generally will be freely transferable without restriction or further
registration under the Securities Act, except that any shares held by our
"affiliates" as defined in Rule 144 under the Securities Act may be sold only in
compliance with the limitations described below.

All of the remaining shares of common stock which will be outstanding after
the offering will be "restricted securities" as defined in Rule 144, and may be
sold in the future without registration under the Securities Act subject to
compliance with the provisions of Rule 144 or any other applicable exemption
under the Securities Act. Generally, restricted securities that have been owned
for a period of at least two years may be sold immediately after the completion
of this offering, and restricted securities that have been owned for at least
one year may be sold immediately after the completion of this offering but
subject to the volume limitations of Rule 144.

At our request, the underwriters have reserved up to 3% of the shares of
common stock in the offering for sale at the initial public offering price to
our directors, officers and employees as well as to clients and vendors who have
advised us of their desire to purchase the shares. All of the shares purchased
through the directed share program will be subject to lock-up agreements for a
period of 30 days from the date of this prospectus and for a period of 180 days
from the date of this prospectus if they are purchased by shareholders subject
to the lock-up agreements described separately below.

In connection with this offering, our existing officers, directors, and
certain stockholders who will own an aggregate of 30,366,220 shares of common
stock after this offering, have agreed with the underwriters that, subject to
exceptions, they will not sell or dispose of any of their shares for 180 days
after the date of this prospectus. Salomon Smith Barney, Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such restrictions. Subject to these lock-up agreements, the
shares of common stock outstanding upon the closing of the offering will be
available for sale in the public market as follows:

<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES DESCRIPTION
---------------------------- -----------
<C> <S>
13,488 These shares will be immediately saleable under Rule 144.
7,760,000 After the date of this prospectus, freely tradable shares
sold in the offering.
240,000 After 30 days from the date of this prospectus, these shares
will be freely tradable, unless purchased by shareholders
who are subject to 180-day lock-up agreements.
102,932 After 90 days from the date of this prospectus, these shares
will be saleable under Rule 701.
83,334 After 180 days from the date of this prospectus, the lock-up
period will expire and these shares will be saleable under
Rule 701.
12,929,186 After 180 days from the date of this prospectus, the lock-up
period will expire and these shares will be saleable under
Rule 144 without regard to holding period limitations but
subject, in some cases, to volume limitations.
17,437,034 After 180 days from the date of this prospectus, the lock-up
period will expire and these shares will be saleable under
Rule 144, subject to holding period and volume limitations.
</TABLE>

58
<PAGE>
In general, under Rule 144 as currently in effect, assuming we are current
in our public filings with the Securities Exchange Commission, a person or
persons whose shares are required to be aggregated, including an affiliate of
ours, and who has beneficially owned shares for at least one year is entitled to
sell through a broker's transaction or in a transaction directly with a market
maker, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, which is expected to be 385,660 shares
upon the completion of this offering, or the average weekly trading volume of
the common stock during the four calendar weeks preceding the date on which
notice of such sale is filed, subject to certain restrictions. In addition, a
person who is not deemed to have been an affiliate of ours at any time during
the 90 days preceding a sale and who has beneficially owned the shares proposed
to be sold for at least two years would be entitled to sell those shares under
Rule 144(k) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate of ours, that person's holding
period for the purpose of effecting a sale under Rule 144 commences on the date
of transfer from the affiliate.

WARRANTS

STOCK INCENTIVE PLAN

Under our stock incentive plan, as of October 24, 2000, options to purchase
4,769,540 shares of common stock were issued and outstanding, of which options
to purchase 1,119,890 shares have vested. We intend to file a registration
statement on Form S-8 with respect to the aggregate of shares of common stock
issuable under our stock incentive plan promptly following the consummation of
this offering. Shares issued upon the exercise of stock options after the
effective date of the Form S-8 registration statement will be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to affiliates and the lock-up agreements described above.

ISSUANCE OF ADDITIONAL SHARES

We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under our stock
incentive plan.

REGISTRATION RIGHTS

After this offering, holders of 30,366,220 shares of our common stock and
the common stock issuable upon exercise of outstanding warrants to purchase
11,699,403 shares of common stock will be entitled to cause us to register
those shares. See "Description of Capital Stock--Registration Rights."
Registration of these shares would result in them becoming freely tradable
without restriction under the Securities Act of 1933.

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<PAGE>
UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to each underwriter, the number of shares
set forth opposite the name of that underwriter.

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Salomon Smith Barney Inc.................................... 3,600,000
Banc of America Securities LLC.............................. 1,800,000
CIBC World Markets Corp..................................... 1,800,000
Allen & Company Incorporated................................ 71,000
Bear, Stearns & Co. Inc..................................... 71,000
Credit Suisse First Boston Corporation...................... 71,000
A.G. Edwards & Sons, Inc.................................... 71,000
First Union Securities, Inc................................. 71,000
Lehman Brothers Inc......................................... 71,000
Morgan Stanley & Co. Incorporated........................... 71,000
Adams, Harkness & Hill, Inc................................. 50,500
Friedman, Billings, Ramsey & Co., Inc....................... 50,500
Jefferies & Company......................................... 50,500
C.L. King & Associates, Inc................................. 50,500
Stephens Inc................................................ 50,500
Tucker Anthony Incorporated................................. 50,500
---------
Total................................................... 8,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to the
approval of particular legal matters by the underwriters' counsel and to other
conditions. The underwriters are obligated to purchase all the shares, other
than those covered by their over-allotment option described below, if they
purchase any of the shares.

The underwriters, for whom Salomon Smith Barney Inc., Banc of America
Securities LLC, and CIBC World Markets Corp. are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to particular dealers at the public offering price less a concession not
in excess of $0.25 per share. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share on sales to other
dealers. If all the shares are not sold at the initial offering price, the
underwriters may change the public offering price and other selling terms. The
representatives have advised us that the underwriters do not intend to confirm
any sales to any accounts over which they exercise discretionary authority.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,200,000 additional shares of
our common stock at the public offering price less the underwriting discount.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to some
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitment.

At our request, the underwriters have reserved up to 3% of the shares of
common stock in the offering for sale at the initial public offering price to
our directors, officers and employees and certain of their friends and family
members as well as to clients and vendors who have advised us of their desire to
purchase the shares. All of the shares purchased through the directed share
program will be

60
<PAGE>
subject to lock-up agreements for a period of 30 days from the date of this
prospectus and for a period of 180 days from the date of this prospectus if they
are purchased by shareholders subject to the lock-up agreements described
separately below. The number of shares of common stock available for sale to the
general public will be reduced to the extent that these individuals purchase
reserved shares. Any reserved shares that are not purchased through this
directed share program will be offered by the underwriters to the general public
on the same basis as all other shares of common stock offered by this
prospectus. We have agreed to indemnify the underwriters against certain
liabilities and expenses, including liabilities under the Securities Act of
1933, in connection with the sales of the directed shares.

We and our officers, directors and major shareholders have agreed that, for
a period of 180 days from the date of this prospectus, we will not, without the
prior written consent of Salomon Smith Barney Inc., dispose of or hedge any
shares of our common stock or any securities convertible into, or exercisable or
exchangeable for, our common stock. Salomon Smith Barney Inc., in its sole
discretion, may release any of the securities subject to these lock-up
agreements at any time without notice.

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering for the shares was determined
by negotiation between us and the representatives. Among the factors considered
in determining the initial public offering price were:

- our record of operations;

- our current financial condition;

- our future prospects;

- our markets;

- the economic conditions in and future prospects for the industry in which
we compete;

- our management; and

- currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies
considered comparable to us.

The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in our common stock may not
develop and continue after this offering.

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "BCON."

The following table shows the underwriting discounts and commissions that we
will pay to the underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.

<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................ $ 0.42 $ 0.42
Total................................................ $3,360,000 $3,864,000
</TABLE>

In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
"Covered" short sales are sales of shares made in an amount up to the number of
shares represented by the underwriters' over-allotment option. In determining
the source of shares to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the

61
<PAGE>
price at which they may purchase shares through the over-allotment option.
Transactions to close out the covered syndicate short involve either purchases
of the common stock in the open market after the distribution has been completed
or the exercise of the over-allotment option. The underwriters may also make
"naked" short sales of shares in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing shares of
common stock in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure on
the price of the shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of bids for or purchases of shares in the open market while the offering is in
progress.

The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member while
Salomon Smith Barney Inc., in covering a syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.

Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common stock. They may also cause the price
of the common stock to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the Nasdaq National Market or in the
over-the-counter market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.

A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The underwriters may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. The representatives will allocate shares to underwriters that
may make Internet distributions on the same basis as other allocations.

We estimate that our total expenses for this offering, excluding the
underwriting discount, will be $1,175,860.

We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.

62
<PAGE>
LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed
upon for us by Edwards & Angell, LLP, Boston, Massachusetts. Various legal
matters related to this offering will be passed upon for the underwriters by
Cravath, Swaine & Moore, New York, New York.

EXPERTS

The financial statements as of December 31, 1998 and 1999 and for the years
then ended and the period from May 8, 1997 (date of inception) to December 31,
1997 and the period from May 8, 1997 (date of inception) to December 31, 1999
and the financial statements as of September 30, 2000 and for the nine months
then ended and the period from May 8, 1997 (date of inception) to September 30,
2000 included in this prospectus, and from which certain Selected Financial Data
included in this prospectus have been derived, and have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein. Such financial statements and Selected Financial Data have
been included herein in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits and schedules thereto) under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus is part of the registration
statement. This prospectus does not contain all the information included in the
registration statement because we have omitted certain parts of the registration
statement as permitted by the Securities and Exchange Commission's rules and
regulations. For further information about us and our common stock, you should
refer to the registration statement. Statements made in this prospectus as to
the contents of any contract, agreement or other document are necessarily
summaries of these documents and are qualified in their entirety by reference to
each such contract, agreement or other document which is filed as an exhibit to
the registration statement.

You can inspect and copy all or any portion of the registration statements
or any reports, statements or other information we file at the public reference
facility maintained by the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
operation of the public reference rooms. Copies of all or any portion of the
registration statement can be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the registration statement is publicly
available through the Securities and Exchange Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov.

We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You can also
request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission. We intend to furnish to our stockholders
annual reports containing audited financial statements for each fiscal year.

63
<PAGE>
BEACON POWER CORPORATION

(A DEVELOPMENT STAGE COMPANY)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FINANCIAL STATEMENTS:
</TABLE>

AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS
THEN ENDED AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31,
1997 AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999.

<S> <C>
Independent Auditors' Report.............................. F-2

Balance Sheets............................................ F-3

Statements of Operations.................................. F-4

Statements of Stockholders' Deficiency.................... F-5

Statements of Cash Flows.................................. F-6

Notes to Financial Statements............................. F-7
</TABLE>

FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 AND THE PERIOD FROM MAY 8, 1997 (DATE
OF INCEPTION) TO SEPTEMBER 30, 2000.

<S> <C>
Independent Auditors' Report.............................. F-21

Balance Sheet............................................. F-22

Statements of Operations.................................. F-23

Statements of Stockholders' Deficiency.................... F-24

Statements of Cash Flows.................................. F-25

Notes to Financial Statements............................. F-26
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying balance sheets of Beacon Power Corporation
(the "Company")(a development stage company) as of December 31, 1998 and 1999,
and the related statements of operations, stockholders' deficiency and cash
flows for the years then ended and for the period from May 8, 1997 (date of
inception) through December 31, 1997 and the period from May 8, 1997 (date of
inception) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Beacon Power Corporation as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended and the period from May 8, 1997 (date of
inception) through December 31, 1997 and the period from May 8, 1997 (date of
inception) through December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
May 25, 2000 (September 22, 2000 as to the last two paragraphs of Note 15 and
November 13, 2000 as to Note 16)

F-2
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $2,491,151 $ 234,350
Prepaid expenses and other current assets................. 20,307 15,987
---------- ------------
Total current assets.................................. 2,511,458 250,337
PROPERTY AND EQUIPMENT, Net................................. 433,726 566,013

PREPAID FINANCING COSTS..................................... -- 81,934

DEPOSITS.................................................... 42,595 57,150

OTHER ASSETS................................................ 4,375 18,066
---------- ------------
TOTAL ASSETS................................................ $2,992,154 $ 973,500
========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 822,723 $ 413,146
Accrued compensation and benefits......................... 68,183 109,206
Accrued interest.......................................... -- 164,140
Accrued loss on sales commitments......................... -- 325,000
Due to related party...................................... 18,611 --
Other accrued expenses.................................... 15,622 43,222
Current portion of capital lease obligations.............. 105,406 73,291
---------- ------------
Total current liabilities............................. 1,030,545 1,128,005
---------- ------------
DIVIDENDS PAYABLE........................................... 112,153 749,005
---------- ------------
NOTES PAYABLE TO INVESTORS.................................. -- 3,150,000
---------- ------------
CAPITAL LEASE OBLIGATIONS, Net of current portion........... 76,166 2,875
---------- ------------
COMMITMENTS (Note 6)

CLASS D REDEEMABLE CONVERTIBLE
PREFERRED STOCK (Liquidation preference of $4,750,000)...... 4,493,145 4,534,816
---------- ------------
STOCKHOLDERS' (DEFICIENCY) EQUITY:
Preferred stock:
Class A Convertible, $.01 par value; 6,000,000, shares
authorized 4,622,907, and 4,767,907 shares issued and
outstanding in 1998 and 1999 respectively, (liquidation
preference, $20,571,936, and $21,217,186,
respectively).......................................... 5,378,951 5,741,451
Class B Convertible, $.01 par value; 1 share authorized;
no shares issued and outstanding....................... -- --
Class C Convertible, $.01 par value; 6 shares
authorized, issued and outstanding..................... 29,866 29,866
Common stock, $.01 par value; 110,000,000 shares
authorized; 16,848 shares issued and outstanding....... 168 168
Deferred consulting expense, net.......................... (37,500) (100,000)
Deferred stock compensation............................... -- (56,648)
Additional paid-in capital................................ -- 515,318
Deficit accumulated during the development stage.......... (8,091,340) (14,721,356)
---------- ------------
Total stockholders' deficiency........................ (2,719,855) (8,591,201)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $2,992,154 $ 973,500
========== ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-3
<PAGE>
BEACON POWER CORPORATION

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

OPERATING EXPENSES:
Selling, general and administrative....................... 1,168,471 1,188,165 1,558,985 3,915,621
Research and development.................................. 2,291,874 3,523,572 3,506,031 9,321,477
Loss on sales commitments................................. -- -- 325,000 325,000
Depreciation and amortization............................. -- 78,208 218,594 296,802
----------- ----------- ----------- ------------
Total operating expenses................................ 3,460,345 4,789,945 5,608,610 13,858,900
----------- ----------- ----------- ------------

LOSS FROM OPERATIONS........................................ (3,228,029) (4,789,945) (5,339,742) (13,357,716)
----------- ----------- ----------- ------------

OTHER INCOME (EXPENSE):
Interest income........................................... 116,648 11,277 25,118 153,043
Interest expense.......................................... -- (14,730) (356,869) (371,599)
----------- ----------- ----------- ------------
Total other income (expense), net....................... 116,648 (3,453) (331,751) (218,556)
----------- ----------- ----------- ------------

NET LOSS.................................................... (3,111,381) (4,793,398) (5,671,493) (13,576,272)

PREFERRED STOCK DIVIDENDS................................... -- (112,153) (916,852) (1,029,005)

ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK......... -- (6,908) (41,671) (48,579)
----------- ----------- ----------- ------------

LOSS TO COMMON SHAREHOLDERS................................. $(3,111,381) $(4,912,459) $(6,630,016) $(14,653,856)
=========== =========== =========== ============

LOSS PER SHARE--BASIC AND DILUTED........................... $ (184.67) $ (291.58) $ (393.52)
=========== =========== ===========

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING.................. 16,848 16,848 16,848
=========== =========== ===========

PRO FORMA LOSS PER SHARE.................................... $ (0.42)
===========

PRO FORMA WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING--BASIC
AND DILUTED............................................... 13,492,674
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-4
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>

CLASS A CLASS C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............. -- $ -- -- $ -- -- $ --
Issuance of founder's shares......................... -- -- -- -- 6,750,000 67,500
Issuance of Class A preferred stock.................. 1,125,000 5,000,000 -- -- -- --
Recapitalization..................................... 3,373,313 67,466 -- -- (6,746,626) (67,466)
Rounding for fractional shares....................... -- -- -- -- (2) --
Issuance of Class C preferred and common stock....... -- -- 6 29,866 13,476 134
Repayment of subscription receivable.................
Accrual of consulting expense........................ -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1997............................. 4,498,313 5,067,466 6 29,866 16,848 168
Issuance of Class A preferred stock for services..... 120,000 300,000 -- -- -- --
Issuance of Class A preferred stock for services and
interest on loans.................................. 4,594 11,485 -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- -- --
Repayment of subscription receivable................. -- -- -- -- -- --
Amortization of deferred consulting expense, net..... -- -- -- -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1998............................. 4,622,907 5,378,951 6 29,866 16,848 168
Issuance of Class A preferred stock for services..... 145,000 362,500 -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- -- --
Deferred stock compensation.......................... -- -- -- -- -- --
Amortization of deferred stock compensation.......... -- -- -- -- -- --
Amortization of deferred consulting expense, net..... -- -- -- -- -- --
Issuance of warrants to holders of Class D shares.... -- -- -- -- -- --
Issuance of warrants for bridge loans................ -- -- -- -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1999............................. 4,767,907 $5,741,451 6 $29,866 16,848 $ 168
========= ========== ========== ======= ========== ========

<CAPTION>
DEFICIT
DEFERRED ACCUMULATED
CONSULTING DEFERRED ADDITIONAL STOCK DURING THE
EXPENSE, STOCK PAID-IN SUBSCRIPTION DEVELOPMENT
NET COMPENSATION CAPITAL RECEIVABLE STAGE
---------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............. $ -- $ -- $ -- $ -- $ --
Issuance of founder's shares......................... -- -- -- -- (67,500)
Issuance of Class A preferred stock.................. -- -- -- (5,000,000) --
Recapitalization..................................... -- -- -- -- --
Rounding for fractional shares....................... -- -- -- -- --
Issuance of Class C preferred and common stock....... -- -- -- -- --
Repayment of subscription receivable................. 2,992,492 --
Accrual of consulting expense........................ 87,500 -- -- -- --
Net loss............................................. -- -- -- -- (3,111,381)
--------- -------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1997............................. 87,500 -- -- (2,007,508) (3,178,881)
Issuance of Class A preferred stock for services..... (150,000) -- -- -- --
Issuance of Class A preferred stock for services and
interest on loans.................................. -- -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- (112,153)
Repayment of subscription receivable................. -- -- -- 2,007,508 --
Amortization of deferred consulting expense, net..... 25,000 -- -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- (6,908)
Net loss............................................. -- -- -- -- (4,793,398)
--------- -------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1998............................. (37,500) -- -- -- (8,091,340)
Issuance of Class A preferred stock for services..... (125,000) -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- (636,852)
Deferred stock compensation.......................... -- (65,318) 65,318 -- --
Amortization of deferred stock compensation.......... -- 8,670 -- -- --
Amortization of deferred consulting expense, net..... 62,500 -- -- -- --
Issuance of warrants to holders of Class D shares.... -- -- 280,000 -- (280,000)
Issuance of warrants for bridge loans................ -- -- 170,000 -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- (41,671)
Net loss............................................. -- -- -- -- (5,671,493)
--------- -------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1999............................. $(100,000) $(56,648) $ 515,318 $ -- $(14,721,356)
========= ======== ========== =========== ============

SEE NOTES TO FINANCIAL STATEMENTS.

F-5
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
MAY 8, 1997 MAY 8, 1997
(DATE OF (DATE OF
INCEPTION) TO YEAR ENDED YEAR ENDED INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(3,111,381) $(4,793,398) $(5,671,493) $(13,576,272)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ -- 78,208 218,594 296,802
Interest expense relating to issuance of warrants.... -- -- 170,000 170,000
Amortization of deferred consulting expense, net..... 87,500 175,000 300,000 562,500
Amortization of deferred stock compensation.......... -- -- -- --
Services and interest expense paid in preferred
stock.............................................. -- 11,485 -- 11,485
Accrued loss on sales commitments.................... -- -- 325,000 325,000
Changes in operating assets and liabilities:
Accounts receivable................................ (14,487) 14,487 -- --
Prepaid expenses and other current assets.......... -- (20,307) 4,320 (15,987)
Accounts payable................................... 50,000 772,723 (409,577) 413,146
Accrued compensation and benefits.................. 31,042 37,141 41,023 109,206
Accrued interest................................... -- -- 164,140 164,140
Due to related party............................... -- 18,611 (18,611) --
Other accrued expenses and current liabilities..... 31,981 (16,359) 36,270 51,892
----------- ----------- ----------- ------------
Net cash used in operating activities............ (2,925,345) (3,722,409) (4,840,334) (11,488,088)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets............................... (27,147) (19,823) (110,180) (157,150)
Repayment (issuance) of note receivable from officer... (40,000) 40,000 -- --
Purchases of property and equipment.................... -- (257,423) (350,881) (608,304)
----------- ----------- ----------- ------------
Net cash used in investing activities............ (67,147) (237,246) (461,061) (765,454)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subscription receivable................... 2,992,492 2,007,508 -- 5,000,000
Issuance of Class C preferred stock.................... 30,000 -- -- 30,000
Issuance of Class D redeemable preferred stock......... -- 4,486,237 -- 4,486,237
Repayment of capital leases............................ -- (72,939) (105,406) (178,345)
Proceeds from notes payable issued to investors........ -- -- 3,150,000 3,150,000
----------- ----------- ----------- ------------
Net cash provided by financing activities.............. 3,022,492 6,420,806 3,044,594 12,487,892
----------- ----------- ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 30,000 2,461,151 (2,256,801) 234,350

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... -- 30,000 2,491,151 --
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 30,000 $ 2,491,151 $ 234,350 $ 234,350
=========== =========== =========== ============
SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Class A preferred stock for subscription
receivable........................................... $ 5,000,000 $ -- $ -- $ 5,000,000
=========== =========== =========== ============
Acquisition of assets with capital leases.............. $ -- $ 254,411 $ -- $ 254,411
=========== =========== =========== ============
Issuance of warrants in conjunction with financing..... $ -- $ -- $ 450,000 $ 450,000
=========== =========== =========== ============
Issuance of non-qualified stock options to
consultants.......................................... $ -- $ -- $ 65,318 $ 65,318
=========== =========== =========== ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-6
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

AS OF DECEMBER 31, 1998 AND 1999 AND FOR THE YEARS THEN ENDED
AND FOR THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
AND THE PERIOD MAY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1999

1. NATURE OF BUSINESS AND OPERATIONS

NATURE OF BUSINESS--Beacon Power Corporation (the "Company" or "Beacon") (a
development stage company) was incorporated on May 8, 1997 as a wholly owned
subsidiary of SatCon Technology Corporation ("SatCon"). Since its inception,
Beacon has been engaged in the development of flywheel devices for storing and
transmitting kinetic energy. As of December 31, 1999, the Company had not yet
commenced its planned principal activities of marketing and manufacturing such
devices and accordingly is accounted for as a development stage company under
Statement of Financial Accounting Standards No. 7. As of December 31, 1999, a
majority of the Company's outstanding shares was owned by SatCon. However, in
conjunction with the October 1998 Class D preferred stock offering, the
Company's minority investors were granted the right to appoint a majority of the
members of the Company's Board of Directors.

The Company has a single operating segment, manufacturing alternative power
sources. The Company has no organizational structure dictated by product lines,
geography or customer type.

OPERATIONS--The Company has experienced net losses since its inception and,
as of December 31, 1999, had an accumulated deficit of approximately
$14.7 million. The Company is currently facing the challenge of finalizing
development of a viable commercial product and raising adequate capital to
sustain operations. As discussed in Note 15, during the period during
January 1, 2000 to May 25, 2000, the Company secured additional financing of
approximately $32 million. Management believes that this funding is sufficient
to continue its operations as a going concern through at least December 31,
2000.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

ACCOUNTING PRINCIPLES--The accompanying financial statements have been
prepared using accounting principles generally accepted in the United States of
America.

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

F-7
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PREPAID FINANCING COSTS--Prepaid financing costs consist of legal, financing
and other related expenses incurred in connection with the Class E financing
completed during the year ending December 31, 2000 and will be amortized over
the terms of the obligations using the effective interest method.

OTHER ASSETS--Other assets consist of unamortized legal expenses related to
patents.

LOSSES ON SALES COMMITMENTS--Substantially all of the Company's sales
commitments are firm and have fixed-prices. Revenue and cost of revenue on such
sales commitments are recorded as deliveries are made. The direct costs to
manufacture products covered by the Company's firm sales commitments are in
excess of the fixed selling prices. Direct costs consist of materials and direct
labor costs. These excess costs have been estimated and accrued as losses on
sales commitments in the period in which the sales commitment is made. Estimates
of costs to manufacture products are reviewed and revised periodically and
accruals for estimated losses from such revisions are recorded in the accounting
period in which the revisions are made.

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

REVENUE RECOGNITION--Revenue relates to work performed under research and
development contracts. Revenue is recognized as services are performed.

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

INCOME TAXES--Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and tax loss and credit carryforwards using the currently
enacted tax rates and laws. A valuation allowance is provided to the extent
realization of deferred tax assets is not considered more likely than not.

RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred.

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

F-8
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to significant concentration of credit risk consist primarily of
cash and cash equivalents. Substantially all of the Company's cash and cash
equivalents are managed by one financial institution. At December 31, 1998 and
1999, the Company had cash balances at a financial institution in excess of
federally insured limits. However, the Company does not believe that it is
subject to unusual credit risk beyond the normal credit risk associated with
commercial banking relationships.

COMPREHENSIVE LOSS--Comprehensive loss is the same as net loss for all
periods presented.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Statement, as
amended, is effective for fiscal years beginning after June 15, 2000. Management
is currently evaluating the effect of adopting SFAS No. 133 on the financial
statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
established guidelines for revenue recognition and is effective for periods
beginning no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. Management does not expect that the adoption of SAB 101
will have a material impact on the Company's financial condition or results of
operations.

HISTORICAL LOSS PER SHARE--Historical loss per share has been computed using
the weighted-average number of shares of common stock outstanding during each
period. Diluted loss per share was computed in the same manner. The impact of
the Company's outstanding potential common shares, such as options and warrants
(computed using the treasury stock method) and convertible preferred stock, were
excluded from the calculation because such items were antidilutive.

The weighted average number of shares of common stock issuable during the
years ended December 31, 1999, and 1998, the period from May 8, 1997 to
December 31, 1997 and the period from May 8, 1997 through December 31, 1999
aggregated 16,298,920, 14,495,538, and 3,700,956, and 10,676,036, respectively,
upon the exercise of options and warrants and the conversion of preferred stock
outstanding.

F-9
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1998 1999
---------- -------- --------
<S> <C> <C> <C>
Machinery and equipment..................... 5 years $214,635 $298,180
Furniture and fixtures...................... 7 years 19,423 41,521
Office equipment............................ 3 years 10,904 159,894
Leasehold improvements...................... lease term 12,561 108,809
Equipment under capital lease obligations... lease term 254,411 254,411
-------- --------
Total..................................... 511,934 862,815
Less accumulated depreciation and
amortization.............................. (78,208) (296,802)
-------- --------
Property and equipment, net............... $433,726 $566,013
======== ========
</TABLE>

4. NOTES PAYABLE TO INVESTORS

At December 31, 1999, notes payable to investors consists of Senior Secured
Convertible Promissory Notes (the "Senior Notes") held by the Company's primary
investors. The Senior Notes bear interest, which is payable upon conversion, at
an annual rate of 12.5%, increasing to 15% after six months if the Class E
redeemable convertible preferred stock ("Class E Stock") funding had not
occurred at that time. The notes are secured by substantially all of the assets
of the Company. In connection with the issuance of the Senior Notes, the
investors received warrants to purchase shares of the Company's common stock
(see Note 10).

On April 7, 2000, the Senior Notes and accrued interest were converted into
Class E Stock (see Note 15).

5. CAPITAL LEASE OBLIGATIONS

The Company leases equipment under capital lease agreements expiring through
2001. Future obligations under such capital leases as of December 31, 1999 are
as follows:

<TABLE>
<S> <C>
2000........................................................ $77,530
2001........................................................ 3,067
-------
80,597
Less amount representing interest........................... 4,431
-------
76,166
Less current portion of capital lease obligations........... 73,291
-------
Capital lease obligations, excluding current portion........ $ 2,875
=======
</TABLE>

F-10
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. COMMITMENTS

The Company leases office and light manufacturing space under operating
leases expiring through January 30, 2001 and an operating lease for office
equipment expiring October 2001.

Future minimum annual lease payments under noncancelable operating leases as
of December 31, 1999 are as follows:

Total rent expense was $146,255 and $199,405, during 1998 and 1999, and
$345,660 for the period from inception to December 31, 1999.

7. PREFERRED STOCK

CLASS A CONVERTIBLE PREFERRED STOCK--Each share of Class A convertible
preferred stock ("Class A Stock") is convertible into two shares of common stock
at the option of the holder (see Note 16). The Class A Stock is nonvoting. Upon
liquidation, holders of Class A Stock are entitled to receive, out of funds then
generally available prior to any payment with respect to the holders of common
stock, $4.45 per share, plus any declared and unpaid dividends thereon. Holders
of the Class A Stock have the right to receive the same dividends as declared by
the Board of Directors on common shares on an "as-if-converted" basis. The
Class A Stock will automatically be converted into shares of common stock upon
the closing of a public offering of common stock of the Company, upon a vote of
the Board of Directors or upon the automatic conversion of the Class D preferred
stock (see Note 8). Class A Stock is subordinate to Class D, E and F preferred
stock and has parity with Class B and C preferred stock. The Class A stock does
not have redemption features.

CLASS B AND C CONVERTIBLE PREFERRED STOCK--The Company has authorized both
Class B and C convertible preferred stock. Only Class C shares are outstanding.
Class B shares were never issued. Class B and C shares have identical conversion
and voting rights. Class C convertible preferred stock ("Class C Stock") is
convertible into two shares of common stock at the option of the holder (see
Note 16). The holders of the Class C Stock have voting rights equivalent to the
number of shares of common stock into which their shares of Class C Stock
convert. The Class C Stock has the right to receive the same dividends as
declared by the Board of Directors on common shares on an "as-if-converted"
basis. The Class C Stock will automatically be converted into shares of common
stock upon the closing of a public offering of common stock of the Company, upon
a vote of the Board of Directors, upon the automatic conversion of the Class D
preferred stock (see Note 8), or upon conversion of the Class A Stock. Class B
and C Stock have parity with Class A Stock in liquidation and are subordinate to
Class D, E and F preferred stock. The Class B and C Stock do not have redemption
features.

F-11
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. REDEEMABLE PREFERRED STOCK

CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has authorized
6,000,000 shares of Class D convertible preferred stock ("Class D Stock") with a
par value of $.01 per share. On October 23, 1998, the Company issued 1,900,000
shares of Class D Stock and received net proceeds of approximately $4,486,000.
Issuance costs totaled approximately $264,000 and are being accreted to the
carrying value of the Class D Stock over the period to the stock's earliest
redemption date. Each share of Class D Stock is convertible into two shares of
common stock at the option of the holder (see Note 16). The holders of the
Class D Stock have voting rights equivalent to the number of shares of common
stock into which their shares of Class D Stock convert. Holders of the Class D
Stock are also entitled to appoint representatives to the Board of Directors.
The Class D Stock earns cumulative dividends at an annual rate of 12.5% through
May 23, 2000 and 6% on and after this date, payable quarterly. Dividends can be
paid in shares of Class D Stock through May 23, 2000 and after this date, are
payable only in cash. Cumulative dividends not paid on Class D Stock total
$112,153 and $749,005 as of December 31, 1998 and 1999, respectively. Upon
liquidation, holders of Class D Stock are entitled to receive, out of funds then
generally available, unpaid dividends previously declared or accrued and a per
share amount of $2.50. The Class D Stock is redeemable by the holder at any time
after December 31, 2004 for the stated value of $2.50 per share plus accrued,
but unpaid, dividends. The Class D Stock will automatically be converted into
shares of common stock upon a change in ownership of 50% of the Company's
outstanding voting stock, upon a merger or consolidation of the Company or upon
the sale of significant assets of the Company, or upon the closing of a
qualified public offering.

Pursuant to the Stock Purchase Agreement related to the Class D Stock (the
"Class D Agreement"), the Company is bound by certain covenants. The Class D
Stock is senior to the Class A, B and C Stock, subordinate to Class F preferred
stock and has parity with Class E preferred Stock (see Note 15).

9. COMMON STOCK

DIVIDENDS--Dividends may be declared and paid on the common stock as and
when determined by the Board of Directors subject to any preferential dividend
rights of any then outstanding shares of preferred stock.

RESERVED SHARES--At December 31, 1999, 18,260,840 shares of common stock
were reserved for issuance under the Company's stock option plan, outstanding
warrants and for the potential conversion of preferred stock.

10. STOCK WARRANTS

At its inception in 1997, the Company issued a warrant to purchase
1,125,000 shares of common stock to an investor at the price of $2.67 per share
(the "1997 warrant"). The warrant expired unexercised on May 28, 1999. Value
ascribed to this warrant was not material.

F-12
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. STOCK WARRANTS (CONTINUED)
Under the conditions of the Class D Stock offering, the Company issued
warrants in October 1999 to three investors to purchase 772,500 shares of common
stock at $1.67, 772,500 shares of common stock at $2.25, and 772,500 shares of
common stock at $3.00 (the "October 1999 warrants"). The estimated fair value of
the warrants at the date of their issuance was $280,000. This amount has been
recorded as a dividend to the holders of the Class D Stock and credited to
additional paid-in-capital. These warrants expire December 31, 2004. Additional
warrants were issued under the Class D agreement during April 2000 (see
Note 15).

In conjunction with the issuance of the Senior Notes in August 1999, the
Company issued warrants to four investors to purchase 315,000 shares of Class E
Preferred Stock (see Note 15) at an exercise price of $2.50 per share (the
"August 1999 warrants"). The estimated fair value of these warrants at the date
of grant was $170,000. This amount has been recorded as a discount on the Senior
Notes and was charged to interest expense in 1999 as the Senior Notes are demand
notes. These warrants expire on August 2, 2004.

In conjunction with the Class E conversion in April 2000 (see Note 15), the
August 1999 warrants were cancelled.

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

<TABLE>
<CAPTION>
AUGUST OCTOBER
1997 1999 1999
WARRANT WARRANTS WARRANTS
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate.................................. 6.25% 5.62% 5.86%
Expected life of warrant................................. 24 months 30 months 27 months
Expected dividend payment rate, as a percentage of the
stock price on the date of grant....................... 0% 0% 0%
Assumed volatility....................................... 48% 60% 60%
</TABLE>

11. STOCK OPTIONS

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

F-13
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. STOCK OPTIONS (CONTINUED)
Stock option activity since inception is as follows:

<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE
---------- --------- ---------
<S> <C> <C> <C>
Outstanding at inception.................................... --
Granted................................................... 647,874 $.89 $0.35
----------
Outstanding, December 31, 1997.............................. 647,874 .89
Granted................................................... 199,126 .89 0.38
Canceled, forfeited or expired............................ (10,000) .89
----------
Outstanding, December 31, 1998.............................. 837,000 .89
Granted................................................... 1,467,000 .89 0.40
Canceled, forfeited or expired............................ (295,688) .89
---------- ----
Outstanding, December 31, 1999.............................. 2,008,312 $.89
========== ====
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
VESTED
WEIGHTED- --------------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE AVERAGE
OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE
-------------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$.89 2,008,312 8.64 $.89 378,244 $.89
============ ========= ==== ==== ======= ====
</TABLE>

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

F-14
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
MAY 8, 1997 MAY 8, 1997
(DATE OF INCEPTION) (DATE OF INCEPTION)
TO YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Net loss to common shareholders as
reported.......................... $(3,111,381) $(4,912,459) $(6,630,016) $(14,653,856)
Net loss pro forma.................. (3,336,722) (4,987,251) (7,154,362) (15,478,335)
Loss per share--as reported......... (184.67) (291.58) (393.52)
Loss per share--pro forma........... (198.05) (296.01) (424.64)
</TABLE>

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

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate..................................... 5.5% 5.75% 6.0%
Expected life of option..................................... 3 years 3 years 3 years
Expected dividend payment rate, as a percentage of the stock
price on the date of grant................................ 0% 0% 0%
Assumed volatility.......................................... 50% 58% 60%
</TABLE>

The option-pricing model used was designed to value readily tradable stock
options with relatively short lives. However, management believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances (see also
Note 15).

F-15
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES

The components of the provision (benefit) for income taxes consisted of the
following:

<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE FROM
MAY 8, 1997 MAY 8, 1997
(DATE OF INCEPTION) (DATE OF INCEPTION)
TO YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Federal--deferred................... $(1,037,870) $(1,594,955) $(1,995,158) $(4,627,983)
State--deferred..................... (181,683) (282,933) (352,087) (816,703)
Increase in valuation allowance..... 1,219,553 1,877,888 2,347,245 5,444,686
----------- ----------- ----------- -----------
Provision (benefit) for income
taxes............................. $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>

Taxes during interim periods are computed using the estimated rate effective
for the entire year. Changes to the estimated rate are reflected in periods in
which the estimated charge occurs.

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

<TABLE>
<S> <C>
Statutory federal rate benefit.............................. (34)%
State, net of federal effect................................ (6)
Valuation allowance provided................................ 40
---
Effective rate.............................................. --%
===
</TABLE>

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

<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Long-term assets:
Net operating loss carryforwards................. $ 2,643,962 $ 4,728,408
Research and development credits................. 444,513 524,958
Loss on sales commitments........................ -- 130,000
Other............................................ 8,966 61,320
----------- -----------
Net deferred tax assets before valuation
allowance........................................ 3,097,441 5,444,686
Less valuation allowance........................... (3,097,441) (5,444,686)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>

The valuation allowance increased by $1,877,888 in 1998 and $2,347,245 in
1999, primarily due to the generation of net operating loss carryforwards and
credits for which realization is not reasonably assured.

F-16
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES (CONTINUED)
The Company has available for future periods federal and state tax net
operating loss carryforwards for federal and state purposes of approximately
$11,850,000 and $11,616,000, respectively, as of December 31, 1999. In addition,
the Company has business credits of approximately $524,958 as of December 31,
1999. The net operating loss carryforwards expire beginning in 2012 and 2002 for
federal and state tax purposes, respectively. The federal research and
development credits begin to expire in 2012. The Company did not pay any income
taxes from inception to December 31, 1999.

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

13. BENEFIT PLAN

In 1998, the Company created a 401(k) Profit Sharing Plan (the "Plan") for
its full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service ($10,200 for
1999). The Company matches employee contributions at a rate of 50% up to the
first 6% of the employee's contributions. The Company may also elect to make a
profit-sharing contribution based on the discretion of the Board of Directors.
Employee contributions are fully vested. Company matching and profit sharing
contributions vest 20% after two years of service consisting of at least
1,000 hours per calendar year and 20% annually thereafter. Company contributions
were $19,376, $41,963 and $61,339 during 1998, 1999, and the Period from
Inception to December 31, 1999, respectively.

14. RELATED-PARTY TRANSACTIONS

CONSULTING AGREEMENTS--The Company entered into consulting agreements with
three investors in 1998 and 1997. The contracts are seven-year agreements,
renewable annually thereafter, for consulting services to be provided by the
investors in exchange for annual issuances of shares of the Company's Class A
Stock. During 1997, 1998, 1999 and the period from inception, $87,500, $175,000,
$300,000, and $562,500, respectively, was recorded as consulting expense
relating to these agreements, and 120,000 and 145,000 shares of Class A Stock in
1998 and 1999, respectively, were issued or issuable as compensation under these
contracts. Prepaid and accrued consulting expenses have been recorded annually,
based on the terms and dates of the consulting agreements. The services provided
by the investors were recorded based upon the value of the securities issued.
These contracts all expire immediately upon an initial public offering of the
Company's common stock.

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

F-17
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. RELATED-PARTY TRANSACTIONS (CONTINUED)
SERVICES AGREEMENTS--SatCon performs certain research and development,
administrative and other services for the Company. Amounts paid to SatCon for
such services rendered amounted to approximately $1,351,000, $443,000, $59,000
and $1,853,000 during 1997, 1998, 1999 and the period from inception to
December 31, 1999, respectively. As of December 31, 1998, there was $18,611 due
to SatCon relating to such services.

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

15. SUBSEQUENT EVENTS

BRIDGE FINANCING--On January 7, 2000, the Company received $600,000 of
bridge loans bearing annual interest at a rate of 12.5%; $200,000 of these loans
were repaid in February 2000 and the remaining loans were converted into
Class E redeemable convertible preferred stock (the "Class E Stock") in
conjunction with the Class E conversion (see below).

In February, March and April 2000, the Company received additional bridge
financing of $1,400,000 from previous investors and $4,100,000 from new and
previous investors (the "Class F Bridge Loans"). The Class F Bridge Loans bear
annual interest at a rate of 6%. $5,200,000 of these loans were converted into
Class F redeemable convertible preferred stock ("Class F Stock") in May 2000,
(see below). The remaining $300,000 plus interest was repaid in April 2000.

In conjunction with the April bridge loans, investors were granted warrants
to purchase 82,000 shares of the Company's common stock at $2.10 per share.
These warrants expire April 21, 2005. The estimated fair value of such warrants
is $27,000 based on the Black-Scholes Pricing Model.

WARRANTS ISSUED UNDER CLASS D AGREEMENT--Under the conditions of the
Class D Stock offering, the Company issued warrants in April 2000 to three
investors to purchase 712,500 shares of common stock at $1.67, 712,500 shares of
common stock at $2.25, and 712,500 shares of common stock at $3.00. Upon
issuance of these warrants the Company recorded a dividend of approximately
$1,300,000 for the fair market value of these warrants based on the
Black-Scholes Pricing Model. These warrants expire December 31, 2004.

CLASS E CONVERSION--During April 2000, the Company authorized 2,000,000
shares of $.01 par value per share Class E Stock. On April 7, 2000, the Company
converted $3,550,000 of bridge loans plus interest of $275,559 into 1,226,141
shares of Class E Stock (the "Class E conversion"). Each share of Class E Stock
is convertible into two shares of common stock at the option of the holder (see
Note 2). Holders of the Class E Stock have voting rights equivalent to the
number of shares of common stock into which their shares of Class E Stock
convert. Holders of the Class E Stock also share with the Class D Stock
shareholders the right to appoint representatives to the Board of Directors. The
Class E Stock earns cumulative dividends at an annual rate of 12.5% through
May 23, 2000 and 6% on and after this date, payable quarterly. Dividends are
payable in shares of Class E Stock through May 23,

F-18
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. SUBSEQUENT EVENTS (CONTINUED)
2000 and after this date, are payable in cash. Upon liquidation, holders of
Class E Stock are entitled to receive, out of funds then generally available
unpaid dividends previously declared or accrued and a per share amount of $3.12.
The Class E Stock is redeemable by the holder at any time after December 31,
2004 for the stated value of $3.12 per share plus accrued but unpaid dividends.
The Class E Stock will automatically be converted into shares of common stock
upon a change in ownership of 50% of the Company's outstanding voting stock,
upon a merger or consolidation of the Company, upon the sale of significant
assets of the Company, or upon consummation of a qualified public offering.

Class E Stock is senior to Class A, B and C Stock, on parity with Class D
Stock and subordinate to Class F Stock.

In conjunction with the Class E conversion, warrants totaling 315,000,
issued in conjunction with the issuance of the Senior Notes in August 1999
(Note 10), were cancelled. In exchange, warrants to purchase 306,535 shares of
Class E Stock at $2.50 per share were issued. These warrants expire April 7,
2005. The estimated fair market value of these warrants is approximately
$344,000 based on the Binary Option Pricing Model.

Pursuant to the stock purchase agreement related to the Class E Stock, the
Company is bound by certain covenants.

CLASS F ISSUANCE--During May 2000 the Company authorized 7,500,000 shares of
$.01 par value Class F Stock. On May 23, 2000, the Company sold 6,785,711 shares
of Class F Stock for a total of $28.5 million, and accordingly, the outstanding
Class F Bridge Loans of $5,200,000 were converted to Class F Stock.

Each share of Class F Stock is convertible into two shares of common stock
at the option of the holder (see Note 16). Holders of the Class F Stock have
voting rights equivalent to the number of shares of common stock into which
their shares of Class F Stock convert. The Class F Stock earns cumulative
dividends at an annual rate of 6%, payable quarterly. Dividends are payable in
cash. The Class F Stock will automatically be converted into shares of common
stock immediately prior to a merger or consolidation of the Company or upon the
sale of significant assets of the Company, or the consummation of a qualified
public offering. The Class F shareholders are entitled to appoint
representatives to the Board of Directors. The Class F stock is redeemable by
the holder at any time after May 23, 2005 at a price per share equal to the sum
of the Class F stated value, initially $4.20 per share, multiplied by the number
of shares to be redeemed, plus all accrued but unpaid dividends.

The Class F Stock is senior to all other classes of preferred stock.

Upon liquidation, holders of the Class F stock are entitled to receive, out
of funds then generally available, unpaid dividends previously paid or accrued
and a per share amount equal to the Class F stated value.

Pursuant to the Stock Purchase Agreement related to the Class F Stock (the
"Class F Agreement"), the Company is bound by certain covenants.

F-19
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

15. SUBSEQUENT EVENTS (CONTINUED)
Under the conditions of the Class F Agreement, the Company has a contingent
obligation to issue warrants for shares of common stock equal to $14,250,000
divided by the warrant price. The warrant price is defined as 37.5% of the lower
of: (i) the effective price per share of common stock paid by the acquirer in a
sale transaction as determined by a nationally recognized banking firm chosen by
the Company and approved by a majority of the purchasers that hold a majority of
the aggregate preferred shares and conversion shares (shares of common stock
issuable upon conversion of the Class F Stock) as of the date of consummation of
such sale transaction and (ii) the initial price in the first qualified offering
of the Company's common stock. These warrants expire on May 23, 2005 and no
warrants have been issued at this time.

STOCK OPTIONS--During the period from January 1, 2000 to September 22, 2000,
the Company issued 1,808,988 ISOs with exercise prices from $.89 to $6.10,
1,157,200 NSOs to employees at exercise prices from $2.10 to $7.50, and 160,000
NSOs to consultants at an exercise price of $4.10.

AUTHORIZATION OF PREFERRED STOCK--Upon consummation of the Company's initial
public offering, the Company will authorize a new class of preferred stock
consisting of 10,000,000 shares.

16. STOCK SPLIT

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

* * * * * *

F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying balance sheet of Beacon Power Corporation
(the "Company")(a development stage company) as of September 30, 2000, and the
related statements of operations, stockholders' deficiency and cash flows for
the nine-month period then ended and for the period from May 8, 1997 (date of
inception) through September 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Beacon Power Corporation as
of September 30, 2000, and the results of its operations and its cash flows for
the nine-month period then ended and the period from May 8, 1997 (date of
inception) through September 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
October 23, 2000 (October 24, 2000 as to Note 17 and November 13, 2000 as to
Note 18)

F-21
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

SEPTEMBER 30, 2000

<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30,
2000 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 21,347,297
Inventory................................................. 732,700
Prepaid expenses and other current assets................. 221,796
------------
Total current assets.................................... 22,301,793
------------
PROPERTY AND EQUIPMENT, Net................................. 1,007,850
------------
PREPAID FINANCING COSTS..................................... 706,429
------------
DEPOSITS.................................................... 86,560
------------
OTHER ASSETS................................................ 56,583
------------
TOTAL ASSETS................................................ $ 24,159,215
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,213,190
Accrued compensation and benefits......................... 109,753
Accrued loss on sales commitments......................... 1,095,699
Due to Related Party...................................... 331,904
Other accrued expenses and current liabilities............ 733,295
Current portion of capital lease obligations.............. 97,482
------------
Total current liabilities............................... 3,581,323
------------
DIVIDENDS PAYABLE........................................... 1,901,384
------------
CAPITAL LEASE OBLIGATIONS, Net of current portion........... 50,518
------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK
(Liquidation preference of $4,750,000 Class D, $3,825,560
Class E and $28,499,986 Class F).......................... 36,681,757 --
------------ ------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK WARRANTS............. 344,000 --
------------ ------------
STOCKHOLDERS' (DEFICIENCY) EQUITY:
Preferred stock:
Class A Convertible, $.01 par value; 6,000,000 shares
authorized; 4,767,907 shares issued and outstanding
(liquidation preference, $21,217,186).................. 5,741,451 --
------------ ------------
Class B Convertible, $.01 par value; 1 share authorized;
no shares issued and outstanding....................... -- --
Class C Convertible, $.01 par value; 6 shares
authorized, issued and outstanding..................... 29,866 --
Common stock, $.01 par value; 110,000,000 shares
authorized; 198,182 shares issued and outstanding
(30,517,050 shares pro forma).......................... 1,982 305,171
Deferred consulting expense, net.......................... 339,000 (10,000)
Deferred stock compensation............................... (1,256,618) (1,256,618)
Additional paid-in capital................................ 3,762,526 80,691,718
Accumulated deficit during the development stage.......... (27,017,974) (60,017,974)
------------ ------------
Total stockholders' (deficiency) equity................. (18,399,767) $ 19,712,297
------------ ============
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $ 24,159,215
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-22
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
CUMULATIVE
FROM MAY 8, 1997
NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, THROUGH
-------------------------- SEPTEMBER 30,
1999 2000 2000
----------- ------------ -------------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE............................................ $ 65,862 $ -- $ 501,184
----------- ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative.............. 1,084,367 2,866,405 6,782,026
Research and development......................... 2,386,005 5,774,505 15,095,982
Loss on sales commitments........................ -- 880,000 1,205,000
Depreciation and amortization.................... 154,812 250,692 547,494
----------- ------------ ------------
Total operating expenses....................... 3,625,184 9,771,602 23,630,502
----------- ------------ ------------
LOSS FROM OPERATIONS............................... (3,559,322) (9,771,602) (23,129,318)
----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income.................................. 19,505 344,577 497,620
Interest expense................................. (247,675) (365,690) (737,289)
----------- ------------ ------------
Total other expense, net....................... (228,170) (21,113) (239,669)
----------- ------------ ------------
NET LOSS........................................... (3,787,492) (9,792,715) (23,368,987)

PREFERRED STOCK DIVIDENDS.......................... (422,142) (2,452,379) (3,481,384)

ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK............................................ (31,254) (51,524) (100,103)
----------- ------------ ------------
LOSS TO COMMON SHAREHOLDERS........................ $(4,240,888) $(12,296,618) $(26,950,474)
=========== ============ ============
LOSS PER SHARE--BASIC AND DILUTED.................. $ (251.71) $ (401.09)
=========== ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING......... 16,848 30,658
=========== ============
PRO FORMA LOSS PER SHARE (UNAUDITED)............... $ (0.45)
============
PRO FORMA WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING--BASIC AND
DILUTED (UNAUDITED).............................. 22,017,051
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-23
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>

CLASS A CLASS C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............. -- $ -- -- $ -- -- $ --
Issuance of founder's shares......................... -- -- -- -- 6,750,000 67,500
Issuance of Class A preferred stock.................. 1,125,000 5,000,000 -- -- -- --
Recapitalization..................................... 3,373,313 67,466 -- -- (6,746,626) (67,466)
Rounding for fractional shares....................... -- -- -- -- (2) --
Issuance of Class C preferred and common stock....... -- -- 6 29,866 13,476 134
Repayment of subscription receivable.................
Accrual of consulting expense........................ -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1997............................. 4,498,313 5,067,466 6 29,866 16,848 168
Issuance of Class A preferred stock for services..... 120,000 300,000 -- -- -- --
Issuance of Class A preferred stock for services and
interest on loans.................................. 4,594 11,485 -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- -- --
Repayment of subscription receivable................. -- -- -- -- -- --
Amortization of deferred consulting expense, net..... -- -- -- -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1998............................. 4,622,907 5,378,951 6 29,866 16,848 168
Issuance of Class A preferred stock for services..... 145,000 362,500 -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- -- --
Deferred stock compensation.......................... -- -- -- -- -- --
Amortization of deferred stock compensation.......... -- -- -- -- -- --
Amortization of deferred consulting expense, net..... -- -- -- -- -- --
Issuance of warrants to holders of Class D shares.... -- -- -- -- -- --
Issuance of warrants for bridge loans................ -- -- -- -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- -- --
Net loss............................................. -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --------
BALANCE, DECEMBER 31, 1999............................. 4,767,907 5,741,451 6 29,866 16,848 168
Dividend on Class D preferred stock.................. -- -- -- -- -- --
Dividend on Class E preferred stock.................. -- -- -- -- -- --
Dividend on Class F preferred stock.................. -- -- -- -- -- --
Issuance of warrants to holders of Class D shares.... -- -- -- -- -- --
Issuance of warrants on bridge loans................. -- -- -- -- -- --
Cancellation of E warrants........................... -- -- -- -- -- --
Deferred stock compensation.......................... -- -- -- -- -- --
Amortization of deferred stock compensation.......... -- -- -- -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- -- --
Deferred consulting expense.......................... -- -- -- -- -- --
Exercise of employee stock options and warrants...... -- -- -- -- 181,334 1,814

Net loss............................................. -- -- -- -- -- --
--------- ---------- ---------- ------- ---------- --------
BALANCE SEPTEMBER 30, 2000........................... 4,767,907 $5,741,451 6 $29,866 198,182 $ 1,982
========= ========== ========== ======= ========== ========

<CAPTION>
DEFICIT
DEFERRED ACCUMULATED
CONSULTING DEFERRED ADDITIONAL STOCK DURING THE
EXPENSE, STOCK PAID-IN SUBSCRIPTION DEVELOPMENT
NET COMPENSATION CAPITAL RECEIVABLE STAGE
---------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............. $ -- $ -- $ -- $ -- $ --
Issuance of founder's shares......................... -- -- -- -- (67,500)
Issuance of Class A preferred stock.................. -- -- -- (5,000,000) --
Recapitalization..................................... -- -- -- -- --
Rounding for fractional shares....................... -- -- -- -- --
Issuance of Class C preferred and common stock....... -- -- -- -- --
Repayment of subscription receivable................. 2,992,492 --
Accrual of consulting expense........................ 87,500 -- -- -- --
Net loss............................................. -- -- -- -- (3,111,381)
--------- ------------ ---------- ----------- ------------
BALANCE, DECEMBER 31, 1997............................. 87,500 -- -- (2,007,508) (3,178,881)
Issuance of Class A preferred stock for services..... (150,000) -- -- -- --
Issuance of Class A preferred stock for services and
interest on loans.................................. -- -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- (112,153)
Repayment of subscription receivable................. -- -- -- 2,007,508 --
Amortization of deferred consulting expense, net..... 25,000 -- -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- (6,908)
Net loss............................................. -- -- -- -- (4,793,398)
--------- ------------ ---------- ----------- ------------
BALANCE, DECEMBER 31, 1998............................. (37,500) -- -- -- (8,091,340)
Issuance of Class A preferred stock for services..... (125,000) -- -- -- --
Dividend on Class D preferred stock.................. -- -- -- -- (636,852)
Deferred stock compensation.......................... -- (65,318) 65,318 -- --
Amortization of deferred stock compensation.......... -- 8,670 -- -- --
Amortization of deferred consulting expense, net..... 62,500 -- -- -- --
Issuance of warrants to holders of Class D shares.... -- -- 280,000 -- (280,000)
Issuance of warrants for bridge loans................ -- -- 170,000 -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- (41,671)
Net loss............................................. -- -- -- -- (5,671,493)
--------- ------------ ---------- ----------- ------------
BALANCE, DECEMBER 31, 1999............................. (100,000) (56,648) 515,318 -- (14,721,356)
Dividend on Class D preferred stock.................. -- -- -- -- (398,323)
Dividend on Class E preferred stock.................. -- -- -- -- (143,349)
Dividend on Class F preferred stock.................. -- -- -- -- (610,707)
Issuance of warrants to holders of Class D shares.... -- -- 1,300,000 -- (1,300,000)
Issuance of warrants on bridge loans................. -- -- 27,000 -- --
Cancellation of E warrants........................... -- -- (170,000) -- --
Deferred stock compensation.......................... -- (1,901,594) 1,901,594 -- --
Amortization of deferred stock compensation.......... -- 701,624 -- -- --
Accretion of redeemable preferred stock to redemption
value.............................................. -- -- -- -- (51,524)
Deferred consulting expense.......................... 439,000 -- -- -- --
Exercise of employee stock options and warrants...... -- -- 188,614 -- --
Net loss............................................. -- -- -- -- (9,792,715)
--------- ------------ ---------- ----------- ------------
BALANCE SEPTEMBER 30, 2000........................... $ 339,000 $ (1,256,618) $3,762,526 -- $(27,017,974)
========= ============ ========== =========== ============

TOTAL
STOCKHOLDERS'
DEFICIENCY
-------------
<S> <C>
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION)............. $ --
Issuance of founder's shares......................... --
Issuance of Class A preferred stock.................. --
Recapitalization..................................... --
Rounding for fractional shares....................... --
Issuance of Class C preferred and common stock....... 30,000
Repayment of subscription receivable................. 2,992,492
Accrual of consulting expense........................ 87,500
Net loss............................................. (3,111,381)
------------
BALANCE, DECEMBER 31, 1997............................. (1,389)
Issuance of Class A preferred stock for services..... 150,000
Issuance of Class A preferred stock for services and
interest on loans.................................. 11,485
Dividend on Class D preferred stock.................. (112,153)
Repayment of subscription receivable................. 2,007,508
Amortization of deferred consulting expense, net..... 25,000
Accretion of redeemable preferred stock to redemption
value.............................................. (6,908)
Net loss............................................. (4,793,398)
------------
BALANCE, DECEMBER 31, 1998............................. (2,719,855)
Issuance of Class A preferred stock for services..... 237,500
Dividend on Class D preferred stock.................. (636,852)
Deferred stock compensation.......................... --
Amortization of deferred stock compensation.......... 8,670
Amortization of deferred consulting expense, net..... 62,500
Issuance of warrants to holders of Class D shares.... --
Issuance of warrants for bridge loans................ 170,000
Accretion of redeemable preferred stock to redemption
value.............................................. (41,671)
Net loss............................................. (5,671,493)
------------
BALANCE, DECEMBER 31, 1999............................. (8,591,201)
Dividend on Class D preferred stock.................. (398,323)
Dividend on Class E preferred stock.................. (143,349)
Dividend on Class F preferred stock.................. (610,707)
Issuance of warrants to holders of Class D shares.... --
Issuance of warrants on bridge loans................. 27,000
Cancellation of E warrants........................... (170,000)
Deferred stock compensation.......................... --
Amortization of deferred stock compensation.......... 701,624
Accretion of redeemable preferred stock to redemption
value.............................................. (51,524)
Deferred consulting expense.......................... 439,000
Exercise of employee stock options and warrants...... 190,428
Net loss............................................. (9,792,715)
------------
BALANCE SEPTEMBER 30, 2000........................... $(18,399,767)
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-24
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF
INCEPTION)
NINE MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------
1999 2000 2000
------------ ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (3,787,492) $(9,792,715) $(23,368,987)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 154,812 250,692 547,494
Interest expense relating to issuance of warrants....... 170,000 201,000 371,000
Amortization of deferred consulting expense, net........ 225,000 439,000 1,001,500
Amortization of deferred stock compensation............. -- 701,624 701,624
Services and interest expense paid in preferred stock... -- -- 11,485
Accrued loss on sales commitments....................... -- 880,000 1,205,000
Changes in operating assets and liabilities:
Inventory............................................... -- (842,001) (742,001)
Prepaid expenses and other current assets............... 7,569 (205,809) (221,796)
Accounts payable........................................ (677,236) 800,042 1,213,188
Accrued compensation and benefits....................... (38,425) 547 109,753
Accrued interest........................................ 61,439 111,419 275,559
Due to related party.................................... (13,221) 331,904 231,904
Other accrued expenses and current liabilities.......... 133,822 690,073 741,965
------------ ----------- ------------
Net cash used in operating activities................. (3,763,732) (6,434,224) (17,922,312)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets.................................. (17,907) (149,859) (225,075)
Purchases of property and equipment....................... (146,334) (527,099) (1,135,403)
------------ ----------- ------------
Net cash used in investing activities................. (164,241) (676,958) (1,360,478)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in prepaid financing costs....................... (35,332) (624,495) (706,429)
Repayment of subscription receivable...................... -- -- 5,000,000
Exercise of employee stock options........................ -- 190,428 190,428
Class C preferred stock................................... -- -- 30,000
Issuance of Class D preferred stock....................... -- -- 4,486,237
Issuance of Class F redeemable preferred stock............ -- 28,351,792 28,351,792
Repayment of capital leases............................... (76,688) (93,596) (271,941)
Proceeds from notes payable issued to investors........... 2,816,667 400,000 3,550,000
------------ ----------- ------------
Net cash provided by financing activities............. 2,704,647 28,224,129 40,630,087
------------ ----------- ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (1,223,326) 21,112,947 21,347,297

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,491,151 234,350 --
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 1,267,825 $21,347,297 $ 21,347,297
============ =========== ============

SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Class A preferred stock for subscription
receivable.............................................. $ -- $ -- $ 5,000,000
============ =========== ============
Acquisition of assets with capital leases................. $ -- $ 165,425 $ 419,836
============ =========== ============
Issuance of warrants in conjunction with financing........ $ 170,000 $ 1,671,000 $ 2,121,000
============ =========== ============
Conversion of bridge loans and accrued interest to Class E
redeemable preferred stock.............................. $ -- $ 3,825,559 $ 3,825,559
============ =========== ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-25
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

1. NATURE OF BUSINESS AND OPERATIONS

The Company has a single operating segment, manufacturing alternative power
sources. The Company has no organizational structure dictated by product lines,
geography or customer type.

OPERATIONS--The Company has experienced net losses since its inception and,
as of September 30, 2000, had an accumulated deficit of approximately
$27.0 million. The Company is currently facing the challenge of finalizing
development of a viable commercial product and raising adequate capital to
sustain operations. As discussed in Note 8, during the nine months ended
September 30, 2000, the Company secured additional financing of approximately
$32 million. Management believes that this funding is sufficient to continue its
operations as a going concern through at least the next year.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

INTERIM FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999 AND PRO FORMA PRESENTATION--The accompanying financial statements for
the nine months ended September 30, 2000 and 1999 have been prepared using
accounting principles generally accepted in the United States of America for
interim financial information and with Regulation S-X. In the opinion of
management, all adjustments, consisting of normal recurring accruals considered
necessary for a fair presentation, have been included in the accompanying
financial statements. The unaudited pro forma information as of September 30,
2000 reflects the conversion of all outstanding shares of the Class A, C, D, E,
and F preferred stock to common stock on a two-for-one basis, which will occur
upon closing of an initial public offering. In addition, the pro forma
information contemplates the issuance of the contingent warrants associated with
the Class F agreement as described in Note 16. The issuance has been treated as
a dividend to the Class F Shareholders and charged to additional paid in
capital.

ACCOUNTING PRINCIPLES--The accompanying financial statements have been
prepared using accounting principles generally accepted in the United States of
America.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

F-26
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include demand deposits
and highly liquid investments with a maturity of three months or less when
acquired. Cash equivalents are stated at cost, which approximates market value.

INVENTORY--Inventory is carried at the lower of cost or market utilizing the
first-in, first-out ("FIFO") method.

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

PREPAID FINANCING COSTS--Prepaid financing costs consist of legal, financing
and other related expenses incurred in connection with the proposed initial
public offering of the Company's stock and will be netted against the proceeds
of such offering.

OTHER ASSETS--Other assets consist of unamortized legal expenses related to
patents.

LONG LIVED ASSETS--In accordance with SFAS No. 121 long lived assets to be
held and used by the Company are reviewed to determine whether any events or
changes in circumstances indicate that the carrying value of the asset may not
be recoverable. The conditions considered include whether or not the asset is in
service, has become obsolete, or whether external market circumstances indicate
that the carrying amount may not be recoverable. The Company recognizes a loss
for the difference between the estimated fair value of the asset and the
carrying amount. The fair value of the asset is measured using either available
market prices or estimated discounted cash flows. The Company's analyses
indicate that there has been no impairment of long lived assets.

REVENUE RECOGNITION--Revenue relates to work performed under research and
development contracts. Revenue is recognized as services are performed or when
products are shipped.

F-27
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES--Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and tax loss and credit carryforwards using the currently
enacted tax rates and laws. A valuation allowance is provided to the extent
realization of deferred tax assets is not considered more likely than not.

RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred.

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

CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to significant concentration of credit risk consist primarily of
cash and cash equivalents. Substantially all of the Company's cash and cash
equivalents are managed by one financial institution. At September 30, 2000, the
Company had cash balances at a financial institution in excess of federally
insured limits. However, the Company does not believe that it is subject to
unusual credit risk beyond the normal credit risk associated with commercial
banking relationships.

COMPREHENSIVE LOSS--Comprehensive loss is the same as net loss for all
periods presented.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
established guidelines for revenue recognition and is effective for periods
beginning no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. Management does not expect that the adoption of SAB 101
will have a material impact on the Company's financial condition or results of
operations.

The weighted average number of shares of common stock issuable during the
nine-month periods ended September 30, 1999 and 2000 aggregated 15,339,450 and
31,816,826, respectively, upon the exercise of options and warrants and upon the
conversion of preferred stock outstanding.

PRO FORMA NET LOSS PER SHARE (UNAUDITED)--Pro forma net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during each period. In addition,

F-28
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
for the purposes of pro forma net loss per share, all shares of Class A, B, C,
D, E, and F preferred stock, which are convertible into common stock on a
two-for-one basis and will be converted to common stock upon closing of an
initial public offering, have been treated as though they were common stock in
all periods for which such shares were outstanding (see Note 18).

3. INVENTORY

Inventory consisted of the following at September 30, 2000:

<TABLE>
<S> <C>
Raw materials............................................. $612,982
Work-in-process........................................... 97,718
--------
$732,700
========
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at September 30, 2000:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Machinery and equipment.............................. 5 years $ 383,790
Furniture and fixtures............................... 7 years 195,638
Office equipment..................................... 3 years 440,897
Leasehold improvements............................... lease term 115,178
Equipment under capital lease obligations............ 2-3 years 419,841
----------
Total................................................ 1,555,344
Less accumulated depreciation and amortization....... (547,494)
----------
Property and equipment, net.......................... $1,007,850
==========
</TABLE>

5. NOTES PAYABLE TO INVESTORS

On January 7, 2000, the Company received $600,000 of bridge loans bearing
annual interest at a rate of 12.5%; $200,000 of these loans were repaid in
February 2000 and the remaining loans were converted into Class E redeemable
convertible preferred stock (the "Class E Stock") in conjunction with the
Class E conversion (see Note 9).

In February, March and April 2000, the Company received additional bridge
financing of $1,400,000 from previous investors and $4,100,000 from new and
previous investors (the "Class F Bridge Loans"). The Class F Bridge Loans bore
annual interest at a rate of 6% and were due on demand. Of these loans
$5,200,000 was converted into Class F redeemable convertible preferred stock
("Class F Stock") in May 2000 (see Note 8). The remaining $300,000 plus interest
was repaid in April 2000.

F-29
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

5. NOTES PAYABLE TO INVESTORS (CONTINUED)
In conjunction with the April bridge loans, investors were granted warrants
to purchase 82,000 shares of the Company's common stock at $2.10 per share.
These warrants expire April 21, 2005. The estimated fair value of such warrants
was determined to be $27,000. This value was charged to interest expense in the
nine months ended September 30, 2000.

6. CAPITAL LEASE OBLIGATIONS

The Company leases equipment under capital lease agreements expiring through
2002. Future obligations under such capital leases as of September 30, 2000 are
as follows:

<TABLE>
<S> <C>
2000........................................................ $ 35,711
2001........................................................ 96,207
2002........................................................ 29,244
--------
161,163
Less amount representing interest........................... 13,163
148,000

Less current portion of capital lease obligations........... 97,482
--------
Capital lease obligations, excluding current portion........ $ 50,518
========
</TABLE>

7. COMMITMENTS

The Company leases office and light manufacturing space under operating
leases expiring through September 30, 2007 with a five year renewal option and
an operating lease for office equipment expiring October 2001. At September 30,
2000 the Company has provided a lessor with an irrevocable letter of credit in
the amount of $450,000. This letter of credit is secured by a cash deposit.
Future minimum annual lease payments under noncancelable operating leases as of
September 30, 2000 are as follows:

Total rent expense was $155,579 and $230,370 for the nine-month periods
ended September 30, 1999 and 2000, respectively.

8. PREFERRED STOCK

F-30
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

8. PREFERRED STOCK (CONTINUED)
funds then generally available prior to any payment with respect to the holders
of common stock, $4.45 per share, plus any declared and unpaid dividends
thereon. Holders of the Class A Stock have the right to receive the same
dividends as declared by the Board of Directors on common shares on an
"as-if-converted" basis. The Class A Stock will automatically be converted into
shares of common stock upon the closing of a public offering of common stock of
the Company, upon a vote of the Board of Directors or upon the automatic
conversion of the Class D preferred stock (see Note 9). Class A Stock is
subordinate to Class D, E and F preferred stock and has parity with Class B and
C preferred stock. The Class A Stock does not have redemption features.

CLASS B AND C CONVERTIBLE PREFERRED STOCK The Company has authorized both
Class B and C convertible preferred stock. Only Class C shares are outstanding.
Class B shares were never issued. Class B and C shares have identical conversion
and voting rights. Class C convertible preferred stock ("Class C Stock") is
convertible into two shares of common stock at the option of the holder (see
Note 18). The holders of the Class C Stock have voting rights equivalent to the
number of shares of common stock into which their shares of Class C Stock
convert. The Class C Stock has the right to receive the same dividends as
declared by the Board of Directors on common shares on an "as-if-converted"
basis. The Class C Stock will automatically be converted into shares of common
stock upon the closing of a public offering of common stock of the Company, upon
a vote of the Board of Directors, upon the automatic conversion of the Class D
preferred Stock (see Note 9), or upon conversion of the Class A Stock. Class B
and C Stock have parity with Class A Stock in liquidation and are subordinate to
Class D, E and F preferred stock. The Class B and C Stock do not have redemption
features.

9. REDEEMABLE PREFERRED STOCK

CLASS D REDEEMABLE CONVERTIBLE PREFERRED STOCK--The Company has authorized
6,000,000 shares of Class D convertible preferred stock ("Class D Stock") with a
par value of $.01 per share. On October 23, 1998, the Company issued 1,900,000
shares of Class D Stock and received net proceeds of approximately $4,486,000.
Issuance costs totaled approximately $264,000 and are being accreted to the
carrying value of the Class D Stock over the period to the stock's earliest
redemption date. Each share of Class D Stock is convertible into two shares of
common stock at the option of the holder (see Note 18). The holders of the
Class D Stock have voting rights equivalent to the number of shares of common
stock into which their shares of Class D Stock convert. Holders of the Class D
Stock are also entitled to appoint representatives to the Board of Directors.
The Class D Stock earns cumulative dividends at an annual rate of 12.5% through
May 23, 2000 and 6% on and after this date, payable quarterly. Dividends can be
paid in shares of Class D Stock through May 23, 2000 and after this date, are
payable only in cash. Cumulative dividends not paid on Class D Stock total
$1,147,327 as of September 30, 2000. Upon liquidation, holders of Class D Stock
are entitled to receive, out of funds then generally available, unpaid dividends
previously declared or accrued and a per share amount of $2.50. The Class D
Stock is redeemable by the holder at any time after December 31, 2004 for the
stated value of $2.50 per share plus accrued, but unpaid, dividends. The
Class D Stock will automatically be converted into shares of common stock upon a
change in ownership of 50% of the

F-31
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

9. REDEEMABLE PREFERRED STOCK (CONTINUED)
Company's outstanding voting stock, upon a merger or consolidation of the
Company or upon the sale of significant assets of the Company, or upon the
closing of a qualified public offering.

CLASS E REDEEMABLE CONVERTIBLE PREFERRED STOCK--During April 2000, the
Company authorized 2,000,000 shares of $.01 par value per share Class E Stock.
On April 7, 2000, the Company converted $3,550,000 of bridge loans plus interest
of $275,559 into 1,226,141 shares of Class E Stock (the "Class E conversion").

Each share of Class E Stock is convertible into two shares of common stock
at the option of the holder (see Note 18). Holders of the Class E Stock have
voting rights equivalent to the number of shares of common stock into which
their shares of Class E Stock convert. Holders of the Class E Stock also share
with the Class D Stock shareholders the right to appoint representatives to the
Board of Directors. The Class E Stock earns cumulative dividends at an annual
rate of 12.5% through May 23, 2000 and 6% on and after this date, payable
quarterly. Dividends are payable in shares of Class E Stock through May 23, 2000
and after this date are payable in cash. Cumulative dividends not paid on
Class E Stock total $143,347 at September 30, 2000. Upon liquidation, holders of
Class E Stock are entitled to receive, out of funds then generally available
unpaid dividends previously declared or accrued and a per share amount of $3.12.
The Class E Stock is redeemable by the holder at any time after December 31,
2004 for the stated value of $3.12 per share plus accrued but unpaid dividends.
The Class E Stock will automatically be converted into shares of common stock
upon a change in ownership of 50% of the Company's outstanding voting stock,
upon a merger or consolidation of the Company, upon the sale of significant
assets of the Company, or upon consummation of a qualified public offering.

Class E Stock is senior to Class A, B and C Stock, on parity with Class D
Stock and subordinate to Class F Stock.

In conjunction with the above-mentioned Class E conversion, warrants
totaling 630,000, issued in conjunction with the issuance of the Senior Notes in
August 1999, were cancelled. In exchange, warrants to purchase 306,535 shares of
Class E Stock at $2.50 per share were issued. These warrants expire April 7,
2005. The estimated fair market value of these warrants is approximately
$344,000. Since these warrants replace the August 2, 1999 warrants, the amount
allocated to the August 2, 1999 warrants have been reallocated to Class E
Redeemable Preferred Warrants and the remaining $174,000 has been charged to
interest expense in the nine months ended September 30, 2000. Pursuant to the
stock purchase agreement related to the Class E Stock, the Company is bound by
certain covenants.

CLASS F REDEEMABLE CONVERTIBLE PREFERRED STOCK--During May 2000 the Company
authorized 7,500,000 shares of $.01 par value Class F Stock. On May 23, 2000,
the Company sold 6,785,711 shares of Class F Stock for a total of $28,500,000,
and simultaneously, outstanding Class F Bridge Loans of $5,200,000 were
converted to Class F Stock at the rate of $4.20 per share.

F-32
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

9. REDEEMABLE PREFERRED STOCK (CONTINUED)

Each share of Class F Stock is convertible into two shares of common stock
at the option of the holder (see Note 18). Holders of the Class F Stock have
voting rights equivalent to the number of shares of common stock into which
their shares of Class F Stock convert. The Class F Stock earns cumulative
dividends at an annual rate of 6%, payable quarterly. Dividends are payable in
cash. Cumulative dividends not paid on Class F Stock total $610,707 at
September 30, 2000. The Class F Stock will automatically be converted into
shares of common stock immediately prior to a merger or consolidation of the
Company, or upon the sale of significant assets of the Company or the
consummation of a qualified public offering.

The Class F Stock shareholders are entitled to appoint representatives to
the Board of Directors. The Class F Stock is redeemable by the holder at any
time after May 23, 2005 at a price per share equal to the sum of the Class F
Stock stated value, initially $4.20 per share, multiplied by the number of
shares to be redeemed, plus all accrued but unpaid dividends.

The Class F Stock is senior to all other classes of preferred stock.

Upon liquidation, holders of the Class F Stock are entitled to receive, out
of funds then generally available, unpaid dividends previously paid or accrued
and a per share amount equal to the Class F Stock stated value.

Pursuant to the stock purchase agreement related to the Class F Stock (the
"Class F Agreement"), the Company is bound by certain covenants.

10. COMMON STOCK

RESERVED SHARES--At September 30, 2000, 40,350,222 shares of common stock
were reserved for issuance under the Company's stock option plan, outstanding
warrants and for the potential conversion of preferred stock.

11. STOCK WARRANTS

In conjunction with the issuance of the Senior Notes in August 1999, the
Company issued warrants to four investors to purchase 315,000 shares of Class E
Stock (see Note 9) at an exercise price of $2.50 per share (the "August 1999
warrants"). The estimated fair value of the these warrants at the date of grant
was $170,000. This amount has been recorded as a discount on the Senior Notes
and was charged to interest expense during the nine months ended September 30,
1999 as the Senior Notes are demand notes. These warrants expire on August 2,
2004.

In conjunction with the Class E conversion in April 2000 (see Note 9), the
August 1999 warrants were canceled.

F-33
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

11. STOCK WARRANTS (CONTINUED)
Under the conditions of the Class D Stock offering, the Company issued
warrants in April 2000 to three investors to purchase 712,500 shares of common
stock at $1.67 per share, 712,500 shares of common stock at $2.25 per share, and
712,500 shares of common stock at $3.00 per share. Upon issuance of these
warrants, the Company recorded a dividend of approximately $1,300,000 for the
fair market value of these warrants based on the Black-Scholes option pricing
model. These warrants expire December 31, 2004.

<TABLE>
<CAPTION>
AUGUST 1999 APRIL 2000
WARRANTS WARRANTS
----------- ----------
<S> <C> <C>
Risk-free interest rate.............................. 5.62% 6.15%
Expected life of warrant............................. 30 months 12 months
Expected dividend payment rate, as a percentage of
the stock price on the date of grant............... 0.0% 0.0%
Assumed volatility................................... 60% 73%
</TABLE>

12. STOCK OPTIONS

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

Stock option activity since inception is as follows:

<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at inception....................... --
Granted........................................ 2,314,000 $ .89 $ .38
Canceled, forfeited or expired................. (305,688) .89
---------
Outstanding, December 31, 1999................. 2,008,312 .89
Granted........................................ 3,210,188 3.12 3.62
Canceled, forfeited or expired................. (249,876) .89
Exercised...................................... (157,334) .89
---------
Outstanding, September 30, 2000................ 4,811,290 $2.39
=========
</TABLE>

F-34
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

12. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 2000:

<TABLE>
<CAPTION>
VESTED
WEIGHTED- ----------------------
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE AVERAGE
OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OF OPTIONS PRICE
-------------- ----------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$.89-$6.10 4,811,290 9.32 $2.39 955,373 $ 1.16
</TABLE>

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

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

<TABLE>
<CAPTION>
CUMULATIVE FROM
MAY 8, 1997
(DATE OF INCEPTION)
NINE MONTHS ENDED NINE MONTHS ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2000
----------------- ----------------- -------------------
<S> <C> <C> <C>
Net loss to common shareholders as
reported................................. $(4,240,888) $(12,296,618) $(26,950,474)
Net loss pro forma......................... (4,373,512) (12,737,491) (28,215,826)
Loss per share--as reported................ (251.71) $ (401.09)
Loss per share--pro forma.................. (259.59) (415.47)
</TABLE>

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

<TABLE>
<CAPTION>
1997 1998 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Risk-free interest rate................................... 5.5% 5.75% 6.0% 6.0%
Expected life of option................................... 3 years 3 years 3 years 3 years
Expected dividend payment rate, as a percentage of the
stock price on the date of grant........................ 0% 0% 0% 0%
Assumed volatility........................................ 50% 58% 60% 100%
</TABLE>

F-35
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

13. INCOME TAXES

The components of the provision (benefit) for income taxes consisted of the
following:

<TABLE>
<CAPTION>
PERIOD FROM
CUMULATIVE
FROM
MAY 8, 1997
(DATE OF
NINE MONTH NINE MONTH INCEPTION)
PERIOD ENDED PERIOD ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2000
------------- ------------- --------------
<S> <C> <C> <C>
Federal--deferred...................................... $(1,253,580) $(3,424,470) $(8,052,453)
State--deferred........................................ (221,250) (872,849) (1,688,952)
Increase in valuation allowance........................ 1,474,830 4,296,719 9,741,405
----------- ----------- -----------
Provision (benefit) for income taxes................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>

Taxes during interim periods are computed using the estimated rate effective
for the entire year. Changes to the estimated rate are reflected in periods in
which the estimated charge occurs. A reconciliation of the statutory federal
rate to the effective rate for all periods is as follows:

The components of the Company's deferred tax assets and liabilities
consisted of the following at September 30, 2000:

<TABLE>
<S> <C>
Long-term assets:
Net operating loss carryforwards.......................... $ 8,066,190
Research and development credits.......................... 998,059
Loss on sales commitments................................. 438,280
Other..................................................... 238,876
-----------
Net deferred tax assets before valuation allowance.......... 9,741,405
Less valuation allowance.................................... (9,741,405)
-----------
Net deferred tax assets..................................... $ --
===========
</TABLE>

The valuation allowance increased by $4,296,719 in 2000, primarily due to
the generation of net operating loss carryforwards and credits for which
realization is not reasonably assured.

The Company has available for future periods federal and state tax net
operating loss carryforwards of approximately $11,850,000 and $11,616,000,
respectively, as of December 31, 1999, the last date for which the Company has
filed a tax return. In addition, the Company has business credits

F-36
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

13. INCOME TAXES (CONTINUED)
of approximately $525,000 as of December 31, 1999. The net operating loss
carryforwards expire beginning in 2012 and 2002 for federal and state tax
purposes, respectively. The federal research and development credits begin to
expire in 2012. The Company did not pay any income taxes from inception to
September 30, 2000. Under the provisions of the Internal Revenue Code, certain
substantial changes in the Company's ownership may have limited, or may limit in
the future, the amount of net operating loss carryforwards which could be
utilized annually to offset future taxable income and income tax liabilities.
The amount of any annual limitation is determined based upon the Company's value
prior to an ownership change.

14. BENEFIT PLAN

The Company operates a 401(k) Profit Sharing Plan (the "Plan") for its
full-time employees. Each participant in the Plan may elect to contribute a
percentage of his or her annual compensation to the Plan on a pre-tax basis up
to the annual limit established by the Internal Revenue Service. The Company
matches employee contributions at a rate of 50% up to the first 6% of the
employee's contributions. The Company may also elect to make a profit-sharing
contribution based on the discretion of the Board of Directors. Employee
contributions are fully vested. Company matching and profit sharing
contributions vest 20% after two years of service consisting of at least
1,000 hours per calendar year and 20% annually thereafter. Company contributions
were $29,601, $60,701, and $122,040 during the nine-month periods ended
September 30, 1999 and 2000, and the period from May 8, 1997 (date of inception)
to September 30, 2000, respectively.

15. RELATED-PARTY TRANSACTIONS

CONSULTING AGREEMENTS--The Company entered into consulting agreements with
three investors in 1998 and 1997. The contracts are seven-year agreements,
renewable annually thereafter, for consulting services to be provided by the
investors in exchange for annual issuances of shares of the Company's Class A
Stock. During the nine-month periods ended September 30, 1999 and 2000 and the
period from May 8, 1997 (date of inception) to September 30, 2000, $225,000,
$439,000 and $942,500, respectively, was recorded as consulting expense relating
to these agreements, and 265,000 shares of Class A Stock, were issued or
issuable as compensation under these contracts. Prepaid and accrued consulting
expenses have been recorded annually, based on the terms and dates of the
consulting agreements. The services provided by the investors were recorded
based upon the value of the securities issued. These contracts all expire
immediately upon an initial public offering of the Company's common stock.

SERVICES AGREEMENTS--SatCon performs certain research and development,
administrative and other services and sells certain goods to the Company.
Amounts paid to SatCon for such services rendered amounted to approximately
$45,000, $478,000 and $2,331,000 during nine-month periods ended September 30,
1999 and 2000 and the period from May 8, 1997 (date of inception) to
September 30,

F-37
<PAGE>
BEACON POWER CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999 (UNAUDITED) AND THE PERIOD MAY 8, 1997 (DATE OF
INCEPTION) TO SEPTEMBER 30, 2000

15. RELATED-PARTY TRANSACTIONS (CONTINUED)
2000, respectively. As of September 30, 2000 there was $331,904 due to SatCon
relating to such goods and services.

16. CONTINGENT WARRANTS

Under the conditions of the Class F Agreement, the Company has a contingent
obligation to issue warrants for shares of common stock equal to $14,250,000
divided by the warrant price. The warrant price is defined as 37.5% of the lower
of: (i) the effective price per share of common stock paid by the acquirer in a
sale transaction as determined by a nationally recognized banking firm chosen by
the Company and approved by a majority of the purchasers that hold a majority of
the aggregate preferred shares and conversion shares (shares of common stock
issuable upon conversion of the Class F Stock) as of the date of consummation of
such sale transaction and (ii) the initial price in the first qualified offering
of the Company's common stock. These warrants expire on May 23, 2005 and no
warrants have been issued at this time.

17. SUBSEQUENT EVENT

On October 24, 2000, the Company issued 240,000 warrants to an investor at
an exercise price of $2.10 per share in conjunction with an agreement by an
affiliate of that investor to provide the Company with technical expertise. One
half of the warrants vest immediately, the remainder vest as services are
utilized. The fair market value of the vested warrants will be charged to
expense in the fourth quarter and the remainder as services are provided.

18. STOCK SPLIT

F-38
<PAGE>
[The back cover consists of a collage of pictures showing field trial
installation sites.]
<PAGE>
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8,000,000 SHARES
BEACON POWER CORPORATION
COMMON STOCK

[LOGO]

------

P R O S P E C T U S

NOVEMBER 16, 2000

---------

SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS

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