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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended September 30, 2002

Commission file number 1-11512

SATCON TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)

(617) 661-0540
(Registrant's telephone number, including area code)

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

Title of Class
Common Stock, $.01 Par Value

Securities registered pursuant to Section 12(g) of the Act: None

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

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

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o    No ý

        The aggregate market value of the Registrant's Common Stock, $.01 par value per share, held by non-affiliates of the Registrant was $12,520,803 based on the last reported sale price of the Registrant's Common Stock on the Nasdaq National Market as of the close of business on the last business day of the Registrant's most recently completed second fiscal quarter ($3.25). There were 16,904,827 shares of Common Stock outstanding as of December 27, 2002.

        DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for its 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

PART I

Item 1. BUSINESS

Recent Developments

        We need an immediate infusion of equity capital to sustain our operations. We anticipate that our existing cash and cash resources will enable us to fund our operations through only approximately January 15, 2003. We are operating under a forbearance agreement with Silicon Valley Bank which is currently enabling us to borrow minimal levels of working capital from Silicon Valley Bank. On December 13, 2002, we executed a term sheet with an institutional investor to raise between $5 and $7 million of equity capital. The term sheet contemplates that $3 to $5 million of the equity investment will be funded during the week of January 6, 2003 and the remaining $2 million will be funded promptly after the registration statement we are required to file with the Securities and Exchange Commission is declared effective registering all of the underlying equity securities in this financing.

        If Silicon Valley Bank decides to discontinue lending to us or we are unable to close an equity financing with the institutional investor or other investors prior to January 15, 2003, we will be forced to furlough or permanently lay off a significant portion of our work force. This will have a material adverse effect on us. Under these circumstances, we may not be able to continue our operations. Further, without additional cash resources, we may not be able to keep all or a significant portion of our operations going for a sufficient period of time to enable us to sell all or portions of our assets or operations at other than distressed sale prices. Even if we are able to consummate the financing with the institutional investor prior to January 15, 2003 and retain a credit facility with Silicon Valley Bank, we may still require additional cash resources in the future to fund our anticipated operating losses, to grow, to develop new or enhance existing products and services and to respond to competitive pressures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" below.

        Under the proposed terms of the term sheet with the institutional investor, we would issue shares of convertible preferred stock for $15,000 per share and warrants to purchase 5,000 shares of common stock for each share of convertible preferred stock issued. The preferred stock will be convertible into a number of shares of common stock equal to 15,000 divided by the conversion price of the stock (which will initially be $1.50). The convertible preferred stock will accrue dividends of 8% per annum, increasing to 12% on January 1, 2004. Under the proposed terms of the term sheet with the institutional investor, we may opt to pay the dividends in cash or in kind. Nevertheless, our current credit facility prohibits, and future credit facilities will likely prohibit, the payment of any cash dividend. The dividend for the first year will be paid at the closing in shares of common stock, valued based on the conversion price of the preferred stock, and thereafter will be paid on a quarterly basis. The warrants will be exercisable for a five-year term and will have an exercise price of $2.00 per share.

        As mentioned above, the term sheet with the institutional investor contemplates that we will issue between $3 million and $5 million of the convertible preferred stock at a first closing during the week of January 6, 2003. The remaining $2 million will be funded promptly after the registration statement we are required to file to register the common stock issuable upon conversion of the convertible preferred stock and exercise of the warrants is declared effective. We are required to file the registration statement within 30 days after the first closing and use our best efforts to have the registration statement declared effective within 90 days after the first closing. If the registration statement is not declared effective within 120 days of the first closing, we will be obligated to pay to the investors liquidated damages equal to 1.5% of the amount invested for each 30-day period, beginning 90 days after the first closing, that the registration statement is not effective.

        If we issue shares of common stock at a purchase price below the conversion price of the convertible preferred stock or the exercise price of the warrants, the conversion price and the exercise price, as applicable, will be adjusted on a weighted average basis.

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        If we consummate any private equity or equity-linked financing within 12 months after the first closing, the investors in our convertible preferred stock will have a right of first offer to purchase all or part of that financing. In addition, if we enter into a private equity or equity-linked financing within 24 months after the first closing, the investors will have the rights to exchange their shares of convertible preferred stock at the stated value of the securities issued in that financing.

        To date, the documentation relating to the financing with the institutional investor has been produced by counsel to the institutional investor but has not been finalized. There can be no guarantee that we will be able to secure financing with the institutional investor on these or any other terms, or that we will be able to successfully close this financing and raise the $5 million to $7 million contemplated by the term sheet.

        Any securities offered to the institutional investor will not be or have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.

Overview

        SatCon was organized as a Massachusetts corporation in 1985 and reincorporated as a Delaware corporation in 1992. We are developing enabling technologies for the emerging critical power marketplace where power quality and uninterruptible power are important. We design, develop and manufacture high-efficiency high power electronics and a variety of standard and custom high-performance machines for specific applications. Our critical power products convert, store and manage electricity for businesses and consumers, the U.S. Government and the military that require high-reliability electronics and controls and high-quality, uninterruptible power. We are utilizing our engineering and manufacturing expertise to develop products we believe will be integral components of distributed power generation and power quality systems. Our specialty motors are typically designed and manufactured for unique customer requirements such as high power-to-size requirements or high efficiency.

        We have been developing technology in power and energy management since our inception. Power and energy management is the combination of products and technology to improve the efficiency of machines and systems in the generation, storage or usage of energy. During fiscal year 2002, we focused on the development of a 2.2 megawatt Rotary UPS system, a three phase utility multimode inverter for on-site power generation and modular power control modules for potential application on an "all-electric" ship. In some critical power applications, customers cannot afford even a millisecond of power outage. These potential customers will need and demand reliable power all the time.

        Prior to 1993, we were primarily funded through research and development contracts with the U.S. government. These contracts were directed at developing new technologies in motion control, control software and electronics. Through this work, we built an engineering base in magnetics, motor/drive technology, digital signal processing and high-speed electronics. From 1993 to 1996, we expanded that base through commercially-funded research and development to include high-power electronics, high-density packaging and advanced materials. Together, these engineering skills formed the foundation for our power and energy management technology. Since 1996, we have concentrated on employing that technology to solving market needs and transitioning from technology development to product development and manufacturing.

        Since 1996, our revenue has increased from $9.4 million, primarily from funded research and development, to $41.6 million in 2002, of which $30.8 million, or 74%, was derived from product sales and the balance was from funded research and development and other revenue. We are also introducing new products, which we believe we can transition into commercial production over the next few years, products such as our Rotary Uninterruptible Power Supplies, Power Conditioning Systems and Power Control Modules.

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        Since 1996, we have expanded our business and capabilities through several acquisitions. In January 1997, we acquired our MagMotor division, a manufacturer of custom and standard electric motors. In April 1997, we acquired Film Microelectronics, Inc., a manufacturer of thin film substrates and hybrid microelectronics. In January 1999, we acquired Inductive Components, Inc., a value-added supplier of customized electric motors, and Lighthouse Software, Inc., a supplier of control software for machine tools. We acquired HyComp, Inc., a manufacturer of hybrid microelectronics in April 1999 followed by Ling Electronics, Inc., a manufacturer of shaker vibration test systems, power converters, amplifiers and controllers, which we acquired in October 1999. In November 1999, we acquired intellectual property, tooling and other assets from Northrop Grumman Corporation used in their power electronics business area. In July 2001, we acquired substantially all of the assets of Inverpower Controls, Ltd., a manufacturer of power electronics and high-speed digital controls for use in industrial power and power quality systems. Inverpower also has UL and CE certification capability. On September 27, 2002, we acquired the data conversion product line from Sipex Corporation.

        These acquisitions have provided us with increased revenues, a manufacturing capability to transition our technology into commercial products, and a market presence from which we can derive the need for new products based on our technology. Over the past five years, we have sought to expand our markets in power and energy management to include telecommunications, industrial automation, semiconductor manufacturing, aircraft, high-reliability shipboard power conversion and controls and electric and hybrid-electric vehicles and distributed power generation. We sell our current products into the following markets:

        Revenues for our fiscal years ended September 30, 2002, 2001 and 2000 were $41.6 million, $41.7 million and $31.1 million, respectively. We operate through three business units, which sell these products as follows:

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Power Systems—Power conversion systems, power electronics systems, digital control software, high performance motors, and vibration test systems for the UPS and power quality, distributed power generation, hybrid-electric vehicles, industrial automation, machine tools and semiconductor manufacturing markets. In fiscal year 2002, revenue from our Power Systems business unit was approximately $19.9 million.

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Electronics—Hybrid microcircuits and electronic components for aircraft, satellites, defense system, telecommunications and medical instruments. In fiscal year 2002, revenue from our Electronics business unit was approximately $10.9 million.

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Applied Technology—Intelligent electronics systems, controls, motors and magnetic structures for defense and government applications such as shipboard electronics and military and commercial hybrid-electric vehicles. In fiscal year 2002, revenue from our Applied Technology business unit was approximately $10.8 million.

        In 2002, we focused our new product development efforts on combining our high-power electronics and control systems into enabling components of critical power systems such as our Rotary

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Uninterruptible Power Supply (UPS) and Power Quality System, our Power Conditioning Systems for distributed power generation and Power Control Modules for use in the U.S. Navy's future "all-electric" ships. In concentrating our efforts on these critical power systems, we focused our resources toward completing product development and building and testing prototypes. We have also conducted customer surveys to understand market requirements. We have established some strategic relationships with key customers and suppliers, and have successfully demonstrated our UPS, Power Quality and Distributed Power Generation products. We believe that there is a developing market demand for these products.

        During fiscal 2002, we also focused our efforts on developing our management team, cutting costs and reducing our cash burn rate. We added new members to our management team that we believe will help enable us to accomplish our strategic objectives of completing our product development efforts while reducing our cost structure.

        In fiscal 2002, Mike Williams came in to serve as senior Vice-President and General Manager of SatCon Power Systems. Mike began his career with General Electric (GE) in 1969 in Lynn, Massachusetts developing large turbine and aircraft engines and most recently he managed the Industrial Systems Solutions division. Also joining us this past fiscal year was our new Chief Financial Officer, Ralph Norwood. Ralph worked for over twenty years at Polaroid Corporation where he served as both the vice president and treasurer and the vice president and controller of the corporation.

        We also focused our efforts in fiscal 2002 toward streamlining our costs. In our first quarter, we expended $7.9 million in cash with a loss of $5.3 million on revenues of $8.3 million. The cash burn was due in part to spending primarily on product development and capital expenses related to our UPS and Power Quality products. We realized that such expenditures would have to be reduced significantly given economic conditions. We immediately sought ways to reduce cash burn and reduce our loss position while attempting to recover our revenue growth.

        We reduced our cash burn to $5.0 million in the second quarter, $3.5 million in the third quarter and $2.1 million in the final quarter. We also improved our earnings position by reducing our loss to $5.0 million in the second quarter, including a $1.5 million charge for restructuring, and to approximately $3.5 million in the last two quarters. At the same time we increased revenue from $8.3 million in the first quarter to $11.2 million in the fourth quarter and a total for the year of $41.6 million.

Industry Background

        We believe the markets for critical power products are entering a period of expansion. UPS and power quality; distributed power, such as on-site power generation; "all-electric" ships and "fly-by-wire" aircraft that replace mechanical systems with electrical ones; hybrid-electric vehicles, that replace conventional internal combustion engines with a combination of a smaller internal combustion engine and electric motors; among others, are product areas that are approaching commercialization. In the United States, this expansion is being driven by several factors, including:

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Growing demand for high-quality, high-reliability power, as more mission-critical and sensitive electronics are interconnected. The growing importance—and the proliferation of—electronics and computer networks that are power-quality sensitive has heightened the awareness of the importance of the quality and reliability of electricity. As the need for high-quality power grows, avoiding downtime and damaged equipment due to power-related problems will become increasingly important.

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Increasing demand for electricity, driven by the proliferation of computers and electronics technology. The demand for electricity has increased rapidly in recent years due in large part to the use of high speed, high power electronics, complex defense systems, computer based manufacturing

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equipment, e-commerce and telecommunications systems. This growth reflects a trend toward electrification of energy use throughout the developed world.

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Increased use of electrical systems versus mechanical systems. There is a growing displacement of higher efficiency electrical systems replacing older mechanical system technology. The change is taking place as we see more electrified platforms like the U.S. Navy's "all-electric" ship, increased electrification of the automobile and a growing proliferation of computer based industrial machining and manufacturing. These large electrical systems are being made possible by higher power, faster electronics and have created a market for our power conversion and control systems as components of larger critical power systems.

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Growing environmental concerns regarding pollution from transportation and conventional power generation. Among the most significant environmental effects of energy production and consumption is the emission of greenhouse gases, such as carbon dioxide, methane and nitrogen oxides. The United States, as one of the world's largest producers and consumers of fossil fuels, is responsible for a major portion of the global energy-related emissions. Utilities, due to their reliance on coal-burning power plants, and automobiles are two of the largest sources of air pollution. Global environmental concerns are emphasizing the need to find cleaner forms of transportation and power generation such as hybrid-electric vehicles and fuel cell power generation sources.

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Growth in alternative energy sources such as fuel cells, photovoltaics and wind-turbines among others. Because of environmental concerns and the need for highly reliable power, these alternative energy power generation sources are becoming more prevalent as supplements, and sometimes replacements to, the utility grid. Because they do not generate useable electrical power at the source, they require high power electronics and controls to convert the electricity generated into useable, computer grade electricity.

        As a result of market dynamics, power generation uncertainty and environmental concerns, business and government are seeking more reliable, cleaner and more cost-effective solutions to their critical power needs. The demand for reliable, high-quality, cleaner power is creating a growing market for distributed power generation and power quality systems. All of these systems require critical power products to convert, store and manage electricity. In order to be commercially viable and operate effectively, these critical power products must be highly reliable, efficient, low-cost and compact. Many of these products must be highly customized to meet the evolving needs of the distributed power generation and power quality marketplace. We believe this provides us with an opportunity to apply our technical expertise to meet these needs and to manufacture and supply critical power products. Market dynamics, power generation uncertainty and environmental concerns have also lead to the development of the following markets:

Uninterruptible Power Supply and Power Quality Market

        UPS systems maintain a predictable quality of electricity during power outages or periods of low power quality. These systems can be used as a replacement to the electricity grid for an unlimited time, needing only to be refueled. In addition to their primary role of providing uninterruptible power in the absence of the grid, our UPS system is designed to work in conjunction with the electricity grid to provide high quality power, without the fluctuations caused by power surges, sags and brownouts. These electrical disturbances can also cause system malfunctions within automated industrial processes, data centers or other industries with computer driven systems. As a result, UPS and power quality systems are used to support the operation of computer centers, manufacturing facilities and communication and other electronic networks in the event of power losses and are particularly important to those users who operate 24 hours a day, seven days a week, or where there are critical operations that cannot be interrupted even for one millisecond.

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        Currently, when electrical power is lost or its quality drops, lead-acid batteries provide back-up electricity until a generator can be manually engaged. Batteries have poor reliability and reduced life expectancy. The dangers of explosion and acid spills are additional environmental concerns associated with lead-acid batteries.

Distributed Power Generation Market

        With the deregulation of the electric utility industry, the ability to offer new forms of electrical power generation such as distributed, on-site, power generation is creating new markets, products and opportunities. Distributed power, that is power generated independent of the electric utility grid, locates power-generating capability closer to the end user. The distributed generation of electrical power from clean diesels, microturbines, solar arrays, wind turbines or fuel cell systems is potentially an environmentally cleaner, more efficient and more reliable means of producing electricity when compared to conventional generation and distribution methods. Distributed power generation systems can also alleviate congestion on highly loaded utility distribution networks and offer an alternative to power line extensions in remote regions. Fuel cells, microturbines and photovoltaics are technologies that are being developed by several companies to address the distributed power generation market.

Defense Systems Market

        Defense systems require high reliability electronics. With the continuing electrification of modern defense systems, the need to distribute and manage electrical power has become more critical. Aircraft, transportation and ship systems are becoming more sophisticated and the electronics required for these systems demand greater reliability and improved performance in smaller packages. In some instances electrical systems are replacing entire mechanical systems to gain performance advantages and reduce overall maintenance costs.

        While aircraft systems continue to require high reliability electronics like those used in heads-up displays or cruise missile video electronics, new systems, like "fly-by-wire" aircraft that employ increasing numbers of electrical systems to replace mechanical systems are being developed. New "all-electric" ships are being designed to replace mechanical systems with electrical systems both in the distribution of electricity and the use of it in such applications as "all-electric" gun systems.

        New secure communication systems require higher speed amplifiers. New airborne mine sweeping equipment requires modern compact power conversion equipment. New radar systems require more efficient electronics, and many of the defense electronics systems require vibration testing.

Hybrid-Electric Vehicles

        Prices of oil and refined products will strongly influence the demand for hybrid-electric vehicles. In the last year, significant increases in crude oil and gasoline prices have renewed a national public policy debate regarding substitute fuel sources. We believe these higher prices, if sustained, will increase demand for substitute fuel sources and may result in regulatory incentives to develop and commercialize vehicles powered by alternative fuel sources.

        We believe that fuel cell hybrid-electric vehicles have the potential to be the leading alternative to internal combustion engines in meeting clean air initiatives while offering greater driving range and performance than electric vehicles. Hybrid-electric vehicles can reduce air pollution while offering greater driving range and performance than electric vehicles. Hybrid-electric vehicles function by creating mechanical energy from a source such as an internal combustion engine or fuel cell. The mechanical energy is then transformed into electricity by a generator and transferred to an electric drive train, which propels the vehicle. Excess electricity is stored in an energy storage system consisting of a battery or flywheel. All hybrid-electric vehicles require complex power and control electronics to convert, condition and manage electricity, as well as high-performance motors, electric drive trains and energy storage systems.

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Our Solution

        Our solution is to provide critical power products and systems that encompasses the following key attributes demanded by the critical power marketplace:

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Performance. At a minimum, distributed power generation and power quality systems must provide the same degree of quality power that is provided by the traditional electric utility system that supplies electric power for commercial, industrial and residential usage. Our products use proprietary designs to ensure that high-quality power is produced during peak as well as steady-state operations.

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Reliability. We design our products to support the long-life, always-on requirements of the distributed power generation and power quality markets. We have experience designing and manufacturing high-reliability, long-life electronics for applications such as aircraft navigation systems and satellite uplink electronics. We design, manufacture and test our electronics to last at least fifteen years.

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Efficiency. The overall efficiency of a distributed power generation system, or its ability to deliver power with minimum energy loss, is vital to its effective commercialization and depends on the efficiency of all of its component parts. We apply our power electronics expertise to design and manufacture our products to meet the efficiency needs of our customers as defined by their specifications and the end use of the product.

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High Power Density. High power density, or the ability to convert, condition and manage large amounts of energy within a compact design, is required for cost reduction and is critical in applications such as automobiles where weight and space requirements are stringent. We design our products to meet the distributed power market's demands for high power density.

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Flexibility. Due to the rapidly evolving nature of the distributed power and power quality industries, our engineers work closely with our customers to address overall systems design issues as well as to ensure that our products meet their system specifications. We develop and manufacture our products for use in various distributed power generation and power quality systems such as fuel cells, microturbines, cogeneration systems and UPS systems that are modular and scalable to meet a wide range of power requirements.

Strategy

        Our strategy is to use our expertise and proprietary technologies to leverage SatCon into a position of leadership as a provider of critical power systems for a variety of applications including UPS and power quality systems, alternative energy and distributed power generation systems, defense systems, clean transportation and industrial automation. Our strategy to leverage ourselves into a leadership position is two-fold: first, since the power control system is an enabler for critical power products, we believe that our control system expertise positions us to be a key supplier to the marketplace; second, we believe that we possess the enabling technology in power electronics, magnetics and software controls to position SatCon to compete as an integrator of critical power systems—developing innovative power systems using our power electronics and control software and integrating third party "best of breed" power generation and energy storage.

        Our critical power customers include semiconductor fabricators, industrial manufacturers, defense and aerospace contractors, and transportation and communication systems. We believe that by designing and developing our products with cross-market applications, our success should be less dependent upon the adoption of a specific application or on the business of a single market participant. To accomplish our objective, we are also pursuing the following:

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Design and develop proprietary products that are integral components in UPS, power quality and distributed power generation systems. We believe that we have a competitive advantage resulting

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from our engineering expertise and proprietary knowledge in the areas of power electronics, electromagnetics, mechanical and thermal dynamics, system controls and microelectronic design.

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Establish our products as industry standards and become a major supplier to the UPS and power quality, distributed power generation, military, hybrid-electric vehicle and industrial automation markets by working with our customers to determine cost and performance requirements as we design and build our products to meet those requirements.

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Develop manufacturing capabilities to give us a competitive advantage in our markets. We are developing semi-automated manufacturing processes and have expanded our manufacturing capacity in an effort to reduce costs as production volumes increase. In addition to installing low-cost, high-volume manufacturing capacity at existing facilities, we intend to continue to pursue our strategy of enhancing our manufacturing capabilities through acquisitions.

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Acquire new products, manufacturing capabilities and technologies. We believe that the opportunistic acquisition of new products, manufacturing capabilities and technologies will enhance our competitive position and growth opportunities. Historically, the acquisition of products or companies has been a key element of our business strategy. Our first acquisition, MagMotor, provided us with revenue in the industrial automation market, and a manufacturing capability with which to build our MagLev™ systems for use in the semiconductor manufacturing industry. Since then, we have had similar experiences with Film Microelectronics, Ling Electronics, the Northrop Grumman power electronics group, Inverpower Controls and most recently, on September 27, 2002, the acquisition of data conversion product lines from Sipex Corporation. These companies brought technology, products and capacity that have enabled us to offer UPS and power quality products to an emerging critical power market and we believe will offer us opportunities for expansion of existing product lines into new markets and with new customers.

Products

        We design, develop and manufacture high-efficiency, high-reliability and long-lived critical power products that convert, store and manage electricity. We are using our electronics and manufacturing expertise to develop products that meet the high-reliability, high-efficiency, low-cost and compact-size requirements of the distributed power generation and power quality markets. Our products are sold through our three business units:

SatCon Power Systems

        SatCon Power Systems manufactures and sells our high power line of critical power systems including our standard lines of high-performance motors for the industrial machinery, factory automation and automotive markets; MagLev™ integrated suspension and motor systems; and Ling Electronics vibration test systems StarSine™ amplifiers. It has also been developing a new line of commercial Rotary UPS Systems for back-up power and power quality, for which we have been completing product development and testing over this past year; power conversion systems for distributed power generation which were in the final stages of development and UL compliance testing in fiscal year 2002 and Inverpower industrial and commercial power conversion and conditioning products. Revenues for our fiscal years ended September 30, 2002, 2001 and 2000 from our Power Systems business unit were approximately $19.9 million, $20.2 million and $14.1 million, respectively.

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        During fiscal 2002, $7.5 million of revenue was generated by the sale of Power Solutions, $6.5 million was generated by the sale of Ling Electronics' shaker vibration test systems, $2.7 million was generated by the sale of magnetic levitation systems to Applied Materials and $3.2 million was generated selling industrial automation and machine tool motors. Motors for fuel cell automobiles have generated little revenue to date as these motors are in the development and test phase.

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Power Solutions.  We sell DC and AC power solutions from 5KW to 200MW, static transfer switches, static voltage regulators, frequency converters and AC arc furnace line controllers. Our product lines include power quality equipment for mitigation of electrical disturbances and power supplies for a variety of industrial, energy and environmental applications. We believe our products provide our customers with solutions that minimize power disturbances, minimize capital and operating costs, reduce energy consumption and improve productivity and quality.



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Shaker Vibration Test Systems.  We sell shaker vibration test systems that enable manufacturers to understand how their mechanical and electronic products will perform after exposure to vibrations. Our shaker vibration test systems are designed to replicate vibrations ranging from continuous shaking to high impact forces such as those arising from dropping a product on the floor or landing a plane. Our shaker vibration test systems are used for testing a variety of products, including small electronic components, computer hardware, consumer electronics, automobiles and aerospace and satellite structures. In addition, since our acquisition of Ling Electronics in October 1999, we have begun to sell a line of digitally modulated power amplifiers under the StarSine™ label. We sell these amplifiers individually and as components of our shaker vibration test systems.



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Magnetic Levitation Systems.  We manufacture magnetic levitation, or MagLev™, systems that enable machinery to rotate or move without contacting other machine parts. Our MagLev™ systems use electro-magnetic fields to lift mechanical components without any surface contact. Sensors within the system determine the actual position of the levitated object and send signals to a high-speed digital controller, which commands electricity to activate the electro-magnets thereby making the object move away from any surface it is about to contact. This is done at extremely high speeds in order to maintain the stability of the levitated object and can be accomplished with objects that spin, such as motors, or objects that move in one direction, like pistons or push rods. Our largest selling MagLev™ system is the integrated suspension and motor, or ISAM, system that is sold to Applied Materials, Inc. for silicon wafer manufacturing.



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Industrial Automation Motors.  We manufacture brush and brushless DC motors for the industrial automation market. These small, high-efficiency motors are available with a variety of options including optical encoders, tachometers, brakes, custom cables and connectors. Our industrial automation motors are typically used in semiconductor equipment manufacturing, medical device assembly and other automated assembly processes.



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Machine Tool Motors.  We manufacture a line of precise positioning motors for use with machine tools such as computer numerical controlled machines. These include machining centers, lathes and milling machines.



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Fuel Cell Vehicle Auxiliary Motors.  We are currently developing a line of high-performance motors for auxiliary uses, such as fuel pumps, in fuel cell hybrid-electric vehicles. We are also developing these high-performance motors for use in commercial and residential fuel cell power generation systems.

SatCon Electronics

        SatCon Electronics designs and manufactures advanced electronic assemblies for the aerospace, defense, wireless and telecom industries including thin film products and custom modules. Revenue for

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our fiscal years ended September 30, 2002, 2001 and 2000 from our Electronics business unit was approximately $10.9 million, $10.6 million and $8.3 million, respectively. The following are descriptions of some of our products within the Electronics business unit:

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Custom Modules—We manufacture standard and custom microcircuits, which are a combination of several electronic components imbedded in a miniature printed circuit board. Due to their size, versatility and high reliability, these hybrid microcircuits are used in a broad spectrum of applications. Using our semi-automated manufacturing capability we build modules, sub-assemblies and fully integrated electronic systems for both military and commercial customers that require compact, high-speed electronic systems.



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Power Modules—SatCon Electronics designs, manufactures and tests modules for high power applications. These modules are used as building blocks for motor control applications in aerospace, automotive, industrial, medical and defense.



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Thin Film Products—Thin film substrates are miniature printed circuits onto which small electronic components are mounted, such as those used in hybrid microcircuits. Our thin film products are integrated into electronic devices that require small, high-reliability components. Substrate and resistor products manufactured by SatCon Electronics are used for high-speed telecommunications applications, military modules and high-frequency wireless devices. We supply components to original equipment manufacturers and suppliers.



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RF Products—SatCon Electronics provides solutions to both military and commercial wireless communications. Using our design, analysis and test capability we build standard and custom amplifiers, switches and passive devices for secure communication systems, cell tower base stations, point-to-point data transmission, and wireless Large Area Networks.

SatCon Applied Technology

        Our Applied Technology business unit designs and builds power conversion products, which include power electronics, high-efficiency machines and control systems for a variety of defense and commercial applications. Our objective is to transition prototype development contracts into multiyear production programs. Revenue for our fiscal years ended September 30, 2002, 2001 and 2000 from Applied Technology was approximately $10.8 million, $10.9 million and $8.7 million, respectively.

        We pursue development programs in areas where we have technical expertise and where we believe there is significant long-term production potential for the developed technology. Technical disciplines represented at our Applied Technology business unit include electromechanics, digital and analog electronics, power electronics and electronic packaging, thermal management, motor dynamics, materials, software development, control technology, and system integration. To date, SatCon Applied Technology has built products for use in distributed power generation, energy storage and power quality, high performance electric machinery, transportation and defense systems, including components for military hybrid-electric vehicles, "all-electric" ships and aircraft subsystems.

        For more information, you can visit our website at www.satcon.com.

Funded Research and Development

        We perform funded research and development in connection with government programs and for third parties. We pursue funded research and development in areas where we have technical expertise and where we believe there is significant commercial application for the developed technology. We have performed funded research and development in connection with the development of each of our product areas.

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        We also have specialized engineering expertise in the areas of power electronics, electromechanics, mechanical and thermal dynamics, system controls and microelectronic design. We have leveraged research and development funding from industry and government sources to design, develop and manufacture electronics for power conversion, amplification and storage, high-performance electric motors, flywheel energy storage systems and system controls software. We continue to pursue industry and government funding to supplement the on-going development of our products.

        In 1999, we entered into an agreement with the U.S. Department of Energy, or DOE, for the research, development and demonstration of a power conversion system for a new generation of hybrid-electric vehicles. Under this government contract, we have been engaged to design a power conversion system that can be manufactured at high volume and low cost. We believe that the resulting design will enable us to enhance our manufacturing capabilities to produce our power conversion products for distributed power generation systems. This program was funded half by us and half by DOE. The total DOE approved budget for this program was $10.0 million through September 29, 2002. As of September 30, 2002, revenues for this program had totaled $2.5 million in fiscal 2002, $3.1 million in fiscal 2001, $3.4 million in fiscal 2000 and $1.0 million in fiscal 1999. We expect to complete final hardware deliveries in the first half of fiscal year 2003.

New Product Opportunities

Rotary Uninterruptible Power Supply (UPS) Systems

        During fiscal year 2002, we continued to work on completing the development of a line of Rotary Uninterruptible Power Supply, or UPS, systems for sale as back up power supplies and power quality systems. Our line of Rotary UPS systems are designed to provide both power quality and UPS functions in power ranges from 250 kilowatts to 2.2 megawatts and beyond in single or multiple unit systems. For comparison, 2.2 megawatts would be enough power to supply 440 homes using an average of 5kw of power. In fiscal year 2002, we concentrated on completing the development and test of the 2.2 megawatt system for industrial and manufacturing operations.

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SatCon's 2.2 Megawatt Rotary UPS System

        Our Rotary UPS product combines a diesel generator, a flywheel energy storage system, electronics and a proprietary control system into an uninterruptible power supply. We believe that this system is an attractive alternative to lead-acid battery based UPS systems due to its seamless transition during power outages, increased reliability, longer life and the ability to operate effectively in remote locations.

Power Conditioning System

        We have developed modular power conditioning systems such as our Three Phase Utility Interactive Multi-Mode Inverter for use in connection with large, commercial sized, fuel cell or microturbine distributed power generation systems that produce power ranging from 200 kilowatts to 5 megawatts. Our power conditioning systems are designed to convert the DC power generated by an alternative energy source, such as a fuel cell, into useable AC power. They also provide the interface with the electric utility grid, an energy storage device, like a battery or flywheel, and the end user applications. These units use a technology that allows them to be combined and scaled to handle high-power requirements. We introduced this product during our 2002 fiscal year.

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SatCon's Three Phase Utility Interactive Multi-Mode Inverter (UL 1741 Compliant)

        In 2002, our Three Phase Utility Interactive Multi-Mode Inverter was determined to be in compliance with the UL 1741 "Standard for Inverters, Converters, and Controllers for Use in Independent Power Systems." At that time, the SatCon power inverter was the highest power rated, on-site generation inverter to comply with the UL 1741 Standard. By meeting the UL 1741 requirements, we believe that our Power Conditioning Systems are well-positioned to become the leading choice for customers interested in creating their own distributed power using fuel cells in conjunction with, or completely separate from, the utility grid. In addition to fuel cell applications, these UL compliant inverters are designed to be compatible with photovoltaics, microturbines and other on-site power generation systems.

Power Control Modules

        As part of a defense contractor team that includes General Atomics and Gibbs and Cox, we have been developing an Integrated-Fight-Through-Power System for potential application to the U.S. Navy's "all-electric" ship. As part of the most recent program phase, awarded in late fiscal year 2002, we are under contract to deliver modular, electrical power converter and control assemblies, or Power Control Modules for land testing. The next phase of the program requires us to deliver power control modules for installation on the RV Triton, a British research vessel, for at-sea testing. As part of the Navy's on-going development of the "all-electric" ship platform, we have been awarded approximately $12.0 million in product development funding to date, $8.9 million of which was awarded in fiscal 2002.

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SatCon's Power Control Modules as Components of the US Navy's Integrated-Fight-
Through-Power System

        Developing methods for distributing and converting power from large-scale turbines to end use applications aboard a ship, we believe, is an example of how distributed power can become the future of electrical power generation and distribution for a wide range of applications. We believe that the technology developed by us in connection with the Integrated Fight-Through-Power System will have other commercial applications. We also believe that our involvement with the Integrated-Fight-Through-Power System program positions us to become a more traditional supplier of advanced ship power converters for future "all-electric" ship and other Navy shipboard applications.

Significant Customers

        The U.S. Department of Defense accounted for 5.7%, 6.8% and 9.8% of our total revenue for our fiscal years ended September 30, 2002, 2001 and 2000, respectively. For our fiscal years ended September 30, 2002, 2001 and 2000, revenue from the U.S. Department of Energy accounted for 6.1%, 7.4% and 11.5% of our total revenue, respectively. For our fiscal years ended September 30, 2002, 2001 and 2000, revenue from Applied Materials accounted for 4.7%, 8.3% and 10.6% of our total revenue, respectively. For our fiscal years ended September 30, 2002, 2001 and 2000, revenue from General Atomics accounted for 12.0%, 9.4% and 1.7% of our total revenue, respectively. The loss of any one or more of these customers would have a material adverse effect on SatCon.

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Research and Development

        We believe that the continued and timely development of new products and enhancements to our existing products is necessary to maintain our competitive position. We use technologies developed by our business units, together with information supplied by our distributors and customers, to design and develop new products and product enhancements and to reduce the time-to-market for our products.

        During the fiscal year ended September 30, 2002, $10.8 million, or 26%, of our revenue was attributable to research and development activities funded by commercial customers and U.S. government agency sponsors. Under the agreements funded by the U.S. government, the government retains a royalty-free license to use the technology developed for government purposes and we retain exclusive rights to the technology for commercial and industrial applications. The rights to technology developed under contracts funded by commercial customers are negotiated on a case-by-case basis. We expended $5.7 million, $6.2 million and $3.5 million on internally-funded research and development during our fiscal years ended September 30, 2002, 2001 and 2000, respectively. During our fiscal year ended September 30, 2002, our most concentrated effort was directed toward building the power inverter for an on-site power generation system and our 250 kilowatt and 2.2 megawatt rotary UPS and power quality systems.

Sales and Marketing

        We sell our products and services both domestically and internationally through our direct sales force and through independent distributors and representatives. Our direct sales staff manages our key customer accounts, provides customer support and identifies significant market opportunities in their respective markets.

        Each of our three divisions manages its own marketing organization and is responsible for developing sales and advertising literature, such as product announcements, catalogs, brochures and magazine articles in trade and other publications. Publication of significant events or material information is handled through our corporate office.

        We maintain close contact with our customers' design and engineering staffs in order to provide the appropriate products for our customers' applications. We maintain this close working relationship with our customers throughout the life of a product, and we believe that it has been a key component of our customers' satisfaction.

        We compete for and market our research and development contracts through several methods, including pursuing new and existing customer relationships in the commercial and government sectors, responding to Small Business Innovative Research calls for proposals and calls for proposals listed in the daily publication, Commerce Business Daily, seeking to maintain a strong technical reputation within the community, responding to unsolicited requests for proposals and through our Internet site.

Backlog

        Our backlog consists primarily of product development contracts, orders for critical power systems, electronics and motion control products. At September 30, 2002, our backlog was approximately $16 million. Of this amount, approximately $13 million is scheduled to be shipped during fiscal year 2003. These amounts exclude approximately $2 million of UPS orders booked in November 2001 but which are unlikely to be shipped. Many of our contracts and sales orders may be canceled at any time with limited or no penalty. In addition, contract awards may be subject to funding approval from the U.S. government and commercial entities, which involves political, budgetary and other considerations over which we have no control. Our backlog at September 30, 2001 was $21.0 million. We believe that our backlog at any time should not be used as an indication of future revenue.

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Competition

        We believe that competitive performance in the marketplace for critical power products depend upon several factors, including product price, technical innovation, product quality and reliability, range of products, customer service and technical support. We believe our technical innovation emphasizing product performance and reliability, supported by our commitment to strong customer service and technical support, enables us to continue to compete successfully against the following competitors:

•

Manufacturers of converters and inverters for alternative energy such as Trace Engineering, a division of Xantrex Technology, Inc., Asea Brown Boveri Ltd., Siemens Corporation and Alstom S.A.;



•

Manufacturers of electronic modules such as Omnirel L.L.C., Aeroflex Inc., Teledyne Inc. and DDC & R, Inc.; manufacturers of thin film substrates such as MIC Technology, an Aeroflex Company and Ultrasource, Inc.;



•

Manufacturers of motors such as MCG Inc., Reliance Electric CO/DE, CMC Industries, Inc. and other regional and specialty motor manufacturers;



•

Manufacturers of shaker vibration test systems such as Ling Dynamics Systems, Ltd. and Unholtz-Dickie, Corp.;



•

Manufacturers of Uninterruptible Power Supplies such as Piller, Inc. and Hitech Power Protection bv.; and



•

Developers of advanced power electronics and machines such as Moog, Semikron, Eaton and Silicon Power.

        Some of our competitors have substantially greater financial resources than we do and could devote greater resources to the development, promotion, sale and support of their products and may have more manufacturing expertise and capacity. In addition, some of our competitors have more extensive customer bases and broader customer relationships than we do.

Manufacturing

        We manufacture our products at our facilities located in Marlborough, Massachusetts; Worcester, Massachusetts and Burlington, Ontario, Canada. We believe our existing manufacturing capacity is sufficient to meet our current needs. Our goal is to mass manufacture high volume, low-cost products as our products gain market acceptance and the markets for our products develop. We believe that most of the raw materials used in our products are readily available from a variety of vendors. Additionally, we design and develop our products to use commodity parts in order to simplify the manufacturing process. We have a semi-automated production line in our Marlborough, Massachusetts facility. We intend to add additional production lines for our products in the future as demand dictates and our revenues enable. We have made and expect to continue to make technological improvements that reduce the costs to manufacture our products.

        Our manufacturing facilities are subject to numerous environmental laws and regulations, particularly with respect to industrial waste and emissions. Compliance with these laws and regulations has not had a material impact on our capital expenditures or competitive position.

        We believe that most of the raw materials used in our products are readily available from a variety of vendors. Additionally, we design and develop our products to use commodity parts in order to simplify the manufacturing process.

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Intellectual Property

        Our success and competitiveness depend 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 technologies. 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.

        As of December 10, 2002, we held 75 U.S. patents and had 10 patent applications pending with the U.S. Patent and Trademark Office. We have also obtained corresponding patents in the rest of North America, Europe and Asia. In addition, we have a non-exclusive, royalty-free license for non-automotive applications for 38 other patents that were issued to our employees and subsequently assigned to DaimlerChrysler in connection with the now completed Chrysler Patriot racecar project. The expiration dates of our patents range from 2007 to 2021, with the majority expiring after 2016.

        In 1997, we granted Beacon Power Corporation a perpetual, worldwide, royalty-free, exclusive right and license to our flywheel technology for stationary, terrestrial applications. Beacon Power was formed as a spin off of SatCon Technology Corporation. In November of 2000, Beacon Power became a publicly traded company. In September of 2001 we made a 5,000,000-share distribution of our Beacon Power ownership to our stockholders and currently own approximately 11% of Beacon Power following that distribution.

        Many of the U.S. patents described above are the result of retaining ownership of inventions made under U.S. government-funded research and development programs. As a qualifying small business, we have retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants, including small business innovation research contracts. With respect to any invention made with government assistance, the government has a nonexclusive, nontransferable, irrevocable, paid-up license to use the technology or have the technology employed for or on behalf of the U.S. government throughout the world. Under certain conditions, the U.S. government also has "march-in rights." These rights enable the U.S. government to require us to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to responsible applicants, upon terms that are reasonable under the circumstances.

Government Regulation

        We presently are subject to various federal, state and local laws and regulations relating to, among other things, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of pollutants into the atmosphere. To date, we believe that we have obtained all necessary government permits and have been in substantial compliance with all of these applicable laws and regulations.

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Government Contracts

        We act as a prime contractor or major subcontractor for many different U.S. government programs, including those that involve the development of electro-mechanical transportation, navigation and energy-related products. Over its lifetime, a program may be implemented by the award of many individual contracts and subcontracts, or contracts with option years, or partially funded contracts.

        U.S. government contracts include provisions permitting termination, in whole or in part, without prior notice, at the U.S. government's discretion. The U.S. government generally pays compensation for work actually done and commitments made at the time of termination, and some allowance for profit on the work performed. The U.S. government may also terminate for default in performance and pay only the value delivered to the U.S. government. It can also hold the contractor responsible for reprocurement costs.

        Our government contract business is also subject to specific procurement statutes and regulations and a variety of socio-economic and other factors. Failure to comply with these regulations and requirements could lead to loss of contract or suspension or debarment from U.S. government contracting or subcontracting for a period of time. Examples of these statutes and regulations are those related to procurement integrity, export control, employment practices, the accuracy of records and the recording of costs.

        Sales to the U.S. government may be affected by changes in research interests in the areas in which we engage, changing government department budgets, and changing procurement policies.

Employees

        At September 30, 2002, we had a total of 275 full-time employees, 5 part-time employees and 29 contract employees. Of the total, 90 persons were employed in engineering, 153 in manufacturing, 42 in administration and 24 in sales and marketing. Our future success depends in large part on the continued service of our key technical and senior management personnel, and on our ability to attract, retain and motivate qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on us. None of our employees are represented by a union. We believe that our relations with our employees are good.

Item 2. PROPERTIES

        We lease office, manufacturing and research and development space in the following locations:

        Our Cambridge, Massachusetts lease contains an additional 13,000 square feet of space, which is subleased to a third party until December 31, 2002. Our Anaheim, California lease contains an additional 77,000 square feet of space, of which 25,000 square feet is subleased to a third party through the term of the lease. We are seeking a sublet tenant for the remainder of the space.

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        We believe our facilities are adequate for our current needs and that adequate facilities for expansion, if required, are available.

Item 3. LEGAL PROCEEDINGS

        From time to time, we are a party to routine litigation and proceedings in the ordinary course of business. We are not aware of any current or pending litigation to which we are or may be a party that we believe could materially adversely affect our results of operations or financial condition.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

        No matter was submitted to a vote of security holders during the fourth quarter of our fiscal year covered by this report through the solicitation of proxies or otherwise.

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PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

        Our common stock is publicly traded on the NASDAQ National Market under the symbol "SATC."

        The following table sets forth the range of high and low sales prices of our common stock as reported on the NASDAQ National Market for our fiscal years ended September 30, 2001 and 2002:

        On December 27, 2002, the last reported sale price of our common stock as reported on the NASDAQ National Market was $1.43 per share. As of December 27, 2002, there were 16,904,827 shares of our common stock outstanding held by approximately 227 holders of record.

Dividend Policy

        We have never paid cash dividends on our common stock. We currently intend to retain earnings, if any, to fund the development and growth of our business and do not anticipate paying cash dividends for 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. In addition, the Loan and Security Agreement between Silicon Valley Bank and us, dated as of September 13, 2002, provides for certain limitations on the payment of dividends by us on our common stock.

Recent Sales of Unregistered Securities

        On August 23, 2002, we issued to J.P. Turner & Company, LLC, in connection with investor awareness and business advisory services rendered by J.P. Turner & Company, LLC pursuant to an investment banking agreement with us, a warrant exercisable for 250,000 shares of our common stock, at an exercise price of $1.75 per share. This warrant expires on August 23, 2005. This warrant was issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering.

        On September 13, 2002, we issued to Silicon Valley Bank, in connection with a loan and security agreement with Silicon Valley Bank, a warrant exercisable for 181,951 shares of our common stock, at an exercise price of $1.374 per share. This warrant expires on September 13, 2007. This warrant was issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering.

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        During the fiscal year ended September 30, 2002, we issued 202,049 shares of our common stock to our employees pursuant to a discretionary 401(k) match authorized by our Board of Directors. Such securities were issued without registration and are freely tradable pursuant to Employee Benefit Plans Release Nos. 33-6188 and 33-6281.

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

        You should read the data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data set forth below for our fiscal years ended September 30, 2002, 2001 and 2000 and the consolidated balance sheet data as of September 30, 2002 and 2001 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for our fiscal years ended September 30, 1999 and 1998 and the consolidated balance sheet data as of September 30, 2000, 1999 and 1998 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. The statement of operations for our fiscal year ended September 30, 2002 includes the results of the acquisition of assets from Sipex Corporation beginning from September 27, 2002, the date which we acquired assets from Sipex Corporation.

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Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Information

        This Annual Report on Form 10-K contains or incorporates forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Act of 1934. You can identify these forward-looking statement by our use of the words "believes," "anticipates," "plans," "expects," "may," "will," "intends," "estimates," and similar expressions, whether in the negative or in the affirmative. Although we believe that these forward-looking statements reasonably reflect our plans, intentions and expectations, our actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements below under the heading "Factors Affecting Future Results" that we believe could cause our actual results to differ materially from the forward-looking statements that we make. These factors also include, without limitation, those set forth in Exhibit 99.1 to this Form 10-K, which are expressly incorporated by reference herein. We do not intend to update information contained in any forward-looking statements we make.

Recent Developments

        We need an immediate infusion of equity capital to sustain our operations. We anticipate that our existing cash and cash resources will enable us to fund our operations through only approximately January 15, 2003. We are operating under a forbearance agreement with Silicon Valley Bank which is currently enabling us to borrow minimal levels of working capital from Silicon Valley Bank. On December 13, 2002, we executed a term sheet with an institutional investor to raise between $5 and $7 million of equity capital. The term sheet contemplates that $3 to $5 million of the equity investment will be funded during the week of January 6, 2003 and the remaining $2 million will be funded promptly after the registration statement we are required to file with the Securities and Exchange Commission is declared effective registering all of the underlying equity securities in this financing.

        If Silicon Valley Bank decides to discontinue lending to us or we are unable to close an equity financing with the institutional investor or other investors prior to January 15, 2003, we will be forced to furlough or permanently lay off a significant portion of our work force. This will have a material adverse effect on us. Under these circumstances, we may not be able to continue our operations. Further, without additional cash resources, we may not be able to keep all or a significant portion of our operations going for a sufficient period of time to enable us to sell all or portions of our assets or operations at other than distressed sale prices. Even if we are able to consummate the financing with the institutional investor prior to January 15, 2003 and retain a credit facility with Silicon Valley Bank, we may still require additional cash resources in the future to fund our anticipated operating losses, to grow, to develop new or enhance existing products and services and to respond to competitive pressures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" below.

        Under the proposed terms of the term sheet with the institutional investor, we would issue shares of convertible preferred stock for $15,000 per share and warrants to purchase 5,000 shares of common stock for each share of convertible preferred stock issued. The preferred stock will be convertible into a number of shares of common stock equal to 15,000 divided by the conversion price of the stock (which will initially be $1.50). The convertible preferred stock will accrue dividends of 8% per annum, increasing to 12% on January 1, 2004. Under the proposed terms of the term sheet with the institutional investor, we may opt to pay the dividends in cash or in kind. Nevertheless, our current credit facility prohibits, and future credit facilities will likely prohibit, the payment of any cash dividend. The dividend for the first year will be paid at the closing in shares of common stock, valued based on the conversion price of the preferred stock, and thereafter will be paid on a quarterly basis. The warrants will be exercisable for a five-year term and will have an exercise price of $2.00 per share.

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        As mentioned above, the term sheet with the institutional investor contemplates that we will issue between $3 million and $5 million of the convertible preferred stock at a first closing during the week of January 6, 2003. The remaining $2 million will be funded promptly after the registration statement we are required to file to register the common stock issuable upon conversion of the convertible preferred stock and exercise of the warrants is declared effective. We are required to file the registration statement within 30 days after the first closing and use our best efforts to have the registration statement declared effective within 90 days after the first closing. If the registration statement is not declared effective within 120 days of the first closing, we will be obligated to pay to the investors liquidated damages equal to 1.5% of the amount invested for each 30-day period, beginning 90 days after the first closing, that the registration statement is not effective.

        If we issue shares of common stock at a purchase price below the conversion price of the convertible preferred stock or the exercise price of the warrants, the conversion price and the exercise price, as applicable, will be adjusted on a weighted average basis.

        If we consummate any private equity or equity-linked financing within 12 months after the first closing, the investors in our convertible preferred stock will have a right of first offer to purchase all or part of that financing. In addition, if we enter into a private equity or equity-linked financing within 24 months after the first closing, the investors will have the rights to exchange their shares of convertible preferred stock at the stated value of the securities issued in that financing.

        To date, the documentation relating to the financing with the institutional investor has been produced by counsel to the institutional investor but has not been finalized. There can be no guarantee that we will be able to secure financing with the institutional investor on these or any other terms, or that we will be able to successfully close this financing and raise the $5 million to $7 million contemplated by the term sheet.

        Any securities offered to the institutional investor will not be or have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.

Overview

        SatCon was organized as a Massachusetts corporation in 1985 and reincorporated as a Delaware corporation in 1992. We are developing enabling technologies for the emerging critical power marketplace where power quality and uninterruptible power are important. We design, develop and manufacture high-efficiency high power electronics and a variety of standard and custom high-performance machines for specific applications. Our critical power products convert, store and manage electricity for businesses and consumers, the U.S. Government and the military that require high-reliability electronics and controls and high-quality, uninterruptible power. We are utilizing our engineering and manufacturing expertise to develop products we believe will be integral components of distributed power generation and power quality systems. Our specialty motors are typically designed and manufactured for unique customer requirements such as high power-to-size requirements or high efficiency.

        We have expanded our business and capabilities through the following acquisitions:

•

K&D Magmotor Corp.—a manufacturer of custom and standard electric motors, acquired in January 1997.

•

Film Microelectronics, Inc.—a manufacturer of thin film substrates and hybrid microelectronics, acquired in April 1997.

•

Inductive Components, Inc.—a value-added supplier of customized electric motors, acquired in January 1999.

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•

Lighthouse Software, Inc.—a supplier of control software for machine tools, acquired in January 1999.

•

HyComp, Inc.—a manufacturer of hybrid microelectronics, acquired in April 1999.

•

Ling Electronics, Inc.—a manufacturer of shaker vibration test systems, power converters, amplifiers and controllers, acquired in October 1999.

•

Inverpower Controls Ltd.—a manufacturer of power electronics modules and advanced high-speed digital controls, acquired in July 2001.

        In addition, in November 1999, we acquired intellectual property, tooling and other assets from Northrop Grumman Corporation enabling us to manufacture and sell electric drivetrains and, in September 2002, we acquired certain intellectual property, equipment and other assets from Sipex Corporation to expand our high-reliability data conversion product line. See Note R to our Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding our acquisitions.

Critical Accounting Policies and Significant Judgments and Estimates

        Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, receivable reserves, inventory reserves, investment in Beacon Power Corporation, goodwill and intangible assets and income taxes. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

        The significant accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:

        We recognize revenue from product sales in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and we have determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped FOB shipping point, except for certain foreign shipments. If the product requires installation to be performed by us, all revenue related to the product is deferred and recognized upon the completion of the installation. We provide for a warranty reserve at the time the product revenue is recognized.

        We perform funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each type of contract, we receive periodic progress payments or payment upon

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reaching interim milestones and retain the rights to the intellectual property developed in government contracts. All payments to us for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue and contract costs for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses as incurred. As of September 30, 2002 and 2001, we have accrued $0.2 million and $0.1 million, respectively, for anticipated contract losses on commercial contracts. For the fiscal year ended September 30, 2002 and 2001, revenue from commercial contracts, which represents other revenue, is included in funded research and development and other revenue and amounted to $0.2 million and $0.7 million, respectively.

        Cost of product revenue includes cost of product revenue including material, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements and other revenue are included in funded research and development and other revenue expenses. For the fiscal year ended September 30, 2002 and 2001, costs and expenses from commercial contracts, which represents other revenue expenses, are included in funded research and development and other revenue expenses and amounted to $0.2 million and $0.5 million, respectively.

        Deferred revenue consists of payments received from customers in advance of services performed, product shipped or installation completed.

        Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not yet been recognized as revenue or billed to the customer. These amounts included retained fee and unliquidated costs totaling $0.1 and $0.2 million at September 30, 2002 and 2001, respectively.

Accounts Receivable

        Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Inventory

        We value our inventory at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, as well as based on historical usage. Due to the custom and specific nature of certain of our products, demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

Investment in Beacon Power Corporation

        During substantially all of the fiscal year ended September 30, 2001, we accounted for our investment in Beacon Power Corporation under the equity method of accounting and recorded $5.1 million of losses from Beacon Power. On September 28, 2001, we distributed 5,000,000 shares of

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Beacon Power common stock to our stockholders. Upon the distribution of the 5,000,000 shares, we recorded the distribution of the 5,000,000 shares as a reduction of additional paid-in capital based on the book value per share prior to the distribution, or $0.59 per share. After the distribution, we owned 4,705,910 shares, or approximately 11.0%, of Beacon Power's outstanding voting stock. Additionally, we have determined that we do not have the ability to exercise significant influence over the operating and financial policies of Beacon Power and, therefore, now account for our investment in Beacon Power using the fair value method as set forth in Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Debt and Equity Securities. We are no longer required to record our share of any losses from Beacon Power and the investment is carried at fair value and designated as available for sale and any unrealized holding gains or losses are to be included in stockholders' equity as a component of accumulated other comprehensive income/(loss). As of September 30, 2002, the shares of Beacon Power common stock held by us had a fair value of $0.8 million and we recorded an unrealized loss of $6.4 million in stockholders' equity as a component of accumulated other comprehensive income/(loss) during the fiscal year ended September 30, 2002. As of September 30, 2002, the fair market value of Beacon Power's common stock was $0.17 per share. Our cost basis in our investment in Beacon Power's common stock was $0.59 per share. As of September 30, 2002, we believe the decline in market value represents an other than temporary decline because, among other things, the market value has been less than cost since March 2002 and there is some uncertainty of the financial condition and near-term prospects of Beacon Power and, accordingly, have recorded an other than temporary write-down of our investment in Beacon Power of $1.4 million. Additionally, we have a warrant to purchase 173,704 shares of Beacon Power's common stock that has an exercise price of $1.25 per share and expires in 2005. We account for this warrant in accordance with SFAS No. 133 and, therefore, record the warrant at its fair value and record any changes in value in our statement of operations. As of September 30, 2002, the warrant to purchase Beacon Power common stock had a fair value of $14,365 and is included in warrants to purchase common stock on the accompanying balance sheet.

Goodwill and Intangible Assets

        Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets purchased and liabilities assumed. We have accounted for our acquisitions using the purchase method of accounting. Values were assigned to goodwill and intangible assets based on third-party independent valuations, as well as management's forecasts and projections that include assumptions related to future revenue and cash flows generated from the acquired assets.

        Effective October 1, 2001, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects our treatment of goodwill and other intangible assets. The statements require that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives will cease.

        We completed the first step of the transitional goodwill impairment test based on the amount of goodwill as of the beginning of fiscal year 2002, as required by SFAS No. 142. We utilized a third party independent valuation to determine the fair value of each of the reporting units based on a discounted cash flow income approach. Based on the results of the first step of the transitional goodwill impairment test, we have determined that the fair value of each of the reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of October 1, 2001. As a result, the second step of the transitional goodwill impairment test was not required to be completed. We performed a goodwill impairment test on the amount of goodwill as of the beginning of our fiscal fourth quarter 2002, as required by SFAS No. 142 on an annual basis. We again utilized a third party

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independent valuation to determine the fair value of each of the reporting units based on a discounted cash flow income approach. The income approach indicates the fair value of a business enterprise based on the discounted value of the cash flows that the business can be expected to generate in the future. This analysis is based upon projections prepared by us and data from sources of publicly available information available at the time of preparation. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. Based on the results of the first step of the annual goodwill impairment test, we have determined that the fair value of each of the reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of the beginning of our fiscal fourth quarter 2002. As a result, the second step of the annual goodwill impairment test was not required to be completed. We will continue to perform a goodwill impairment test on an annual basis.

        We did not record expense related to the amortization of goodwill during the fiscal year ended September 30, 2002. We recorded expense related to the amortization of goodwill of $0.6 million during the fiscal year ended September 30, 2001. We have determined that all of our intangible assets have finite lives and, therefore, we have continued to amortize our intangible assets. We recorded expense related to the amortization of our intangible assets of $0.6 million and $0.7 million during the fiscal year ended September 30, 2002 and 2001, respectively.

Accounting for Income Taxes

        The preparation of our consolidated financial statements requires us to estimate our income taxes in each of the jurisdictions in which we operate, including those outside the United States, which may be subject to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. We must then record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.

        Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We have recorded a full valuation allowance against our deferred tax assets of $29.1 million as of September 30, 2002, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to adjust our valuation allowance which could materially impact our financial position and results of operations.

Results of Operations

Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30, 2001

Product Revenue.

        Product revenue remained flat at $30.8 million. Power Systems was down 1% from $20.2 million in 2001 to $19.9 million in 2002. This was offset by an increase in the Electronics Division from $10.6 million in 2001 to $10.9 million in 2002.

        Within Power Systems, revenue from magnetic levitation and high performance motor products declined 35% from $7.2 million in 2001 to $4.7 million in 2002. This decrease was due in large part to the decline in revenue from magnetic levitation products due to the weak semiconductor industry. In addition, revenue from vibration test equipment ("Shaker") was down 39% from $12.2 million in 2001 to $7.5 million in 2002. This reduction in Shaker revenue was due in part to the disruption caused by the relocation of the business from Anaheim, CA to Worcester, MA during the last half of 2002. These

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decreases were more than offset by an increase in revenue from power conversion products from $0.8 million in 2001 to $7.7 million in 2002. This increase was due largely to the fact that Inverpower was acquired in July 2001 and, as a result, represented less than three months of business in 2001. The increase in 2002 was due, in addition to having a full year of business, to the up tick in the power conversion products.

        Despite the weak telecom and semiconductor industries, the Electronics Division was able to increase revenue by 3% from $10.6 million in 2001 to $10.9 million in 2002. The increase was due to an increase in revenue from the defense sector, which during 2002 represented approximately 69% of the total Electronics Division revenue. This compared with approximately 63% in 2001. In addition, on September 27, 2002, we acquired the hybrid product line from Sipex Corp. and were able to ship $0.2 million of product during 2002.

Funded research and development and other revenue.

        Funded research and development and other revenue decreased by $0.1 million, or 1% from $10.9 million to $10.8 million. The largest change was the increase of $1.7 million in funded research and development revenue from a program to develop high power converter assemblies for the U.S. Navy's next generation of modern "all-electric" ships offset by decreases of $0.6 million from a Department of Energy program to develop low-cost power conversion modules for electric and hybrid-electric vehicles and $0.6 million from the U.S. Navy's electric missile air launch system program.

Cost of product revenue.

        Cost of product revenue increased by $1.8 million, or 7%, from $27.8 million to $29.6 million. The increase was attributable to $3.8 million of increased cost of product revenue from Power Systems from $17.6 million to $21.4 million. This increase was offset in part by a decrease in the Electronics Division of $2.0 million from $10.1 million in 2001 to $8.1 million in 2002.

        Within Power Systems, power products accounted for $6.1 million of the increase due primarily to the full year effect of the Inverpower acquisition. This increase was offset by a decrease of $2.3 million in the Shaker, magnetic levitation and high performance motors cost of product revenue, which all experienced volume reductions in 2002. Inventory obsolescence charges for Power Systems products totaled $1.9 million in 2002 compared with $0.2 million in 2001. These charges in 2002 represented $1.0 million in power conversion products, $0.6 million in Shakers and $0.3 million in other products.

        The Electronics Division was able to realize a decrease in its cost of product revenue despite a 3% increase in revenue. This decrease was primarily due to lower spending resulting from its restructuring program, and, to a lesser extent, lower material costs as a percentage of revenue. Charges for inventory obsolescence were $0.4 million in each year.

Funded research and development and other revenue expenses.

        Funded research and development and other revenue expenses decreased by $0.3 million, or 4%, from $7.4 million in 2001 to $7.2 million in 2002. The largest change was the increase of $1.2 million in funded research and development revenue expenses from a program to develop high power converter assemblies for the U.S. Navy's next generation of modern "all-electric" ships offset by a decrease of $0.4 million from the U.S. Navy's electric missile air launch system program. In addition, we provided an additional provision of $0.1 million for contract losses during 2002. Although revenue from the Department of Energy program to develop low-cost power conversion modules for electric and hybrid- electric vehicles decreased by $0.6 million, there was no corresponding reduction in costs as that revenue was derived from costs incurred in 2000.

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Unfunded research and development expenses.

        Unfunded research and development expenses decreased by $0.4 million, or 6%, from $6.2 million in 2001 to $5.9 million in 2002. The decrease is due to the near completion of the internally funded research and development projects including the power inverter for an on-site power generation system and our 250 kilowatt and 2.2 megawatt rotary UPS and power quality systems.

Selling, general and administrative expenses.

        Selling, general and administrative expenses increased by $2.3 million, or 17%, from $13.6 million in 2001 to $15.9 million in 2002. The increase was primarily due to the full-year inclusion of Inverpower for 2002 and to a lesser extent the increase in business development costs, primarily in the Applied Technology Division.

Write-off of public offering costs.

        On April 25, 2001, we converted our registration statement initially filed with the Securities and Exchange Commission on October 30, 2000 to a shelf registration statement. We expensed during 2001 $1.4 million of equity financing costs incurred in connection with this initial registration statement.

Amortization of goodwill and intangibles.

        Amortization of goodwill and intangibles decreased by $774,000, or 57%, from $1.4 million in 2001 to $0.6 million in 2002. The decrease is a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, and of no longer being required to amortize goodwill and intangible assets with indeterminable lives. During the year ended September 30, 2001, amortization of goodwill amounted to $0.6 million. In addition, during 2001 we wrote-off an impaired intangible asset with a net book value of $0.1 million and annual amortization of $0.1 million. These decreases were partially offset by the amortization of intangible assets acquired from Inverpower in July 2001.

Restructuring costs.

        During April 2002, we commenced a restructuring plan designed to streamline our production base, improve efficiency and enhance our competitiveness and recorded a restructuring charge of $1.5 million. The restructuring charge includes approximately $0.6 million for severance costs associated with the reduction of approximately 60 employees, or 17% of the work force. The reductions occurred in the following business segments: Applied Technology—9: Corporate—2; Electronics—16; and Power Systems—33. On a functional basis, the reductions were: manufacturing—45; research and development—4; and selling, general and administrative—11. As of September 30, 2002, 56 employees have been terminated and the remaining 4 are expected to be terminated by March 2003. In addition, as of September 30, 2002, $0.5 of the severance has been paid and the remaining severance will be paid by March 2003. The balance of the restructuring charge relates to the closing of the Anaheim, CA facility. These costs include approximately $0.3 million of cash charges primarily related to rent, real estate taxes and operating costs to be paid through the remainder of the lease and an estimated $0.3 million of other cash charges for restoration and clean-up. In addition, approximately $0.2 million of the restructuring charge relates to non-cash charges on assets to be disposed of. We anticipate the Anaheim, CA manufacturing facility will be closed during the second quarter of fiscal year 2003.

Net unrealized loss on warrants to purchase common stock.

        Net unrealized loss on warrants to purchase common stock decreased by $1.0 million, or 65%, from $1.5 million in 2001 to $0.5 million in 2002. We account for our warrants to purchase Mechanical Technology Incorporated's common stock and to purchase Beacon Power's common stock in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and, therefore, we have

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recorded these warrants at their fair value at September 30, 2002 and recorded and unrealized loss of $0.5 million during 2002.

Write-down of investment in Beacon Power Corporation.

        Effective September 28, 2001, we account for our investment in Beacon Power using the fair value method as set forth in SFAS No. 115, Accounting for Certain Debt and Equity Securities. At September 30, 2002, the fair market value of Beacon Power's common stock was $0.17 per share. Our cost basis in our investment in Beacon Power's common stock was $0.59 per share. As of September 30, 2002, we believe the decline in market value represents an other than temporary decline because, among other things, the market value has been less than cost since March 2002 and there is some uncertainty of the financial condition and near-term prospects of Beacon Power and, accordingly, we have recorded an other than temporary write-down of our investment in Beacon Power of $1.4 million.

Other income.

        Other income decreased by $0.5 million, or 79%, from $0.6 million in 2001 to $0.1 million in 2002. The decrease is primarily the result of $0.4 million decrease in interest income, which is directly related to the decrease in cash, cash equivalents and marketable securities.

Loss from Beacon Power Corporation.

        Effective September 28, 2001, we account for our investment in Beacon Power using the fair value method as set forth in SFAS No. 115, Accounting for Certain Debt and Equity Securities. We are no longer required to record our share of any losses from Beacon Power and the investment is carried at fair value and is designated as available for sale, and any unrealized holding gains and losses are to be included in stockholders' equity as a component of accumulated other comprehensive income (loss).

Cumulative effect of change in accounting principle.

        On October 1, 2000, we began accounting for our warrants to purchase Mechanical Technology Incorporated common stock in accordance with SFAS No. 133 and, therefore, recorded a cumulative unrealized loss of $1.0 million as of October 1, 2000. On June 30, 2001, we began accounting for warrants to purchase our common stock that are designated as a liability in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", and, therefore, recorded a cumulative unrealized gain of $1.0 million as of June 30, 2001 to record the warrants at fair value.

Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30, 2000

Product Revenue.

        Product revenue increased by $8.4 million, or 37%, from $22.4 million in 2000 to $30.8 million in 2001. The increase was attributable to $6.1 million of increased revenue from Power Systems, of which Ling Electronics accounted for $4.9 million, magnetic levitation products and high-performance motors accounted for $0.7 million and power products accounted for $0.5 million, primarily as a result of our acquisition of Inverpower. $2.3 million of increased revenue was attributable to the Electronics Division.

Funded research and development and other revenue.

        Funded research and development and other revenue increased by $2.3 million, or 26%, from $8.6 million in 2000 to $10.9 million in 2001. This increase was primarily attributable to $2.7 million in funded research and development revenue from a new program to develop high power converter

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assemblies for the U.S. Navy's next generation of modern "all-electric" ships offset by a reduction of $0.4 million in funded research and development revenue from a Department of Energy program to develop low-cost power conversion modules for electric and hybrid-electric vehicles.

Cost of product revenue.

        Cost of product revenue increased by $8.8 million, or 46%, from $19.1 million in 2000 to $27.8 million in 2001. The increase was primarily attributable to the increase in product revenue. In addition, for 2001, we provided a $1.2 million reserve for excess and obsolete inventory as compared to $0.7 million for 2000. Gross margin from product revenue as a percentage of product revenue decreased from 15% in 2000 to 10% in 2001.

Funded research and development and other revenue expenses.

        Funded research and development and other revenue expenses increased by $598,000, or 9%, from $6.8 million in 2000 to $7.4 million in 2001. The increase was primarily attributable to $1.9 million in funded research and development expenses from the U.S. Navy program offset by the reduction of $1.0 million of research and development expenses related to the Department of Energy program.

Unfunded research and development expenses.

        Unfunded research and development expenses increased by $2.8 million, or 80%, from $3.5 million in 2000 to $6.2 million in 2001. The increase is due to increased focus on internally funded research and development projects including the power inverter for an on-site power generation system and our 250 kilowatt and 2.2 megawatt rotary UPS and power quality systems.

Selling, general and administrative expenses.

        Selling, general and administrative expenses increased by $3.6 million, or 36%, from $10.0 million in 2000 to $13.6 million in 2001. The increase was primarily due to an increase in selling expenses associated with the $10.6 million increase in total revenue and the inclusion of Ling Electronics for the entire fiscal year 2001 and Inverpower from July 13, 2001 to September 30, 2001. During 2001, we provided a $0.5 million reserve for doubtful accounts as compared to $0.3 million in 2000. In addition, we recorded charges of $0.2 million, $0.2 million, $0.2 million and $0.1 million in settlement of litigation, consolidation of facilities, write-off of impaired assets and for acceleration of a stock option award-vesting schedule, respectively, during 2001.

Write-off of public offering costs.

        On April 25, 2001, we converted our registration statement initially filed with the Securities and Exchange Commission on October 30, 2000 to a shelf registration statement. We expensed $1.4 million of equity financing costs incurred in connection with this initial registration statement.

Amortization of intangibles.

        Amortization of intangibles increased by $0.1 million, or 12%, from $1.2 million to $1.4 million. The increase was the result of amortization of intangibles recorded in connection with the acquisitions of Ling Electronics in October 1999, certain intellectual property and other intangible assets from Northrop Grumman in November 1999 and certain intangible assets from Inverpower Controls Ltd. in July 2001. In addition, during 2001 we wrote-off an impaired intangible asset with a net book value of $0.1 million.

Net unrealized loss on warrants to purchase common stock.

        During the fiscal year ended September 30, 2001, we began accounting for our warrants to purchase Mechanical Technology Incorporated's common stock and the warrant to purchase Beacon Power's common stock in accordance with SFAS No. 133, and, therefore, we have recorded these warrants at their fair value at September 30, 2001 and recorded an unrealized loss of $1.5 million during 2001.

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Other income (loss).

        Other income increased $0.1 million, or 27%, from $0.5 million in 2000 to $0.6 million in 2001. The increase is the result of cash, cash equivalents and marketable securities being maintained in interest bearing accounts offset by an increase in interest expense associated with the increase in debt.

Loss from Beacon Power Corporation.

        Loss from Beacon Power Corporation increased by $4.2 million from $0.9 million in 2000 to $5.1 million in 2001. In connection with Beacon Power's initial public offering in November 2000, our investment in Beacon Power and additional paid-in-capital was written up to reflect our beneficial interest in the book value of the stockholders' equity of Beacon Power, which was approximately $16.6 million, less losses previously recorded in connection with the put right obligation in the amount of $5.8 million for a net gain of $10.7 million. After the write-up of our investment in Beacon Power, we continued to account for our investment in Beacon Power under the equity method of accounting and recorded our share of losses of $5.1 million from Beacon Power for 2001.

Cumulative effect of change in accounting principle.

        On October 1, 2000, we began accounting for our warrants to purchase Mechanical Technology Incorporated common stock in accordance with SFAS No. 133 and, therefore, recorded a cumulative unrealized loss of $1.0 million as of October 1, 2000. On June 30, 2001, we began accounting for warrants to purchase our common stock that are designated as a liability in accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, and, therefore, recorded a cumulative unrealized gain of $0.9 million as of June 30, 2001 to record the warrants at fair value.

Quarterly Results of Operations

        The following table presents unaudited quarterly statement of operations data for the eight quarters ended September 30, 2002. This data has been prepared on a basis consistent with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. This data includes all adjustments, consisting solely of normal recurring adjustments, that we believe necessary for a fair presentation of this information. The operating results for any quarter are not necessarily indicative of results to be expected for any future period. In fiscal year 2002, we changed the reporting periods for operational purposes for the first three quarters of our fiscal year to the 13-week periods ending on the last Saturday of the last month of each quarter. We believe that due to this fact there is no material difference between the 2002 and 2001 quarterly statement of operations data and that the results of all periods presented are comparable.

        The fourth quarter of 2002 includes a provision of $1.3 million for excess and obsolete inventory as compared to $0.2 million during the fourth quarter of 2001. The fourth quarter of 2002 provision includes $0.8 million for inventory related to residential fuel cell and battery UPS products. Based on our strategic business plan to focus our efforts on our rotary UPS systems, we deemed it appropriate during the fourth quarter to establish these reserves.

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Liquidity and Capital Resources

        We need an immediate infusion of equity capital to sustain our operations. We anticipate that our existing cash and cash resources will enable us to fund our operations through only approximately January 15, 2003. As more fully discussed below, if Silicon Valley Bank, our senior lender, decides to discontinue lending to us, which it has the right to do, or we are unable to raise additional equity by January 15, 2003, we will be forced to furlough or permanently lay off a significant portion of our work force which will have a material adverse impact on us. Under these circumstances, we may not be able

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to continue our operations. Further, without additional cash resources, we may not be able to keep all or significant portions of our operations going for a sufficient period of time to enable us to sell all or portions of our assets or operations at other than distressed sale prices.

        We have incurred significant costs to develop our technologies and products. These costs have exceeded total revenue. As a result, we have incurred losses in each of the past five years. As of September 30, 2002, we had an accumulated deficit of $85.2 million. During the fiscal year ended September 30, 2002, we incurred a loss of $20.8 million and a reduction in our cash from $20.9 million to $2.1 million. Due to restructuring activities, we were able to slow our cash burn rate from $7.9 million in the first quarter of fiscal year 2002 to $5.2 million, $3.5 million and $2.1 million in the second, third and fourth quarters of fiscal year 2002, respectively.

        However, we need to achieve quarterly revenue of approximately $15 million in order to reach a breakeven cash run rate based on today's cost structure and expected incremental margins on the additional revenue. Our highest quarterly revenue for fiscal year 2002 were $11.7 million in the third quarter of fiscal year 2002. Given our current operating plan, we do not expect to achieve $15 million of quarterly revenue until the fourth quarter of fiscal year 2003 at the earliest. As a result, because we had only $2.1 million in cash at the end of fiscal year 2002, we will need at least $9 million to $10 million in borrowing capacity and additional capital, in the aggregate, in order to fund our current business plan for the next 12 months. We may also need additional future funds in order to fund unanticipated operating losses, to grow, to develop new or enhance existing products and services and to respond to competitive pressures.

        At September 30, 2002, we had a line of credit with Silicon Valley Bank which enabled us to borrow up to $5 million based on eligible receivables, and none of the credit line had been used as of that date. The credit line included various financial covenants which needed to be satisfied in order for us to retain our right to borrow. One of these covenants required us to raise $4 million of new equity or subordinated debt by December 1, 2002. We did not raise these funds as of December 1, 2002 and, as a result, are in default under the credit line and from December 1, 2002 through December 18, 2002, were not permitted to borrow against the credit line. As of December 1, 2002, the loan balance was $2.1 million and all receipts from our Electronics and Power Systems divisions were required to be used to reduce this loan. Although Silicon Valley Bank is not required to do so while we are in default under our loan agreement, it has permitted us to use receivables collected from our Applied Technology division. As a result, from December 1, 2002 through December 18, 2002, we were limited to available cash and receipts from our Applied Technology division to fund our business until the Silicon Valley Bank loan was repaid. This level of resources is insufficient to sustain our ongoing operations as our Applied Technology division generates less than $1 million of cash receipts in an average month.

        On December 19, 2002, we entered into a forebearance agreement with Silicon Valley Bank pursuant to which Silicon Valley Bank agreed that, unless other defaults occurred under our credit facility, Silicon Valley Bank would not exercise its rights as creditor under our loan agreement with them until January 15, 2003. We hope that Silicon Valley Bank's forbearance will enable us sufficient time to raise $4 million of equity capital or subordinated debt by January 15, 2003. We acknowledged to Silicon Valley Bank in the forebearance agreement that we were in material default of our credit facility with Silicon Valley Bank. The forebearance agreement required us to obtain a signed term sheet by December 19, 2002 for a transaction structured to raise at least $3 million and, as more fully described below, we believe we have met this requirement.

        On December 19, 2002, we owed Silicon Valley Bank approximately $886,000 and had a cash balance of approximately $1 million. As a result of executing the forbearance agreement, we are now able to return to borrowing from the bank, but are limited to the lesser of 75% of eligible receivables or $2 million. In addition, all collections can now be used by us to fund operations or pay down the loan, as they had been prior to the default on December 1, 2002. Although the line of credit was up to

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$5 million prior to our default, it was limited to 75% of eligible receivables which typically permitted borrowing in the October to November period of from approximately $2.2 million to $2.8 million outstanding at any one time. However, at anytime prior to January 15, 2003, Silicon Valley Bank may discontinue lending funds to us if, in its business judgment, it decides to do so.

        We intend to work with Silicon Valley Bank in an effort to amend the existing credit facility before January 15, 2003. The existing credit facility is scheduled to expire in September, 2003. However, there can be no assurance that we will be successful in achieving an amended credit facility by January 15, 2003. We believe that we will need to raise at least $3 million of new equity or subordinated debt, acceptable to Silicon Valley Bank, by January 15, 2003, or we will be unable to borrow funds or use new collections to fund our business after January 15, 2003. If we are unable to raise these additional funds, we may not be able to amend our existing credit facility with Silicon Valley Bank which would permit us to borrow any additional amounts under the credit facility.

        On December 13, 2002, we executed a term sheet with an institutional investor to raise between $5 and $7 million of equity capital. The term sheet contemplates that $3 to $5 million of the equity investment will be funded during the week of January 6, 2003 and the remaining $2 million will be funded promptly after the registration statement we are required to file with the Securities and Exchange Commission is declared effective registering all of the underlying equity securities in this financing. We expect it will take a minimum of 90 days to file a registration statement and obtain its effectiveness. We will be unable to file a registration statement until after we have an initial closing with the institutional investor. To date, the documentation relating to this financing has been produced by counsel to the institutional investor but has not been finalized. There can be no guarantee that we will be able to successfully close this financing and raise the $5 to $7 million on the terms contemplated by the term sheet or on any other terms.

        We have agreed with the institutional investor that we will not solicit or negotiate any additional equity or debt financings through January 14, 2003. Upon consummation of a financing with the institutional investor, the institutional investor would have rights of first refusal and exchange rights which would generally be triggered upon future financings we may seek to consummate. The right of first refusal would allow the institutional investor to purchase future securities issued by us for a period of 12 months following the initial closing of the financing. For a period of 24 months following the initial closing, the exchange right would allow the institutional investor to exchange any shares of preferred stock held by it into future securities that we may issue at the preferred stock's liquidation preference. Each of these factors may adversely affect our ability to raise additional funds from third parties on terms acceptable to us, or at all.

        The financing with the institutional investor would also require that we seek the approval of our stockholders, which we will attempt to obtain at our 2003 annual meeting of stockholders. In the event that we do not obtain the approval of our stockholders, we would be required to redeem all or a portion of the investment by the institutional investor in cash, which would have a material adverse effect on us and our operations. The exercise by the institutional investor of any rights of first refusal or exchange rights may require us to seek additional approvals of our stockholders, which may not be required if these rights were not exercised. This may also hinder or delay our ability to obtain equity funding in the future.

        Any securities offered to the institutional investor will not be or have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.

        If Silicon Valley Bank does not continue to lend money to us through January 15, 2003 or we are unable to close an equity financing with the institutional investor prior to January 15, 2003, we will be forced to furlough or permanently lay off a significant portion of our work force. This will have a material adverse effect on us. Under these circumstances, we may not be able to continue our operations. Further, without additional cash resources, we may not be able to keep all or a significant

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portion of our operations going for a sufficient period of time to enable us to sell all or portions of our assets or operations at other than distressed sale prices.

        Our financial statements for our fiscal year ended September 30, 2002, which are included in this Annual Report on Form 10-K, contain an audit report from Grant Thornton LLP. The audit report contains a going concern qualification which raises substantial doubt with respect to our ability to continue as a going concern. The receipt of a going concern qualification may adversely affect our ability to manage our accounts payable and cause some of our suppliers to deal with us on a cash-on-delivery basis only. If this were to occur, this would adversely affect our operations by increasing our immediate need for additional capital.

        If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and our stockholders may experience additional dilution. The terms of additional funding may also limit our operating and financial flexibility. There can be no assurance that additional financing of any kind will be available to us on terms acceptable to us, or at all. Failure to obtain future funding when needed or on acceptable terms would materially, adversely affect our results of operations.

        Since inception, we have financed our operations and met our capital expenditure requirements primarily through the sale of private equity securities, public security offerings, borrowings on our expired line of credit and capital equipment leases.

        As of September 30, 2002, our cash, cash equivalents and marketable securities were $2.1 million, a decrease of $18.8 million from September 30, 2001. Cash used in operating activities for the fiscal year ended September 30, 2002 was $15.3 million as compared to $11.0 million in 2001. Cash used in operating activities during the fiscal year ended September 30, 2002 was primarily attributable to our net loss offset by non-cash items such as depreciation and amortization, increases in allowances for uncollectible accounts and excess and obsolete inventory, realized gain on sale of marketable securities, net unrealized loss from warrants to purchase common stock, write-off of impaired assets, write-down of investment in Beacon Power Corporation, non-cash compensation expense and changes in working capital.

        Cash used in investing activities during the fiscal year ended September 30, 2002 was $3.1 million, excluding the sale of marketable securities of $9.9 million, as compared to $2.0 million excluding the purchase of marketable securities of $9.9 million, in 2001. Net cash used in investing activities during the fiscal year ended September 30, 2002 included capital expenditures of $3.1 million primarily at Power Systems to expand our capacity to manufacture our power conversion products.

        Cash used in financing activities for the fiscal year ended September 30, 2002 was $0.3 million as compared to $25.1 million provided by financing activities in 2001. Net cash used by financing activities during the fiscal year ended September 30, 2002 represents the repayment of long-term debt.

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        We lease equipment and office space under non-cancelable capital and operating leases. Future minimum rental payments, as of September 30, 2002, under the capital and operating leases with non-cancelable terms are as follows:

Factors Affecting Future Results

        Our future results remain difficult to predict and may be affected by a number of factors which could cause actual results to differ materially from forward-looking statements contained in this Annual Report on Form 10-K and presented elsewhere by management from time to time. These factors include business conditions within the distributed power, power quality, aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive industries and the world economies as a whole, and competitive pressures that may impact research and development spending. Our revenue growth is dependent on technology developments and contract research and development for both the government and commercial sectors and no assurance can be given that these investments will continue or that we will be able to obtain such funds. In addition, our growth opportunities are dependent on the introduction of new products that must penetrate distributed power, power quality, aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive markets. No assurance can be given that new products can be developed, or if developed, will be successful; that competitors will not force prices to an unacceptably low level or take market share from us; or that we can achieve or maintain profits in these or any new markets. Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the market price of our common stock experiences significant volatility.

Effects of Inflation

        We believe that inflation and changing prices over the past three years have not had a significant impact on our net revenue or on our income from continuing operations.

Recent Accounting Pronouncements

        In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. We are currently reviewing this statement to determine its effect on our consolidated financial statements.

        In April, 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS

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No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. This statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions and is effective for fiscal years beginning after May 15, 2002. We are currently reviewing this statement to determine its effect on our consolidated financial statements.

        In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement is effective for exit and disposal activities initiated after December 31, 2002. We are currently reviewing this statement to determine its effect on our consolidated financial statements.

        In November 2001, the EITF issued Topic No. D-103 (Topic D-103) relating to the accounting for reimbursements received for out-of-pocket expenses. In accordance with Topic D-103, reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the statement of operations. Our arrangements have historically included reimbursement for expenses as part of the overall fee charged. As a result, we have historically accounted for these reimbursements as revenue and recorded the associated costs as either cost of product revenue or funded research and development and other revenue expenses. As a result, our adoption of Topic D-103 had no impact on our financial position, results of operations and cash flows.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. Interest income is sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in short-term instruments. Based on the nature and current levels of our investments, however, we have concluded that there is no material market risk exposure.

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Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
SatCon Technology Corporation:

        We have audited the accompanying consolidated balance sheet of SatCon Technology Corporation and its subsidiaries (the Company) (a Delaware corporation) as of September 30, 2002 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive loss and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of SatCon Technology Corporation as of September 30, 2001 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated December 4, 2001.

        We conducted our audit 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 audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SatCon Technology Corporation and its subsidiaries as of September 30, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

        The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company incurred a net loss of $20,760,598 during the year ended September 30, 2002, and, as of that date, the Company used $15,339,425 in its operating activities. The Company is operating under a forbearance agreement with its primary lender in which, unless other defaults occur, the primary lender would not exercise its rights as a creditor under the loan agreement until January 15, 2003. The Company needs an infusion of equity capital and, in addition, needs to achieve quarterly revenues at levels it has not achieved in the recent past in order to reach an estimated breakeven cash run rate. These factors, among others, as discussed in Note B to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regards to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        As discussed above, the consolidated financial statements of the Company as of September 30, 2001 and 2000, and for the years then ended were audited by other auditors who have ceased operations. As described in Note C, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) which was adopted by the Company as of October 1, 2001. Our audit procedures with respect to the disclosures in Note C for fiscal 2001 and 2000 included (i) agreeing the previously reported net loss attributable to common stockholders before cumulative effect of changes in accounting principles ("net loss") to the previously issued consolidated financial statements and the adjustments to reported net loss representing amortization expense (including any related tax effects) recognized in those periods related to goodwill that are no longer being amortized to the Company's underlying records obtained from management, and (ii) testing the

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mathematical accuracy of the reconciliation of adjusted net loss to reported net loss, and the related loss per weighted average share amounts. In our opinion, the disclosures for fiscal 2001 and 2000 in Note C related to the transitional disclosures of SFAS No. 142 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the Company's consolidated financial statements for fiscal 2001 and 2000 other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the Company's fiscal 2001 and 2000 consolidated financial statements taken as a whole.

Boston, Massachusetts
December 20, 2002

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
SatCon Technology Corporation:

        We have audited the accompanying consolidated balance sheets of SatCon Technology Corporation and its subsidiaries (the Company) (a Delaware corporation) as of September 30, 2001 and 2000 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive loss and cash flows for each of the three years in the period ended September 30, 2001. 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. 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 SatCon Technology Corporation and its subsidiaries as of September 30, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with auditing standards generally accepted in the United States.

Boston, Massachusetts
December 4, 2001

NOTE: THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP ("ANDERSEN") IN CONNECTION WITH SATCON TECHNOLOGY CORPORATION'S FORM 10-K FILING FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001. THE INCLUSION OF THIS PREVIOUSLY ISSUED ANDERSEN REPORT IS PURSUANT TO THE "TEMPORARY FINAL RULE AND FINAL RULE REQUIREMENTS FOR ARTHUR ANDERSEN LLP AUDITING CLIENTS," ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION IN MARCH 2002. NOTE THAT THE PREVIOUSLY ISSUED ANDERSEN REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS WHICH ARE NOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2002. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ANDERSEN IN CONNECTION WITH THIS FILING ON FORM 10-K.

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS