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UNITED STATES
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, 2003

Commission file number 1-11512

SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

        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 $11,897,507 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 ($0.79). There were 24,917,671 shares of Common Stock outstanding as of December 9, 2003.

        DOCUMENTS INCORPORATED BY REFERENCE:    Portions of the Registrant's Proxy Statement for its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

PART I

Item 1. BUSINESS

Recent Developments

        On October 31, 2003, we completed a $7.7 million financing transaction involving the issuance of 1,535 shares of our Series B Convertible Preferred Stock, $0.01 par value per share, and warrants to purchase up to 1,228,000 shares of our common stock, $0.01 par value per share, from 25 accredited investors.

        In connection with the financing, we issued shares of Series B Preferred Stock for $5,000 per share. The Series B Preferred Stock is convertible into a number of shares of common stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which is $2.50. The total number of shares of common stock issuable upon conversion of the shares of Series B Preferred Stock issued and sold is 3,070,000. The Series B Preferred Stock accrues dividends of 6% per annum, increasing to 8% per annum on October 1, 2005. The dividend for the first six months was paid at closing by issuing 76,054 shares of common stock, valued based on the average of the closing bid and ask price of the common stock on the Nasdaq National Market for the five trading days preceding October 31, 2003. All further dividends will be paid on a semi-annual basis. Except in certain limited circumstances, we may opt to pay these dividends in cash or in shares of common stock.

        As part of the financing, we also issued warrants to purchase up to 1,228,000 shares of common stock. These warrants have an initial exercise price of $3.32 per share, which represents 110% of the average closing price of the common stock for the five trading days prior to October 31, 2003. These warrants are immediately exercisable and expire on October 31, 2008.

        In November 2003, with the proceeds from this financing transaction, we paid off the outstanding balance under our line of credit with Silicon Valley Bank (the "Bank") of $1.8 million and the Bank released $0.4 million of the $0.5 million of cash previously restricted. In addition, on December 12, 2003, we amended our agreement with the Bank. Under the amended agreement, the Bank will provide us with a line of credit of up to approximately $6.3 million (the "Amended Loan"). The Amended Loan is secured by most of the assets of the Company and advances under the Amended Loan are limited to 80% of eligible accounts receivables, which will permit borrowings up to $5.0 million.

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 power control 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 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.

        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

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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 $26.9 million in 2003, of which $21.6 million, or 80%, was derived from product sales and the balance was from funded research and development and other revenue. We continue to introduce new products, which we believe we can transition into commercial production over the next few years, such as our Rotary Uninterruptible Power Supplies, Power Conditioning Systems and Power Control Modules.

        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. In September 2002, we acquired the machinery, inventory, backlog and intellectual property of Sipex Corporation's thin film and hybrid assembly operations that supplied product to the defense and aerospace industry.

        These acquisitions have provided us with increased revenues, a manufacturing capability to transition our technology into commercial products, and an expanded customer base. We sell our current products into the following markets:

        Revenues for our fiscal years ended September 30, 2003, 2002 and 2001 were $26.9 million, $41.6 million and $41.7 million, respectively. We sell our products both domestically and internationally, and our international sales for our fiscal years ended September 30, 2003, 2002 and 2001 were $3.3 million, $7.2 million and $6.1 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 2003, revenue from our Power Systems business unit was approximately $12.5 million.

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Electronics—Hybrid microcircuits and electronic components for aircraft, satellites, defense system, telecommunications and medical instruments. In fiscal year 2003, revenue from our Electronics business unit was approximately $9.2 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 2003, revenue from our Applied Technology business unit was approximately $5.3 million.

        In fiscal year 2003, we continued to focus our efforts on combining our high-power electronics and control systems into enabling components of power control systems such as our Rotary 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 power control systems, we focused our resources toward completing product development and marketing and selling these new products.

        During fiscal year 2003, we also focused our efforts on developing our management team, cutting costs and reducing our cash burn rate. We restructured the Company by reducing our headcount from over 300 in fiscal year 2002 to fewer than 200 employees currently. Along with streamlining our personnel, we reduced outside services costs and consolidated the space we lease in Canada to further reduce our fixed costs. We also created a centrally managed engineering pool that supports all of the divisions and which we believe has resulted in improved allocation of personnel.

        During fiscal year 2003 we cut costs in order to position ourselves for profitability and reduce our cash burn rate. We sold our Beacon Power Corporation common stock. Beacon Power Corporation, a former affiliate of the Company, develops and markets composite material based flywheels for telecommunications applications. We also raised cash through financing transactions, the most recent of which is discussed above under "Recent Developments". See also Note J to the notes to the consolidated financial statements for a discussion of our fiscal year 2003 financing transactions. Our restructuring efforts over the last few quarters have enabled us to operate at a reduced cash burn rate despite larger accounting losses associated with non-cash items.

        During fiscal year 2003, our focus continued to be the development and manufacturing of power control systems. Power control systems match the electrical power characteristics of power generation sources to the load requirements of users. In simpler terms, they make electrical power usable, distributable and controllable by controlling the power characteristics at the end use. This ability is important for high power applications in critical military systems, alternative energy applications and in high reliability industrial automation. Our power control products include power inverters, power converters and control systems. We believe that our products have now reached a level of maturity that can lead to profitable sales. We have had success in the military markets both at the Applied Technology and Electronics divisions and are beginning to see some increased interest in alternative energy products in our Power Systems division.

        We expect to see a growing market acceptance for power control products in these potentially significant markets, particularly given an increased demand by users for higher reliability electricity after the blackout of August 2003. Because of their need for reliability and increased power within decreased size requirements, the military has become a strong early adopter of our power control products that offer reduced size and increased reliability at high power ratings.

        Our Applied Technology division has expanded its customer base significantly and has generated a significant increase in backlog. SatCon Electronics has maintained a solid base of military and commercial customers and, under its new management team, has made significant strides in quality and on-time performance.

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        Our web site is www.satcon.com and we make available through this site, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. These reports may be accessed through our website's investor relations page.

Industry Background

        In the United States, we see several trends developing which will have the effect of increasing the demand for power electronics and alternative energy products 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 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 power control 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 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 power control products to convert, store and manage electricity. In order to be commercially viable and operate

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effectively, these 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 power control products. Market dynamics, power generation uncertainty and environmental concerns have also lead to the emerging 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, 7 days a week, or where there are critical operations that cannot be interrupted even for one millisecond.

        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 applications such as "all-electric" gun systems.

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        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

        Although this market is in its infancy, we believe that fuel cell hybrid-electric vehicles have the potential to be the leading alternative to internal combustion engines. These vehicles contribute to 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. We are developing power electronics systems and components as well as auxiliary motors for use in hybrid- electric vehicles.

Our Solution

        Our solution is to provide power control products and systems that encompass the following key attributes:

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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.

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Strategy

        Our strategy is to use our expertise and proprietary technologies to position SatCon to benefit from an increase in demand for power electronics and alternative energy products. Our strategy to establish this positioning is two-fold: first, since the power control system is an enabler for power quality, UPS and alternative energy products, we believe that our control system expertise positions us to be a valued 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 these systems—developing innovative power systems using our power electronics and control software and integrating third party power generation and energy storage.

        Our customers include semiconductor fabricators, industrial manufacturers, defense and aerospace contractors, 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 long-term strategy:

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



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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 the 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 market and we believe will offer us opportunities for expansion of existing product lines into new markets and with new customers.



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Develop strategic alliances with other companies to exploit technological advantages of our product lines. These alliances may take the form of marketing, sales, distribution and/or manufacturing agreements.

Products

        We design, develop and manufacture high-efficiency, high-reliability and long-lived power control 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 have a wide range of prices from several cents for electronics resistors to several thousands of dollars for complex

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packaged circuits; from several hundreds of dollars for precision industrial automation motors to tens of thousands of dollars for computer driven specialty motor systems; from hundreds of thousands of dollars for smaller UPS systems to over one million dollars for larger UPS systems depending on the accessories ordered by our customers. Our funded research and development is priced according to the level of complexity of the project, the amount of deliverable units and the time and effort entailed within each project. Prices charged can range from a few hundreds of thousands of dollars to several million dollars for each project. Our products are sold through our three business units:

SatCon Power Systems

        SatCon Power Systems manufactures and sells our high power line of power control 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. We also developed our new line of commercial Rotary UPS Systems for back-up power and power quality, for which we have completed product development and testing and in November 2003 we also completed the installation of our first 250 kilowatt and 2.2 megawatt systems. During the past year, we also continued development efforts including: power control systems for distributed power generation including UL compliance testing, and Inverpower industrial and commercial power conversion and conditioning products. Revenues for our fiscal years ended September 30, 2003, 2002 and 2001 from our Power Systems business unit were approximately $12.5 million, $19.9 million and $20.2 million, respectively.

        During the fiscal year 2003, $4.7 million of revenue was generated by the sales of Power Solutions, $3.4 million was generated by the sales of Ling Electronics' shaker vibration test systems, $1.7 million was generated by the sales of magnetic levitation systems primarily to Applied Materials and $2.7 million was generated by the sales of 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 5 kilowatts to 100 megawatts, 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 we 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

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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.

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 our fiscal years ended September 30, 2003, 2002 and 2001 from our Electronics business unit was approximately $9.2 million, $10.9 million and $10.6 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 and test modules, sub-assemblies and fully integrated electronic systems for both military and commercial customers that require compact, high reliability 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 sold directly customers and also further integrated internally 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 substrates and components to military and commercial equipment markets.



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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 networks.

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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, 2003, 2002 and 2001 from Applied Technology was approximately $5.3 million, $10.8 million and $10.9 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.

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.

        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.

New Product Opportunities

Rotary Uninterruptible Power Supply (UPS) Systems

        During the fiscal year 2003, we completed the development of our 250 kilowatt and 2.2 megawatt Rotary Uninterruptible Power Supply, or UPS, systems which are used as back up power supplies and power quality systems. The 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 5 kilowatts of power.

        In the fiscal year 2003, we concentrated on completing the initial build and product introduction of both our 250 kilowatt and 2.2 megawatt systems for industrial and manufacturing operations. During fiscal year 2003, we shipped a 250 kilowatt system to the Lecroy Center in Texas and a 2.2 megawatt system to Deluxe Film Laboratories in Toronto, Canada. Both of these systems were installed in November 2003 and revenue is anticipated to be recorded on these transactions in fiscal year 2004.

        Our Rotary UPS product combines a diesel generator, supplied by Cummins, Inc., who SatCon identified as its preferred supplier in March of 2002, 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.

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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 fiscal year 2002 and further introduced a line of Power Conditioning Systems for photovoltaic applications in fiscal year 2003.

        In fiscal year 2003, 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. In November 2003, we completed the requirements for compliance with UL1741 for our 100 kilowatt Power Conditioning System for photovoltaic applications.

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. In December of 2002, General Atomics issued a purchase order to us calling for $5.0 million in deliverables for the Triton project over a two year period commencing in December of 2002. As is typical of government subcontracts of this nature, this purchase order is cancelable at any time for the convenience of General Atomics. 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.

        In order to formalize potential collaboration with General Atomics on future work relating to shipboard power distribution, we entered into a teaming agreement with General Atomics in February 2003 in which each agrees to assist the other in preparing proposals. It further provides that if General Atomics is seeking work in the program area, it will use us as its subcontractor and we agree that we will not collaborate with another entity if General Atomics is soliciting work in that area. It is the intent of the parties to coordinate their respective endeavors in order to obtain additional contracts in the program area. The term of the teaming agreement was originally three years, unless terminated earlier by mutual agreement of the parties. In September 2003, that agreement was extended to five years through March 2007, subject to termination provisions. However, there can be no assurance that any material revenues or expenses will be associated with the teaming agreement in the future.

        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-

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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 7.1%, 5.7% and 6.8% of our total revenue for our fiscal years ended September 30, 2003, 2002 and 2001, respectively. For our fiscal years ended September 30, 2003, 2002 and 2001, revenue from the U.S. Department of Energy accounted for 0.2%, 6.1% and 7.4% of our total revenue, respectively. For our fiscal years ended September 30, 2003, 2002 and 2001, revenue from Applied Materials accounted for 5.1%, 4.7% and 8.3% of our total revenue, respectively. For our fiscal years ended September 30, 2003, 2002 and 2001, revenue from General Atomics accounted for 9.9%, 12.0% and 9.4% of our total revenue, respectively. The loss of any one or more of these customers would have a material adverse effect on SatCon. In addition, approximately 50% of our revenue during fiscal year 2003 was derived from government contracts and subcontracts with the U.S. government's prime contractors.

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 years ended September 30, 2003, 2002 and 2001, we expended $5.0 million, $7.2 million and $7.4 million, respectively, on funded research and development and other revenue 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 $1.5 million, $5.9 million and $6.2 million on internally-funded research and development during our fiscal years ended September 30, 2003, 2002 and 2001, respectively. During our fiscal year ended September 30, 2003, our most concentrated effort was directed toward the continued development of power electronics and various power conditioning systems for alternative energy applications.

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.

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        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 and responding to unsolicited requests for proposals and through our Internet site.

Backlog

        Our backlog consists primarily of product development contracts, orders for power control systems, electronics and motion control products. At September 30, 2003, our backlog was approximately $19.8 million. Of this amount, approximately $15.2 million is scheduled to be shipped during our fiscal year 2004. 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. We believe that our backlog at any time should not be used as an indication of future revenue.

Competition

        We believe that competitive performance in the marketplace for power control 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:

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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.;



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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.;



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



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



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



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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. 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

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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.

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 September 30, 2003, we held 72 U.S. patents and had 3 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. The expiration dates of our patents range from 2009 to 2021, with the majority expiring after 2015.

        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.

        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, export control energy generation, 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 the necessary government permits and have been in substantial compliance with all of these applicable laws and regulations.

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

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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, 2003, we had a total of 179 full-time employees, 4 part-time employees and 11 contract employees. Of the total, 69 persons were employed in engineering, 79 in manufacturing, 32 in administration and 14 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:

        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.

        In June 2003, we were served with a civil action by Framingham Welding & Engineering Corporation ("Framingham Welding") seeking payment in the amount of approximately $225,000 for goods and services allegedly provided by Framingham Welding. We have achieved a partial settlement and received a release from Framingham Welding for products and services actually delivered and continue to negotiate with them to resolve the remaining claims. We believe that a resolution will be achieved within the first half of fiscal year 2004 and will not materially adversely affect our results of operations or financial condition or net cash flows.

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        In July 2003, Donald R. Gililland, Sharon Gililland, Vernon Dunham and Jean Dunham, owners of the real property commonly known as 4890 E. La Palma Avenue, Anaheim, CA 92870 (collectively the "Owners"), filed a complaint against the Company for breach of lease with the Orange County Superior Court. The complaint alleges, among other things, failure of the Company to maintain/repair premises. The Owners allege that the correction and repair of the various breaches by the Company of its obligations under the Lease will exceed the sum of $400,000. We do not believe that this complaint has merit and intend to vigorously defend against it.

        We are not aware of any other 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 or net cash flows.

Item 4. SUBMISSION OF MATTERS TO A 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.

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, 2002 and 2003:

        On December 9, 2003, the last reported sale price of our common stock as reported on the Nasdaq National Market was $2.31 per share. As of December 9, 2003, there were 24,917,671 shares of our common stock outstanding held by approximately 291 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, our Amended and Restated Accounts Receivable Financing Agreement with Silicon Valley Bank, dated as of April 4, 2003, as amended, provides for certain limitations on the payment of dividends by us on our common stock. Furthermore, under the terms of our Series B Preferred Stock, we may not pay dividends on our

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common stock without the consent of the holders of at least 75% of the outstanding shares of Series B Preferred Stock.

Recent Sales of Unregistered Securities

        On July 22, 2003, we issued to FuelCell Energy Inc., in connection with a materials financing arrangement, a warrant exercisable for 250,000 shares of our common stock, at an exercise price of $0.72 per share. This warrant expires on July 21, 2006. 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 December 12, 2003, we issued to Silicon Valley Bank, in connection with the sixth amendment to the Amended and Restated Accounts Receivable Financing Agreement, dated December 12, 2003, a warrant exercisable for 16,164 shares of our common stock, at an exercise price of $2.32 per share. This warrant expires on December 11, 2010. 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.

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, 2003, 2002 and 2001 and the consolidated balance sheet data as of September 30, 2003 and 2002 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, 2000 and 1999 and the consolidated balance sheet data as of September 30, 2001, 2000 and 1999 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

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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 statements 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. We do not intend to update information contained in any forward-looking statements we make.

Recent Developments

        On October 31, 2003, we completed a $7.7 million financing transaction involving the issuance of 1,535 shares of our Series B Convertible Preferred Stock, and warrants to purchase up to 1,228,000 shares of our common stock, from 25 accredited investors.

        In connection with the financing, we issued shares of Series B Preferred Stock for $5,000 per share. The Series B Preferred Stock is convertible into a number of shares of common stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which is $2.50. The total number of shares of common stock issuable upon conversion of the shares of Series B Preferred Stock issued and sold is 3,070,000. The Series B Preferred Stock accrues dividends of 6% per annum, increasing to 8% per annum on October 1, 2005. The dividend for the first six months was paid at closing by issuing 76,054 shares of common stock, valued based on the average of the closing bid and ask price of the common stock on the Nasdaq National Market for the five trading days preceding October 31, 2003. All further dividends will be paid on a semi-annual basis. Except in certain limited circumstances, we may opt to pay these dividends in cash or in shares of common stock.

        As part of the financing, we also issued warrants to purchase up to 1,228,000 shares of common stock. These warrants have an initial exercise price of $3.32 per share, which represents 110% of the average closing price of our common stock for the five trading days prior to October 31, 2003. These warrants are immediately exercisable and expire on October 31, 2008.

        In November 2003, with the proceeds from this financing transaction, we paid off the outstanding balance under our line of credit with Silicon Valley Bank (the "Bank") of $1.8 million and the Bank released $0.4 million of the $0.5 million of cash previously restricted. In addition, on December 12, 2003, we amended our agreement with the Bank. Under the amended agreement, the Bank will provide us with a line of credit of up to approximately $6.3 million (the "Amended Loan"). The Amended Loan is secured by most of the assets of the Company and advances under the Amended Loan are limited to 80% of eligible accounts receivables, which will permit borrowings up to $5.0 million.

Overview

        SatCon designs, develops and manufactures high-efficiency high power electronics and a variety of standard and custom high-performance machines for specific applications. SatCon's power control products convert, store and manage electricity for businesses and consumers, the U.S Government and military that require high-quality, uninterruptible power. SatCon is utilizing its engineering and manufacturing expertise to develop products that it believes will be integral components of distributed

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power generation and power quality systems. SatCon's specialty motors are typically designed and manufactured for unique customer requirements such as high power-to-size requirements or high efficiency.

        SatCon has expanded its business and capabilities through the following acquisitions:

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



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Film Microelectronics, Inc.—a manufacturer of hybrid microelectronics, acquired in April 1997.



•

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



•

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



•

HyComp, Inc.—a manufacturer of electronic multi-chip modules, acquired in April 1999.



•

Ling Electronics, Inc.—a manufacturer of test equipment, power converters, amplifiers and converters, 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, the Company acquired intellectual property, tooling and other assets from Northrop Grumman Corporation enabling the Company 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.

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 of America. 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 revenue 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.

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

Revenue Recognition

        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 passes upon shipment of the product, as the products are typically 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. If the product requires specific

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customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless we can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. 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 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. The Defense Contract Audit Agency has agreed-upon the final indirect cost rates for the fiscal year ended September 30, 2000. When the current estimates of total contract revenue and contract costs for 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, 2003 and 2002, we have accrued approximately $0.4 million and $0.2 million, respectively, for anticipated contract losses.

        Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements are included in funded research and development and other revenue expenses.

        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.

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

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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.

        At the end of June 2003, we were actively engaged in selling our Shaker product line, and we were pursuing a strategy which we hoped would lead to a strategic alliance with a larger company for the development and exploitation of the advantages embodied in our Uninterruptible Power Supply ("UPS") system. During the process of considering various options, we concluded that both our Shaker and UPS system inventories were overvalued based upon the June 2003 plans. We analyzed the situation and recorded in increase to our valuation reserve. This reserve was based on our assessment of the situation as of that time. Events in the future could be materially different than expected. Late in calendar year 2003, we decided to retain our Shaker product line, due in part to a significant improvement in our liquidity situation. In light of the plan to retain the Shaker product line, we have not reversed the valuation reserves we established in June 2003.

Investment in Beacon Power Corporation

        On September 28, 2001, we distributed 5,000,000 shares of 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 had determined that we did not have the ability to exercise significant influence over the operating and financial policies of Beacon Power and, therefore, accounted 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. The investment was carried at fair value and designated as available for sale and any unrealized holding gains or losses were to be included in stockholders' equity as a component of accumulated other comprehensive income (loss) so long as any unrealized losses were deemed temporary in nature. If the decline in fair value was judged to be other than temporary, the cost basis was written down to the fair value as a new cost basis and the amount of the write-down was included in the statement of operations. The new cost basis would not be changed for subsequent recoveries in fair value. Subsequent increases in the fair value were to be included in stockholders' equity as a component of accumulated other comprehensive income (loss). Subsequent decreases in fair value, if not an other-than-temporary impairment, also were to be included in stockholders' equity as a component of accumulated other comprehensive income (loss).

        As of September 30, 2002, the quoted fair market value of Beacon Power's common stock held by us was $0.17 per share, or $0.8 million. Our historical cost basis in our investment in Beacon Power's common stock was approximately $0.59 per share, or $2.8 million, resulting in an unrealized loss of $2.0 million as of September 30, 2002. We determined that of this $2.0 million, $1.4 million represented an other than temporary decline based on the extent and length of the time the stock price has been below its cost as well as its assessment of the financial condition and near term prospects of Beacon Power. We recorded a charge of $1.4 million in the statement of operations to realize this portion of the loss. This charge was measured based on the trading value of Beacon Power's common stock during the month of November and early December and was less than the gross unrealized loss due to subsequent recovery of Beacon Power's stock price, as well as our ability and intent to hold the stock for a long enough period of time for it to recover to the new cost basis. After this write-down, the new cost basis of the Beacon Power common stock held by us was approximately $0.30 per share and the unrealized loss of the Beacon Power common stock held by us was $0.6 million as of September 30, 2002.

        As of March 29, 2003, the quoted fair market value of Beacon Power's common stock held by us was $0.18 per share, or $0.8 million. Our cost basis in our investment in Beacon Power's common stock was approximately $0.30 per share, or $1.4 million, resulting in an unrealized loss of $0.5 million as of March 29, 2003. As of March 29, 2003, we believed the difference in the current fair market value and

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the cost basis of our investment represented an other than temporary decline based upon our ability and intent to hold the stock for a long enough period of time for it to recover. We recorded a charge of $0.5 million in our statement of operations to realize this loss. After the write-down, the new cost basis of the Beacon Power stock held by us was $0.18 per share.

        During June and July 2003, we sold all of our 4,705,910 shares of our Beacon Power Corporation common stock for proceeds of $1.7 million, net of fees and commissions. As a consequence of the sale of these shares, we realized a gain of $0.9 million, which is included in our results for the fiscal year ending September 30, 2003.

        The following summarizes our investment in Beacon Power Corporation:

        In addition, 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, Accounting for Derivative Instruments and Hedging Activities, and, therefore, record the warrant at its fair value. As of September 30, 2003 and 2002, the warrant to purchase Beacon Power common stock had a fair value of $0.1 million and $0.0 million, respectively.

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 statement requires impairment tests be periodically repeated and on an interim basis, if certain conditions exist, 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 ceased.

        We 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 largely based upon projections prepared by us and data from sources of publicly available information available at the time of preparation. These projections are based on management's best estimate of future results. In making these projections, we consider the markets we are addressing, the competitive environment and our advantages. 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. In addition, we perform a macro assessment of the overall likelihood that we would

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achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Long-Lived Assets

        As of October 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes 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 Opinion No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The statement requires that long-lived assets be reviewed for possible impairment, if certain conditions exist, with impaired assets written down to fair value.

        We determine the fair value of certain of the long-lived assets based on a discounted cash flow income approach. The income approach indicates the fair value of a long-lived assets based on the discounted value of the cash flows that the long-lived asset can be expected to generate in the future over the life of the long-lived asset. This analysis is based upon projections prepared by us. These projections represent management's best estimate of future results. In making these projections, we consider the markets we are addressing, the competitive environment and our advantages. 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. In addition, we perform a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

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 $41.1 million as of September 30, 2003, 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, 2003 Compared to Fiscal Year Ended September 30, 2002

        Product Revenue.    Product revenue decreased by $9.2 million, or 30%, from $30.8 million in fiscal year 2002 to $21.6 million in fiscal year 2003. The decrease in revenue was comprised of $7.5 million in our Power Systems Division and $1.7 million in our Electronics Division.

        The decline of $7.5 million in Power Systems was due to significantly lower sales in all product lines. Approximately two-thirds of this variance was in our Power Conversion and Test & Measurement product lines; we also experienced reductions in our Magnetics and Motors and Service and Parts

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product lines. These lower sales reflect an overall general weakness in our business. During the fiscal year ended September 30, 2003, we shipped two UPS systems to third parties—one a 250 kilowatt unit and one a 2.2 megawatt unit. Both transactions had conditions which were not fulfilled as of September 30, 2003; therefore we continued to defer this revenue.

        The decrease of $1.7 million in Electronics revenue reflected the continued weakness in the telecommunication and semiconductor industries. In part because of general economic weakness, we experienced lower sales in both our commercial and military sectors.

        Funded research and development and other revenue.    Funded research and development and other revenue decreased by $5.5 million, or 51%, from $10.8 million in fiscal year 2002 to $5.3 million in fiscal year 2003. This decrease was attributable to the reduction in revenue of $2.5 million from a program with the Department of Energy to develop low-cost power conversion modules for electric and hybrid-electric vehicles ("AIPM"), and $0.5 million from a program with General Atomics for the U.S. Navy's electric missile air launch system ("EMALS"). These reductions were the results of these programs being completed. In addition, the decrease was attributable to a reduction in revenue of $1.9 million from programs with General Atomics to develop integrated power systems for future U.S. Navy's "all-electric" ship platforms ("IPS") and to deliver modular, electric power converter and control assemblies to be installed on the RV Triton, a British research vessel ("TRITON)". During fiscal year 2003, we began work on a $1.1 million program with EDO Corporation ("EDO") for the design and development of a power converter for a new mine sweeping system for the U.S. Navy's Organic Airborne and Surface Influence Sweep system ("OASIS"). We have deferred recognizing revenue on this program until the contract is complete. As of September 30, 2003, we have deferred $0.7 million of costs associated with this program. We expect this program to be completed in the third fiscal quarter of 2004.

        Cost of product revenue.    Cost of product revenue decreased by $3.6 million, or 12%, from $29.6 million in fiscal year 2002 to $26.0 million in fiscal year 2003. This was primarily due to lower material costs of $2.2 million directly related to our decline in revenue. We also experienced a reduction of $2.7 million in manufacturing and overhead costs reflecting a reduction in the cost structure of the business. These reductions were offset in part by a higher provision for excess and obsolete inventory and purchase commitments of $1.3 million primarily related to inventory for our Shaker and UPS system products. In general, our businesses operate on negative margins at the current revenue levels due to excess manufacturing capacity, which is expensed as incurred. Since our cost structure, except for materials, is relatively fixed, our revenue levels significantly affect our gross margin. The large drop in revenue for the year coupled with the valuation adjustment, were the major reasons why our product gross margin declined from 4% in fiscal year 2002 to -20% in fiscal year 2003.

        Funded research and development and other revenue expenses.    Funded research and development and other revenue expenses decreased by $2.1 million, or 30%, from $7.2 million in fiscal year 2002 to $5.0 million in fiscal year 2003. The decrease was directly attributable to the reduction in funded research and development revenue. The gross margin on funded research and other revenue declined from 34% in fiscal year 2002 to 5% in fiscal year 2003. In large part, this decline is reflective of the fact that there is a significant fixed overhead component in our funded research and development and other revenue expenses. During fiscal year 2003, we entered into a fixed-price contract with EDO for OASIS. We expect to incur costs in excess of the contract value and accordingly have accrued for this loss of $0.6 million in the fourth quarter of fiscal year 2003.

        Unfunded research and development expenses.    Unfunded research and development expenses decreased by $4.4 million, or 75%, from $5.9 million in fiscal year 2002 to $1.5 million in fiscal year 2003. During fiscal year 2002, we were involved in developing the UPS product line in Power Systems which is largely completed. This is the major reason for the reduction in unfunded research and

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development. In addition, we have greatly reduced our development of radio frequency activity in our Electronics Division and terminated the biosensor activity in our Applied Technology Division.

        Selling, general and administrative expenses.    Selling, general and administrative expenses decreased by $2.3 million, or 14%, from $15.9 million in fiscal year 2002 to $13.6 million in fiscal year 2003. This decrease was the direct result of cost savings including the restructuring activities completed during the last half of fiscal year 2002.

        Amortization of intangibles.    Amortization of intangibles decreased by $0.1 million, or 14%, from $0.6 million in fiscal year 2002 to $0.5 million in fiscal year 2003. This was the result of the write-off of intangible assets as described below.

        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 included 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. 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 disposed of.

        Write-off of long-lived assets.    We recorded a $0.7 million charge representing an impairment in the carrying value of the long-lived assets in our Worcester, Massachusetts manufacturing facility. This was required as a result of our decision to streamline our operations. We have decided to reduce our UPS sales, marketing and development effort and plan to form a strategic alliance with a major company. In this scenario, our Worcester facility will have the Magnetics (Servo Motors and its Maglev products), EPT and StarSine as its remaining product lines. Based in large part on our recent history, we prepared a cash flow forecast of these products over the 7 years—representing the current lease and our 5-year option to extend—we do not expect to recoup the value of our long-lived assets. These assets, before write-down, approximate $3.2 million and are comprised primarily of leasehold improvements made within the last few years. Given this situation, we performed a fair market analysis of this asset and determined that a $0.7 million charge was required in our fiscal third quarter representing an impairment of this long-lived asset. Late in calendar 2003, we decided to retain our Shaker product line due in part to a significant improvement in our liquidity situation.

        Write-off of impaired goodwill and intangible assets.    During the three months ended March 29, 2003, we experienced a significant adverse change in the business climate, in particular, significant reductions in revenue and cash flows. This coupled with our current liquidity issues at that time, required us to consider selling assets unrelated to our engineering and manufacturing expertise in electromechanical systems. The assets and product lines we considered selling included our Ling Shaker product line, our patented smart predictive line control technology utilized by the electric arc steel manufacturing industry and patents acquired from Northrop Grumman related to the hybrid electric vehicles. Based on these conditions, we performed an impairment test on an interim basis. We determined the fair value of each of the reporting units based on a discounted cash flow income approach. This analysis was largely based upon historical data. Based on the results of the first step of the goodwill impairment test, we determined that the fair value of the Applied Technology and Electronics reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of March 29, 2003. As a result, the second step of the goodwill impairment test was not required to be completed. We will continue to perform a goodwill impairment test for these reporting units on an annual basis and on an interim basis, if certain

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conditions exist. Based on the results of the first step of the goodwill impairment test, we determined that the fair value of the Power Systems reporting unit does not exceed its carrying amount. The fair value was determined to approximate the fair value of the net tangible assets. The second step of the impairment test required us to write off the unamortized balance of the goodwill and intangible assets of the Power Systems reporting unit as of March 29, 2003 of $5.8 million. Late in calendar 2003, we decided to retain our Shaker product line due in part to a significant improvement in our liquidity situation. However, we continue to consider selling our patented smart predictive line control technology utilized by the electric arc steel manufacturing industry and patents acquired from Northrop Grumman related to hybrid electric vehicles.

        Net unrealized gain (loss) on warrants to purchase common stock.    Net unrealized gain on warrants to purchase common stock in fiscal year 2003 was $0.1 million as compared with a net unrealized loss of $0.5 million in fiscal year 2002. We account for our warrants to purchase Mechanical Technology Incorporated's common stock and to purchase Beacon Power Corporation's common stock in accordance with SFAS No. 133 and, therefore, we have recorded these warrants at their fair value at September 30, 2003.

        Unrealized loss on Series B warrants.    Unrealized loss on Series B warrants in fiscal year 2003 was $1.9 million. We account for our Series B warrants issued in connection with the February 2003 financing transaction in accordance with SFAS No. 133 and, therefore, we have recorded these warrants at their fair value at September 30, 2003. Because we did not achieve certain financial conditions for our fourth quarter of fiscal year 2003, the exercise price of these warrants was to be reduced from $1.50 per share down to $1.00 per share commencing on the date we file this Form 10-K. Accordingly, we considered this fact in determining the fair value at September 30, 2003.

        Write-down of investment in Beacon Power Corporation common stock/ Realized gain from sale of Beacon Power Corporation common stock.      We account for our investment in Beacon Power using the fair value method as set forth in SFAS No. 115. As of March 29, 2003, the quoted fair market value of Beacon Power's common stock held by the Company was $0.18 per share, or $0.8 million. Our cost basis in our investment in Beacon Power's common stock was approximately $0.30 per share, or $1.4 million, resulting in an unrealized loss of $0.5 million as of March 29, 2003. As of March 29, 2003, we believed the difference in the current fair market value and the cost basis of our investment represents an other than temporary decline based upon our ability and intent to hold the stock for a long enough period of time for it to recover. We recorded a charge of $0.5 million in the statement of operations to realize this loss. After the write-down, the new cost basis of the Beacon Power stock held by us was $0.18 per share. During June 2003, we commenced the sale of the 4,705,910 shares of our Beacon Power Corporation common stock. As of September 30, 2003, we had sold all of those shares for proceeds of $1.7 million, net of fees and commissions. As a consequence of the sale of these shares, we realized a gain of $0.9 million.

        Interest income (expense), net.    Interest expense, net was $4.0 million for fiscal year 2003 compared with interest income, net of $0.1 million for fiscal year 2002, an increase in interest expense of $4.1 million. Interest expense for the fiscal year ended September 30, 2003 includes the following: $0.1 million fees associated with the line of credit; $0.2 million of interest expense associated with outstanding amounts under the line of credit; $0.3 million of expense associated with the issuance of warrants in connection with the line of credit; $0.1 million of fess associated with forbearances of loan covenant violations; $0.1 million on capital lease obligations; $2.5 million amortization of discount on the convertible redeemable Series A preferred stock; $0.2 million dividends on convertible redeemable Series A preferred stock; and $0.4 million of amortization of discount on the convertible subordinated debentures.

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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 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. Revenue from power conversion products in 2002 included $2.4 million from our StarSine Power Conditioning System ("PCS") to FuelCell Energy, $1.8 million from our Inverpower Brand Smart Predictive Line Controllers ("SPLC") to Hatch Steltech, Ltd. and $0.3 million from a 250-kilowatt power conversion system to Siemens Westinghouse.

        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 from $2.7 million to $4.4 million in funded research and development revenue from a program with General Atomics 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 $3.1 million to $2.5 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 $1.1 million to $0.5 million with General Atomics from the U.S. Navy's electric missile air launch system program. During 2002, we received all of the funding under the Department of Energy contract of $10.0 million and completed final hardware deliveries in the first half of fiscal year 2003.

        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. We purchased significant quantities of inventory related to our power conversion products during 2001 and 2002. When the primary customer for these products became insolvent in 2002, we determined not to continue in this line of business and as a consequence the inventory that we maintained was no longer salable in the ordinary course of business and had to be substantially reserved. As a consequence, our reserves against inventory as a percentage of gross inventory rose from 15.2% at the

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end of fiscal year 2001 to 23.6% at the end of fiscal year 2002. With the exception of certain materials that were scrapped, we have not disposed of the inventory that was the subject of the obsolescence charge.

        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.

        In general, our businesses operate on thin margins at the current revenue levels. Our cost structure, except for materials, is relatively fixed and includes such costs as manufacturing labor, facilities and equipment. Gross margin from product revenue as a percentage of product revenue decreased from 10% in 2001 to 4% in 2002. During 2002, we increased our fixed costs significantly as a result of relocating our Power Systems main facility from a 17,000 square foot facility to a 65,000 square foot facility. In addition, we began depreciating significant capital improvements we made to this facility.

        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 from $1.9 million to $3.1 million in funded research and development revenue expenses from a program with General Atomics 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 $0.8 million to $0.4 million from a program with General Atomics for 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, the costs remained flat at $1.9 million.

        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. The Company has not yet derived any revenue from this investment.

        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 $0.8 million, 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 fiscal 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.

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        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. 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. The Anaheim, CA manufacturing facility was closed during 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 and, therefore, we have recorded these warrants at their fair value at September 30, 2002 and recorded and unrealized loss of $0.5 million during 2002. The fair value of our warrants to purchase Mechanical Technology Incorporated's common stock decreased by $0.3 million from $0.3 million to $0.0 million. The fair value of our warrants to purchase Beacon Power's common stock decreased by $0.2 million from $0.2 million to $0.0 million.

        Write-down of investment in Beacon Power Corporation common stock.    Effective September 28, 2001, we account for our investment in Beacon Power using the fair value method as set forth in SFAS No. 115. 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 believed the decline in market value represented an other than temporary decline because, among other things, the market value had been less than cost since March 2002 and there was some uncertainty of the financial condition and near-term prospects of Beacon Power and, accordingly, we 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. 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.

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Quarterly Results of Operations (Unaudited)

        The following table presents unaudited quarterly statement of operations data for the eight quarters ended September 30, 2003. 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. The historical quarterly data for the fiscal year ended September 30, 2003 has been adjusted to reflect the impact of recognizing revenue on a funded research and development contract using the completed-contract method instead of the percentage-of-completion method. The impact of this adjustment was as follows:

        In addition, during the fiscal fourth quarter of 2003 the current estimate of the contract revenue and contract costs for this contract indicated a loss, a provision of $0.6 million for the entire loss, of which $0.3 million was incurred as of September 30, 2003, on this contract was recorded and is included in funded research and development and other revenue expenses.

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33

Liquidity and Capital Resources

        As of September 30, 2003, we had $1.2 million of cash, of which $0.5 million was restricted, and an outstanding loan balance to Silicon Valley Bank (the "Bank") of $1.8 million. In addition, at September 30, 2003 our trade payables totaled $4.7 million, of which $3.5 million were for invoices over 60 days old. In addition, we had $1.3 million of accrued accounts payable at September 30, 2003 for goods and services received but not yet invoiced.

        In October 2003, warrants to purchase 1.6 million shares of our Common Stock were exercised for net proceeds of $1.5 million, we sold an additional $0.1 million of convertible subordinated debentures and we sold shares of series B preferred stock for proceeds of approximately $7.1 million, net of placement agent's fees.

        In November 2003, with the proceeds from these financing transactions, we paid off the outstanding balance under the line of credit of $1.8 million and the Bank released $0.4 million of the $0.5 million of cash previously restricted. In addition, on December 12, 2003, we amended our agreement with the Bank. Under the amended agreement, the Bank will provide us with a line of credit of up to approximately $6.3 million (the "Amended Loan"). The Amended Loan is secured by most of the assets of the Company and advances under the Amended Loan are limited to 80% of eligible accounts receivables, which will permit borrowings up to $5.0 million. Interest on outstanding borrowings accrues at a rate equal to the Bank's prime rate of interest plus 1.5% per annum. In addition, we will pay to the Bank a collateral handling fee of 2.4% per annum of the average daily outstanding balance. The interest rate increases to the Bank's prime rate plus 3.0% per annum and the collateral handling fee increases to 3.0% per annum if we fail to meet certain financial ratios. We have also agreed to the following fees: (i) a $23,250 non-refundable facility fee upon the execution of the agreement; (ii) an unused line fee in an amount equal to 0.50% per annum on the difference between $5 million and the average daily principal balance of the loans outstanding during the month; and (iii) an early termination fee of $25,000 if we terminate the agreement before June 12, 2004. The Amended Loan contains certain financial covenants relating to tangible net worth, as defined, which we must satisfy in order to continue borrowing from the Bank. The Amended Loan matures on December 9, 2004.

        We anticipate that our cash after these transactions, together with the availability under the Amended Loan will be sufficient to fund our operations through September 30, 2004. This assumes that we will achieve our business plan and remain in compliance with the Amended Loan. The business plan envisions a significant increase in revenue and significant reductions in the cost structure and the cash burn rate from the results experienced in the recent past. If, however, we are unable to realize our plan, we may not be in compliance with loan covenants which may cause a default, as defined, and we may be forced to raise additional funds by selling stock, restructuring its borrowing, selling assets, or taking other actions to conserve our cash position.

        If additional funds are raised in the future 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.

        We have recently reevaluated our business in light of recent results and our October financing transactions. As a result of this reevaluation, we have decided to retain our Ling Shaker product line. And although we continue to consider selling our patented smart predictive line control technology utilized by the electric arc steel manufacturing industry and patents acquired from Northrop Grumman related to hybrid electric vehicles, these together represent less than $2 million of our total assets. We

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have informed our financial advisor, Alliant Capital Partners (an affiliate of the Bank) of our intentions and we are no longer actively working with them to dispose of these assets.

        Our financial statements for our fiscal year ended September 30, 2003, which are included in our 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 create a concern amongst our current and future customers and vendors as to whether we will be able to fulfill our contractual obligations.

        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, 2003, we had an accumulated deficit of $116.7 million. 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 line of credit and capital equipment leases.

        As of September 30, 2003, our cash and cash equivalents were $1.2 million, including restricted cash and cash equivalents of $0.5 million, a decrease of $0.9 million from September 30, 2002. Cash used in operating activities for the fiscal year ended September 30, 2003 was $7.3 million as compared to $15.3 million for fiscal year ended September 30, 2002. Cash used in operating activities during the fiscal year ended September 30, 2003 was primarily attributable to the net loss, net of realized gain from the sale of Beacon Power Corporation common stock and unrealized gain on warrants to purchase common stock, offset by non-cash items such as depreciation and amortization, increases in allowances for doubtful accounts and excess and obsolete inventory, unrealized loss from Series B warrants to purchase common stock, write-off of impaired long-lived, goodwill and intangible assets, write-down of investment in Beacon Power Corporation common stock, non-cash compensation expense and decreases in working capital.

        Cash provided by investing activities during year ended September 30, 2003 was $1.5 million as compared to of $6.8 million for the fiscal year ended September 30, 2002. Cash provided by investing activities during the fiscal year ended September 30, 2003 was primarily the result from proceeds from the sale of our Beacon Power Corporation common stock of $1.7 million.

        Cash provided by financing activities for the fiscal year ended September 30, 2003 was $4.8 million as compared to cash used by financing activities of $0.3 million for the fiscal year ended September 30, 2002. Net cash provided by financing activities during the fiscal year ended September 30, 2003 includes $3.2 million from the proceeds from the sale of the Series A Preferred Stock and the convertible subordinated debentures and $1.8 million of net borrowing under the bank line of credit offset by $0.3 million of 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, 2003, under the capital and operating leases with non-cancelable terms are as follows:

        In addition, as of September 30, 2003, we were obligated to pay the outstanding principal balance of $762,500 on the convertible subordinated debentures on September 5, 2008. However, in October 2003, all of the outstanding convertible subordinated debentures were converted into Common Stock.

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, including, without limitation, the factors set forth below, 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.

        We have a history of operating losses, may not be able to achieve profitability and may require additional capital in order to sustain our businesses.

        For each of the past eight fiscal years, we have experienced losses from operating our businesses. As of September 30, 2003, we had an accumulated deficit of approximately $116.7 million. During the fiscal year ended September 30, 2003, we had a loss from operations of approximately $26.1 million. The bulk of our 2003 loss from operations occurred in the first three quarters and by the fourth quarter of 2003 the quarterly loss from operations had been reduced to $2.2 million. If we are unable to operate on a cash flow breakeven basis during 2004, we may need to raise additional capital in order to sustain our operations. There can be no assurance that we will be able to achieve such results or to raise such funds if they are required.

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        We may not be able to continue as a going concern.

        Our financial statements for our fiscal year ended September 30, 2003, which are included in our 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 create a concern among our current and future customers and vendors as to whether we will be able to fulfill our contractual obligations.

        We could issue additional common stock, which might dilute the book value of our common stock.

        We have authorized 50,000,000 shares of our common stock, of which 24,917,671 shares were issued and outstanding as of December 9, 2003. Our board of directors has the authority, without action or vote of our stockholders in most cases, to issue all or a part of any authorized but unissued shares. Such stock issuances may be made at a price that reflects a discount from the then-current trading price of our common stock. In addition, in order to raise capital that we may need at today's stock prices, we will need to issue securities that are convertible into or exercisable for a significant amount of our common stock. These issuances would dilute your percentage ownership interest, which will have the effect of reducing your influence on matters on which our stockholders vote, and might dilute the book value of our common stock. You may incur additional dilution of net tangible book value if holders of stock options, whether currently outstanding or subsequently granted, exercise their options or if warrant holders exercise their warrants to purchase shares of our common stock.

        The sale or issuance of a large number of shares of our common stock could depress our stock price.

        As of December 9, 2003, we have reserved 5,709,430 shares of common stock for issuance upon exercise of stock options and warrants, 1,185,480 shares for future issuances under our stock plans and 447,052 shares for future issuances as matching contributions under our 401(k) plan. We have also reserved 3,070,000 shares of common stock for issuance upon conversion of the outstanding Series B Preferred Stock, which can be converted at any time. As of December 9, 2003, holders of warrants and options to purchase an aggregate of 4,895,818 shares of our common stock may exercise those securities and transfer the underlying common stock at any time subject, in some cases, to Rule 144.

        Financial investors may have interests different than you or SatCon, and may be able to impact corporate actions requiring stockholder approval because they own a significant amount of our common stock.

        We have recently completed two significant financing transactions. In February 2003, we raised approximately $4,000,000 through the issuance of securities that were convertible into or exercisable for up to 50% or more of the number of shares of our common stock outstanding at that time. In October 2003, we raised an additional $7,675,000 through the issuance of 1,535 shares of our Series B Convertible Preferred Stock and warrants to purchase up to 1,228,000 shares of our common stock from 25 accredited investors. Prior to the October 2003 transaction, all of the convertible securities issued in connection with the February 2003 transaction were exercised or converted and as a result of the exercise and conversion of these securities we raised approximately $1.5 million.

        In future financings, we may also issue securities that are convertible into or exercisable for a significant number of shares of our outstanding common stock. Financial investors such as those who participated in our 2003 financings may have short-term financial interests different from SatCon's long-term goals and the long-term goals of our management and other stockholders. In addition, based on their significant ownership of our outstanding common stock, financial investors may be able to impact corporate actions requiring stockholder approval.

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        We have not consistently complied with Nasdaq's Marketplace rules for continued listing, which exposes us to the risk of delisting from the Nasdaq National Market.

        Our stock is listed on the Nasdaq National Market, which affords us an opportunity for relatively broad exposure to a wide spectrum of prospective investors. As a requirement of continued inclusion in the Nasdaq National Market, SatCon must comply with Nasdaq's Marketplace Rules, which require that we maintain a market value of $50 million or have total assets of $50 million and $50 million of total revenue and that our stock price stays above $1.00, among others. Over the past twelve months, SatCon had received notice from Nasdaq that it was not in compliance with Marketplace Rules. Subsequently, SatCon was advised that it had achieved compliance and as of December 9, 2003, SatCon is in compliance with the Nasdaq National Market Marketplace Rules for Continued Inclusion. However, if we fail to maintain compliance with these rules and our common stock is delisted from the Nasdaq National Market, there could be a number of negative implications, including reduced liquidity in our common stock as a result of the loss of market efficiencies associated with the Nasdaq National Market, the loss of federal preemption of state securities laws, the potential loss of confidence by suppliers, customers and employees, as well as the loss of analyst coverage and institutional investor interest, fewer business development opportunities and greater difficulty in obtaining financing.

        We expect to generate a significant portion of our future revenues from sales of our power control products and cannot assure market acceptance or commercial viability of our power control products.

        We intend to continue to expand development of our power control products. We cannot assure you that potential customers will select SatCon's products to incorporate into their systems or that our customers' products will realize market acceptance, that they will meet the technical demands of their end users or that they will offer cost-effective advantages over existing products. Our marketing efforts to date involve development contracts with several customers, identification of specific market segments for power and energy management systems and the continuation of marketing efforts of recently acquired businesses. We cannot know if our commercial marketing efforts will be successful in the future. Furthermore, we cannot assure you that our products, in their current form, will be suitable for specific commercial applications or that further design modifications, beyond anticipated changes to accommodate different markets, will not be necessary. Additionally, we may not be able to develop competitive products, our products may not receive market acceptance, and we may not be able to profitably compete in this market even if market acceptance is achieved. If our products do not gain market acceptance or commercial viability, we will not achieve our anticipated levels of profitability and growth.

        If we are unable to maintain our technological expertise in design and manufacturing processes, we will not be able to successfully compete.

        We believe that our future success will depend upon our ability to develop and provide products that meet the changing needs of our customers. This requires that we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. As a result, we continually evaluate the advantages and feasibility of new product design and manufacturing processes. We cannot, however, assure you that our process development efforts will be successful. The introduction of new products embodying new technologies and the emergence of shifting customer demands or changing industry standards could render our existing products obsolete and unmarketable which would have a significant impact on our ability to generate revenue. Our future success will depend upon our ability to continue to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers. This will require us to continue to make substantial product development investments. We may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new

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products or product enhancements may cause customers to forego purchases of our products and purchase those of our competitors.

        We are heavily dependent on contracts with the U.S. government and its agencies or from subcontracts with the U.S. government's prime contractors for revenue to develop our products, and the loss of one or more of our government contracts could preclude us from achieving our anticipated levels of growth and revenues.

        Our ability to develop and market our products is heavily dependent upon maintaining our U.S. government contract revenue and research grants. Most of our U.S. government contracts are funded incrementally on a year-to-year basis. Approximately 50% of our revenue during fiscal year 2003 was derived from government contracts and subcontracts with the U.S. government's prime contractors. Any change in our relationship with the U.S. government or its agencies whether as a result of market, economic, or competitive pressures, including any decision by the U.S. government to alter its commitment to our research and development efforts, could harm our business and financial condition by depriving us of the resources necessary to develop our products. In addition there can be no assurance that once a government contract is completed that it will lead to follow-on contracts for additional research and development, prototype build and test, or production. Furthermore, contracts with the U.S. government may be terminated or suspended by the U.S. government at any time, with or without cause. There can be no assurance that our U.S. government contracts will not be terminated or suspended in the future, or that contract suspensions or terminations will not result in unreimbursable expenses or charges or other adverse effects on us.

        The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any such contract. Additionally, substantial portions of the payments to us under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. Adjustments that result from inquiries or audits of our contracts could have a material adverse impact on our financial condition or results of operations.

        Since our inception, we have not experienced any material adjustments as a result of any inquiries or audits, but there can be no assurance that our contracts will not be subject to material adjustments in the future.

        In the event that any of our government contracts are terminated for cause, it could significantly affect our ability to obtain future government contracts, which could seriously harm our ability to develop our technologies and products.

        A significant portion of our revenue is derived from contracts with the U.S. government and its agencies or from subcontracts with the U.S. government's prime contractors, and a slowdown in government spending may adversely affect our ability to obtain anticipated revenues.

        Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies or the imposition of budgetary constraints could significantly impair our ability to achieve this level of revenue going forward. Any reductions or slowdowns in government spending could also severely inhibit our ability to successfully complete the development and commercialization of our products. Changes in funding levels could cause the government to cancel existing contracts or eliminate follow-on phases in the future.

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        The U.S. government has certain rights relating to our intellectual property.

        Many of our patents are the result of retaining ownership of inventions made under U.S. government-funded research and development programs. 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. If we refuse, the government can grant the license itself, provided that it determines that such action is necessary because we have not achieved practical application of the invention, or to alleviate health or safety needs, or to meet requirements for public use specified by federal regulations, or because products using such inventions are not being produced substantially in the United States. The exercise of these rights by the government could create potential competitors for us if we later determine to further develop the technologies and utilize the inventions in which the government has exercised these rights.

        Our business could be adversely affected if we are unable to protect our patents and proprietary technology.

        As of December 9, 2003, we held 72 U.S. patents and had 3 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 for many of these patents. The expiration date of our patents range from 2009 to 2021, with the majority expiring after 2015. As a qualifying small business from our inception to date, we have retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants.

        Our patent and trade secret rights are of significant importance to us and to our future prospects. Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary technology and systems designs relating to our products. Although we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be successful in doing so. Further, our competitors may independently develop or patent technologies that are substantially equivalent or superior to ours. No assurance can be given as to the issuance of additional patents or, if so issued, as to their scope. Patents granted may not provide meaningful protection from competitors. Even if a competitor's products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action and there can be no assurance that we would be successful in enforcing our intellectual property rights. Because we intend to enforce our patents, trademarks and copyrights and protect our trade secrets, we may be involved from time to time in litigation to determine the enforceability, scope and validity of these rights. This litigation could result in substantial costs to us and divert resources from operational goals. In addition, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country where we operate or sell our products.

        We may not be able to maintain confidentiality of our proprietary knowledge.

        In addition to our patent rights, we also rely on treatment of our technology as trade secrets and upon confidentiality agreements, which all of our employees are required to sign, assigning to us all patent rights and technical or other information developed by the employees during their employment with us. We also rely, in part, on contractual provisions to protect our trade secrets and proprietary knowledge. Our employees have also agreed not to disclose any trade secrets or confidential information without our prior written consent. These agreements may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of these agreements or may be independently developed by competitors. Our inability to maintain the

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proprietary nature of our technology and information could harm our business, results of operations and financial condition by adversely affecting our ability to compete in our markets.

        Others may assert that our technology infringes their intellectual property rights.

        We believe that we do not infringe the proprietary rights of others and, to date, no third parties have asserted an infringement claim against us, but we may be subject to infringement claims in the future. The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our operating results may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.

        Loss of any of our key personnel, and particularly our Chief Executive Officer, could hurt our business because of their experience, contacts and technological expertise.

        The loss of the services of one or more of our key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering and sales personnel, could result in the loss of customers or otherwise inhibit our ability to operate and grow our business successfully. In addition, our ability to successfully integrate acquired facilities or businesses depends, in part, on our ability to retain and motivate key management and employees hired by us in connection with these acquisitions. We have been particularly dependent upon the services of David B. Eisenhaure, our president, chief executive officer, chairman of the board and founder, as a result of his business and academic relationships, understanding of government contracts and technical expertise. The loss of Mr. Eisenhaure's services could have a material adverse effect on our business.

        We expect significant competition for our products and services.

        In the past, we faced limited competition in providing research services, prototype development and custom and limited quantity manufacturing. We expect competition to intensify greatly as commercial applications increase for our products under development. Many of our competitors and potential competitors are well established and have substantially greater financial, research and development, technical, manufacturing and marketing resources than we do. Some of our competitors and potential competitors are much larger than we are. If these larger competitors decide to focus on the development of distributed power and power quality products, they have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of these products more quickly and effectively than we can. There can also be no assurance that current and future competitors will not develop new or enhanced technologies perceived to be superior to those sold or developed by us. There can be no assurance that we will be successful in this competitive environment.

        Price increases of materials or components used by us could adversely affect the volume of our sales.

        We use materials and components obtained from third-party suppliers to manufacture many of our products. If prices of materials and components that we use were to increase, we may not be able to afford them or to pass these costs on to our customers. Since some of our vendors are single sourced, our ability to consider lower priced options are limited in the short run. In addition, if we were required to raise the price of our products as a result of increases in the price of materials or components that we use, demand for our products may decrease which would reduce our sales.

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        We are dependent on third-party suppliers for the supply of key components for our products.

        We use third-party suppliers for components in many of our systems. From time to time, shipments can be delayed because of industry-wide or other shortages of necessary materials and components from third-party suppliers. A supplier's failure to supply components in a timely manner, or to supply components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to manufacture our products. If alternative sources are identified, we may not be able to successfully integrate those components into our system without incurring additional cost and risk. In addition, to the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers.

        Long-term contracts are not typical in our business, and reductions, cancellations or delays in customer orders would adversely affect our operating results.

        Other than certain contracts in our Applied Technology Division, we typically do not obtain long-term purchase orders or commitments from our customers. Instead, we work closely with our customers to develop accurate non-binding forecasts of the future volume and timing of orders to effectively allocate and manage our resources. Customers may cancel their orders, change production quantities from forecasted volumes or delay production for a number of reasons beyond our control. Significant or numerous cancellations, reductions or delays in orders by our customers would reduce or delay our net sales.

        If we experience a period of significant growth or expansion, it could place a substantial strain on our resources.

        If we are successful in obtaining rapid market penetration of our power control products, we may be required to deliver large volumes of technically complex products or components to our customers on a timely basis at reasonable costs to us. We have limited experience in ramping up our manufacturing capabilities to meet large-scale production requirements and delivering large volumes of our power control products. If we were to commit to deliver large volumes of our power control products, we cannot assure you that our efforts will be successful, that we will be able to satisfy large-scale commercial production on a timely and cost-effective basis or that such growth will not strain our operational and technical resources.

        Our business could be subject to product liability claims.

        Our business exposes us to potential product liability claims, which are inherent in the manufacturing, marketing and sale of our products, and we may face substantial liability for damages resulting from the faulty design or manufacture of products or improper use of products by end users. We currently maintain a low level of product liability insurance, and there can be no assurance that this insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain such coverage on acceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. In addition, negative publicity in connection with the faulty design or manufacture of our products would adversely affect our ability to market and sell our products.

        We are subject to a variety of environmental laws that expose us to potential financial liability.

        Our operations are regulated under a number of federal, state and foreign environmental and safety laws and regulations that govern, among other things, the discharge or release of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and

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Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Because we use hazardous materials in our manufacturing processes, we are required to comply with these environmental laws. In addition, because we generate hazardous wastes, we, along with any other person who arranges for the disposal of our wastes, may be subject to potential financial exposure for costs associated with an investigation and any remediation of sites at which we have arranged for the disposal of hazardous wastes if those sites become contaminated and even if we fully comply with applicable environmental laws. In the event of a violation of environmental laws, we could be held jointly and severably liable for damages and for the costs of remedial actions. Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, although, to-date, we have not been cited for any improper discharge or release of hazardous materials.

        Businesses and consumers might not adopt alternative distributed power solutions as a means for obtaining their electricity and power needs.

        On-site distributed power generation solutions, such as fuel cell, photovoltaic and wind turbine systems, which utilize our products, provide an alternative means for obtaining electricity and are relatively new methods of obtaining electricity and other forms of power that businesses may not adopt at levels sufficient to grow this part of our business. Traditional electricity distribution is based on the regulated industry model whereby businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to succeed, businesses and consumers must adopt new purchasing practices and must be willing to rely less upon traditional means of purchasing electricity. We cannot assure you that businesses and consumers will choose to utilize this on-site distributed power market at levels sufficient to sustain our business. The development of a mass market for our products may be impacted by many factors which are out of our control, including:

•

market acceptance of fuel cell, photovoltaic and wind turbine systems that incorporate our products;



•

the cost competitiveness of these systems that incorporate our products;



•

regulatory requirements; and



•

the emergence of newer, more competitive technologies and products.

If a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop these products.

        The distributed power generation industry may become subject to future government regulation, which may impact our ability to market our products.

        We do not believe that our products will be subject to existing federal and state regulations governing traditional electric utilities and other regulated entities. We do believe that our products will be subject to oversight and regulation at the federal, state or local level in accordance with state and local ordinances relating to building codes, safety, pipeline connections and related matters. This regulation may depend, in part, upon whether an on-site distributed power system is placed outside or inside a home. At this time, we do not know which jurisdictions, if any, will impose regulations upon our products. We also do not know the extent to which any existing or new regulations may impact our ability to sell and service our products. Once our customers' products reach the commercialization stage and they begin distributing systems to their target markets, federal, state or local government entities may seek to impose additional regulations. Any new government regulation of our products, whether at the federal, state or local level, including any regulations relating to installation and servicing of our products, may increase our costs and the price of our products and may have a negative impact on our revenue and profitability.

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        Our quarterly operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our share price may decrease significantly.

        Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our control.

        Because our operating expenses are based on anticipated revenue levels, our sales cycle for development work is relatively long and a high percentage of our expenses are fixed for the short term, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. If our earnings do not meet the expectations of securities analysts or investors, the price of our stock could decline.

        Existing stockholders can exert considerable control over us.

        As of December 9, 2003, our executive officers and directors, and their affiliates, beneficially owned approximately 3,992,444 of our outstanding shares of common stock, representing approximately 15.4% of our outstanding common stock, a majority of which was beneficially owned by Mr. Eisenhaure, our president, chief executive officer, chairman of the board and founder. Specifically, as of such date, Mr. Eisenhaure beneficially owned 3,146,379 shares of our common stock, representing 12.5% of our outstanding common stock. If all of these stockholders were to vote together as a group, they would have the ability to exert significant influence over our board of directors and its policies. As a practical matter, Mr. Eisenhaure has significant influence over the election of our directors and determining the outcome of corporate actions requiring stockholder approval, including votes concerning director elections, bylaw amendments and possible mergers, corporate control contests and other significant corporate transactions, irrespective of how some of our other stockholders may vote. Accordingly, such concentration of ownership may have the effect of delaying, deterring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could have an adverse effect on the market price of our common stock.

        Provisions in our charter documents and Delaware law may delay, deter or prevent the acquisition of SatCon, which could decrease the value of your shares.

        Some provisions of our certificate of incorporation and bylaws may delay, deter or prevent a change in control of SatCon or a change in our management that you as a stockholder may consider favorable. These provisions include:

•

authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and deter a takeover attempt;



•

a classified board of directors with staggered, three-year terms, which may lengthen the time required to gain control of our board of directors;



•

prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and



•

limitations on who may call special meetings of stockholders.

        In addition, Section 203 of the Delaware General Corporation Law and provisions in some of our stock incentive plans may delay, deter or prevent a change in control of SatCon. Those provisions serve to limit the circumstances in which a premium may be paid for our common stock in proposed transactions, or where a proxy contest for control of our board may be initiated. If a change of control or change in management is delayed, deterred or prevented, the market price of our common stock could suffer.

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        We are subject to stringent export laws and risks inherent in international operations.

        We market and sell our products and services both inside and outside the United States. We are currently selling our products and services throughout North America and in certain countries in South America, Asia, Canada and Europe. Certain of our products are subject to the International Traffic in Arms Regulations (ITAR) 22 U.S.C 2778, which restricts the export of information and material that may be used for military or intelligence applications by a foreign person. Additionally, certain products of ours are subject to export regulations administered by the Department of Commerce, Bureau of Industry Security, which require that we obtain an export license before we can export products or technology. Failure to comply with these laws could result in sanctions by the government, including substantial monetary penalties, denial of export privileges and debarment from government contracts.

        Revenue from sales to our international customers for our fiscal years ended September 30, 2003 and 2002 were $3.3 million and $7.2 million, respectively. Our success depends, in part, on our ability to expand our market for our products and services to foreign customers and our ability to manufacture products that meet foreign regulatory and commercial requirements. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. We face numerous challenges in penetrating international markets, including unforeseen changes in regulatory requirements, export restrictions, fluctuations in currency exchange rates, longer accounts receivable cycles, difficulties in managing international operations, and the challenges of complying with a wide variety of foreign laws.

        You are unlikely to be able to exercise effective remedies against Arthur Andersen LLP, our former independent public accountants.

        Although we have dismissed Arthur Andersen LLP as our independent public accountants and have engaged Grant Thornton LLP, our financial statements for the fiscal year ended September 30, 2001, which are incorporated by reference into this prospectus, were audited by Arthur Andersen. On March 14, 2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from the government's investigation of Enron Corporation. On June 15, 2002, a jury in Houston, Texas found Arthur Andersen guilty of these federal obstruction of justice charges. In light of the jury verdict and the underlying events, Arthur Andersen subsequently substantially discontinued operations and dismissed essentially its entire workforce. You are therefore unlikely to be able to exercise effective remedies or collect judgments against Arthur Andersen. In addition, Arthur Andersen has not consented to the inclusion of its report in this prospectus, and the requirement to file its consent has been dispensed with in reliance on Rule 437a promulgated under the Securities Act of 1933. Because Arthur Andersen has not consented to the inclusion of its report in this prospectus, you will not be able to recover against Arthur Andersen under Section 11 of the Securities Act for any untrue statement of a material fact contained in the financial statements audited by Arthur Andersen or any omissions to state a material fact required to be stated in those financial statements.

        We are exposed to credit risks with respect to some of our customers.

        To the extent our customers do not advance us sufficient funds to finance our expenses during the execution phase of our contracts, we are exposed to the risk that they will be unable to accept delivery or that they will be unable to make payment at the time of delivery. Occasionally, we accept the risk of dealing with thinly financed entities. We attempt to mitigate this risk by seeking to negotiate more timely progress payments and utilizing other risk management procedures.

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        Our agreement with Silicon Valley Bank subjects us to various restrictions, which may limit our ability to pursue business opportunities.

        Our accounts receivable financing agreement subjects us to various restrictions on our ability to engage in certain activities without the prior written consent of the bank, including, among other things, our ability to:

•

dispose of or encumber assets, other than in the ordinary course of business



•

incur additional indebtedness



•

merge or consolidate with other entities, or acquire other businesses, and



•

make investments

These restrictions may also limit our ability to pursue business opportunities or strategies that we would otherwise consider to be in our best interests.

        Our agreement with Silicon Valley Bank contains certain covenants that we may fail to satisfy which, if not satisfied, could result in the acceleration of the amounts due under such agreement and the limitation of our ability to borrow additional funds in the future.

        As of December 9, 2003, we had no borrowings under our financing agreement with The Silicon Valley Bank. This agreement subjects us to various financial and other covenants with which we must comply on an ongoing or periodic basis. The financial covenant requires us to maintain a minimum level of tangible net worth, as defined, which varies from month to month. If we violate this or any other covenant, there may be a material adverse effect on us. Most notably, our outstanding debt under this agreement could become immediately due and payable, the bank could proceed against any collateral securing such indebtedness and our ability to borrow additional funds in the future may be limited.

        The holders of our Series B Preferred Stock are entitled to receive liquidation payments in preference to the holders of our common stock.

        As of December 9, 2003, 1,535 shares of our Series B Preferred Stock were outstanding. Pursuant to the terms of the certificate of designation creating the Series B Preferred Stock, upon a liquidation of our company, the holders of shares of the Series B Preferred Stock are entitled to receive a liquidation payment prior to the payment of any amount with respect to the shares of our common stock. The amount of this preferential liquidation payment is $5,000 per share of Series B Preferred Stock, plus the amount of any accrued but unpaid dividends on those shares. Dividends accrue on the shares of Series B Preferred Stock at a rate of 6% per annum increasing to a rate of 8% per annum on October 1, 2005.

        We have granted to certain investors rights of first refusal and exchange rights which would be triggered upon future financings.

        In connection with our 2003 financings, we granted 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 allows investors to purchase future securities issued by us for a period of time following the initial closing of their financing. The exchange rights allow the investors to exchange any securities held by them into future securities that we may issue at the liquidation preference of the exchanged security. Each of these factors may adversely affect our ability to raise additional funds from third parties on terms acceptable to us, or at all.

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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 Statement of Financial Accounting Statement ("SFAS") No. 143, Accounting for Asset Retirement Obligation. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, an entity capitalizes a cost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on our financial position or results of operations.

        In August 2001, the 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 Opinion 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. The adoption of SFAS No. 144 did not have a material effect on our financial position or results of operations.

        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 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. The adoption of SFAS No. 145 did not have a material effect on our financial position or results of operations.

        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. The adoption of this statement did not have a material impact on our financial position or results of operations.

        In November 2002, FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 3 ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics: (a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an

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equity security of the guaranteed party (e.g., financial and market value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guarantee contracts from its scope. Additionally, certain guarantees are not subject to FIN 45's provisions for initial recognition and measurement but are subject to its disclosure requirements. The initial recognition and measurement provisions are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have made no guarantees, including indirect guarantees of the indebtedness of others.

        In November 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, effective for arrangements entered into after June 15, 2003. This issue defines units of accounting for arrangements with multiple deliverables resulting in revenue being allocated over the units of accounting for revenue recognition purposes. The adoption of this statement did not have a material effect on our financial position or results of operations.

        In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities at the end of the first interim or annual period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We are currently evaluating the impact of FIN 46 on its financial statements and related disclosures but do not expect that there will be any material impact.

        In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation—Transition and Disclosure, an amendment to FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial reporting. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition provisions are effective for fiscal years ending after December 15, 2002. For all other companies, the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. We adopted the disclosure provisions of SFAS No. 148 and it did not have a material effect on our financial position or results of operations.

        In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected

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to have a similar response to changes in market factors. SFAS No. 149 will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. This statement is applicable to existing contracts and new contracts entered into after June 30, 2003 if those contracts relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The adoption of SFAS No. 149 did not have a material effect on our results of operations or financial condition.

        In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 did not have a material effect on our results of operations or financial condition.

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

        The following discussion about our market risks disclosures involves forward-looking statements. Actual results could differ materially from those discussed in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate Risk

        We are exposed to market risk from changes in interest rates primarily through our financing activities. At September 30, 2003 we had a balance on our line of credit of $1.8 million. Prior to amending our loan agreement with the Bank in December 2003, interest on the outstanding borrowings accrued at a rate equal to the greater of 4.75% or the prime rate, plus 4.0% per annum. At September 30, 2003, this rate was 8.00%. Each 1% increase in the prime rate would have resulted in an annual interest expense increase of approximately $18,000 based on the amount outstanding under this facility at September 30, 2003. As noted above, in December 2003 we amended our loan agreement with the Bank. Interest on outstanding balances on the Amended Loan accrues at a rate equal to the Bank's prime rate of interest plus 1.5% per annum. The interest rate increases to the Bank's prime rate plus 3.0% per annum if we fail to meet certain financial ratios. Our ability to carry out our business plan or our ability to finance future working capital requirements may be impacted if the cost of carrying debt fluctuates to the point where it becomes a burden on our resources.

Foreign Currency Risk

        Nearly all of our sales outside the United States are priced in US dollars. If the US Dollar strengthens versus local currencies, it may result in our products becoming more expensive in foreign markets. In addition, approximately 15-20% of our costs are incurred in foreign currencies, especially the Canadian dollar. If the US Dollar weakens versus these local currencies, it may result in an increase in our cost structure.

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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 sheets of SatCon Technology Corporation and its subsidiaries (the Company) (a Delaware corporation) as of September 30, 2003 and 2002 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive loss and cash flows for the years 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 audits. The consolidated financial statements of SatCon Technology Corporation and its subsidiaries as of September 30, 2001 and for the year 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 audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the 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, 2003 and 2002 and the consolidated results of their operations and their cash flows for the years 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 consolidated financial statements, during the fiscal year ended September 30, 2003, the Company incurred a net loss of $31,481,162 and used $7,291,681 in its operating activities. In addition, the Company has historically incurred losses and used cash, rather than provided cash, from operations. The Company currently has a line of credit agreement which expires on December 9, 2004. The line of credit contains certain restrictive covenants. The Company 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 and to remain in compliance with certain covenants in the line of credit agreement. These factors, among others, as discussed in Note B to the consolidated 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 consolidated 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 for the year 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 of the consolidated financial statements for the fiscal year ended September 30, 2001 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

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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 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 in the financial statements for the fiscal year ended September 30, 2001 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 the fiscal year ended September 30, 2001 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 consolidated financial statements for the fiscal year ended September 30, 2001 taken as a whole.

/S/ GRANT THORNTON LLP

Boston, Massachusetts
December 22, 2003

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        Provided below, pursuant to Rule 2-02(e) of Regulation S-X, is a copy of the accountants report issued by Arthur Andersen LLP, our former independent public accountants, in connection with the filing of our Annual Report of Form 10-K for the fiscal year ended September 30, 2001. This audit report has not been reissued by Arthur Andersen in connection with the filing of this Annual Report on Form 10-K for the fiscal year ended September 30, 2003. Note that the previously issued Arthur 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 fiscal year ended September 30, 2003. We are unable to obtain a reissued accountants report from Arthur Andersen, and we will be unable to obtain future accountants reports from Arthur Andersen, because Arthur Andersen has discontinued its auditing practice. This means that we will also be unable to obtain consents to incorporate any financial statements audited by Arthur Andersen into registration statements that we may file in the future or that we may have previously filed. Accordingly, investors will not be able to sue Arthur Andersen pursuant to Section 11(a)(4) of the Securities Act with respect to any such registration statements and, therefore, ultimate recovery on a successful claim may be limited. The ability of investors to recover from Arthur Andersen may also be limited as a result of Arthur Andersen's financial condition or other matters resulting from the various civil and criminal lawsuits against that firm.

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.

/S/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
December 4, 2001

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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