Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

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

For the Year Ended December 31, 2008

Commission file number 1-11512



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

DELAWARE(State or other jurisdiction of
incorporation or organization)

04-2857552(I.R.S. Employer Identification Number)27 Drydock Avenue, Boston, Massachusetts(Address of principal executive offices)

02210(Zip Code)


(617) 897-2400(Registrant's telephone number, including area code)

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

Title of Class

Name of Exchange on Which RegisteredCommon Stock, $.01 Par Value

The NASDAQ Stock Market, LLC


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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). 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 $144,377,441 based
on the last reported sale price of the registrant's Common Stock on the Nasdaq Capital Market as of the close of business on the last business day of the registrant's most recently completed second
quarter ($3.01). There were 51,549,472 shares of Common Stock outstanding as of March 2, 2009.

DOCUMENTS INCORPORATED BY REFERENCE:Portions of the registrant's Proxy Statement for its 2009 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.



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Explanatory Note:While Satcon Technology Corporation (the "Company") is no longer a "smaller reporting company" as of the last business
day of its
most recently completed second fiscal quarter, under the rules and regulations of the Securities and Exchange Commission, the Company may finish reporting using the scaled disclosure afforded to a
smaller reporting company for the rest of the fiscal year, including in its annual report on Form 10-K. Accordingly, the Company is providing such scaled disclosure in this Annual
Report on Form 10-K. As allowed by such rules and regulations, the Company will begin providing the standard non-scaled disclosure in its Quarterly Report on
Form 10-Q for the quarter ended April 4, 2009.

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Table of Contents

SatCon Technology Corporation

TABLE OF CONTENTS



PAGEPart IItem 1.

Business


3Item 1A.

Risk Factors


12Item 1B.

Unresolved Staff Comments


23Item 2.

Properties


23Item 3.

Legal Proceedings


23Item 4.

Submission of Matters to a Vote of Security Holders


23Part IIItem 5.

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities


24Item 6.

Selected Consolidated Financial Data


25Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operation


27Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


37Item 8.

Consolidated Financial Statements and Supplementary Data


38Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure


108Item 9A.

Controls and Procedures


108Item 9B.

Other Information


109Part IIIItem 10.

Directors, Executive Officers and Corporate Governance


109Item 11.

Executive Compensation


109Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters


109Item 13.

Certain Relationships and Related Transactions, and Director
Independence


109Item 14.

Principal Accounting Fees and Services


109Part IVItem 15.

Exhibits, Financial Statement Schedules


110Signatures


111


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PART I

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. The forward-looking statements contained in this
Annual Report are generally located in the material set forth under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations," but may be found in other locations as well. Although we believe that these forward-looking statements reasonably reflect our plans, intentions and expectations disclosed in the
forward-looking statements, 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 under the heading "Risk Factors" under Item 1A that we believe could cause our actual results to differ materially from the forward-looking statements that
we make. Forward-looking statements contained in this Annual Report speak only as of the date of this report. Subsequent events or circumstances occurring after such date may render these statements
incomplete or out of date. We undertake no obligation and expressly disclaim any duty to update such statements.

Item 1.    BUSINESS

Overview

Satcon Technology Corporation ("Satcon" or "Company") is a leading clean energy technology provider of utility grade power solutions
for the renewable and distributed energy markets. We deliver power conversion solutions and system design services for large-scale renewable energy plants. Our products are utilized by businesses and
utility companies to efficiently convert renewable energy sources into stable and reliable electrical power.

Our
PowerGate® Plus suite of photovoltaic and fuel cell power inverters, which are sold through our Renewable Energy Solutions division, offer rugged and reliable solutions
that enhance the total output and power production of the solar installation. We also offer system design services and solutions for management, monitoring, and performance measurement to maximize
capital investment and improve overall quality and performance over the entire lifespan of the installation.

In
addition to our core power conditioning solutions, we also develop, design and build power conversion electronics, power management and distribution systems for a variety of defense
and commercial applications through our Applied Technology division.

Revenue Comparison with Prior Years

Consolidated revenues for the years ended December 31, 2008 and 2007 were as follows:

Year Ended
December 31,2008

2007United States

$
54,600,486

$
35,418,686International


7,921,617


6,608,537Total

$
62,522,103

$
42,027,223


These
numbers have been adjusted to reflect the sale of our Electronics and Power Systems US business units, which was finalized in the third quarter of 2008. See Note D
(Discontinued Operations) to the Consolidated Financial Statements.

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Industry Background & Market Opportunity

The worldwide demand for clean and renewable sources of energy, such as solar, is being driven globally by a variety of factors. These
factors include increasing electricity usage, power grid capacity constraints, fossil fuel price volatility, and harmful levels of pollution and greenhouse gases. As a result of these and other
challenges facing traditional energy sources, individuals, businesses and governments are seeking more reliable, efficient and cleaner solutions for their power needs through renewable portfolio
standards (RPS), tax incentives, and international treaties.

Within
this renewable energy market we believe that the fastest growth area for Satcon involves large-scale, utility grade renewable energy and distributed power generation. These
solutions require power quality control products to manage the performance of individual solar installations and monitor how it will interconnect with larger energy infrastructure (grid). In order to
be commercially viable and operate effectively, these solutions must be highly reliable, efficient, and deliver the command and control performance required to profitably manage multi-megawatt solar
power plants. Our intellectual property, in the form of technical expertise and innovative product offerings, uniquely positions the company to provide the next generation of large-scale, utility
grade renewable energy projects with the energy storage, power quality, and distributed power systems they will require.

Products

We deliver a full suite of power conditioning solutions and services for large commercial and utility scale renewable energy
installations through our two business segments: Renewable Energy Solutions and Satcon Applied Technology.

Renewable Energy Solutions (formerly Satcon Power Systems, Canada)

We produce a broad range of products to provide the critical bridge between clean energy sources and large-scale power grids, helping
companies meet the rising demand for clean energy.

Our
solutions for renewable energy consist of two core product offerings:



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Revenues
for the years ended December 31, 2008 and 2007 from our Renewable Energy Solutions business unit were as follows:

Year Ended
December 31,(Amounts in Millions)

2008

2007Product RevenueAlternative Energy Products

$
52.2

$
25.4Other Legacy


2.1


7.6Total Product Revenue

$
54.3

$
33.0


These
numbers have been adjusted to reflect the sale of our Electronics and Power Systems US business units, which was finalized in the third quarter of 2008. See Note D
(Discontinued Operations) to the Consolidated Financial Statements.

Applied Technology

Applied Technology develops, designs and builds power conversion electronics, power management and distribution systems, for a variety
of defense and commercial applications. 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, 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.

Revenue
for the years ended December 31, 2008 and 2007 from our Applied Technology division was as follows:

Year Ended
December 31,(Amounts in Millions)

2008

2007Funded Research and Development and other revenue

$
8.2

$
9.0


Financial Results by Business Segment

Our financial results by business segments for the fiscal years ended December 31, 2008 and 2007 are presented in Note S
to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Satcon Product Attributes

We strive to meet our customers' needs by providing power conditioning solutions and systems that encompass the following key
attributes:



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Sales, Marketing and Service

We sell our products and services through direct sales personnel, distributor arrangements and sales agent arrangements which comprise
a global market presence for Satcon. Our direct sales staff manages our key customer accounts, regional distributors and agents, as well as, provides customer support and identifies significant market
opportunities in their respective markets.

In
order to maximize our customer's return on assets and investment profitability, we offer a suite of services focused on delivering optimized design and installation support. We also
maintain localized customer service capabilities at sites throughout North America, Europe and Asia. Our services provide technical support throughout the entire lifespan of a product. We believe
these factors are essential to building close, long-term value for our customers, and maintaining our competitive edge.

Within
our Applied Technology division, 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.

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Strategy

Our strategy is to drive revenue growth, expand our leadership position in key markets, and enhance operating results by increasing the
adoption of our products in the large commercial and utility scale renewable energy market. Our focus continues to be:



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Competition

We believe that competitive performance in the marketplace for power conditioning and control products depends upon several factors,
including product price, technical innovation, product quality and reliability, range of products, customer service and technical support. Satcon remains focused on solving large-scale power
production challenges and we have aligned all resources within our organization behind this focus. 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 our competitors.



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Our
ability to continue to compete successfully with these companies depends on our ability to continue to innovate through our products and services.

Significant Customers

There were two customers that were classified as significant customers in 2008 (i.e., sales to any one customer exceeding 10% of
our revenue or gross accounts receivable exceeding 10% of our gross accounts receivable). Our largest customer accounted for approximately 14% of our 2008 revenue. Our second largest customer
accounted for approximately 10% of our 2008 revenue. At December 31, 2008, both customers had a balance greater than 10%, or approximately $3.3 million, of our outstanding gross accounts
receivable. For the year ended December 31, 2007, two customers accounted for approximately 26%, or approximately $11.1 million, of revenue. At December 31, 2007, three customers
had a balance greater than 10%, or approximately $4.4 million, of our outstanding gross accounts receivable.

Backlog

Our backlog consists primarily of orders for power control systems and product development contracts. At December 31, 2008, our
backlog was approximately $25 million. Of this amount, approximately $20 million is scheduled to be shipped during 2009. 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.

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 years ended December 31, 2008 and 2007, we expended approximately $6.5 million and $6.7 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
approximately $5.1 million and $2.3 million on internally-funded research and development during the years ended December 31, 2008 and 2007, respectively.

Manufacturing Facilities

We manufacture our products at our facilities located in Burlington, Ontario, Canada. Our overall manufacturing process has a current
production capacity of approximately 400MW per year. As our business continues to grow both domestically and overseas we are looking to expand our manufacturing capabilities to establish a direct
local presence in all of the regions where we plan to compete. This

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strategy
will enable us to better support the increased worldwide demand for our photovoltaic power conditioning solutions.

Reducing
product cost is essential to our ability to further penetrate the market with our power conditioning solutions and service offerings. 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
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.

Innovation
is at the core of our business. Satcon's success in transitioning its technology development programs to commercially successful solutions has been consistently recognized by
governments and industry. A select list of awards and recognitions is included below:

SEGIS Project

2008Focused on developing the next generation of clean energy technologies required to increase the usage of photovoltaic (PV) systems into the energy network. The goal of the project is to create efficient and
sustainable growth through advances in technology and expanding the usage of solar generated energy, while at the same time improving the power quality and reliability of the overall utility grid.Tibbetts Award

1997Awarded for developing the 20C1000 Series Cable/Telecom, 2.0 kWh flywheel energy systems, which is specifically designed as a "plug-for-plug" replacement for lead-acid batteries in standby power supply
applicationsNational Committee for the Partnership for Next Generation Vehicles

1996A cooperative research and development program between the federal government and the United States Council for Automotive Research (USCAR) focused on development of a vehicle to achieve up to three times the
fuel efficiency of contemporary vehicles, while maintaining or improving current levels of performance, size, utility, and total cost of ownership and while meeting or exceeding federal safety and emissions requirements.


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Co-chaired the Power Electronics Subcommittee

1996Discover Magazine Award for Technological Innovation

1995For work on the Advanced Hybrid Electric Patriot Race Car Drivetrain.


As
of December 31, 2008, we held approximately 61 U.S. patents and had 9 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.

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.

Foreign Operations

We have foreign operations through our Renewable Energy Solutions facility in Burlington, Ontario, Canada.

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

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

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

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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 December 31, 2008, we had a total of 213 full-time employees, 10 part-time employees and
55 contract employees. Of the total, 66 persons were employed in engineering, 153 in manufacturing, 36 in administration and 23 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.

Reports

Our web site iswww.Satcon.com.We make available on this site 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 the SEC. These reports may be
accessed through our website:http://investor.Satcon.com/index.cfm

Item 1A.    RISK FACTORS

The risks described below may materially impact your investment in our company or may in the future, and, in
some cases already do, materially affect us and our business, financial condition and results of operations. You should carefully consider these factors with respect to your investment in our
securities. This section includes or refers to certain forward-looking statements; you should read the explanation of the qualifications and limitations on such forward-looking statements beginning on
pages 4 of this report.

Risks Related to Our Company

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 ten fiscal years, we have experienced losses from operating our businesses. As of December 31, 2008, we had
an accumulated deficit of approximately $190.0 million. During the year ended December 31, 2008 we had a loss from continuing operations of approximately $13.2 million. If,
however, we are unable to operate on a cash flow breakeven basis in the future, 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.

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

We have authorized 200,000,000 shares of our common stock, of which 51,479,822 shares were issued and outstanding as of
December 31, 2008. 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 the capital that we may need at today's
stock prices, we will need to issue securities that are convertible into or exercisable for a

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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 March 1, 2009, we have reserved 35,498,928 shares of common stock for issuance upon exercise of stock options and warrants
and 662,618 shares for future issuances under our stock plans. We have also reserved 935,484 shares of common stock for issuance upon conversion of the outstanding Series B Preferred Stock,
which can be converted at any time. In addition, we have reserved 24,038,461 shares of common stock for issuance upon conversion of the outstanding Series C Preferred Stock, which can be
converted at any time. As of March 1, 2009, holders of warrants and
options to purchase an aggregate of 28,355,157 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.

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

As a result of our failure to comply with the continued listing requirements of The Nasdaq Global Market, on October 25, 2006 we
transferred our securities to The Nasdaq Capital Market. However, if we fail to maintain compliance with the rules for continued listing on The Nasdaq Capital Market, including, without limitation,
the minimum $1.00 bid price requirement, and our common stock is delisted from The Nasdaq Capital 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 Capital Market, the loss of federal preemption of state securities law, 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 have included development contracts with several customers and the targeting of specific market segments for power
and energy management systems. We cannot know if our commercial marketing efforts will be successful in the future. Additionally, we may not be able to develop competitive products, our products may
not receive market acceptance, and we may not be able to compete profitably in this market, even if market acceptance is achieved. If our products do not gain market acceptance or achieve commercial
viability, we will not attain 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

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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 improvement 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. We may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products or product enhancements may cause customers to forego
purchases of our products and purchase those of our competitors.

Our contracts with the U.S. government are subject to audit by the Defense Contract Audit Agency and other agencies of the government, which may
challenge our treatment of direct and indirect costs and reimbursements, resulting in a material adjustment and adverse impact on our financial condition.

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.
Currently 2006, 2007 and 2008 remain open for review with the Defense Contract Audit Agency.

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.

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

Many of our patents are the result 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," which 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.

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

As of March 1, 2009, we held approximately 61 U.S. patents and had 9 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 dates 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.

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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 through confidentiality agreements,
which all of our employees are required
to sign, assigning to us all patent rights and other intellectual property developed by our employees during their employment with us. Our employees have also agreed not to disclose any trade secrets
or confidential information without our prior written consent. We also rely on non-disclosure agreement to protect our trade secrets and proprietary knowledge. These agreements may be
breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of these agreements or may be independently developed by competitors. Failure to
maintain the proprietary nature of our technology and information could harm our results of operations and financial condition by reducing or eliminating our technological advantages in the
marketplace.

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.

Our success is dependent upon attracting and retaining highly qualified personnel and the loss of key personnel could significantly hurt our
business.

To achieve success, we must attract and retain highly qualified technical, operational and executive employees. The loss of the
services of key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering, operations and business development personnel, could result in the
loss of business or could otherwise negatively impact our ability to operate and grow our business successfully.

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We expect significant competition for our products and services.

In the past, we have 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.

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
deliver our products in accordance with contractual obligations.

On occasion, we agree to fixed price engineering contracts, which exposes us to losses.

Most of our engineering design contracts are structured on a cost-plus basis. However, on occasion we have entered into
fixed price contracts, which may expose us to loss. In addition, in our manufacturing divisions we accept fixed price contracts via customer purchase orders. A fixed priced contract, by its very
nature, requires cost estimates during the bidding process and throughout the contract, as the program proceeds to completion. Depending upon the complexity of the program, the estimated completion
costs could change frequently and significantly during the course of the contract. We regularly involve the appropriate people on the program and finance staffs to arrive at a reasonable estimate of
the cost to complete. However, due to unanticipated technical challenges and other factors, there is the potential for substantial cost overruns in order to complete a contract in accordance with the
contract specifications. At December 31, 2008 and 2007, we have accrued approximately $1.3 million and $1.1 million, respectively, related to an anticipated loss on a fixed price
contract.

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

If our power control products are successful in achieving rapid market penetration, 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 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, financial and technical resources.

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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 moderate 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 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 certain of 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 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.
If we were found to be a responsible party, we could be held jointly and severably liable for the costs of remedial actions. To date, we have not been cited for any improper discharge or release of
hazardous materials.

Businesses and consumers might not adopt alternative energy 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 electrical 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 upon less traditional means of purchasing electricity. We
cannot assure you that businesses and consumers will choose to utilize on-site distributed power at levels sufficient to sustain our business in this area. The development of a mass market
for our products may be impacted by many factors which are out of our control, including:



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.

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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.

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:



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.

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 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 certain products or technology. Failure to
comply with these laws could result in enforcement responses by the government, including substantial monetary penalties, denial of export privileges, debarment from government contracts and possible
criminal sanctions.

Revenue
from sales to our international customers for the years ended December 31, 2008 and 2007 were approximately $7.9 million and $6.6 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

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currency
exchange rates, longer accounts receivable cycles, difficulties in managing international operations, and the challenges of complying with a wide variety of foreign laws.

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 costs 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.

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

Our loan agreement with Silicon Valley Bank 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:



The
agreement also 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, any outstanding debt under this agreement could become immediately due and
payable, the bank could proceed against any collateral securing indebtedness and our ability to borrow funds in the future may be restricted or eliminated. These restrictions may also limit our
ability to pursue business opportunities or strategies that we would otherwise consider to be in the best interests of the Company.

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 March 1, 2009, 290 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 8% per annum.

The holders of our certain of our outstanding warrants have the right to put those warrants to us for cash if we issue common stock or common stock
equivalents at a price per share less than $1.65.

As of March 1, 2009, we had outstanding Warrant As to purchase up to an aggregate of 2,090,911 shares of common stock and
Warrant Cs to purchase up to an aggregate of 1,045,456 shares of common stock. The holder of those warrants may put those warrants to us for a cash amount equal to their Black-Scholes value if we
issue common stock or common stock equivalents at a price per share less than $1.65, subject to certain exceptions. These rights are exercisable for the 45-day period following any such
issuance. The existence of these rights could limit our ability to raise necessary

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capital
in the future. Furthermore, the exercise of these rights could materially impact our capital resources and materially affect our ability to fund operations.

Risks Related to Our Private Placement of Series C Preferred Stock and Related Warrants

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

As of March 1, 2009, 25,000 shares of our Series C Preferred Stock were outstanding. Upon a liquidation of our company,
the holders of shares of Series C 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 the greater of (i) $1,000 per share of Series C Preferred Stock, plus the amount of any accrued but unpaid dividends on those shares, or
(ii) the amount per share that a holder would have received if, immediately prior to the liquidation, that holder's share had been converted to our common stock. Dividends accrue on the shares
of Series C Preferred Stock at a rate of 5% per annum. Because of the substantial liquidation preference to which the holders of the Series C Preferred Stock are entitled, the amount
available to be distributed to the holders of our common stock upon a liquidation of our company could be substantially limited or reduced to zero.

We are responsible for having the resale of shares of common stock underlying the Series C Preferred Stock and related warrants registered
with the SEC within defined time periods and will incur liquidated damages if the shares are not registered with the SEC within those defined time periods.

Pursuant to our agreement with the investors in the Series C Preferred Stock financing transaction, we were obligated to
(i) file a registration statement covering the resale of the common stock underlying the Series C Preferred Stock and related warrants with the SEC by the earlier of
(x) five business days after we filed our 2007 Annual Report on Form 10-K and (y) April 7, 2008 (which we satisfied), (ii) use our best efforts to cause
the registration statement to be declared effective within 60 days following the required filing date (which we satisfied), and are required to (iii) use our best efforts to keep the
registration statement effective until the earlier of (x) the date all of the securities covered by the registration statement have been publicly sold and (y) the date all of the
securities covered by the registration statement may be sold without restriction under SEC Rule 144. If we fail to comply with these or certain other provisions, then we will be required to pay
liquidated damages of one twentieth of a percent (.05%) of the aggregate purchase price paid by the investors for the securities that can be registered on the registration statement for each day the
failure continues. The total liquidated damages under this provision are capped at 9.9% of the aggregate purchase price paid by the investors in the private placement. Any such payments could
materially affect our ability to fund operations.

The certificate of designation governing the Series C Preferred Stock contains various covenants and restrictions which may limit our ability
to operate our business.

Under the certificate of designation governing the Series C Preferred Stock we are not permitted, without the affirmative vote
or written consent of the holders of 50% of the Series C Preferred Stock, directly or indirectly, to take any of the following actions or agree to take any of the following
actions:



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These
restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities, any of which could have a material
adverse impact on our business.

The holders of the Series C Preferred Stock will have substantial voting power on matters submitted to a vote of stockholders.

Generally, the holders of Series C Preferred Stock are entitled to vote on all matters on which the holders of our common stock
are entitled to vote, voting together with the holders of our common stock as a single class. Each share of Series C Preferred Stock is entitled to 694 votes. Based on 51,549,472 shares of
common stock outstanding as of March 1, 2009, the outstanding shares of Series C Preferred Stock represent, in the aggregate, 25.2% of the voting power of our stock. The voting
percentage held by the investors would increase to the extent the shares of Series C Preferred Stock are converted or the warrants issued in the private placement are exercised. Because the
investors will own a significant percentage of our voting power, they may have considerable influence in determining the outcome of any corporate transaction or other matter submitted to our
stockholders for approval, including the election of directors and approval of merger, consolidations and the sale of all or substantially all of our assets.

In
addition, the ownership by the investors of a substantial percentage of our total voting power and the terms of the Series C convertible preferred stock could make it more
difficult and expensive for a third party to pursue a change of control of our company, even if a change of control would generally be beneficial to our stockholders.

The Series C Preferred Stock is redeemable at the option of the holders under certain circumstances.

On or after November 8, 2011, the holders of two-thirds of the outstanding shares of Series C Preferred Stock
may require us to redeem all or any portion of the outstanding shares of Series C Preferred Stock. The redemption price is equal to 120% of the stated liquidation preference amount, to

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the
extent that the redemption is made in cash, or 140% of the stated liquidation preference amount to the extent that, at our election, the redemption is made in shares of our common stock. If the
redemption is made in shares of common stock, the shares will be based on the fair market value of the common stock, based on a 10 day volume weighted average, as of the redemption date.
Depending on our cash resources at the time that this redemption right is exercised, we may or may not be able to fund the redemption from our available cash resources. If we were unable to fund the
redemption from available cash we would need to find an alternative source of financing to do so. The can be no assurances that we would be able to raise such funds if they are required. If we were
not able to finance the redemption in cash, we would have to make the redemption payment in shares of our common stock which would be dilutive to our common stockholders.

The investors in our private placement of Series C Preferred Stock will have the right to designate up to four individuals to be elected to
our board of directors.

In the purchase agreement, we agreed that for as long as each investor beneficially owns at least 25% of the Series C Preferred
Stock and warrants issued to them in the private placement, each investor would be entitled to designate one individual to be nominated to our board of directors. We also agreed that as long as either
investor or both investors beneficially owns at least 25% of the Series C Preferred Stock and warrants issued to them in the private placement, we would include one investor designee in the
corporate governance and nominating committee and one investor designee on the compensation committee of our board of directors. Upon the first closing, our board of directors elected Philip J.
Deutch, as the designee of NGP Energy Technology Partners, L.P., and David J. Prend, as the designee of RockPort Capital Partners II, L.P., to serve on our board.

Upon
the second closing, as required under the purchase agreement, our board of directors was reduced from nine directors to seven directors, and the investors jointly had the right to
designate one additional director who is "independent" (as that term is defined in the regulations of the Nasdaq Stock Market) to serve as a director. Accordingly, effective as of the second closing,
three existing directors resigned and the board duly appointed Robert G. Schoenberger, Chairman of the Board and Chief Executive Officer of Unitil Corporation, as the investors' additional independent
designee. However, in the event the size of our board of directors is increased to nine members in order to comply with Nasdaq rules, the investors will be entitled to designate an additional
independent director.

The
number of investor designees will be appropriately adjusted to the extent required by the applicable rules of Nasdaq.

Because
the holders of Series C Preferred Stock will have the right to designate these members to of our board of directors, as well as designees to serve on our board committees,
they will be able to exert considerable influence over the board level decision-making at our company.

We have agreed to give the holders of Series C Preferred Stock the right to participate in subsequent stock issuances.

We agreed that if we issue and sell any new equity securities prior to December 20, 2009, subject to some exceptions, we will
give the investors the right to purchase all or some of those new securities so as we permit the investors to maintain their ownership percentage in our stock. The existence of this right may make it
more difficult for us to obtain financing from third parties that do not wish to have the Series C Preferred Stock investors participating in their financing.

The Series C Preferred Stock private placement had a substantial dilutive effect on our common stock, and subsequent anti-dilution
adjustments could increase the dilutive effect.

Consummation of the private placement had a substantial dilutive effect on our common stockholders. The aggregate number of shares
issued pursuant to the private placement substantially

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increased
the number of shares of our capital stock outstanding on an as converted basis. As a result, the percentage ownership of our common stockholders significantly declined as a result of the
private placement. As a result of the private placement, the investors own approximately 46.77% of the outstanding shares of our capital stock, on an as converted basis assuming conversion of all the
shares of Series C Preferred Stock and exercise of all warrants (excluding the additional warrants that may be issued from time to time upon the exercise of certain existing warrants).

Furthermore,
the anti-dilution protection provided to both the Series C Preferred stock and the warrants could substantially increase the number of shares of our
common stock currently outstanding. Upon a dilutive issuance, the conversion price or exercise price will be adjusted down and
the number of shares issuable upon conversion or exercise of the Series C Preferred Stock and warrants will increase. Accordingly, if any shares of our capital stock are issued below the
current conversion price, there will be additional dilution.

Finally,
sales in the public market of the common stock acquired upon conversion of the Series C Preferred Stock or exercise of the warrants, or the perception that such sales
could occur, could adversely affect the prevailing market price of our common stock and impair our ability to raise funds in additional stock financings.

Item 1B.    UNRESOLVED STAFF COMMENTS

None.

Item 2.    PROPERTIES

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

Location

Primary Use

Approximate
Number of
Square Feet

Expiration
of LeaseBoston, MA

Corporate headquarters and research and development


28,000


2011Freemont, CA

Sales and marketing


8,000


2011Baltimore, MD

Research and development


16,000


2009Burlington, Ontario, Canada

Manufacturing


60,000


2009


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.

On
May 9, 2008, Advanced Energy Industries, Inc. ("AE") filed a civil action in Colorado state court against us and our Chief Executive Officer, Charles S. Rhoades, seeking
to enjoin Mr. Rhoades from employment by the Company based upon its claim that Mr. Rhoades was subject to a non-competition agreement with AE. On March 3, 2009, the
parties agreed to settle this case. The settlement of the case will not have a material financial impact on the Company and Mr. Rhoades will be free to continue to serve as the Company's
President and Chief Executive Officer.

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

None

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is publicly traded on the Nasdaq Capital 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 Capital Market for our years ended December 31, 2007 and 2008:

High

LowYear ended December 31, 2007First Quarter

$
1.58

$
1.14Second Quarter

$
1.31

$
1.08Third Quarter

$
1.65

$
1.02Fourth Quarter

$
1.81

$
1.09Year ended December 31, 2008First Quarter

$
2.14

$
1.39Second Quarter

$
3.32

$
1.77Third Quarter

$
2.84

$
1.80Fourth Quarter

$
1.93

$
1.44


On
March 2, 2009, the last reported sale price of our common stock as reported on the Nasdaq Capital Market was $1.14 per share. As of March 2, 2009, there were 51,549,472
shares of our common stock outstanding held by approximately 232 holders of record. The number of record holders does not include beneficial owners of common stock whose shares are held in the names
of banks, brokers, nominees or other fiduciaries.

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, under the terms of our Series B Preferred Stock, we may not pay dividends on
our common stock without the consent of the holders of at least 75% of the outstanding shares of Series B Preferred Stock. Furthermore, under the terms of our Series C Preferred Stock,
we may not pay dividends on our common stock without the consent of the holders of at least 67% of the outstanding Series C Preferred Stock. In addition, we may not pay dividends on our common
stock, unless we have paid all dividends owing on the Series B Preferred Stock and Series C Preferred Stock. Finally, under our credit facility with Silicon Valley Bank, we may not pay
dividends on our common stock without the consent of the Bank.

Recent Sales of Unregistered Securities

None

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Table of Contents

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 the years ended December 31, 2008 and 2007, and the consolidated balance sheet data as of December 31, 2008 and 2007 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 the year ended December 31, 2006, the three
month transition period ended December 31, 2005 and our fiscal years ended September 30, 2005 and 2004 and the consolidated balance sheet data as of December 31, 2006 and 2005 and
September 30, 2005 and 2004 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. All data set forth below
has been adjusted to reflect the sale of our Electronics and Power Systems US business units, which were finalized in the third quarter of 2008. The results of operations for both the Electronics and
Power Systems US business units are captured in
the line item "Loss from discontinued operations" below. See Note D (Discontinued Operations) to the Consolidated Financial Statements.

Year Ended
December 31,

Three Months
Ended
December 31,

Fiscal Year Ended
September 30,2008

2007

2006

2005

2005

2004(in thousands)Statement of Operations DataProduct revenue


54,293


33,033


14,164


1,817


11,556


6,049Funded research and development revenue


8,229


8,994


4,990


1,079


6,064


7,187Total revenue

$
62,522

$
42,027

$
19,154

$
2,896

$
17,620

$
13,236Cost of product revenue


45,818


33,456


13,545


1,888


10,462


5,503Cost of funded research and development revenue


6,500


6,727


4,041


1,111


5,412


5,982Total cost of revenue

$
52,318

$
40,183

$
17,586

$
2,999

$
15,874

$
11,485Gross margin

$
10,204

$
1,844

$
1,568

$
(104
)
$
1,747

$
1,751Operating expenses:Research and development


5,061


2,256


611


10


56


1Selling, general and administrative


16,633


9,601


9,321


1,737


7,289


6,532Restructuring charges


1,398





1,419





(256
)

Amortization of intangibles


314


314


306


81


322


322Gain on sale of assets








(406
)

(0
)

(318
)

Write-off of impaired long-lived assets








(1,612
)




(0
)

Total operating expenses from continuing operations

$
23,407

$
12,171

$
9,639

$
1,828

$
7,093

$
6,854Operating loss

$
(13,203
)
$
(10,327
)
$
(8,071
)
$
(1,931
)
$
(5,346
)
$
(5,104
)Net unrealized gain (loss) on warrants to purchase common stock














(7
)

(90
)Unrealized loss on Series B warrants

















35Change in Fair Value of Notes and Warrants


265


(2,252
)

(4,192
)







Other income (loss)


707


(546
)

(26
)

(4
)

(120
)

(1
)Interest income


216


280


384


47


42


12Interest expense


(329
)

(3,788
)

(1,432
)

(134
)

(621
)

(6,799
)Net loss from continuing operations

$
(12,344
)
$
(16,633
)
$
(13,337
)
$
(2,022
)
$
(6,052
)
$
(11,946
)Income (loss) from discontinued operations, net


(1,135
)

(1,133
)

(6,441
)

714


(4,194
)

987Gain on sale of discontinued operations, net


274














Net loss

$
(13,205
)
$
(17,766
)
$
(19,778
)
$
(1,308
)
$
(10,246
)
$
(10,959
)Accretion on Series C Preferred Stock to redemption value


(2,849
)













Deemed dividend on Series C Preferred Stockholders


(1,250
)

(11,948
)










Dividend on Series C Preferred Stock


(126
)

(100
)










Net loss attributable to common stockholders

$
(17,429
)
$
(29,814
)
$
(19,778
)
$
(1,308
)
$
(10,246
)
$
(10,959
)Net loss attributable to common stockholders per weighted average share, basic and diluted

$
(0.34
)
$
(0.66
)
$
(0.50
)
$
(0.03
)
$
(0.31
)
$
(0.41
)Weighted average number of common shares, basic and diluted


50,685


45,434


39,290


38,356


32,900


26,834


25

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Table of Contents



Year Ended
December 31,

Three Months
Ended
December 31,

As of
September 30,2008

2007

2006

2005

2005

2004(in thousands)Balance Sheet DataCash and cash equivalents, including restricted cash and cash equivalents

$
10,042

$
12,700

$
8,275

$
9,279

$
6,711

$
2,183Total assets


36,897


46,609


30,577


28,328


27,732


25,586Working capital


12,005


19,616


6,007


10,690


11,393


5,141Redeemable convertible Series A preferred stock

















Redeemable convertible Series B preferred stock


1,450


1,700


1,725


2,125


2,125


2,125Redeemable convertible Series C preferred stock


17,249


13,276











Convertible subordinated debentures








12,740








Investor warrant and Placement Agent Warrant Liability


2,407


3,244


2,921








Other long-term liabilities, net of current portion


2,571


1,679


108


452


460


875Stockholders' equity (deficit)

$
(9,185
)
$
4,363

$
(2,468
)
$
14,501

$
15,602

$
11,659


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Table of Contents

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, including, without limitations, this Item 7, 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 under the heading "Risk Factors" under Item 1A above that we
believe could cause our actual results to differ materially from the forward-looking statements that we make. Forward-looking statements contained in this Annual Report speak only as of the date of
this report. Subsequent events or circumstances occurring after such date may render these statements incomplete or out of date. We undertake no obligation and expressly disclaim any duty to update
such statements.

Overview

Satcon Technology Corporation ("Satcon" or "Company") is a leading clean energy technology provider of utility grade power solutions
for the renewable and distributed energy markets. We deliver power conversion solutions and system design services for large-scale renewable energy plants. Our products are utilized by businesses and
utility companies to efficiently convert renewable energy sources into stable and reliable electrical power.

Our
PowerGate® Plus suite of photovoltaic and fuel cell power inverters, which are sold through the Company's Renewable Energy Solutions division, offer rugged and reliable
solutions that enhance the total output and power production of the solar installation. We also offer system design services and solutions for management, monitoring, and performance measurement to
maximize capital investment and improve overall quality and performance over the entire lifespan of the installation.

In
addition to our core power conditioning solutions, we also develop, design and build power conversion electronics, power management and distribution systems for a variety of defense
and commercial applications through our Applied Technology division.

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 significant 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, goodwill and intangible assets, contract losses 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. Our critical accounting estimates were discussed with our
Audit Committee.

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Table of Contents

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. 104, 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 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. When appropriate, we provide for a warranty reserve at the time the product revenue is recognized. If a
contract involves the provisions of multiple elements and the elements qualify for separation under EITF 00-21Revenue Arrangements with Multiple
Deliverables, total estimated contact revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each
element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.

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, 2004. 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. As of December 31, 2008 and 2007, we have
accrued approximately $1.1 million and $1.3 million, respectively, for anticipated contract losses on commercial contracts.

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

28

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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 within cost of sales based primarily on our historical usage, as well
as based on estimated forecast of product demand . A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an
increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could
result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

Warranty

We offer warranty coverage for our products for periods typically ranging from 1 to 5 years after shipment. We estimate the
anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are
reevaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and
quantity of product returns. Our determination of the appropriate level of warranty accrual is based on estimates of the percentage of units affected and the repair costs. Estimated warranty costs are
recorded at the time of sale of the related product, and are recorded within cost of sales in the consolidated statements of operations.

Long-Lived Assets

We have adopted 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. 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.

29

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Table of Contents

Convertible Debt Instruments and Warrant Liabilities

We accounted for our senior secured convertible notes (the "Convertible Notes"), which were paid off on November 7, 2007, and
associated warrants in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities.The Convertible Notes included
features that qualify as embedded derivatives, such as (i) the holders' conversion option, (ii) our option to settle the Convertible Notes at the scheduled dates in cash or shares of our
common stock and (iii) premiums and penalties we would be liable to pay in the event of default. As permitted under SFAS 155, we irrevocably elected, as of January 1, 2007, to
measure the Convertible Notes in their entirety at fair value with changes in fair value recognized as either gain or loss. Subsequent to the pay-off of the Convertible Notes, we will
continue to account for the associated warrants as described above.

We
recorded interest expense under the Convertible Notes based on the greater of (i) 7% or (ii) the six-month LIBOR, in effect at the time plus 350 basis
points, as well as the amortization of the debt discount, which we computed using the effective interest method. The debt discount represents the difference between our gross proceeds of
$12.0 million and the fair value of the convertible debt upon issuance, after separately valuing the investor warrants, the placement agent warrants and the Convertible Notes on a relative fair
value basis. By amortizing the debt discount to interest expense, rather than recognizing it as a change in fair value of the Convertible debt instrument and warrants, which is a separate line item in
our statement of operations, we believe our interest expense line item more appropriately reflects the cost of the debt associated with the Convertible Notes.

We
determined the fair values of the Convertible Notes, investor warrants and placement agent warrants using valuation models we consider to be appropriate. Our stock price has the most
significant influence on the fair value of the Convertible Notes and related warrants. An increase in our common stock price would cause the fair values of both the Convertible Notes and warrants to
increase, because the conversion and exercise prices, respectively, of such instruments are fixed at $1.65 and $1.815 per share, respectively, and result in a charge to our statement of operations. A
decrease in our stock price would likewise cause the fair value of the Convertible Notes and the warrants to decrease and result in a credit to our statement of operations. If the price of our common
stock were to decline significantly, however, the decrease in the fair value of the Convertible Notes would be limited by the instrument's debt characteristics. Under such circumstances, our estimated
cost of capital would become another significant variable affecting the fair value of the Convertible Notes.

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 approximately $47.9 million and $51.9 million as of December 31, 2008 and 2007,
respectively, 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

30

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Table of Contents

periods
we may need to adjust our valuation allowance which could materially impact our financial position and results of operations.

We
account for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes, which is the asset and liability method
for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting
and income tax basis of assets and liabilities using statutory rates. In addition, SFAS No. 109 requires a valuation allowance against net deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The
tax years 2003 through 2008 remain open to examination by major taxing jurisdictions to which we are subject, which are primarily in the United States, as carry forward attributes
generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. We are currently not under
examination by the Internal Revenue Service or any other jurisdiction for any tax years. We did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying
financial statements. We would record any such interest and penalties as a component of interest expense. We do not expect any material changes to the unrecognized benefits within 12 months of
the reporting date.

Redeemable Convertible Series B Preferred Stock

We account for our Series B Preferred Stock and associated warrants in accordance with in accordance with
EITF 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments,allocating the proceeds received net
of transaction costs based on the relative fair value of the redeemable convertible Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion
rights contained in the convertible redeemable preferred securities. We determined the initial value of the Series B Preferred Stock and investor warrants using valuation models it considers to
be appropriate. The Series B Preferred Stock is classified within the liability section of our balance sheet. To the extent that the Series B Preferred Stock is subject to a
remeasurement event under EITF Topic D-98 or is otherwise modified, the Series B Preferred Stock will be reclassified to temporary equity.

Convertible Series C Preferred Stock

We account for our Series C Preferred Stock and associated warrants in accordance with in accordance with
EITF 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments,allocating the proceeds received net
of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any beneficial conversion
rights contained in the convertible redeemable preferred securities. We determined the initial value of the Series C Preferred Stock and investor warrants using valuation models we consider to
be appropriate.

The
re-pricing of the exercise price of the first tranche warrants from $1.44 to $1.25, as described in the footnotes to the financial statements, was treated as a
cancellation of the original warrants issued on November 8, 2007 and a re-issuance or new warrants on December 21, 2007. The difference in fair value of the warrant was
included in the allocation of net proceeds associated with the second closing of the Series C Preferred Stock on December 21, 2007. We treated this as a deemed dividend on the
Series C Preferred Stock. As of December 31, 2007 we recorded $11,947,881 as a deemed dividend to the holders of the Series C Preferred Stock, which included the beneficial
conversion feature of $11,762,887 and $184,994 related to the accretion of the Series C Preferred Stock to its redemption value through the date that the holders of the Series C
Preferred Stock may first exercise their redemption right. We are using the effective interest method to accrete the carrying value of the

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Series C
Preferred stock through November 8, 2011, at which time the value of the Series C Preferred Stock would be $30.0 million, 120% of its face value.

Recent Accounting Pronouncements

See Note V of our Notes to Consolidated Financial Statements for information regarding recently issued accounting
pronouncements.

Results of Operations

All data set forth below has been adjusted to reflect the sale of our Electronics and Power Systems US business units, which were
finalized in the third quarter of 2008. The results of operations for both the Electronics and Power Systems US business units were captured in "Loss from discontinued operations." See Note D
(Discontinued Operations) to the Consolidated Financial Statements.

Fiscal Year Ended December 31, 2008 ("2008") Compared to the Fiscal Year Ended December 31, 2007 ("2007").

Revenue.Total Company revenue increased $20.5 million, or 49%, from $42.0 million in 2007 to $62.5 million in 2008.

Year Ended
December 31,(Amounts in Millions)

2008

2007

Change $

% ChangeProduct RevenueAlternative Energy Products

$
52.2

$
25.4

$
26.8


106
%Other Legacy


2.1


7.6

$
(5.5
)

-72
%Total Product Revenue

$
54.3

$
33.0

$
21.3


65
%Funded Research and Development and other revenue

$
8.2

$
9.0

$
(0.8
)

-9
%Total Revenue

$
62.5

$
42.0

$
20.5


49
%


Product
revenue increased by $21.3 million, or 65%, from $33.0 million in 2007 to $54.3 million in 2008. This was driven by the commercial adoption of our utility
grade inverters, resulting in an annual increase of $26.8 million, or 106%. This increase was partially offset by a decrease in our legacy power products offerings of $5.5 million, or
72%, as we continue to focus efforts on our renewable energy solutions.

Funded
research and development revenue decreased $0.8 million, or 8.5%, from $9.0 million in 2007 to $8.2 million in 2008. The decline in revenue is due to the
decrease in revenue from commercial customers by $2.2 million offset by and an overall increase in revenue from our government contracts of $1.4 million.

Gross Margin.Total Company gross margin increased from 5% in 2007 to 16% in 2008. Gross margins on product revenue improved from 0% in
2007 to
approximately 15.6% in 2008 due to material cost reduction programs, increased labor efficiency and increased photovoltaic inverter unit volumes. In 2007, gross margins included an additional
$1.3 million in cost over runs on a Navy project, for which we are seeking some economic relief due to design changes, increases in major component costs and increases in anticipated exchange
rates; we have not booked any benefit for such relief as of December 31, 2008 or 2007.

Gross
margins on funded research and development revenue decreased slightly from 25% in 2007 to 21% in 2008 due to lower revenue levels and the composition of revenue as compared to that
of 2007.

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Research and development expenses.We expended approximately $5.1 million on research and development in 2008 compared with
$2.3 million spent in 2007. The increase in spending during 2008 was driven by an increase in technical staffing. These additional resources are developing the new products, features and
customer solutions which we believe will allow us to take advantage of both short-term and long-term market opportunities. This investment in research and development is
critical to both our current and future success and we anticipate this level of investment to continue.

Selling, general and administrative expenses.Selling, general and administrative expenses increased by approximately $7.0 million
from
$9.6 million in 2007 to $16.6 million in 2008. Approximately $1.1 million of the increase is directly attributable to compensation costs related to the issuance of stock options
to our employees and directors pursuant to SFAS 123(R) charged to operations during 2008. Approximately $2.7 million of the increase was associated with increased corporate costs and
approximately $3.2 million of the increase was due to the higher sales and marketing costs directly related to the increase in product revenue, international business development, company
re-branding and our increased outbound marketing efforts in 2008 compared to 2007.

Amortization of intangibles.Amortization of intangibles remained unchanged at $0.3 million in 2007 and 2008.

Restructuring costs.In 2008 we successfully executed a restructuring of our Company. In connection with the restructuring, we
eliminated the
positions of the presidents of the Applied Technology and Renewable Energy Solutions divisions, formalized the release of our Vice President of Finance and former Chief Executive Officer. In addition,
we completed the sale of our Electronics and Power Systems US divisions. As a result of these significant changes in 2008, we recorded a charge of approximately $1.4 million in salary-related
costs and costs associated with the modification of existing options held by certain of the severed employees. The cash component of this severance will be paid out over the next 12 months.
Other costs associated with the restructuring that were related to the Electronics and Power Systems US divisions were recorded in the respective divisions and are included in the loss from
discontinued operations for the periods presented, as discussed below. During 2007 we recorded approximately $0.1 million in restructuring costs associated with the 2006 restructuring of one of
our business units.

Change in fair value of the Convertible Notes and related warrants.The change in fair value of the Convertible Notes and warrants for
2008 was a
credit of approximately $0.3 million. The change in fair value of the Convertible Notes and warrants for 2007 was a charge of approximately $2.3 million. The most significant factor that
contributes to the change in fair value of the Convertible Notes and related warrants is our stock price. The Convertible Notes were paid off in November 2007. (See
Note GConvertible Debt Instrument and Warrant Liabilities)

Other Income (expense).Other income was approximately $0.7 million for 2008 compared to other expense of approximately
$0.5 million
for 2007. Other income, net for 2008 consists primarily of approximately $0.7 million related to foreign exchange impact of operations and translation of inter-company balances. Other expense
for 2007 consists primarily of a charge of approximately $0.4 million related to foreign exchange impact of operations and translation of inter-company balances and $0.1 million in
consulting services related to the valuation of our Convertible Notes and other expenses not related to ongoing operations.

Interest income.Interest income decreased slightly from approximately $0.3 million in 2007 to approximately $0.2 million in
2008. The
decrease is directly attributable to our cash on hand.

Interest expense.Interest expense for 2008 was approximately $0.3 million, which is comprised primarily of the
following:



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Table of Contents



In
2007 interest expense was approximately $3.8 million and was comprised of the following:



Loss from discontinued operations.Loss from discontinued operations represents the results of operations of our Power Systems US and
Electronics
divisions which were sold during the third quarter of 2008. The loss from discontinued operations for 2008 was approximately $1.1 million as compared to approximately $1.1 million in
2007. See Note D "Discontinued Operations" for more information related to the sale of these divisions.

Gain on sale of discontinued operations.As a result of the sale of the Power Systems US and Electronics divisions, we recorded income
of
approximately $0.3 million. See Note D "Discontinued Operations" for more information related to the sale of these divisions and the composition of the net gain calculated for each
division.

Deferred Revenue.Total deferred revenue was $6.7 million at December 31, 2008, comprised of $4.2 million of current
deferred
revenue and $2.5 million of long-term deferred revenue, a decrease of $1.0 million from the $7.7 million balance at December 31, 2007. During 2008 we recognized
previously deferred revenue in our Applied Technology division of approximately $1.8 million and had an increase of approximately $2.2 million primarily related to a large contract with
a commercial customer in our Renewable Energy Solutions division and an increase of $0.9 million related to our extended warranty in our Renewable Energy Solutions division. We record deferred
revenue (i) when a customer pays in advance or (ii) when provisions for revenue recognition on items shipped have not been achieved or the items have not yet been received by the
customer due to shipping terms such as FOB destination. Currently deferred revenue is composed of approximately $3.4 million in our Renewable Energy Solutions division related to
pre-payments received on an order which has been shipped but not recognized, $0.7 million related to pre-payments on
orders currently being manufactured and $2.5 million on deferred revenue related to extended warranties sold to customers that purchased our products.

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Table of Contents

Quarterly Results of Operations (Unaudited)

The following table presents unaudited quarterly statement of operations data for the eight quarters ended December 31, 2008.
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, which we believe necessary for a fair presentation of this information. The operating results for any quarter are not necessarily
indicative of results to be expected for any future period. In addition, all data set forth below has been adjusted to reflect the sale of our Electronics and Power Systems US business units, which
were finalized in the third quarter of 2008. The results of operations for both the Electronics and Power Systems US business units are captured in the line item "Loss from discontinued operations"
below. See Note D (Discontinued Operations) to the Consolidated Financial Statements.

Three Months EndedDec. 31,
2008

Sept. 27,
2008

June 28,
2008

Mar. 29,
2008

Dec. 31,
2007

Sept. 29,
2007

June 30,
2007

Mar. 31,
2007(in thousands, except per share data)Statement of Operations DataProduct revenue

$
17,346

$
17,215

$
9,556

$
10,176

$
9,486

$
14,699

$
5,245

$
3,604Funded research and development revenue


1,936


1,301


3,807


1,184


2,710


2,725


1,775


1,785Total revenue

$
19,282

$
18,517

$
13,363

$
11,360

$
12,196

$
17,424

$
7,019

$
5,389Cost of product revenue


12,976


13,964


9,167


9,710


10,539


13,093


6,189


3,634Cost of funded research and development revenue


1,672


1,146


2,667


1,016


2,069


1,990


1,312


1,357Total cost of revenue

$
14,648

$
15,110

$
11,834

$
10,726

$
12,608

$
15,083

$
7,501

$
4,991Gross margin

$
4,634

$
3,407

$
1,530

$
633

$
(412
)
$
2,341

$
(482
)
$
398Operating expenses:Research and development


1,442


1,642


1,109


868


827


619


401


409Selling, general and administrative


4,802


4,586


4,786


2,459


2,842


2,344


2,358


2,057Restructuring charges


279


513


607














Amortization of intangibles


79


79


79


79


79


79


79


79Gain on sale of assets























Total operating expenses from continuing operations

$
6,601

$
6,819

$
6,580

$
3,406

$
3,748

$
3,041

$
2,837

$
2,546Operating loss

$
(1,967
)
$
(3,412
)
$
(5,051
)
$
(2,772
)
$
(4,160
)
$
(701
)
$
(3,319
)
$
(2,148
)Change in Fair Value of Notes and Warrants


1,087


2,042


(2,397
)

(467
)

(1,829
)

(1,008
)

385


200Other income (loss)


313


153


(18
)

259


182


(239
)

(392
)

(96
)Interest income


19


57


71


69


101


57


37


86Interest expense


(88
)

(98
)

(98
)

(46
)

(2,058
)

(496
)

(625
)

(608
)Net loss from continuing operations

$
(636
)
$
(1,259
)
$
(7,492
)
$
(2,958
)
$
(7,764
)
$
(2,387
)
$
(3,915
)
$
(2,567
)Income (loss) from discontinued operations, net


823


(990
)

(524
)

(443
)

(237
)

(257
)

179


(818
)Gain (loss) on sale of discontinued operations, net


(54
)

328

















Net loss

$
134

$
(1,922
)
$
(8,016
)
$
(3,401
)
$
(8,001
)
$
(2,644
)
$
(3,736
)
$
(3,385
)Accretion on Series C Preferred Stock to redemption value


(786
)

(745
)

(680
)

(637
)

(11,948
)







Dividend on Series C Preferred Stock


(324
)

(311
)

(311
)

(304
)

(100
)







Deemed dividend on Series C Preferred Stock





(10
)

(116
)













Net loss attributable to common stockholders

$
(977
)
$
(2,988
)
$
(9,122
)
$
(4,342
)
$
(20,049
)
$
(2,644
)
$
(3,736
)
$
(3,385
)Net loss attributable to common stockholders per weighted average share, basic and diluted

$
(0.02
)
$
(0.06
)
$
(0.18
)
$
(0.09
)
$
(0.40
)
$
(0.06
)
$
(0.09
)
$
(0.08
)Weighted average number of common shares, basic and diluted


51,375


50,013


50,415


49,935


49,629


47,841


42,869


41,395


35

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Table of Contents

Liquidity and Capital Resources

As of December 31, 2008, we had $10.0 million of cash, of which approximately $0.1 million was restricted.

Based
upon our current working capital position, current operating plans and expected business conditions, we believe that our current cash, as well as the availability from our line of
credit with Silicon Valley Bank, will be adequate to fund our operations through December 31, 2009. Beyond 2009, we expect to fund our working capital needs and other commitments primarily
through our operating cash flow, which we expect to improve as our product costs continue to decrease and as our unit volumes grow. We also expect to rely on our credit facility to fund a portion of
our capital needs and other commitments.

Our
funding plans for our working capital needs and other commitments may be adversely impacted if we fail to realize our underlying assumed levels of revenues and expenses, or if we
fail to remain in compliance with the covenants of our bank line. If either of those events occur, we may need to raise additional funds in order to sustain operations by selling equity or taking
other actions to conserve our cash position, which could include selling of certain assets, delaying capital expenditures and incurring additional indebtedness, subject to the restrictions in the
preferred stock financing with the Investors and in the credit facility with Silicon Valley Bank. Such actions would likely require the consent of the Investors and/or Silicon Valley Bank, and there
can be no assurance that such consents would be given. Furthermore, there can be no assurance that we will be able to raise such funds if they are required

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 will 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 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 December 31, 2008, we had an accumulated deficit of approximately $190 million. Since inception, we have financed our operations and met our capital expenditure requirements
primarily through the sale of private
equity securities and convertible debt, public security offerings, borrowings under our lines of credit and capital equipment leases.

As
of December 31, 2008, our cash and cash equivalents were $10.0 million, including restricted cash and cash equivalents of $0.1 million; this represents a decrease
in our cash and cash equivalents of approximately $2.7 million from the $12.7 million on hand at December 31, 2007. Cash used in operating activities from continuing operations
for the year ended December 31, 2008 was $8.7 million as compared to $9.0 million for the year ended December 31, 2007. Cash used in operating activities from continuing
operations during the year ended December 31, 2008 was primarily attributable to the net loss from continuing operations of approximately $13.2 million offset by non-cash
items such as the change in the fair value of the Convertible Notes and placement agent fees, depreciation and amortization, deferred revenue, increases in allowances for uncollectible accounts and
excess and obsolete inventory, non-cash compensation and consulting expense, non-cash interest expense and decreases in working capital.

Cash
provided by investing activities from continuing operations during the year ended December 31, 2008 was $4.0 million as compared to cash used in investing activities
from continuing operations of $1.2 million for the year ended December 31, 2007. Cash provided by investing activities during the fiscal year ended December 31, 2008 was a result
of net proceeds from the sale of two of

36

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Table of Contents

our
divisions of $5.1 million offset by capital expenditures of $1.2 million. Cash used in investing activities from continuing operations during the fiscal year ended
December 31, 2007 was a result of capital expenditures.

Cash
provided by financing activities from continuing operations for the year ended December 31, 2008 was $4.1 million as compared to $18.0 million for the year
ended December 31, 2007. Net cash provided by financing activities from continuing operations during 2008 includes borrowings under our line of credit of $3.0 million, approximately
$1.7 million received from the exercise of stock options and warrants to purchase common stock, offset by approximately $0.6 million related to payments to certain Warrant A and Warrant
C holders that exercised their redemption rights under these warrants. Net cash provided by financing activities from continuing operations during 2007 includes net proceeds from the sale of
Series C Preferred Stock of approximately $23.9 million, approximately $4.7 million in net proceeds related to cash received upon the exercise of the Warrant Bs in July 2007 and
$1.0 million decrease in restricted cash, offset by approximately $9.5 million related to monthly principal payments and final settlement of our Convertible Notes and approximately
$2.1 million related to payments to certain Warrant A and Warrant C holders that exercised their redemption rights under these warrants.

Cash
used in discontinued operations was $1.9 million for the year ended December 31, 2008 as compared to $1.5 million for the year ended December 31, 2007.
Net cash used in operating activities from discontinued operations was $1.6 million in 2008 compared to $1.3 million in 2007. Net cash used in investing activities from discontinued
operations was $0.2 million in 2008 compared to $0.1 million in
2007. Net cash used in financing activities from discontinued operations was $0 in 2008 compared to $0.1 million in 2007.

Payments Due Under Contractual Obligations

The following table summarizes the payments due under our contractual obligations at December 31, 2008, and the effect such
obligations are expected to have on liquidity and cash flow in future periods:

Calendar Years Ending December 31,

Capital
Leases

Operating
Leases2009

$


$
825,3232010




$
344,7132011




$
224,712Total

$


$
1,394,748


We
lease equipment and office space under non-cancelable capital and operating leases. The future minimum rental payments, as of December 31, 2008, under the capital
and operating leases with non-cancelable terms are included in the table above.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not
consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

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.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Required.

37

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Table of Contents

Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS



PageConsolidated Financial Statements of SatCon Technology CorporationReport of Independent Registered Public Accounting Firm

39Consolidated Financial Statements:Consolidated Balance Sheets as of December 31, 2008 and 2007

41Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007

42Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss for the Years Ended
December 31, 2008 and 2007

43Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007

45Notes to Consolidated Financial Statements

46Schedule II: Valuation and Qualifying Accounts for the Years Ended December 31, 2008
and 2007

107


38

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Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders 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 December 31, 2008
and 2007, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and comprehensive loss and cash flows for each of the years ended December 31, 2008
and 2007. We have also audited the financial statement schedule for the years ended December 31, 2008 and 2007 listed in the accompanying table of contents as Schedule II. We also have
audited SatCon Technology Corporation and its subsidiaries' internal control over financial reporting as of December 31, 2008, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements and the financial statement schedule, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and schedule and an opinion on the company's internal control over
financial reporting based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

39

---



Table of Contents

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 December 31, 2008 and 2007, and the consolidated results of its operations, changes in stockholders' equity (deficit), and its cash flows for each of the years ended
December 31, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in
the accompanying table of contents as Schedule II presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, SatCon Technology Corporation and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31,
2008, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).

/s/ Vitale, Caturano & Company, P.C.


Boston,
Massachusetts
March 10, 2009

40

---





Table of Contents



SATCON TECHNOLOGY CORPORATION        CONSOLIDATED BALANCE SHEETS

December 31, 2008

December 31, 2007ASSETSCurrent assets:Cash and cash equivalents

$
9,957,716

$
12,615,566Restricted cash and cash equivalents


84,000


84,000Accounts receivable, net of allowance of $168,219 and $124,279 at December 31, 2008 and 2007, respectively


11,471,671


8,532,141Unbilled contract costs and fees


398,707


536,567Inventory


11,457,532


13,807,201Prepaid expenses and other current assets


1,040,441


1,002,187Current assets of discontinued operations





5,384,412Total current assets

$
34,410,067

$
41,962,074Property and equipment, net


1,964,968


1,765,453Goodwill, net


123,714


123,714Intangibles, net


398,526


793,739Other long-term assets





32,931Non-current assets of discontinued operations





1,930,766Total assets

$
36,897,275

$
46,608,677LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current liabilities:Line of credit

$
3,000,000

$
Accounts payable


8,588,313


7,631,486Accrued payroll and payroll related expenses


2,042,786


1,838,792Other accrued expenses


2,825,255


3,182,157Accrued contract loss


1,131,370


1,300,000Accrued restructuring costs


602,782


Deferred revenue


4,214,389


6,127,401Current liabilities of discontinued operations





2,266,191Total current liabilities

$
22,404,895

$
22,346,027Warrant liability

$
2,407,438

$
3,244,316Deferred revenue, net of current portion


2,512,794


1,545,050Redeemable convertible Series B preferred stock (290 and 340 shares issued and outstanding at December 31, 2008 and 2007, respectively; face value
$5,000 per share; liquidation preference $1,450,000 and $1,700,000, respectively)


1,450,000


1,700,000Other long-term liabilities


58,282


70,075Non-current liabilities of discontinued operations





63,825Total Liabilities

$
28,833,409

$
28,969,293Commitments and contingencies (Note L)Redeemable convertible Series C preferred stock (25,000 shares issued and outstanding at December 31, 2008 and 2007, face value $1,000 per share,
liquidation preference $26,350,000 and 25,100,000 at December 31, 2008 and 2007, respectively)


17,248,593


13,276,091Stockholders' equity (deficit):Common stock; $0.01 par value, 200,000,000 shares authorized; 51,479,822 and 49,803,979 shares issued and outstanding at December 31, 2008 and 2007,
respectively


514,798


498,040Additional paid-in capital


182,222,762


180,933,100Accumulated deficit


(189,962,435
)

(176,757,615
)Accumulated other comprehensive loss


(1,959,852
)

(310,232
)Total stockholders' equity (deficit)

$
(9,184,727
)
$
4,363,293Total liabilities and stockholders' equity (deficit)

$
36,897,275

$
46,608,677


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

41

---





Table of Contents



SATCON TECHNOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended
December 31,2008

2007Revenue:Product revenue

$
54,293,334

$
33,032,641Funded research and development and other revenue


8,228,769


8,994,582Total revenue

$
62,522,103

$
42,027,223Cost of revenue:Cost of product revenue

$
45,818,090

$
33,455,956Cost of funded research and development and other revenue


6,500,232


6,727,122Total cost of revenue

$
52,318,322

$
40,183,078Gross margin

$
10,203,781

$
1,844,145Operating expenses:Research and development

$
5,061,472

$
2,256,088Selling, general and administrative


16,632,869


9,601,195Restructuring charges


1,398,140


Amortization of intangibles


314,288


314,289Total operating expenses from continuing operations

$
23,406,769

$
12,171,572Operating loss from continuing operations

$
(13,202,988
)
$
(10,327,427
)Change in fair value of notes and warrants


264,628


(2,252,264
)Other (loss) income, net


707,450


(545,895
)Interest income


216,238


280,392Interest expense


(329,459
)

(3,787,380
)Net loss from continuing operations

$
(12,344,131
)
$
(16,632,574
)Loss from discontinued operations, net

$
(1,134,732
)
$
(1,133,203
)Gain on sale of discontinued operations, net


274,043


Net loss

$
(13,204,820
)
$
(17,765,777
)Deemed dividend and accretion on Series C preferred stock

$
(2,974,502
)
$
(11,947,881
)Dividend on Series C preferred stock


(1,250,000
)

(100,000
)Net loss attributable to common stockholders

$
(17,429,322
)
$
(29,813,658
)Net loss per weighted average share, basic and diluted:From loss on continuing operations attributable to common stockholders

$
(0.33
)
$
(0.64
)From loss on discontinued operations

$
(0.02
)
$
(0.02
)From gain on sale of discontinued operations

$
0.01


Net loss attributable to common stockholders per weighted average share, basic and diluted

$
(0.34
)
$
(0.66
)Weighted average number of common shares, basic and diluted


50,684,564


45,433,539


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

42

---



Table of Contents

SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2008

Common
Shares

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockholders'
Equity (Deficit)

Comprehensive
LossBalance, December 31, 2007


49,803,979

$
498,040

$
180,933,100

$
(176,757,615
)
$
(310,232
)
$
4,363,293

$
Net loss











(13,204,820
)




(13,204,820
)
$
(13,204,820
)Issuance of warrants to Series C Preferred Stockholders








126,000








126,000Beneficial conversion feature on Series C preferred stock








126,000








126,000Series C preferred stock deemed dividend








(126,000
)







(126,000
)Accretion of Series C preferred stock to its redemption value








(2,848,502
)







(2,848,502
)Dividend on Series C preferred stock








(1,250,000
)







(1,250,000
)Issuance of common stock to 401(k) Plan


279,831


2,798


575,434








578,232Issuance of common stock in connection with the exercise of stock options to purchase common stock


891,168


8,912


1,435,607








1,444,519Issuance of common stock in lieu of six-month cash dividend on redeemable convertible Series B preferred stock.


86,241


862


132,804








133,666Issuance of common stock in connection with the exercise of warrants to purchase common stock


174,967


1,750


239,560








241,310Issuance of restricted stock to employees


82,346


823


144,930








145,753Issuance of common stock in connection with the conversion of Series B preferred stock


161,290


1,613


248,387








250,000Issuance of warrants to purchase common stock to contractor








121,000








121,000Employee stock-based compensation








2,364,442








2,364,442Foreign currency translation adjustment














(1,649,620
)

(1,649,620
)

(1,649,620
)Comprehensive loss



















$
(14,854,440
)Balance, December 31, 2008


51,479,822

$
514,798

$
182,222,762

$
(189,962,435
)
$
(1,959,852
)
$
(9,184,727
)


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

43

---



Table of Contents

SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2007

Common
Shares

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockholders'
Equity (Deficit)

Comprehensive
LossBalance, December 31, 2006


40,105,073

$
401,051

$
156,379,193

$
(158,991,838
)
$
(256,486
)
$
(2,468,080
)Net loss











(17,765,777
)




(17,765,777
)
$
(17,765,777
)Beneficial conversion feature on Series C preferred stock








11,762,887








11,762,887Series C preferred stock deemed dividend








(11,762,887
)







(11,762,887
)Issuance of warrants and re-pricing of warrants to Series C Preferred Stock holders








10,092,623








10,092,623Accretion of Series C preferred stock to its carrying value








(184,994
)







(184,994
)Dividend on Series C preferred stock








(100,000
)







(100,000
)Issuance of common stock to 401(k) Plan


474,379


4,744


562,417








567,161


Issuance of common stock in connection with the exercise of stock options to purchase common stock


27,205


272


20,420








20,692


Issuance of common stock in connection with the termination of Worcester lease


850,000


8,500


1,113,500








1,122,000


Issuance of common stock in lieu of cash principal payments on the Convertible Notes


3,163,186


31,632


3,777,814








3,809,446


Issuance of common stock in lieu of cash interest on the Convertible Notes


396,522


3,965


514,200








518,165


Issuance of common stock in connection with the exercise of Warrant Bs


3,636,368


36,364


5,525,006








5,561,370


Issuance of common stock to Convertible Note holders as incentive to accelerate pay-off of the Convertible Notes


749,999


7,500


907,499








914,999


Issuance of common stock upon conversion of a portion of the Convertible Notes


318,182


3,182


521,818








525,000Employee stock-based compensation








1,112,099








1,112,099


Issuance of common stock in lieu of six-months cash dividend on redeemable convertible Series B preferred stock


70,045


700


137,156








137,856


Issuance of common stock in connection with the conversion of Series B preferred stock


13,020


130


24,870








25,000


Adjustment to conversion price of Series B preferred stock, due to anti-dilution provisions








529,479








529,479


Foreign currency translation adjustment














(53,746
)

(53,746
)

(53,746
)Comprehensive loss



















$
(17,819,523
)Balance, December 31, 2007


49,803,979

$
498,040

$
180,933,100

$
(176,757,615
)
$
(310,232
)
$
4,363,293


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

44

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SATCON TECHNOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended
December 31,2008

2007Cash flows from operating activities:Net loss

$
(13,204,820
)
$
(17,765,777
)Net loss from discontinued operations


1,134,732


1,133,203Net gain on sale of discontinued operations


(274,043
)

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:Depreciation and amortization


1,032,803


981,555Provision for uncollectible accounts


80,142


47,019Provision for excess and obsolete inventory


360,035


206,780Non-cash compensation expense related to issuance of stock options and warrants to employees and non-employees and issuance of common stock to 401(k) Plan,
including stock based compensation costs of $2,183,801 and $1,008,022 for the years ended December 31, 2008 and 2007, respectively.


2,725,481


2,482,165Change in fair value of Senior Secured Convertible Notes and investor and placement agent warrant liability


(264,628
)

2,252,264Non-cash interest expense


130,334


3,581,760Non-cash restructuring charges


274,552


Changes in operating assets and liabilities:Accounts receivable


(5,205,155
)

(2,132,106
)Unbilled contract costs and fees


137,860


(269,320
)Prepaid expenses and other assets


(44,412
)

(1,078,868
)Inventory


(1,965,474
)

(7,914,938
)Other long-term assets


32,931


(17,469
)Accounts payable


2,392,434


3,806,333Accrued expenses and payroll


744,089


2,165,030Accrued restructuring


602,782


Accrued contract losses


94,700


1,447,161Deferred revenue, current and long portion


2,510,183


1,992,591Other current liabilities


(11,793
)

70,075Total adjustments


3,626,864


7,620,032Net cash used in operating activities in continuing operations


(8,717,267
)

(9,012,542
)Cash flows from investing activities:Purchases of property and equipment


(1,167,332
)

(1,203,475
)Net proceeds from sale of business segments


5,136,881


Net cash provided by (used in) investing activities in continuing operations


3,969,549


(1,203,475
)Cash flows from financing activities:Net borrowings under line of credit


3,000,000


Proceeds from short-term loan





10,000,000Repayment of short-term loan





(10,000,000
)Net proceeds from issuance of convertible redeemable Series C preferred stock





23,856,281Repayment of Senior Secured Convertible Notes





(9,477,293
)Payments related to warrant holder redemption rights


(572,250
)

(2,099,958
)Decrease (increase) in restricted cash





1,000,000Net proceeds from exercise of warrants to purchase common stock


241,310


4,688,642Net proceeds from exercise of options to purchase common stock


1,444,519


20,692Net cash provided by financing activities in continuing operations


4,113,579


17,988,364Net cash used in operating activities of discontinued operations


(1,660,704
)

(1,307,293
)Net cash used in investing activities of discontinued operations


(211,297
)

(63,959
)Net cash used in financing activities of discontinued operations





(123,219
)Net decrease in cash and cash equivalents from discontinued operations


(1,872,001
)

(1,494,471
)Effects of foreign currency exchange rates on cash and cash equivalents


(151,710
)

(853,137
)Net increase (decrease) in cash and cash equivalents


(2,657,850
)

5,424,739Cash and cash equivalents at beginning of year

$
12,615,566

$
7,190,827Cash and cash equivalents at end of year

$
9,957,716

$
12,615,566




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

45

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Table of Contents



SATCON TECHNOLOGY CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2008 and 2007

A. THE COMPANY

Satcon
Technology Corporation (the "Company" or "Satcon") was organized as a Massachusetts corporation in February 1985 and reincorporated in Delaware in 1992. The Company is a leading
clean energy technology provider of utility grade power solutions for the renewable and distributed energy markets. The Company delivers power conversion solutions and system design services for
large-scale renewable energy plants. The Company's products are utilized by businesses and utility companies to efficiently convert renewable energy sources into stable and reliable electrical power.
In addition to its core power conditioning solutions, the Company also develops, designs and builds power conversion electronics, power management and distribution systems for a variety of defense and
commercial applications through its Applied Technology division.

The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

B. REALIZATION OF ASSETS AND LIQUIDITY

The
Company anticipates that its current cash, along with the availability under its credit facility with Silicon Valley Bank, will be sufficient to fund its operations through at least
December 31, 2009. The Company has developed a business plan that 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 and allows the Company to remain in compliance with the covenants of the credit facility. Although the Company believes it has developed a realistic business
plan, there is no assurance that it can achieve these objectives. Accordingly, if the Company is unable to realize its business plan or does not remain in compliance with the covenants of the credit
facility, the Company would need to raise additional funds in the near future in order to sustain operations by selling equity or taking other actions to conserve its cash position, which could
include selling of certain assets and incurring additional indebtedness, subject to the restrictions in the preferred stock financing with the Investors. Such actions would likely require the consent
of the Investors, and there can be no assurance that such consent would be given. Furthermore, there can be no assurance that the Company will be able to raise such funds if they are required.

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Consolidation

The consolidated financial statements include the accounts of Satcon and its wholly-owned subsidiaries (Satcon Applied
Technology, Inc. and Satcon Power Systems Canada, Ltd., and its discontinued operating divisions Satcon Electronics, Inc. and Satcon Power Systems, Inc.). All intercompany
accounts and transactions have been eliminated in consolidation.

Revenue Recognition

The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 104, 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 the Company has 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

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

for
certain foreign shipments. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the
installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs
or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate the Company
provides for a warranty reserve at the time the product revenue is recognized. If a contract involves the provisions of multiple elements and the elements qualify for separation under
EITF 00-21,Revenue Arrangements with Multiple Deliverables, total estimated contact revenue is allocated to each element based on
the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future.
Revenue is recognized on each element as described above.

The
Company performs funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts.
Product development revenue is included in product revenue. 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 fees 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 the services are performed. In
each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. All payments to the Company for work performed on contracts with agencies of the
U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue for
commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. As of December 31, 2008 and 2007, the Company has accrued approximately
$1.1 million and $1.3 million, respectively, for anticipated contract losses on commercial contracts.

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

Deferred
revenue consists of payments received from customers in advance of services performed, product shipped, or installation completed. Deferred revenue also consists of cash
received for extended product warranties.

Unbilled Contract Costs and Fees and Funded Research and Development Costs in Excess of Billings

Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred
costs that have not been recognized as revenue or billed to the customer.

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits, overnight repurchase agreements with Silicon Valley Bank and highly-liquid
investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. At December 31, 2008 and 2007, the Company has
restricted cash as indicated in the table below. In addition, at December 31, 2007, the Company had overnight repurchase agreements with Silicon Valley Bank of $1,763,502. There were no
overnight repurchase agreements outstanding at December 31, 2008.

December 31,Restricted Cash

2008

2007Security deposits

$
34,000

$
34,000Certificates of deposit


50,000


50,000Total restricted cash

$
84,000

$
84,000


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

Inventory is stated at the lower of cost or market and costs are determined based on the first-in, first-out
method of accounting and include material, labor and manufacturing overhead costs. The Company periodically reviews quantities of inventory on hand and compares these amounts to expected usage of each
particular product or product line. The Company records, as a charge to cost of sales, any amounts required to reduce the carrying value to net realizable value.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over
the asset's estimated useful life. The estimated useful lives of property and equipment are as follows:

Estimated LivesMachinery and equipment

2-10 yearsFurniture and fixtures

7-10 yearsComputer software

3 yearsLeasehold improvements

Lesser of the remaining life of the lease or the useful life of the improvement


48

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

When
assets are retired or otherwise disposed of, the cost and related depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in
operating expenses.

Long-Lived Assets

The Company has adopted 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. The statement requires that long-lived assets be reviewed for possible impairment, if certain conditions
exist, with impaired assets written down to fair value.

The
Company 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 management. These projections represent management's best estimate of future results. In making these projections, the
Company considered the markets the Company is addressing, the competitive environment and the Company's 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, the Company performs a macro assessment of the overall likelihood that the Company would achieve
the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Goodwill and Other Intangible Assets

The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. This statement affects the Company's treatment of goodwill and other intangible assets. The statement requires
that goodwill be reviewed for possible impairment and that impairment tests be periodically repeated (at least annually), 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.

The
Company performs a goodwill impairment test as of the beginning of its fiscal fourth quarter, as required by SFAS No. 142 on an annual basis. The Company determines the fair
value of each of the reporting units based on a discounted cash flow income approach.

Goodwill
by reporting segment consists of the following:

December 31,Reporting Unit

2008

2007Applied Technology

$
123,714

$
123,714$
123,714

$
123,714


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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

The
Company performed its annual goodwill impairment test as of the beginning of its fiscal fourth quarter 2008. The Company determined the fair value of the Applied Technology unit
based on a discounted cash flow income approach. Based on the results of the first step of the annual goodwill impairment test, the Company determined that the fair value of this reporting unit
exceeded the carrying amount and, therefore, no goodwill impairment existed as of December 31, 2008. As a result, the second step of the annual goodwill impairment test was not required. The
Company will continue to perform a goodwill impairment test on the Applied Technology reporting unit on an annual basis and on an interim basis, if certain conditions exist.

The
Company has determined that all of its intangible assets have finite lives and, therefore, the Company has continued to amortize its intangible assets. The Company recorded expense
related to the amortization of its intangible assets for the periods presented below as follows:

Year Ended
December 31,2008

2007Amortization expense

$
395,289

$
394,288


Intangible
assets consist of the following:

As of December 31, 2008



As of December 31, 2007Reporting Unit

Description

Estimated
Useful
Life

Gross
Carrying
Value

Accumulated
Amortization

Net
Book
Value

Gross
Carrying
Value

Accumulated
Amortization

Net
Book
ValueApplied Technology

Patents


10

$
744,780

$
620,343

$
124,437

$
744,780

$
540,343

$
204,437Applied Technology

Completed Technology


10


3,142,882


2,868,793


274,089


3,142,882


2,554,505


588,377Applied Technology

Favorable Lease


5


36,999


36,999


0


36,999


36,074


925$
3,924,661

$
3,526,135

$
398,526

$
3,924,661

$
3,130,922

$
793,739


The estimated remaining amortization expense for each of the five succeeding years:

Fiscal Years ended December 31,2009


354,0902010


44,4362011


2012


2013


Thereafter





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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Foreign Currency Translation

The functional currency of the Company's foreign subsidiary is its local currency. Assets and liabilities of foreign subsidiaries are
translated at the rates in effect at the balance sheet date, while stockholders' equity (deficit) including the long-term portion of intercompany advances is translated at historical
rates. Statements of operations and cash flow amounts are translated at the average rate for the period. Translation adjustments are included as a component of accumulated other comprehensive income
(loss). Foreign currency gains and losses were approximately income of $0.7 million for the year ended December 31, 2008 and charge of approximately $0.4 million for the year
ended December 31, 2007. All foreign currency transaction gains and losses are recorded as a component of other income (expense) and all periods presented have been adjusted to reflect this
classification.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period reported. Management believes the most significant estimates include the net realizable value of accounts receivable and
inventory, warranty provisions, the recoverability of long-lived assets and intangible assets, the accrued contract losses on fixed-price contracts, the recoverability of deferred tax
assets and the fair value of equity and financial instruments. Actual results could differ from these estimates.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,Accounting for Income
Taxes, which is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and deferred tax liabilities are
recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In addition, SFAS No. 109 requires a valuation
allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

In
June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109"("FIN 48"). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not"
to be sustained assuming examination by tax authorities. The amount recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately
realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and
penalties (if applicable) on that excess. FIN 48 requires a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns
and disclosure relating to the accrued interest and penalties for unrecognized tax benefits. Discussion is also required for those uncertain tax positions where it is reasonably possible that the
estimate of the tax benefit will change significantly in the next twelve months.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

The
Company adopted the provisions of FIN 48 on January 1, 2007. The Company did not recognize any change in the liability for unrecognized tax benefits as a result of the
adoption.

As
of December 31, 2008, the Company had federal and state net operating losses ("NOL") carry forwards and federal and state R&D credit carry forwards, which may be
available to offset future federal and state income tax liabilities which expire at various dates through 2029. Utilization of the NOL and R&D credit carry forwards may be subject to a substantial
annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as well as
similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carry forwards that can be utilized annually to offset future taxable income and tax,
respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a
corporation by more than 50 percentage points over a rolling three-year period. Since the Company's formation, the Company has raised capital through the issuance of capital stock
on several occasions (both pre and post initial public offering) which, combined with the purchasing shareholders' subsequent disposition of those shares, may have resulted in a change of control, as
defined by Section 382, or could result in a change of control in the future upon subsequent disposition. The Company has not currently completed a study to assess whether a change of control
has occurred or whether there have been multiple changes of control since the Company's formation due to the significant complexity and cost associated with such study and that there could be
additional changes in control in the future. If the Company has experienced a change of control at any time since Company formation, utilization of its NOL or R&D credit carry forwards would be
subject to an annual limitation under Section 382 which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term
tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL or R&D credit carry forwards before
utilization. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position under FIN 48. The Company does not expect to have any
taxable income for the foreseeable future. The Company has a full valuation allowance against the net operating losses and credits.

The
tax years 2005 through 2007 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carryforward
attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. The Company is
currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. The Company did not recognize any interest and penalties associated with unrecognized tax
benefits in the accompanying financial statements. The Company would record any such interest and penalties as a component of interest expense. The Company does not expect any material changes to the
unrecognized benefits within 12 months of the reporting date.

Accounting for Stock-based Compensation

The Company has several stock-based employee compensation plans. On October 1, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123R ("SFAS 123R")Accounting for Stock-based Compensation, using the modified prospective method, which results
in the provisions of

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

SFAS 123R
only being applied to the consolidated financial statements on a going-forward basis (that is, the prior period results have not been restated). At the time of adoption the Company
had no unvested outstanding options. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is
recognized as expense over the service period. Previously, the Company had followed Accounting Principles Board ("APB") Opinion No. 25,Accounting for Stock Issued to
Employees, and related interpretations, which resulted in the accounting for employee share options at their intrinsic value in the consolidated financial statements.

On
March 29, 2005, the SEC issued SAB 107 which expresses the view of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations
concerning the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with
non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain
redeemable financial instrument issues under shares-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of
SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements,
the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R,
and disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. The Company has accounted for its stock option
grants in compliance with SAB 107 and Staff
Accounting Bulletin No. 110,Year-End Help for Expensing Employee Stock Option(SAB No. 110).

On
November 10, 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position SFAS 123R-3 "Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards."The Company has elected to adopt the alternative transition method provided the FASB Staff Position for
calculating the tax effects (if any) of stock-based compensation expense pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact to the additional paid-in capital
pool and the consolidated statements of operations and cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.

The
Company uses historical volatility as it believes it is more reflective of market conditions and a better indicator of volatility. The Company uses the simplified calculation of
expected life described in SAB No. 107 and SAB No. 110. If the Company determines that another method used to estimate expected volatility is more reasonable than the Company's current
methods, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher
volatility and longer expected lives result in an increase to share-based compensation determined at the date of grant.

The
Company recognized the full impact of its share-based payment plans in the consolidated financial statements for the year ended December 31, 2008 and 2007 under
SFAS 123R and did not capitalize any such costs on the consolidated balance sheets, as such costs that qualified for

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

capitalization
were not material. The following table presents share-based compensation expense included in the Company's consolidated statement of operations:

Year Ended
December 31,2008

2007Cost of product revenue

$
96,249

$
97,664Funded research and development and other revenue expense


109,095


120,248Un-funded research and development and other revenue expenses


158,341


60,779Selling, general and administrative expenses


1,973,667


729,331Share based compensation expense from continuing operations before tax

$
2,337,352

$
1,008,022Share based compensation expense from discontinued operations


27,090


104,077Total share based compensation expense before tax

$
2,364,442

$
1,112,099Income tax benefit





Net share-based compensation expense

$
2,364,442

$
1,112,099


Compensation
expense associated with the granting of stock options to employees is being recognized on a straight line basis over the service period of the option. In instances where the
actual compensation expense would be greater than that calculated using the straight line method, the actual compensation expense is recorded in that period.

At
December 31, 2008 approximately $8.3 million in unrecognized compensation expense remains to be recognized in future periods. The table below summaries the recognition
of the deferred compensation expense associated with employee stock options over the next five years as follows:

Calendar Years Ending December 31,

Non Cash Stock-Based
Compensation Expense2009

$
2,553,8512010

$
2,430,2822011

$
2,339,8952012

$
905,1672013

$
21,315Total

$
8,250,510


During
the year ended December 31, 2008, the Company accelerated unvested options for two of its senior executives in connection with their departures. In addition, the Company
extended the time to exercise these options, normally ninety days, to two years from the date of their respective last days of employment. As a result, the Company recorded a non-cash
restructuring charge of approximately $0.3 million, of which approximately $0.1 million related to the acceleration of unvested options and

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

$0.2 million
related to the extension of time to exercise these options. The Company valued these changes using the Black-Scholes option pricing model.

The
weighted-average grant-date fair value of options granted during the year ended December 31, 2008 and 2007 were $2.03 and $1.39, respectively, per option. The fair
value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following range of assumptions:

Year Ended
December 31,Assumptions:

2008

2007Expected life

5.0 years to 6.25 years(1)

5.0 years to 6.25 years(1)Expected volatility ranging from

80.0%89.5%(2)

81.9%89.9%(2)Dividends

none

NoneRisk-free interest rate

2.70%3.38%(3)

3.23%4.83%(3)


---

Net Loss per Basic and Diluted Common Share

The Company reports net loss per basic and diluted common share in accordance with SFAS No. 128, Earnings Per Share, which
establishes standards for computing and
presenting earnings per share. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the earnings of the Company, except when the effect would be anti-dilutive. See Note R, Loss Per Share, for
more information related to options, warrants, convertible Preferred Stock and Convertible Notes which would be considered anti-dilutive.

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Concentration of Credit Risk

Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, trade accounts
receivable, unbilled contract costs and deposits in bank accounts. The Company deposits its cash and invests in short-term investments primarily through a national commercial bank.
Deposits in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) are exposed to loss in the event of nonperformance by the institution. The Company has had cash deposits in
excess of the FDIC insurance coverage.

The
Company's trade accounts receivable and unbilled contract costs and fees are primarily from sales to U.S. government agencies and commercial customers. The Company does not require
collateral and has not historically experienced significant credit losses related to receivables, letters of credit or unbilled contract costs and fees from individual customers or groups of customers
in any particular industry or geographic area.

Significant
customers are defined as those customers that account for 10% or more of total net revenue in a fiscal year or 10% or more of accounts receivable and unbilled contract costs
and fees at the end of a fiscal period. For the year ended December 31, 2008, there were two customers that were deemed significant with regards to revenue and accounts receivable. For the year
ended December 31, 2007, there was one customer that was deemed significant with regards to revenue. For the year ended December 31, 2008, these customers accounted for approximately
25%, or approximately $15.4 million, of revenue. At December 31, 2008, both customers had a balance greater than 10%, or approximately $3.3 million, of the Company's outstanding
gross accounts receivable. For the year ended December 31, 2007, two customers accounted for approximately 26%, or approximately $11.1 million, of revenue. At December 31, 2007,
three customers had a balance greater than 10%, or approximately $4.4 million, of the Company's outstanding gross accounts receivable.

Research and Development Costs

The Company expenses research and development costs as incurred. Cost of research and development and other revenue includes costs
incurred in connection with both funded research and development and other revenue arrangements and unfunded research and development activities.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net loss and foreign currency translation adjustments.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash equivalents, accounts receivable, unbilled contract costs and fees, warrants to
purchase shares of common stock, accounts payable, debt instruments and convertible notes. The estimated fair values of these financial instruments approximate their carrying values at
December 31, 2008 and 2007. The estimated fair values have been determined through information obtained from market sources and management estimates. The Company's warrant liability is recorded
at fair value. See "Fair Value Measurement" section below.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). In February
2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157," which provides a one year deferral of the effective date of
SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least
annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework
for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The
standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are
the following:



The
adoption of this statement did not have a material impact on the Company's consolidated results of operations and financial condition.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Assets
and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2008 are as follows:

Fair Value Measurements at Reporting Date UsingDescription

Balance as of
December 31,
2008

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)(Dollars in Thousands)AssetsMoney market funds(2)

$
4,243,989

$
4,243,989

$


$
Total Assets

$
4,243,989

$
4,243,989

$


$
LiabilitiesLong-term warrant liability(1)

$
2,407,438

$


$
2,407,438

$
Total Liabilities

$
2,407,438

$


$
2,407,438

$



---

Convertible Debt Instruments and Warrant Liabilities

The Company accounted for its senior secured convertible notes (the "Convertible Notes"), which were paid off on November 7,
2007, and continues to account for the associated warrants in accordance with SFAS 155,Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and 140, and SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,(SFAS 155). The Convertible Notes included features that qualified as embedded
derivatives, such as (i) the holders' conversion option, (ii) the Company's option to settle the Convertible Notes at the scheduled dates in cash or shares of its common stock, and
(iii) premiums and penalties the Company would be liable to pay in the event of default. As permitted under SFAS 155, the Company has irrevocably elected, as of January 1, 2007,
to measure the Convertible Notes and embedded derivatives in their entirety at fair value with changes in fair value recognized as either a gain or loss.

The
Company recorded interest expense under the Convertible Notes based on the greater of (i) 7% or (ii) the six-month LIBOR in effect at the time plus 350
basis points, as well as the amortization of the debt discount, which the Company computed using the effective interest method. The debt discount represented the difference between the Company's gross
proceeds from the sale of the Convertible Notes in July 2006 of $12.0 million and the fair value of the convertible debt upon

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

issuance,
after separately valuing the investor warrants, the placement agent warrants and the Convertible Notes on a relative fair value basis. By amortizing the debt discount to interest expense,
rather than recognizing it as a change in fair value of the convertible debt instrument and warrants, which is a separate line item in the Company's statement of operations, the Company believes its
interest expense line item more appropriately reflects the cost of the debt associated with the Convertible Notes.

The
Company determined the fair values of the Convertible Notes, investor warrants and placement agent warrants using valuation models it considers to be appropriate. The Company's stock
price has the most significant influence on the fair value of its Convertible Notes and related warrants. An increase in the Company's common stock price would cause the fair values of both the
Convertible Notes and warrants to increase, because the conversion and exercise prices, respectively, of such instruments are fixed at $1.65 and $1.815 per share, respectively, and result in a charge
to our statement of operations. A decrease in the Company's stock price would likewise cause the fair value of the Convertible Notes and the warrants to decrease and result in a credit to our
statement of operations. If the price of the Company's common stock were to have declined significantly, however, the decrease in the fair value of the Convertible Notes would have been limited by the
instrument's debt characteristics. Under such circumstances, the Company's estimated cost of capital would have become another significant variable affecting the fair value of the Convertible Notes.

Redeemable Convertible Series B Preferred Stock

The Company accounts for its Series B Preferred Stock and associated warrants in accordance with EITF 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments,allocating the proceeds received net of transaction costs based on
the relative fair value of the redeemable convertible Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the
convertible redeemable preferred securities. The Company determined the initial value of the Series B Preferred Stock and investor warrants using valuation models it considers to be
appropriate. The Series B Preferred Stock is classified within the liability section of the Company's balance sheet. To the extent that the Series B Preferred Stock is subject to a
remeasurement event under EITF Topic D-98,Classification and Measurement of Redeemable Securities,or is otherwise modified, the
Series B Preferred Stock will be reclassified to temporary equity.

Redeemable Convertible Series C Preferred Stock

The Company accounts for its Convertible Series C Preferred Stock (the "Series C Preferred Stock"), and associated
warrants in accordance with in accordance with EITF 00-27,Application of Issue No. 98-5 to Certain Convertible
Instruments,allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the
warrants issued to the Investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities and in accordance with EITF Topic D-98,
classifying the Series C Preferred Stock as temporary equity on the balance sheet between the captions for liabilities and permanent shareholder's equity. The Company determined the initial
value of the Series C Preferred Stock and investor warrants using valuation models it considers to be appropriate. The Company is using the effective interest method to accrete the carrying
value of the Series C Preferred

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

stock
through the earliest possible redemption date (November 8, 2011), at which time the value of the Series C Preferred Stock would be $30.0 million or 120% of its face value.

Reclassifications

Certain prior-year balances have been reclassified to conform to current-year presentations. The Company
reclassified the effects of foreign currency translation, of which a portion was previously accounted for in cost of sales, to other income (expense) in its statement of operations for the year ended
December 31, 2007. The effect of the reclassification was approximately $0.4 million of translation related gains being accounted for in other income for the period ended
December 31, 2007.

D. DISCONTINUED OPERATIONS

On September 26, 2008, the Company sold its Electronics and Power Systems US business segments to two unrelated companies, for approximately $5.6 million in cash and
$0.5 million in non-cash consideration consisting of the accounts receivable balance for the Power Systems US division. Prior to the sale, each of these divisions were reported by
the Company as its own operating segment. Operations associated with these discontinued segments have been classified as loss from discontinued operations in the accompanying consolidated statements
of operations, and cash flows associated with these segments are included in cash flows from discontinued operations in the consolidated statements of cash flows.

Net
sales from discontinued operations were $13.3 million and $14.5 million for the year ended December 31, 2008 and December 31, 2007, respectively. Loss
from discontinued operations was $1.1 million and $1.1 million for the year ended December 31, 2008 and December 31, 2007, respectively. Net sales and net loss from
discontinued operations is broken out by division as follows:

Year EndedDivision

December 31,
2008

December 31,
2007ElectronicsNet Sales

$
8,250,768

$
9,581,788Net Loss

$
(1,094,326
)
$
(500,370
)Power Systems, USNet Sales

$
5,021,022

$
4,962,172Net Loss

$
(40,406
)
$
(632,833
)Discontinued OperationsTotal Net Sales

$
13,271,790

$
14,543,960Total Net Loss

$
(1,134,732
)
$
(1,133,203
)


In
accordance with EITF Issue No. 87-24,Allocation of Interest to Discontinued Operations, the Company has not
allocated interest to discontinued operations. The Company has also eliminated all intercompany activity associated with discontinued operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

D. DISCONTINUED OPERATIONS (Continued)

The net assets of the Electronics and Power Systems US divisions at December 31, 2008 and
December 31, 2007 consisted of the following, which have been reclassified in the accompanying consolidated balance sheet:

December 31,
2008

December 31,
2007Accounts receivable, net

$


$
1,930,182Inventory




$
3,383,223Prepaid expenses




$
71,007Current assets of discontinued operations

$


$
5,384,412Property and equipment, net




$
1,294,198Goodwill other long-term assets




$
636,568Non-current assets of discontinued operations

$


$
1,930,766Accounts payable




$
1,521,748Deferred revenue




$
430,642Accrued payroll and related expenses




$
42,075Other current liabilities




$
271,726Current liabilities of discontinued operations

$


$
2,266,191Long-term Liabilities of discontinued operations

$


$
63,825


The
sale of the Electronics and Power Systems US divisions resulted in a gain on sale of discontinued operations for the year ended December 31, 2008 as follows:

Electronics

Power Systems, US

TotalNet current assets sold

$
3,417,632

$
404,474

$
3,822,106Long-term assets sold


1,120,176


45,556


1,165,732Total net assets sold

$
4,537,808

$
450,030

$
4,987,838Consideration, net

$
4,994,137

$
267,744

$
5,261,881Gain (loss) on sale of discontinued operations

$
456,329

$
(182,286
)
$
274,043


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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

E. INVENTORY

Inventory includes material, labor and overhead and consisted of the following:

December 31,2008

2007Raw material

$
4,920,780

$
3,503,057Work-in-process


6,182,835


8,765,015Finished goods


353,917


1,539,129$
11,457,532

$
13,807,201


The
provision for excess and obsolete inventory, from continuing operations, net of usage, for the years ended December 31, 2008 and 2007 was $360,035 and $206,780, respectively.

F. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

December 31,2008

2007Machinery and equipment

$
5,795,744

$
5,240,624Furniture and fixtures


371,262


347,435Computer software


823,662


803,499Leasehold improvements


986,592


748,5977,977,260


7,140,155Less: accumulated depreciation and amortization


(6,012,292
)

(5,374,702
)$
1,964,968

$
1,765,453


Depreciation
and amortization expense from continuing operations relating to property and equipment for the years ended December 31, 2008 and 2007 was $0.9 million and
$0.5 million, respectively.

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES

Features of the Convertible Notes and Warrants

On July 19, 2006, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with the purchasers named
therein (the "Purchasers") in connection with the private placement (the "Private Placement") of:



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)



In
connection with the Private Placement, the Company also entered into a Security Agreement, dated July 19, 2006, with the Purchasers, pursuant to which the Company granted the
Purchasers a security interest in all of its rights, title and interest in, to and under all of the Company's personal property and other assets, including its ownership interest in the capital stock
of its subsidiaries, as security for the prompt payment in full of all amounts due and owing under the Convertible Notes. The following is a summary of the material provisions of the Purchase
Agreement, the Notes, the Warrant As, the Warrant Bs and the Warrant Cs.



As noted above, the Purchase Agreement provided for the issuance and sale to the Purchasers of the Convertible Notes, the Warrant As
and the Warrant Bs for an aggregate purchase price of $12,000,000. Other significant provisions of the Purchase Agreement include:



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)



On
November 7, 2007, the Convertible Notes were retired by cash redemption.

Under
the Purchase Agreement, the Company was also obligated to (i) file the Registration Statement with the SEC within 30 days following the closing of the Private
Placement (which it has satisfied with respect to the securities issued in July 2006), (ii) use its best efforts to cause the Registration Statement to be declared effective within
90 days following the closing of the Private Placement, (which it has satisfied with respect to the securities issued in July 2006, as the Registration Statement was declared effective on
September 27, 2006) and (iii) use its best efforts to keep the Registration Statement effective until the earlier of (x) the fifth anniversary of the effective date of the
registration statement, (y) the date all of the securities covered by the Registration Statement have been publicly sold and (z) the date all of the securities covered by the
Registration Statement may be sold without restriction under SEC Rule 144.

Additionally,
with respect to the common stock underlying the Warrant Cs issued in July 2007 upon exercise of the Warrant Bs, the Company was also obligated to
(i) file a registration statement covering the resale of such common stock with the SEC within 30 days following the issuance of the Warrant Cs (which it has satisfied),
(ii) use its best efforts to cause such registration statement to be declared effective within 60 days following the issuance of the Warrant Cs (or 90 days in the event of
a review of such registration statement by the SEC) (which it has satisfied and was declared effective on September 11, 2007) and (iii) use its best efforts to keep such registration
statement effective until the earlier of (x) the fifth anniversary of the effective date of the registration statement, (y) the date all of the securities covered by the registration
statement have been publicly sold and (z) the date all of the securities covered by the registration statement may be sold without restriction under SEC Rule 144.

If
the Company fails to comply with these or certain other provisions, then the Company will be required to pay liquidated damages of 1% of the aggregate purchase price paid by the
Purchasers in the Private Placement for the initial occurrence of such failure and 1.5% of such amount for each
subsequent 30 day period the failure continues. The total liquidated damages under this provision are capped at 24% of the aggregate purchase price paid by the Purchasers in the Private
Placement.



The Convertible Notes originally had an aggregate principal amount of $12.0 million and were convertible into shares of the
Company's common stock at a conversion price of $1.65, subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers,
consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.

The
Convertible Notes bore interest at the higher of (i) 7.0% per annum or (ii) the six-month LIBOR plus 3.5% (the "Stated Rate 6-Month LIBOR
Condition"). Interest was payable quarterly, beginning on October 31, 2006, and could be paid in cash or, at the Company's option if certain equity conditions ("Equity Conditions") were
satisfied, in shares of the Company's common stock. If interest was paid in shares of common stock, the price per share was at a 10% discount to the volume weighted average price for the 20 trading
days preceding the payment date. The Equity Conditions included

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

(1) the
Company had sufficient authorized shares for issuance, (2) such shares were registered for resale or may be sold without volume restrictions pursuant to Rule 144(k) under
the Securities Act, (3) the common stock was listed or quoted (and was not suspended from trading) on an eligible exchange and such shares were approved for listing upon issuance,
(4) the issuance did not violate Section 6(c) of the Convertible Note or the rules and regulations of any trading market, (5) there had been no event of bankruptcy by the Company,
(6) the Company was not in default with respect to any material obligation under any documents associated with issuance of the Convertible Notes and Warrants, and (7) there had been no
public announcement of a pending or proposed change of control that has not been consummated.

Seventy-five
percent (75%) of the original principal amount of the Convertible Notes was to be repaid in 18 equal monthly installments ($500,000 per month) beginning on
February 28, 2007. Such principal payments could be made in cash or, at the Company's option if certain equity conditions were satisfied, in shares of common stock. If principal was paid in
shares of common stock, the price per share was the lesser of (i) the conversion price or (ii) a 10% discount to the volume weighted average price for the 20 trading days preceding the
payment date. At any time following the 24-month anniversary of the issuance of the Convertible Notes, the holders had the right to elect to require the Company to redeem for cash all or
any portion of the outstanding principal on the Convertible Notes; provided, however, that on the 60 month anniversary of the issuance of the Convertible Notes, the Company would have been
required to redeem any remaining outstanding principal and unpaid interest. Notwithstanding the foregoing, at any time following the one year
anniversary of the effective date of the Registration Statement, the Company had the right, under certain circumstances, including satisfaction of the Equity Conditions with respect to the underlying
shares, redeem the Convertible Notes for cash equal to 120% of the aggregate outstanding principal amount plus any accrued and unpaid interest.

The
Convertible Notes were convertible at the option of the holders into shares of the Company's common stock at any time at the conversion price. If at any time following the one year
anniversary of the effective date of the Registration Statement, the volume weighted average price per share of common stock for any 20 consecutive trading days exceeded 175% of the conversion price,
then, if certain conditions were satisfied, including the Equity Conditions, the Company could require the holders of the Convertible Notes to convert all or any part of the outstanding principal into
shares of common stock at the conversion price. The Convertible Notes contained certain limitations on optional and mandatory conversion, including that, absent stockholder approval of the
transaction, the Company could not issue shares of common stock under the Convertible Notes or the Warrant Bs, in the aggregate, in excess of 19.99% of our outstanding shares on the closing date (or
7,901,276 shares of common stock). On October 19, 2007, the Company received stockholder approval allowing for the issuance of additional shares of the Company's common stock sufficient to
allow for the full conversion of the Company's outstanding Convertible Notes, as well as the full payment of interest and principal on such notes, all in accordance with the terms of such notes.

In
July 2007, $533,895 of the Convertible Notes and accrued interest were converted into shares of common stock. The Convertible Notes and accrued interest converted at $1.65 per share.
The Company issued 318,182 shares of common stock related to the conversion of the principal on the Convertible

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

Notes
and 5,391 shares of common stock related to the accrued interest due through the date of conversion as a result of the Convertible Note holders' conversions.

As
noted above, on November 7, 2007, the remaining balance of the Convertible Notes was retired by cash redemption.



The Warrant As originally entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of the Company's common stock
at a price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from
the date of the warrants is hereinafter referred to as the "non-exercise period." The exercise price and the number of shares underlying these warrants are subject to adjustment for stock
splits, stock dividends, combinations,
distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.

If
a change of control of the Company occurs, as defined, the holders may elect to require us to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the
remaining unexercised portion of each Warrant A.

For
so long as any Warrant As remain outstanding, we may not issue any common stock or common stock equivalents at a price per share less than $1.65. In the event of a breach of this
provision, the holders may elect to require us to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A. As a result of
the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note I below, the holders were entitled for a limited period of time (45 days after
each issuance) to exercise this right. During the fourth quarter of fiscal 2007, the Company paid approximately $1.4 million to redeem Warrant As representing 1,242,426 shares of common stock.
During the first quarter of fiscal 2008, the Company paid approximately $0.4 million to redeem Warrant As representing 303,031 shares of common stock. (See table below for assumptions used in
valuing the warrants redeemed). As of December 31, 2008, Warrant As to purchase 2,090,911 shares of common stock were outstanding.

If
following the later of (i) the effective date of the Registration Statement and (ii) the six month anniversary of the issuance date, the volume weighted average price
per share of our common stock for any 20 consecutive trading days exceeds 200% of the exercise price, then, if certain conditions are satisfied, including the Equity Conditions, we may require the
holders of the Warrant As to exercise up to 50% of the unexercised portions of such warrants. If following the 24 month anniversary of the issuance date, the volume weighted average price per
share of our common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, we may require the holders of the Warrant As to
exercise all or any part of the unexercised portions of such warrants.



The Warrant Bs entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of our common stock at a price of $1.68
per share for a period of 90 trading days beginning the later of

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G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

six
months from the date of such warrants and the date the SEC declares effective the Registration Statement. As noted above, as a result of an amendment, the expiration date of the Warrant Bs was
extended to August 31, 2007.

On
July 17, 2007, the holders of the Warrant Bs exercised such warrants in full, acquiring 3,636,638 shares of common stock at $1.31 per share. The Company received proceeds of
approximately $4.8 million. To entice the holders of the Warrant Bs to exercise such warrants the Company reduced the exercise price from $1.68 to $1.31 per share. As a result of reducing the
exercise price the Company recorded a charge to operations in its fiscal third quarter ending September 29, 2007 related to the warrant modification of approximately $0.9 million to
change in fair value of the Convertible Notes and warrants on the accompanying statement of operations. Pursuant to the original terms of the Warrant Bs, upon exercise of the Warrant Bs, the warrant
holders were entitled to receive additional warrants ("Warrant Cs") to purchase a number of shares of common stock equal to 50% of the number of shares of common stock purchased upon exercise
of the Warrant Bs. As a result of the full exercise of the Warrant Bs, the holders received Warrant Cs to purchase 1,818,187 shares of common stock at an exercise price of $1.815 per share for
a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants.



As discussed above, upon the exercise of the Warrant Bs, the holders were entitled to receive additional warrants (the
"Warrant Cs"). The Warrant Cs originally entitled the holders thereof to purchase up to an aggregate of 1,818,187 shares of our common stock at a price of $1.815 per share for a period
beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter
referred to as the "non-exercise period." The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations,
distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.

If
a change of control of the Company occurs, as defined, the holders may elect to require us to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of
the remaining unexercised portion of each Warrant C.

For
so long as any Warrant Cs remain outstanding, the Company may not issue any common stock or common stock equivalents at a price per share less $1.65. In the event of a breach
of this provision, the holders may elect to require the Company to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each
Warrant C. As a result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note I below, the holders were entitled for a limited period of
time (45 days after each issuance) to exercise this right. During the fourth quarter of fiscal 2007, the Company paid approximately $0.7 million to redeem Warrant Cs representing
621,215 shares of common stock. During the quarter ended March 29, 2008, the Company paid approximately $0.2 million to redeem Warrant Cs representing 151,516 shares of common
stock. (See table below for assumptions used in valuing the warrants redeemed). As of December 31, 2008, Warrant Cs to purchase 1,045,456 shares of common stock were outstanding.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

The
table below summarizes Black-Scholes option pricing model range of assumptions that were used in valuing the warrants redeemed for both the Warrant As and Warrant Cs.

Assumptions:

Warrant As

Warrant CsExpected life

5.68 years to 5.69 years

6.67 years to 6.68 yearsExpected volatility ranging from

83.0%

85.0%Dividends

none

noneRisk-free interest rate

3.75%3.84%

3.85%3.93%


If
following the later of (i) the effective date of the Registration Statement and (ii) the six month anniversary of the issuance date, the volume weighted average price
per share of the Company's common stock for any 20 consecutive trading days exceeds 200% of the exercise price, then, if certain conditions are satisfied, including the Equity Conditions, the Company
may require the holders of the Warrant Cs to exercise up to 50% of the unexercised portions of such warrants. If following the 24 month anniversary of the issuance date, the volume weighted
average price per share of our common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, the Company may require the
holders of the Warrant Cs to exercise all or any part of the unexercised portions of such warrants.



First Albany Capital ("FAC") acted as placement agent in connection with the Private Placement. In addition to a cash transaction fee,
FAC or its designees were entitled to receive five-year warrants to purchase 218,182 shares of the Company's common stock at an exercise price of $1.87 per share. These warrants will be
callable after the second anniversary of the closing of the Private Placement if the 20-day volume weighted average price per share of the Company's common stock exceeds 175% of the
exercise price. At the direction of FAC, these warrants were issued to First Albany Companies Inc., the parent of FAC.

Accounting for the Convertible Debt Instrument and Warrants

The Company determined that the Convertible Notes constituted a hybrid instrument that has the characteristics of a debt host contract
containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of SFAS 133, Accounting for Derivative Instruments and Hedging
Activities(SFAS 133). The
Company identified all of the derivatives associated with the July 19, 2006 financing, and concluded that two of the derivatives could not be reliably measured nor reliably associated with
another derivative that could be reliably measured. As such, the Company valued these derivatives as a single hybrid contract together with the Convertible Notes. The contract was remeasured at each
period at the fair value with the changes in fair value recognized in the statement of operations until settlement of the Convertible Notes. As permitted under SFAS 155, the Company irrevocably
elected, as of January 1, 2007, to continue to measure the Convertible Notes and embedded derivatives in their entirety at fair value with changes in fair value recognized as either gain or
loss. The Company determined that this election had no impact on the accounting for the Convertible Notes.

68

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

Upon
issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together the "Warrants"), did not meet the requirements for equity classification set
forth in EITF Issue 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock,
because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale
registration of the shares and (c) there is a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted
for as freestanding derivative instruments pursuant to the provisions of SFAS 133. Changes in fair value are recognized as either a gain or loss in the statement of operations under the caption
"change in fair value of Notes and warrants." In addition, prior to their exercise by the holders, the Warrant Bs had been classified as a current liability on the balance sheet as they are
outstanding for less than one year.

Upon
issuance of the Convertible Notes and Warrants, the Company allocated the proceeds received from the Convertible Notes and Warrants on a relative fair value basis. As a result of
such allocation, the Company determined the initial carrying value of the Convertible Notes to be $9.4 million. The Convertible Notes were immediately marked to fair value, resulting in a
derivative liability in the amount of $16.3 million. The Convertible Notes were paid off in full in November 2007. The net credit to Change in Fair Value of Convertible Notes and Warrants,
related to the Convertible Notes, for the year ended December 31, 2007 was approximately $1.1 million.

Upon
issuance, the Company allocated $2.7 million of the initial proceeds to the Warrants and immediately marked them to fair value resulting in a derivative liability of
$4.9 million and a charge to other expense of $2.2 million. As of December 31, 2008 and 2007, the remaining outstanding Warrants have been marked to fair value resulting in a
derivative liability of $2.4 million and $3.2 million, respectively. The credit to Change in Fair Value of Convertible Notes and Warrants, related to the Warrants, for the year ended
December 31, 2008 and 2007 was $0.3 million and $0.6 million ($1.5 million and $ (0.9) million, including warrant modification, discussed above), respectively. The
transaction costs were immediately expensed as part of the fair value adjustment.

The
debt discount in the amount of $2.6 million (resulting from the allocation of proceeds) was being amortized to interest expense using the effective interest method over the
expected term of the Convertible Notes. During 2007, as a result of the payment in full of the Convertible Notes, the Company amortized the remaining balance resulting in approximately
$2.1 million, which is a component of interest expense.

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

A
summary of the changes in the fair value of the Convertible Notes and the Warrants:

Fair Value
of Notes

Fair Value
of Warrant
Liabilities

TotalBalance December 31, 2006

$
12,740,482

$
2,920,553

$
15,661,035Amortization of debt discount


2,115,442





2,115,442Fair value adjustment(4)


(1,044,185
)

(1,451,903
)

(2,496,088
)Redemptions:Cash(2)


(8,057,852
)




(8,057,852
)Cash paid related to pre-payment premium of 20%(2)


(1,419,440
)




(1,419,440
)Stock(1)


(3,809,447
)




(3,809,447
)Note holder conversion @ $1.65 per share


(525,000
)




(525,000
)Modification charge of Warrant Bs(4)





872,728


872,728Exercise of Warrant Bs and reclassification to equity





(872,728
)

(872,728
)Charge related to the initial issuance of Warrant Cs(4)





1,775,666


1,775,666Change in fair value of redeemed Warrant As and Cs at redemption(3)(4)





2,099,958


2,099,958Warrant Redemptions:Cash Paid for Warrant A redemption(3)





(1,363,622
)

(1,363,622
)Cash paid for Warrant C redemption(3)





(736,336
)

(736,336
)Balance at December 31, 2007

$


$
3,244,316

$
3,244,316Fair value adjustment(4)





(836,878
)

(836,878
)Change in fair value of redeemed Warrant As and Cs at redemption(3)(4)





572,250


572,250Warrant Redemptions:Cash Paid for Warrant A redemption(3)





(387,591
)

(387,591
)Cash paid for Warrant C redemption(3)





(184,659
)

(184,659
)Balance at December 31, 2008

$


$
2,407,438

$
2,407,438


---

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

Under
the provisions of the Convertible Notes, the Company could elect to make principal and interest payments in shares of its common stock if the Equity Conditions were satisfied. With
the Equity Conditions satisfied the Company elected to pay the April 30, 2007 and July 31, 2007 interest payments in shares of its common stock. As a result, the Company recorded the
following charges as it relates to the interest payment on the Convertible Notes (interest on the Convertible Notes was due quarterly on the last day of January, April, July and October,
respectively):

Due Date

Shares

Cash Interest
$ Value

Fair Value
of Shares
Issued

Additional
Expense
RecordedApril 30, 2007


226,746

$
252,824

$
303,941

$
51,117July 31, 2007


169,776

$
214,858

$
210,059

$
(4,799
)


ValuationMethodology and Significant Assumptions

The valuation of derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair
values for the Company's derivatives are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such
amounts and the recognition of such amounts are subject to significant estimates which may change in the future.

In
estimating the fair value of the Convertible Notes and Warrants the following methods and significant input assumptions were applied:



71

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)



Input

July 19,
2006

Dec. 31,
2006

March 31,
2007

June 30,
2007

Sept. 29,
2007

Nov. 7,
2007(1)Quoted Stock Price

$
1.68

$
1.14

$
1.30

$
1.22

$
1.14


1.44Conversion Price

$
1.65

$
1.65

$
1.65

$
1.65

$
1.65

$
1.65Time to Maturity (in years)


5.00


4.55


4.30


4.05


3.80


3.70Stock Volatility


90
%

90
%

84
%

82
%

70
%

70
%Risk-Free Rate


5.02
%

4.71
%

4.54
%

4.91
%

4.11
%

3.71
%Dividend Rate


0
%

0
%

0
%

0
%

0
%

0
%


---

Warrant AsInput

Dec. 31,
2006

March 31,
2007

June 30,
2007

Sept. 29,
2007

Dec. 31,
2007

Mar. 29,
2008

June 28,
2008

Sept. 27,
2008

Dec. 31,
2008Quoted Stock Price


$1.14

$
1.30

$
1.22

$
1.14

$
1.650

$
1.84

$
3.01

$
2.10

$
1.55Exercise Price


$1.815

$
1.815

$
1.815

$
1.815

$
1.815

$
1.815

$
1.815

$
1.815

$
1.815Time to Maturity (in years)


6.55


6.31


6.06


5.80


5.60


5.30


5.10


4.80


4.60Stock Volatility


91
%

88
%

86
%

85
%

83
%

80
%

80
%

72
%

73
%Risk-Free Rate


4.70
%

4.57
%

4.94


4.29
%

3.53
%

2.57
%

3.37
%

2.96
%

1.44
%Dividend Rate


0
%

0
%

0
%

0
%

0
%

0
%

0
%

0
%

0
%Non-Exercise Period


Until 1/19/2007


N/A


N/A


N/A


N/A


N/A


N/A


N/A


N/A


72

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)



Warrant Bs(1)Input

Dec. 31,
2006

March 31,
2007

June 30,
2007

July 17,
2007Quoted Stock Price


$1.14

$
1.30

$
1.22

$
1.55Conversion Price


$1.68

$
1.68

$
1.68

$
1.68Time to Maturity (in years)


0.67


0.42


0.17


0.17Stock Volatility


72
%

68
%

40
%

40
%Risk-Free Rate


5.06
%

5.04
%

4.56
%

5.02
%Dividend Rate


0
%

0
%

0
%

0
%Non-Exercise Period


Until 1/19/2007


N/A


N/A


N/A


---

Warrant Cs(1)Input

July 17,
2007

Sept. 29,
2007

Dec. 31,
2007

Mar. 29,
2008

June 28,
2008

Sept. 27,
2008

Dec. 31,
2008Quoted Stock Price


$1.55


$1.14


$1.650

$
1.84

$
3.01

$
2.10

$
1.55Exercise Price


$1.815


$1.815


$1.815

$
1.815

$
1.815

$
1.815

$
1.815Time to Maturity (in years)


7.0


6.8


6.5


6.3


6.1


5.8


5.50Stock Volatility


90
%

87
%

85
%

85
%

85
%

80
%

80
%Risk-Free Rate


5.02
%

4.37
%

3.64
%

2.77
%

3.50
%

3.19
%

1.63
%Dividend Rate


0
%

0
%

0
%

0
%

0
%

0
%

0
%Non-Exercise Period


Until 1/17/08


Until 1/17/08


Until 1/17/08


N/A


N/A


N/A


N/A


---

Placement Agent WarrantsInput

Dec. 31, 2006Quoted Stock Price


$1.14Conversion Price


$1.87Time to Maturity (in years)


4.55Stock Volatility


86
%Risk-Free Rate


4.71
%Dividend Rate


0
%Non-Exercise Period


Until 1/19/2007




73

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)



Input

March 31,
2007

June 30,
2007

Dec. 31,
2007

March 29,
2008

June 28,
2008

Sept. 27,
2008

Dec. 31,
2008Quoted Stock Price

$
1.30

$
1.22

$
1.65

$
1.84

$
3.01

$
2.10

$
1.55Exercise Price

$
1.87

$
1.87

$
1.87

$
1.87

$
1.87

$
1.87

$
1.87Time to Maturity (in years)


4.30


4.05


3.55


3.31


3.06


2.81


2.55Stock Volatility


84
%

82
%

70
%

70
%

75
%

75
%

80
%Risk-Free Rate


4.54
%

4.91


3.175
%

1.91
%

2.93
%

2.33
%

0.89
%Dividend Rate


0
%

0
%

0
%

0
%

0
%

0
%

0
%Non-Exercise Period


N/A


N/A


N/A


N/A


N/A


N/A


N/A


Significant Assumptions:



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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

H. LINE OF CREDIT

On February 26, 2008, the Company entered into a Loan and Security Agreement (the "Loan
Agreement") with Silicon Valley Bank (the "Bank"). Under the terms of the Loan Agreement, the Bank agreed to provide the Company with a credit line up to $10.0 million. The Company's
obligations under the Loan Agreement are secured by substantially all of the assets of the Company and advances under the Loan Agreement are limited to 80% of eligible receivables and the lesser of
25% of the value of the Company's eligible inventory, as defined, or $1.0 million. Interest on outstanding borrowings accrues at a rate per annum equal to the Prime Rate plus one percent (1.0%)
per annum, as defined, or the LIBOR Rate plus three and three quarter percent (3.75%) per annum. The Loan Agreement contains certain financial covenants relating to tangible net worth, as defined,
which the Company must satisfy in order to borrow under the agreement. In addition the Company agreed to pay to the Bank a collateral monitoring fee of $750 per month and agreed to the following
additional terms: (i) $50,000 commitment fee, $25,000 to be paid at signing of the Loan Agreement and $25,000 to be paid on the one year anniversary of the Loan Agreement; (ii) an unused
line fee in the amount of 0.5% per annum of the average unused portion of the revolving line; and (iii) an early termination fee of 0.5% of the total credit line if the Company terminates the
Loan Agreement prior to 12 months from the Loan Agreement's effective date. The Loan Agreement, if not sooner terminated in accordance with its terms, expires on February 25, 2010.

On
September 24, 2008, the Company entered into the Second Loan Modification Agreement with the Bank. The Second Loan Modification modified certain of the financial covenants
related to the Loan Agreement. The Company paid legal fees of approximately $15,000 related to the Second Loan Modification Agreement. As of December 31, 2008, the Company had
$3.0 million outstanding under the Loan Agreement and the Bank's prime rate was 5%. The rate used was the Bank's prime rate of 5% plus 1% or (6% at December 31, 2008). The Company was in
compliance with its amended financial covenants related to this agreement as of December 31, 2008. As of December 31, 2008 the Company had availability of $7.4 million under the
line of credit.

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK

Series B Convertible Preferred Stock

On October 31, 2003, the Company completed a $7.7 million equity transaction involving the issuance of 1,535 shares of
its Series B Convertible Preferred Stock, $0.01 par value per share (the "Series B Preferred Stock"), and warrants to purchase up to 1,228,000 shares of the Company's common stock, to
accredited investors (the "October 2003 Financing Transaction"). In connection with the October 2003 Financing Transaction, the Company 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 was
initially $2.50. As of December 31, 2008 and 2007, the conversion price for the Series B Preferred Stock was $1.55, respectively. During 2008, 50 shares of Series B Preferred
Stock were converted by their holder resulting in the Company issuing 161,290 shares of common stock. As of December 31, 2008 and December 31, 2007, 290 and 340 shares of Series B
Preferred Stock were outstanding, respectively. As of December 31, 2008 and 2007, the liquidation preference of the remaining 290 and 340 shares of Series B Preferred Stock was
$1,450,000 and $1,700,000, respectively, and these were convertible into 935,484 and 1,096,774 shares of common stock, respectively.

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

Dividends on Series B Preferred Stock

The shares of Series B Preferred Stock initially bore a cumulative dividend at a rate of 6% per annum; pursuant to its terms,
this was increased to a rate of rate of 8% per annum on October 1, 2005. Dividends on the Series B Preferred Stock are payable semi-annually and, except in certain limited
circumstances, may be paid by the Company, at its option, either through the issuance of shares of common stock or in cash. If the Company elects to pay the dividend in shares of common stock, the
Company will issue a number of shares of common stock equal to the quotient of the dividend payment divided by the greater of 80% of the average closing bid and ask price of the common stock on the
Nasdaq Stock Market for the 15 trading days ending on the 11th trading day prior to the date the dividend is required to be paid, and the conversion price, which was initially $2.50, but which
has since been adjusted in accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2008 and 2007). The Company has paid all dividends in shares of common
stock, in lieu of cash dividends. The table below details out the number of shares and the amount charged to interest expense during the respective periods:

Period

Shares Issued

$ Value of DividendYear ended December 31, 2007


70,045

$
137,856Year ended December 31, 2008


86,241

$
133,666


As
part of the October 2003 Financing Transaction, the Company also issued warrants to purchase up to 1,228,000 shares of its common stock (See Note N). These warrants were
exercisable for a five-year term and had an initial exercise price of $3.32 per share, which represented 110% of the average closing price of the common stock for the five trading days
preceding October 31, 2003. The exercise price had been adjusted due to anti-dilution provisions to $2.93 per share. These warrants were immediately exercisable and would
expire on October 31, 2008. As of December 31, 2008, none of these warrants remained outstanding. During 2008, warrants to purchase an aggregate of 1,116,000 shares of
common stock, which were outstanding at December 31, 2007, expired unexercised.

Burnham
Hill Partners, LLC, a division of Pali Capital, Inc. ("BHP"), served as placement agent for this transaction. As part of its commission BHP, or its assigns,
received warrants, with an exercise price of $0.01 per share, to purchase an aggregate of 150,430 shares of common stock. These warrants were immediately exercisable and would expire on
October 31, 2008. The Company valued these warrants at $435,166, using the Black-Scholes option-pricing model and has treated this as a transaction cost. As of December 31, 2008, none of
these warrants were outstanding as the remaining warrants to purchase an aggregate of 5,182 shares of common stock, which were outstanding as of December 31, 2007, expired unexercised.

Liquidation Preference on Series B Preferred Stock

In the event of a liquidation of the 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 the 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. After payment of the full liquidation preference amount, the holders of the Series B Preferred Stock will
not be entitled to any further participation as such in any distribution of the Company's assets.

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

Optional Conversion of Series B Preferred Stock

The Series B Preferred Stock is convertible into common stock at any time at the option of the holder. Each outstanding share of
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 was initially
$2.50, but which has since been adjusted in accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2007 and 2008). The Series B Preferred Stock has
anti-dilution protections which adjust the conversion price, in the event of the issuance of shares of common stock at a price less than the conversion price then in effect. If the Company
issues equity securities for a per share price less than the conversion price of the Series B Preferred Stock, which was initially $2.50, the conversion price will be adjusted downwards using a
weighted average calculation.

Mandatory Conversion of Series B Preferred Stock

If certain conditions described below are met, each share of Series B Preferred Stock will be automatically converted into a
number of shares of common stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which was initially $2.50, but which has since been adjusted in accordance with
the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2008 and 2007). Mandatory conversion may only occur if the average of the closing bid and ask price of the common
stock on the Nasdaq Stock Market exceeds $5.00 (as adjusted for stock splits, stock dividends, combinations and similar transactions) for 20 consecutive trading days and either the registration
statement governing the underlying shares of common stock is effective or the shares of common stock issuable upon conversion of the Series B Preferred Stock can be sold without restriction
pursuant to Rule 144 of the Securities Act of 1933. The mandatory conversion date will be extended for so long as the following events have occurred and are
continuing:



If,
however, on the mandatory conversion date, a holder is prohibited from converting all of its shares of Series B Preferred Stock as a result of the restrictions described below
under "Conversion

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

Restrictions,"
such shares of Series B Preferred Stock will not be converted, will remain outstanding and will not accrue any dividends.

Conversion Restrictions

Unless the Company seeks and obtains stockholder approval, the number of shares of common stock the Company may issue upon the
conversion of the shares of Series B Preferred Stock (when aggregated with the number of shares of common stock issued as dividends on the Series B Preferred Stock and upon exercise of
the warrants issued to the placement agent and its affiliates for the Series B Preferred Stock financing) is limited to 4,947,352 shares (representing 19.999% of the Company's total outstanding
common stock as of October 31, 2003 immediately prior to the issuance of the Series B Preferred Stock). In addition, no holder may convert shares of Series B Preferred Stock if
conversion of those shares would result in the holder owning more than 4.99% of the common stock then outstanding or would result in the holder beneficially owning more than 9.999% of the common stock
then outstanding, unless the holder waives this limitation at least 61 days prior to the proposed conversion.

Failure to Convert

If for any reason upon an optional or mandatory conversion the Company cannot issue shares of common stock which have been registered
for resale pursuant to an effective registration statement, then the Company will be obligated to issue as many shares of common stock as its is able to issue. If the Company does not have enough
shares of common stock to cover the conversion of all outstanding shares of Series B Preferred Stock, then with respect to the unconverted shares of Series B Preferred Stock (other than
unconverted Series B Preferred Stock resulting from the restrictions described above under "Conversion Restrictions"), the holder will have the right to (i) void its conversion notice,
(ii) require the Company to redeem the unconverted shares of Series B Preferred Stock at a price per share equal to $6,250 plus liquidated damages and any accrued but unpaid dividends or
(iii) require the Company to issue shares of common stock that have not been registered pursuant to the Securities Act. If the holder elects redemption, the Company may pay the redemption price
either in cash or in shares of common stock based on the quotient of the redemption price divided by the greater of 80% of the average of the closing bid and ask price of the common stock on the
Nasdaq Stock Market for the 15 trading days ending on the 11th trading day prior to the redemption date and the conversion price, which was initially $2.50, but which has since been
adjusted in accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2008 and 2007).

Redemption of Series B Preferred Stock

The holders of Series B Preferred Stock are entitled to redeem their shares of Series B Preferred Stock immediately prior
to the consolidation, merger or business combination of the Company with another entity (other than pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company or a consolidation, merger or other business combination in which holders of the Company's voting power immediately prior to the transaction continue after the transaction
to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

other
than a corporation) of such entity or entities), the sale or transfer of more than 50% of the Company's assets (other than inventory in the ordinary course of business) or the closing of a
purchase, tender or exchange offer made to the holders of more than 50% of the outstanding common stock. In such an event, the redemption price per share will equal $6,250 plus any accrued but unpaid
dividends and liquidated damages. The Company may pay the redemption price in either cash or shares of common stock based on the quotient of the redemption price divided by the greater of 80% of the
average of the closing bid and ask price of the common stock on the Nasdaq Stock Market for the 15 trading days ending on the 11th trading day prior to the redemption date and the
conversion price, which was initially $2.50, but which has since been adjusted in accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2008 and 2007).

In
addition, the holders of Series B Preferred Stock are entitled to redeem their shares of Series B Preferred Stock if the following events
occur:



With
respect to the events set forth in the first three bullet points above, the redemption price per share will equal $6,000 plus liquidated damages and any accrued but unpaid
dividends. With respect to the event described in the fourth bullet point above, the redemption price per share will be the greater of (i) $6,000 plus liquidated damages and any accrued but
unpaid dividends and (ii) the product of the number of shares of common stock issuable upon the relevant shares of Series B Preferred Stock multiplied by the highest closing price for
the common stock during the period beginning on the date of first occurrence of the event and ending one day prior to the date of payment of the redemption price. If the effectiveness of the
registration statement lapses, listing is suspended or the holders receive a notice that the Company will not or cannot comply with a conversion notice, the Company may choose to pay the redemption
price in shares of common stock based on the quotient of the redemption price divided by the greater of 80% of the average of the closing bid and ask price of the common stock on the Nasdaq Stock
Market for the 15 trading days ending on the 11th trading day prior to the redemption date and the conversion price, which was initially $2.50, but which has since been adjusted in
accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2008 and 2007).

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

Commencing
October 31, 2006 (and so long as a registration statement covering the resale of the shares of common stock underlying the Series B Preferred Stock and related
warrants is effective and none of the events listed in the four bullet points above has occurred and is continuing), the Company may redeem all or any portion of the outstanding Series B
Preferred Stock upon five days prior written notice at a price per share of $7,500, plus liquidated damages and any accrued but unpaid dividends. However, if a holder has delivered a conversion notice
to the Company within three trading days of receipt of the Company's redemption notice for all or a portion of the shares of Series B Preferred Stock, such shares of Series B Preferred
Shares which the Company has designated for redemption may be converted by the holder. In addition, if during the period between the date of the Company's redemption notice and the redemption date a
holder becomes entitled to redeem the Series B Preferred Stock as a result of a consolidation, merger or business combination of the Company with another entity, the sale or transfer of more
than 50% of the Company's assets (other than inventory in the ordinary course of business) or the closing of a purchase, tender or exchange offer made to the holders of more than 50% of the common
stock, the right of the holder with respect to the conversion will take precedence over the Company's redemption notice. If a holder delivers a conversion notice but is prohibited from converting all
of its shares of Series B Preferred Stock as a result of the restrictions described above under "Conversion Restrictions," such shares of Series B Preferred Stock will not be converted,
will remain outstanding and will not accrue any dividends.

Accounting for the Series B Preferred Stock and Adjustments to the Conversion Price

The Company accounted for the transaction in accordance with EITF 00-27,Application of
Issue No. 98-5 to Certain Convertible Instruments,allocating the proceeds received net of transaction costs based on the relative fair value of the
redeemable convertible Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred
securities as follows:

Security

Face
Value

Fair
Value

Allocation of
Proceeds, Net of
Transaction Costs

Beneficial
Conversion
Feature

DiscountRedeemable convertible Series B Preferred Stock

$
7,675,000

$
12,398,195

$
5,247,393

$
3,655,607

$
6,083,214Warrants




$
2,935,558

$
1,242,441








As
a result of the issuance of shares of common stock in lieu of cash for the principal and interest payments due on the Convertible Notes (see Note G. Convertible Debt
Instruments and Warrant Liabilities), the issuance of common stock to the landlord (see Note T. Restructuring Costs), conversion of a portion of the Convertible Notes by the note holders, the
exercise of the Warrant Bs, the issuance of 749,999 shares of common stock to the note holders as an inducement and the closing of the private placement of Series C Preferred Stock and warrants
in the fourth quarter of 2007, the Company recorded the following non-cash charges as interest expense in its Statement of Operations during the

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

year
ended December 31, 2007 and adjusted the conversion price on the Series B Preferred Stock as follows:

Date

Type of Payment

Conversion/
Exercise Price

Adjusted
Conversion/
Exercise Price(1)

Interest
Expense1/3/2007

Lease settlement issuing 850,000 shares

$
2.06

$
2.04

$
16,9122/28/07

Principal payment issuing 445,899 shares

$
2.04

$
2.03

$
8,4984/30/07

Interest payment issuing 226,746 shares

$
2.03

$
2.03


5/1/07

Principal payment issuing 444,361 shares

$
2.03

$
2.02

$
8,1126/1/07

Principal payment issuing 452,343 shares

$
2.02

$
2.01

$
8,2087/1/07

Principal payment issuing 480,753 shares

$
2.01

$
2.00

$
9,2967/10/07

Conversion of Convertible Notes and accrued interest at $1.65 per shares, issuing 323,573 shares

$
2.00

$
2.00

$
2,2327/17/07

Warrant Exercise issuing 3,636,368 shares

$
2.00

$
1.94

$
46,7747/31/07

Interest payment issuing 174,662 shares

$
1.94

$
1.94

$
2,2818/01/07

Principal payment issuing 379,716 shares

$
1.94

$
1.94

$
4,8709/01/07

Principal payment issuing 381,220 shares

$
1.94

$
1.93

$
8,9389/28/2007

Principal Payment issuing 492,559 shares

$
1.93

$
1.92

$
8,98410/16/2007

Inducement to Convertible Note holders issuing 749,999 shares

$
1.92

$
1.91

$
9,53511/7/2007

Issuance of 10,000 shares of Series C Preferred Stock and related warrants (see Series C Convertible Preferred Stock below)

$
1.91

$
1.70

$
207,88412/20/2007

Issuance of 15,000 shares of Series C Preferred Stock and related warrants (see Series C Convertible Preferred Stock below)

$
1.70

$
1.55

$
186,955Non-cash interest expense for the year ended December 31, 2007







$
529,479


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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

Series C Convertible Preferred Stock

On November 8, 2007, the Company entered into a Stock and Warrant Purchase agreement with Rockport Capital Partners
II, L.P. and NGP Energy Technology Partners, L.P. (the "Investors"). Under this purchase agreement, the Investors agreed to purchase in a private placement up to 25,000 shares of the
Company's newly created Series C convertible preferred stock (the "Series C Preferred Stock") and warrants to purchase up to 19,711,539 shares of common stock, for an aggregate gross
purchase price of $25.0 million. Each share of Series C Preferred Stock initially converts into common stock at a price equal to $1.04 per share, subject to adjustment.

This
private placement occurred in two closings. The first closing occurred on November 8, 2007. At the first closing, the Company issued 10,000 shares of Series C
Preferred Stock at $1,000 per share for an aggregate gross purchase price of $10.0 million. These shares are currently convertible into 9,615,384 shares of common stock. The Company also issued
warrants to purchase an aggregate of 15,262,072 shares of common stock. These warrants are exercisable for a seven-year term and had an initial exercise price of $1.44 per share and were
not exercisable until May 8, 2008. As a result of stockholder approval of the second closing and related matters on December 20, 2007, as described below, the exercise price of these
warrants was reduced to $1.25 per share. The Company considered this a cancellation and reissuance of new warrants and accounted for the change in the fair value of the warrants in the allocation of
net proceeds associated with the second closing and treated it as a deemed dividend to the Series C Preferred Stock holders. (See Accounting for the Series C Preferred Stock below).

At
the second closing, which occurred on December 20, 2007, following stockholder approval, the Company issued 15,000 shares of Series C Preferred Stock for an aggregate
gross purchase price of $15.0 million, of which $10.0 million was paid through the cancellation of the promissory notes previously issued to the Investors on November 7, 2007.
These shares are currently convertible into 14,423,076 shares of common stock. At this closing, the Company also issued warrants to purchase an aggregate of 4,449,467 shares of common stock at an
exercise price of $1.25 per share. These warrants are exercisable for a seven-year term and are exercisable immediately.

In
the purchase agreement, the Company also agreed to issue the Investors additional warrants in the event that the holders of certain existing warrants (none of whom are affiliated with
the Investors) exercise those warrants in the future. Upon such exercises, the Company will issue to the Investors additional warrants to purchase common stock equal to one-half of the
number of shares of common stock issued upon exercise of these existing warrants. The exercise price of these warrants will be $1.66 per share (during 2008, prior to the issuance of any such warrants,
the warrant holders agreed to change the exercise price to $1.66 per share from $1.25 per share). As of December 31, 2008, if all of the remaining existing warrants are exercised, the Company
would need to issue warrants to purchase an additional 2,725,955 shares of common stock to the Investors. During the year ended December 31, 2008, existing warrants to purchase 271,151 shares
of common stock were exercised resulting in the Company issuing 174,857 shares of common stock (some warrants were exercised on a "cashless" basis resulting in fewer shares being issued). As a result
of these exercises the Company issued to the Investors warrants to purchase 87,484 shares of common stock. 77,379 of these warrants expire on June 28, 2015 and 10,105 of these warrants expire
on September 27, 2015 and have an exercise price of $1.66 per share. On June 28, 2008 and September 27, 2008, the dates of issuance, the Company valued

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

these
warrants using a Black-Scholes option pricing model with the assumptions detailed below. After valuing these warrants the Company allocated the calculated value to the relative fair value of
each tranche of preferred stock. As a result, the Company recorded the allocated value of the warrant and the beneficial conversion feature of $252,000 ($232,000 and $20,000) in the aggregate to the
second closing of the Series C Preferred Stock. The Company recorded a deemed dividend on the Series C Preferred Stock of $116,000 and $10,000 related to the beneficial conversion
feature. SeeAccounting for the Series C Preferred Stockbelow.

Input

June 28,
2008

September 27,
2008Quoted Stock Price

$
3.01

$
2.10Exercise Price

$
1.66

$
1.66Time to Maturity (in years)


7.00


7.00Stock Volatility


84.65
%

85.44
%Risk-Free Rate


3.5
%

3.18
%Dividend Rate


0
%

0
%


Dividends on Series C Preferred Stock

The shares of Series C Preferred Stock accrue a cumulative dividend at a rate of 5% per annum of the Stated Liquidation
Preference Amount, as defined below. Dividends on the Series C Preferred Stock shall be cumulative, shall accrue, whether or not declared, and be payable quarterly in cash or, at the Company's
option, added to the Stated Liquidation Preference Amount. So long as any shares of Series C Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any
dividend or make any distribution on any Series B Preferred Stock (other than dividends or distributions paid on the Series B Preferred Stock in common stock in accordance with the terms
of the Series B Preferred Stock) or junior stock (other than dividends or distributions on common stock payable solely in shares of common stock), unless at the time of such dividend or
distribution the Company shall have paid all accrued and unpaid dividends on the outstanding shares of Series C Preferred Stock. In addition, so long as any shares of Series C Preferred
Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend or make any distribution on any common stock (other than dividends or distributions on common stock
payable solely in shares of common stock), unless at the time of such dividend or distribution the Company simultaneously pays a dividend or distribution on each outstanding share of Series C
Preferred Stock in an amount equal to the product of (i) the dividend or distribution payable on each share of common stock and (ii) the number of shares of common stock issuable upon
conversion of a share of Series C Preferred Stock, calculated on the record date for determination of holders entitled to receive such dividend or distribution.

Voting Rights

The holders of Series C Preferred Stock shall be entitled to notice of all meetings of stockholders in accordance with the
Company's bylaws. On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in
lieu of meeting), each holder of outstanding shares of Series C

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

Preferred
Stock shall be entitled to cast the number of votes equal to quotient determined by dividing (i) the Series C Original Issue Price ($1,000 per share) of the shares of
Series C Preferred Stock held by such holder as of the record date for determining stockholders entitled to vote on such matter by (ii) $1.44 (as adjusted for any stock dividends,
combinations, splits and the like with respect to shares of common stock). Except as provided by law or as described below, holders of Series C Preferred Stock shall vote together with the
holders of common stock as a single class.

The
Company is not permitted, without the affirmative vote or written consent of the holders of at least 67% of the outstanding Series C Preferred Stock (50% of the outstanding
Series C Preferred Stock with respect to items (4), (5) and (8) below), directly or indirectly, to take any of the following actions or agree to take any of the following
actions:

(1)   authorize,
create or issue any shares of preferred stock or other equity securities ranking senior to or on a parity with the Series C Preferred Stock;

(2)   increase
or decrease the total number of authorized shares of Series C Preferred Stock;

(3)   amend
or modify the Company's certificate of incorporation (including the Certificate of Designation governing the Series C Preferred Stock) or bylaws that would
adversely affect the rights, preferences, powers and privileges of the Series C Preferred Stock;

(4)   repurchase
or redeem any shares of Series B Preferred Stock (except pursuant to the existing terms of the Series B Preferred Stock) or any equity
securities ranking junior to the Series C Preferred Stock, subject to certain exceptions;

(5)   effect
any distribution or declare, pay or set aside any dividend with respect to any equity securities ranking junior to the Series C Preferred Stock;

(6)   incur
any form of indebtedness for borrowed money in excess of $5,000,000 in the aggregate (other than indebtedness existing at November 8, 2007);

(7)   effect
a liquidation, consummate a reorganization event or dispose, transfer or license any material assets, technology or intellectual property, other than
non-exclusive licenses in connection with sales of the Company's products in the ordinary course of business;

(8)   consummate
any transaction that results in the transfer or issuance of securities, or options, warrants or other rights to receive securities of a subsidiary or any
other transaction following which a subsidiary no longer remains wholly-owned by the Company or pursuant to which any third party has a right to purchase securities of a subsidiary;

(9)   change
the size of the Company's board of directors;

(10) encumber
or grant a security interest in all or substantially all or a material part of the Company's assets except to secure indebtedness permitted above that is
approved by the Company's board of directors;

(11) acquire
a material amount of assets of another entity, through a merger, purchase of assets or purchase of capital stock or otherwise; or

(12) enter
into any agreement to do or cause to be done any of the foregoing.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

Liquidation Preference

In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary (a
"Liquidation"), the holders of shares of the Series C Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its
stockholders before any payment shall be made to the holders of junior stock by reason of their ownership thereof, an amount per share equal to the greater of:

(i)  the
Series C Original Issue Price ($1,000 per share) plus any dividends accrued but unpaid thereon (the "Stated Liquidation Preference Amount"); or

(ii)  such
amount per share as would have been payable had all shares of Series C Preferred Stock been converted into common stock immediately prior to such
Liquidation (the amount payable to the holders of Series C Preferred Stock pursuant to clause (i) or (ii) of this sentence is hereinafter referred to as the "Series C
Liquidation Amount").

If
upon any such Liquidation, the assets of the Company available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series C Preferred
Stock the full amount to which they shall be entitled and the holders of shares of parity stock the full amount to which they shall be entitled pursuant to the terms of such Parity Stock, the holders
of shares of Series C Preferred Stock and the holders of shares of parity stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective
amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. The liquidation
payment with respect to each outstanding fractional share of Series C Preferred Stock shall be equal to a ratably proportionate amount of the liquidation payment with respect to each
outstanding share of Series C Preferred Stock. All payments shall be in cash, property (valued at its fair market value as determined by an independent appraiser reasonably acceptable to the
holders of a majority of the shares of Series C Preferred Stock then outstanding) or a combination thereof; provided, however, that no cash shall be paid to holders of junior stock unless each
holder of the outstanding shares of Series C Preferred Stock has been paid in cash the full amount to which such holder shall be entitled. After payment of the full Series C Liquidation
Amount, such holders of shares of Series C Preferred Stock will not be entitled to any further participation as such in any distribution of the assets of the Company.

Conversion

The holder of Series C Preferred Stock shall have the following conversion rights:



At any time the holder of any such shares of Series C Preferred Stock may, at such holder's option, elect to convert all or any
portion of the shares of Series C Preferred Stock held by such person into a number of fully paid and nonassessable shares of common stock equal to the quotient of (i) the Stated
Liquidation Preference Amount of the shares of Series C Preferred Stock being converted divided by (ii) the conversion price then in effect as of the date of the delivery by such holder
of its notice of election to convert. The initial conversion price of the Series C Preferred Stock is $1.04 per share. The Series C Preferred Stock will receive weighted average
anti-dilution protection in the event

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

of
a dilutive issuance in accordance with a formula set forth in the Certificate of Designation, subject to certain exceptions.



At any time on or after November 8, 2009, if the average closing price of the Company's common stock for any immediately
preceding 180-day period exceeds $7.00 (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the
common stock), the Company will have the right, but not the obligation, to convert each outstanding share of Series C Preferred Stock into a number of fully paid and nonassessable shares of
common stock equal to the quotient of (i) the Stated Liquidation Preference Amount divided by (ii) the conversion price in effect as of the Company conversion date.

Redemption

At any time and from time to time on or after November 8, 2011 the holders of at least 66.7% of the then outstanding shares of
Series C Preferred Stock may elect to have all or any portion of the outstanding shares of Series C Preferred Stock redeemed. The Company shall effect the redemption on a redemption date
by paying cash or, at the Company's election, shares of common stock (valued in the manner described below).

If
such redemption shall be for cash, the Company shall effect the redemption, out of funds legally available therefor, by paying in cash in exchange for each share of Series C
Preferred Stock to be redeemed a sum equal to the product of (i) 1.2 multiplied by (ii) the Stated Liquidation Preference Amount.

If
such redemption shall be for shares of common stock, the Company shall effect the redemption by issuing, in exchange for each share of Series C Preferred Stock to be redeemed,
that number of shares of common stock equal to (A) the product of (i) 1.4 multiplied by (ii) the Stated Liquidation Preference Amount divided by (B) the fair market value
of the common stock, based on a 10 day volume weighted average, as of the redemption date.

Accounting for the Series C Preferred Stock

The Company accounted for the transaction in accordance with EITF 00-27,Application of
Issue No. 98-5 to Certain Convertible Instruments,allocating the proceeds received net of transaction costs based on the relative fair value of the
redeemable convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred
securities as follows:

Security

Face
Value

Fair
Value

Allocation of
Proceeds, Net of
Transaction
Costs

Beneficial
Conversion
Feature

Initial
Carrying
ValueRedeemable convertible Series C Preferred Stock

$
25,000,000

$
18,193,950

$
12,991,097

$
11,762,887

$
1,228,210Warrants




$
18,352,179

$
10,092,623








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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)

The
re-pricing of the exercise price of the Tranche I warrants from $1.44 to $1.25, as described above, was treated as a cancellation of the original warrants issued
on November 8, 2007 and a re-issuance of new warrants on December 20, 2007. The difference in fair value of the warrant was included in the allocation of net proceeds
associated with the second closing of the Series C Preferred Stock on December 20, 2007. The Company treated this as a deemed dividend on the Series C Preferred Stock. The Company
recorded a discount, including the re-pricing and beneficial conversion feature of $11,762,887 and recorded a deemed dividend of $11,947,881 to the holders of the Series C Preferred
Stock, which included the initial allocation of the discount of $11,762,887 and $184,994 related to the accretion of the Series C Preferred Stock to its redemption value through the date that
holders of the Series C Preferred Stock may first exercise their redemption right. The Company is using the effective interest method to accrete the carrying value of the Series C
Preferred Stock through the earliest possible redemption date (November 8, 2011), at which time the value of the Series C Preferred Stock would be $30.0 million or 120% of its
face value. The components of the carrying value of the Series C Preferred Stock from inception on November 8, 2007, the year ended December 31, 2007 and December 31, 2008,
is as follows:

TotalInitial carrying value November 8, 2007

$
1,228,210Deemed dividend through December 31, 2007


11,762,887Accretion of original issue discount to redemption value through December 31, 2007


184,994Total

$
13,176,091Dividend through December 31, 2007


100,000Balance at December 31, 2007

$
13,276,091Accretion of original issue discount to redemption value


2,848,502Dividend(1)


1,250,000Additional discount from issuance of warrants and beneficial conversion feature


(252,000
)Deemed dividend


126,000Balance at December 31, 2008

$
17,248,593






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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK (Continued)



In
valuing the warrants associated with the Series C Preferred Stock the Company used the Black-Scholes option pricing model with the following range of assumptions:

Assumptions:

November 8, 2007

December 20, 2007Expected life

4.0 years

5.2 yearsExpected volatility

70%

70%Dividends

none

noneRisk-free interest rate

3.64%

3.48%


The
Company has designated these warrants as equity instruments in accordance with EITF 00-19.

K. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facilities under various operating leases that expire through October 2011.

Future
minimum annual rentals under lease agreements at December 31, 2008 are as follows:

Fiscal Year2009

$
825,3232010

$
344,7132011

$
224,712Total

$
1,394,748


Total
rental expense including operating expenses and real estate taxes for operating leases from continuing operations amounted to $1,285,623 and $1,125,624, for the years ended
December 31, 2008 and 2007, respectively.

Certain
of the facility leases contain escalation clauses, and rental expense has been recognized on a straight-line basis over the remaining lease term. At
December 31, 2008 and 2007 deferred rent expense amounted to approximately $0.1 million and $0.2 million, respectively.

Letters of Credit

The Company utilizes a standby letter of credit to satisfy a security deposit requirement and in some instances to satisfy warranty
commitments. Outstanding standby letters of credit as of December 31, 2008 and 2007 were $34,000, respectively. The Company is required to pledge cash as collateral on these outstanding letters
of credit. As of December 31, 2008 and 2007, the cash pledged as collateral for these letters of credit was $34,000, respectively, and is included in restricted cash and cash equivalents on the
balance sheet.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

K. COMMITMENTS AND CONTINGENCIES (Continued)

Employment Agreements

The Company has employment agreements with certain employees that provide severance payments and accelerated vesting of options upon
termination of employment under certain circumstances or a change of control, as defined. As of December 31, 2008 the Company has either terminated or given notice to these employees. As a
result, the Company charged approximately $0.5 million to restructuring during the year ended December 31, 2008. Approximately $0.3 million related to the employment contract of
the former Chief Executive Officer which represents amounts due subsequent to March 1, 2009. The Former Chief Executive Officer will continue on as a director of the Company and will continue
to provide services to the Company until March 1, 2009.

Litigation

From time to time, the Company is a party to routine litigation and proceedings in the ordinary course of business.

On
May 9, 2008, Advanced Energy Industries, Inc. ("AE") filed a civil action in Colorado state court against the Company and its Chief Executive Officer, Charles S.
Rhoades, seeking to enjoin Mr. Rhoades from employment by the Company based upon its claim that Mr. Rhoades was subject to a non-competition agreement with AE. On
March 3, 2009, the parties agreed to settle this case. The settlement of the case will not have a material financial impact on the Company and Mr. Rhoades will be free to continue to
serve as the Company's President and Chief Executive Officer.

The
Company is not aware of any other current or pending litigation in which the Company is or may be a party that it believes could materially adversely affect the results of operations
or financial condition.

L. EMPLOYEE BENEFIT PLAN

The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the Plan, any regular employee of the Company or its wholly owned US subsidiaries, as defined by the Plan, who has
attained the age of 21 years is eligible to participate. The Plan allows an employee to defer up to 100% of his or her compensation, as limited under IRC Section 402(g), through
contributions to the Plan. Prior to January 1, 2009, the Company matched 100% in the Company's common stock up to the first 6% of an employee's pay that he or she contributed to the Plan.
Participants were vested immediately in the matches of the Company common stock. The match contribution was determined and accrued in dollars and converted to shares of the Company's common stock
using the share price of the last business day of each fiscal quarter. The stock was issued as soon as practical in the following period. The table below details out the Company's matching
contributions made under the Plan, the number of shares of the Company's common stock issued under the Plan and the value of the common stock

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

L. EMPLOYEE BENEFIT PLAN (Continued)

issued
by the Company as matching contributions to the Plan for the years ended December 31, 2008 and 2007, as follows:

Matching
Contribution $'s

Shares of
Common
Stock
Issued

Value of
Common
Stock
Issued $'sYear ended December 31, 2007

$
559,144


474,379

$
567,161Year ended December 31, 2008

$
541,680


279,831

$
578,232


The
value of the common stock issued as matching contributions was based on the closing price of the Company's common stock on the Nasdaq Stock Market for the last day of the fiscal
quarter in which the contributions were earned. Shares of common stock were transferred the first practical day following the end of the quarter in which the shares were earned. As of
January 1, 2009, the Company has elected to cease the matching in shares of its common stock. The Company will provide for a 3% match to be paid in cash to all eligible participants on a
quarterly basis.

M. INCOME TAXES

The provision for income taxes consists of the following:

Year Ended
December 31,2008

2007Loss before income taxes:Federal

$
(10,975,184
)
$
(11,572,861
)Foreign


(2,229,636
)

(5,992,916
)$
(13,204,820
)
$
(17,565,777
)Current payable:Federal

$


$
State





Foreign





$


$
Deferred income tax benefit / (provision)Federal

$
(1,557,838
)
$
(471,823
)Foreign


(486,986
)

5,536,261State


(954,656
)

(511,877
)$
(2,999,480
)
$
4,552,561Adjustment of beginning of period valuation allowance for deferred tax assets

$
2,999,480

($
4,552,561
)Income tax expense, net, reported in the accompanying statement of operations

$


$



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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

M. INCOME TAXES (Continued)

Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. As of December 31, 2008 and 2007, the components of the net deferred tax assets/ (liabilities) are as follows:

Year Ended
December 31,2008

2007Federal net operating loss carryforwards

$
38,488,382

$
36,632,951Foreign net operating loss carryforwards


5,049,275


5,536,261State net operating loss carryforwards, net of federal benefit


3,692,348


3,849,367Tax credits


1,120,696


1,227,281Depreciation and amortization


14,564


1,349,238Other


557,479


3,327,126Total

$
48,922,744

$
51,922,224Valuation allowance


(48,922,744
)

(51,922,224
)Net deferred income taxes

$


$



As
of December 31, 2008, the Company had U.S. federal and state net operating loss carry forwards of approximately $113.0 million and $56.9 million, respectively,
which may be available to offset future federal and state income tax liabilities. The federal net operating loss carryforwards expire at various dates beginning in 2009 through 2029 and the state net
operating loss carryforwards expire beginning in 2009 through 2029. The Company has foreign net operating loss carryforwards of approximately $14.8 million, which expire beginning in 2009
through 2019. The Company has federal and state tax credits of approximately $0.9 million and $0.2 million, respectively. The federal research and development credits begin to expire in
2009, and the state credits begin to expire in 2018.

As
required by SFAS No. 109,Accounting for Income Taxes, management has evaluated the positive and negative evidence bearing upon
the realizability of the Company's deferred tax assets. Management has determined that it is more likely than not that the Company will not realize the benefits of federal deferred tax assets, and as
a result, a full valuation allowance has been established.

At
December 31, 2008, $275,000 of federal and state net operating loss carryforwards relate to deductions for stock option compensation for which the associated tax benefit will
be credited to additional paid-in capital when realized. This amount is tracked separately and not included in the Company's deferred tax assets. Of the changes in the valuation allowance
described above for the period ended December 31, 2007, an immaterial amount relates to tax return deductions attributable to the exercise of non-qualifying stock options or
disqualifying dispositions of incentive stock options, and are not benefited through income.

In
June 2006, the FASB published FASB Interpretation ("FIN") No. 48, "Accounting for Uncertain Tax Positions,"or FIN
No. 48. This interpretation seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. It would apply to all tax
positions accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes."FIN

91

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

M. INCOME TAXES (Continued)

No. 48
requires that a tax position meet "a more likely than not" threshold for the benefit of the uncertain tax position to be recognized in the financial statements. This threshold is to be
met assuming that the tax authorities will examine the uncertain tax position. FIN No. 48 contains guidance with respect to the measurement of the benefit that is recognized for an uncertain
tax position, when that benefit should be derecognized and other matters. The Company has adopted the provisions of FIN No. 48 effective January 1, 2007.

The
Company had not recorded any adjustments upon adoption of FIN No. 48 and no amount has been reflected in the Company's financial statements related to FIN No. 48.

The
tax years 1994 through 2008 remain open to examination by major taxing jurisdictions to which the Company is subject to carryforward attributes generated in years past may still be
adjusted upon examination by the Internal Revenue Service ("IRS") or state tax authorities if they have or will be used in future periods. The open tax years for Canada are for the years ended
September 30, 2004 through 2007.

Under
the Internal Revenue Code, certain substantial changes in the Company's ownership may result in an annual limitation on the amount of net operating loss and tax credit
carryforwards, which may be utilized in future periods.

The
provision for income taxes differs from the federal statutory rate due to the following:

Year Ended
December 31,2008

2007Federal and foreign tax at statutory rate


34.0
%

34.0
%State taxes, net of federal benefit


6.5
%

6.7
%Expired net operating loss carryforwards


(54.2
)%


%Permanent items


(7.6
)%

(13.7
)%Other


(1.4
)%

(1.1
)%Change in valuation allowance


22.7
%

(25.9
)%Effective tax rate



%


%


N. STOCKHOLDERS' EQUITY

As of December 31, 2008, the Company has reserved 38,939,904 shares of common stock for issuance upon exercise of stock options and warrants, 10,967,276 shares for future
issuances under its stock plans and 732,269 shares for future issuances as matching contributions under its 401(k) plan. The Company has also reserved 935,484 shares of common stock for issuance upon
conversion of the outstanding Series B Preferred Stock, which can be converted at any time and 24,038,462 shares of common stock for the issuance upon conversion of the outstanding
Series C Preferred Stock, which can be converted at any time. As of December 31, 2008, holders of warrants to purchase an aggregate of 25,350,932 shares of the Company's common stock may
exercise. As of December 31, 2008 there are 25,350,932 warrants to purchase common stock outstanding and 10,147,996 options to purchase common stock outstanding.

92

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

N. STOCKHOLDERS' EQUITY (Continued)

Stock Option Plans

Under the Company's 1998, 1999, 2000, 2002 and 2005 Stock Option Plans (collectively, the "Plans"), both qualified and
non-qualified stock options may be granted to certain officers, employees, directors and consultants to purchase shares of the Company's common stock. At December 31, 2008,
10,967,276 stock options are available for future grants under the Plans.

The
Plans are subject to the following provisions:



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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

N. STOCKHOLDERS' EQUITY (Continued)



The
following table summarizes activity of the Company's stock plans since December 31, 2006:

Options OutstandingNumber of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (years)

Aggregate
Intrinsic
ValueOutstanding at December 31, 2006


4,458,745

$
3.73


6.71Grants


1,228,500

$
1.41Exercises


(27,205
)
$
0.90Cancellations


(449,666
)
$
3.08Outstanding at December 31, 2007


5,210,374

$
3.25


6.65Grants


6,739,520

$
2.03Exercises


(891,168
)
$
1.66Cancellations


(910,730
)
$
5.35Outstanding at December 31, 2008


10,147,996

$
2.39


8.09

$
382,951Exercisable at December 31, 2008


3,294,976

$
3.22


5.53

$
347,750


Information related to stock options outstanding as of December 31, 2008 is as follows:

Options Outstanding

Options ExercisableRange of Exercise Prices

Number of
Shares

Weighted
Average
Remaining
Contractual
Life (years)

Weighted
Average
Exercise
Price

Exercisable
Number of
Shares

Exercisable
Weighted
Average
Exercise
Price$0.41 to $1.49


1,497,452


7.77

$
1.30


1,107,077

$
1.24$1.51 to $1.88


614,000


7.58

$
1.66


374,000

$
1.62$1.90 to $1.90


4,846,020


9.29

$
1.90


50,000

$
1.90$1.91 to $2.46


1,583,650


7.52

$
2.27


626,650

$
2.04$2.50 to $9.25


1,454,874


5.93

$
4.08


985,249

$
4.77$12.61 to $17.56


144,500


1.37

$
16.76


144,500

$
16.76$17.75


7,500


1.86

$
17.75


7,500

$
17.75$0.41 to $17.75


10,147,996


8.09

$
2.39


3,294,976

$
3.22


Options for the purchase of 4,171,624 shares were exercisable at December 31, 2007 with a weighted average exercise price of $3.61 per
share.

As
of December 31, 2008, there was approximately $8.3 million of total unrecognized costs related to non-vested share-based compensation arrangements granted
under the Plans. That cost is expected to be recognized over a weighted average period of approximately 2.2 years, with approximately $2.5 million, $2.4 million,
$2.3 million and $0.9 million being recognized in 2009, 2010, 2011 and 2012, respectively. Options to purchase 891,168 shares were exercised during the year ended December 31,
2008; these options had an intrinsic value of approximately $0.5 million on their date of exercise. Options to purchase 27,205 shares were exercised during the year ended December 31,
2007; these options had an intrinsic value of approximately $16,000 on their date of exercise.

During
2000, the Company granted 216,000 non-qualified stock options to employees at an exercise price of $17.56 per share outside of the Board approved Plans. As of
December 31, 2008 and 2007, there were 21,000 options outstanding, respectively, which are included in the above table.

94

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

N. STOCKHOLDERS' EQUITY (Continued)

Warrants

The table below summarizes the Company's warrants currently outstanding as of December 31, 2008 and activity from
December 31, 2007:

Original
Warrant to
Purchase
Shares of
Common
Stock









Remaining
Shares of
Common
Stock
underlying
the warrant2008 ActivityDate of
Warrant Issuance

Holder of Warrant

Exercise
Price $

Warrant
Issued

Warrants
Exercised or
Redeemed

Warrants
Expired

Term
(Years)February 18, 2003

H.C. Wainwright(3)


163,145

$
0.01








(10,197
)




5February 18, 2003

H.C. Wainwright(3)


42,920

$
0.01








(4,599
)




5February 18, 2003

H.C. Wainwright(3)


100,148

$
0.01








(19,864
)




5October 31, 2003

Series B Preferred Investors(3)


1,228,000

$
2.93








(1,116,000
)




5October 31, 2003

Burnham Hill Partners, LLC(3)


150,430

$
0.01








(5,182
)




5December 12, 2004

Silicon Valley Bank(3)


16,164

$
2.32








(16,164
)




5December 22, 2004

December 2004 Financing Investors


2,181,818

$
2.00





(150,000)
(6)




804,546


5March 21, 2005

Ardour Capital Investment, LLC(3)


50,000

$
2.75








(50,000
)




3May 31, 2005

Silicon Valley Bank


151,515

$
1.39











151,515


10August 12, 2005

August 2005 Financing Investors


1,169,038

$
1.99





(121,261)
(8)




1,047,777


5August 12, 2005

Ardour Capital Investment, LLC


93,523

$
1.84











93,523


5July 19, 2006

Warrant A, July 2006 Private Placement


3,636,368

$
1.82





(303,031)
(2)




2,090,911


7July 19, 2006

Warrant B, July 2006 Private Placement


3,636,368

$
1.68














0.5July 19, 2006

First Albany Warrants


218,182

$
1.87











218,182


5July 17, 2007

Warrant C, July 2006 Private Placement


1,818,187

$
1.82





(151,516)
(2)




1,045,456


7November 8, 2007

Series C Preferred Warrants(4)


15,262,072

$
1.25
(1)










15,262,072


7December 20, 2007

Series C Preferred Warrants


4,449,467

$
1.25











4,449,467


7April 7, 2008

International Master Technologies(5)




$
1.84


100,000








100,000


5June 28, 2008

Series C Preferred Warrant(7)




$
1.66


77,378








77,378


7September 27, 2008

Series C Preferred Warrant(7)




$
1.66


10,105








10,105


7Total Warrants outstanding as of December 31, 2008


25,350,932


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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

N. STOCKHOLDERS' EQUITY (Continued)

Input

April 7, 2008Quoted Stock Price

$
1.84Exercise Price

$
1.84Time to Maturity (in years)


5.0Stock Volatility


80.6
%Risk-Free Rate


2.80
%Dividend Rate


0
%


A summary of the status of the Company's warrants as of the year ended December 31, 2008 and 2007 and the changes for these periods are
presented below. The actual common stock issued on warrants exercised in 2008 and 2007 is less than the table presented below due to cashless exercises of warrants in 2008. The actual common stock
issued under warrant exercises for 2008 and 2007 was 174,967 and 0, respectively, and the Company received proceeds of $241,310 related to the 2008 exercises. The table below reflects the change in
warrant price due to the anti-dilutive provisions of the

96

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

N. STOCKHOLDERS' EQUITY (Continued)

warrants
issued in connection with the Series B Preferred Stock financing as a result of capital transactions since their issuance.

Year Ended December 31, 2008

Year Ended December 31, 2007Number of
Shares

Weighted
Average
Price

Number of
Shares

Weighted
Average
PriceOutstanding at beginning of year


27,111,262

$
1.56


11,097,308

$
1.91Granted


187,483


1.76


21,529,726


1.30Exercised


(271,261
)

2.00


(5,500,009
)

1.25Canceled/Expired(1)


(1,676,552
)

2.55


(15,763
)

1.59Outstanding at end of year


25,350,932

$
1.39


27,111,262

$
1.56


---

O. PREFERRED STOCK

The Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.01 par value per share. The Preferred Stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. See Note I for a discussion of Series B Preferred Stock issued in October 2003
and Series C Preferred Stock issued in November and December 2007.

P. SHORT-TERM NOTES

On October 19, 2007, the Company entered into a Note Purchase Agreement with Rockport Capital Partners II, L.P. and NGP Energy Technology Partners, L.P. (the
"Investors") to lend the Company up to $10.0 million to provide funds to repurchase the Convertible Notes, among other things. Pursuant to the Note Purchase Agreement, on November 7,
2007, the Investors purchased from the Company promissory notes (the "Short-Term Notes") in an aggregate principal amount of $10.0 million. The Short-Term Notes bore
interest at 17% per annum. All unpaid
principal, together with accrued but unpaid interest, was to be due and payable in full on February 19, 2008, unless prepaid earlier.

On
December 20, 2007, upon the second closing of the Series C Preferred Stock financing transaction, the Company paid $10.2 million to settle the outstanding amount
on the Short-Term Notes along with accrued interest. Payment was made by offsetting the amounts otherwise owed by the Investors in the Series C Preferred Stock financing
transaction.

97

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

Q. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Non-Cash Investing and Financing Activities

Year Ended
December 31.2008

2007Employee stock-based compensation(1)

$
2,752,481

$
1,122,099Common Stock issued in lieu of interest on redeemable convertible Series B Preferred Stock


133,666


137,856Common Stock issued in lieu of interest on Senior Secured Convertible Notes





518,165Amortization of debt discount associated with the valuation of the July 19, 2006 Senior Secured Convertible Notes





2,115,442Common stock issued related to 401(K) contributions


578,232


567,161Conversion of Series B Preferred Stock for common stock


250,000


25,000Common Stock issued to Note holders as incentive to accelerate pay off





914,999Valuation adjustment to the redeemable convertible Series B Preferred Stock as a result of its anti-dilution provisions





529,479Stock issued related to cancellation of Worcester Lease




$
1,122,000Conversion of Notes to Common Stock




$
525,000Issuance of Common Stock in lieu of principal payments on the Notes




$
3,809,446Accretion of redeemable convertible preferred stock discount and dividends


4,098,502


284,994Issuance of warrants and beneficial conversion feature


252,000


21,855,510






Interest and Income Taxes Paid

Cash paid for interest and income taxes was as follows:

Year Ended
December 31,2008

2007Interest

$
199,126

$
308,093Income taxes








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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

R. LOSS PER SHARE

The following is the reconciliation of the numerators and denominators of the basic and diluted loss
per share computations:

Year EndedDecember 31, 2008

December 31, 2007Loss from continuing operations

$
(12,344,131
)
$
(16,632,574
)Loss from discontinued operations

$
(1,134,732
)
$
(1,133,203
)Gain on disposal of discontinued operations

$
274,043


Accretion and dividends and deemed dividends on Series C Preferred Stock

$
(4,224,502
)
$
(12,047,881
)Net loss attributable to common shareholders

$
(17,429,322
)
$
(29,813,658
)Basic and diluted:Common shares outstanding, beginning of period


49,803,979


40,105,073Weighted average common shares issued during the period


880,585


5,328,175Weighted average shares outstandingbasic and diluted


50,684,564


45,433,248Net loss per weighted average share, basic and diluted:From loss on continuing operations attributable to common stockholders

$
(0.33
)
$
(0.64
)From loss on discontinued operations

$
(0.02
)
$
(0.02
)From gain on sale of discontinued operations

$
0.01


Net loss per weighted average share, basic and diluted

$
(0.34
)
$
(0.66
)


As
of the year ended December 31, 2008 and 2007, shares of common stock issuable upon the exercise of options and warrants were excluded from the diluted average common shares
outstanding, as their effect would have been antidilutive. In addition, shares of common stock issuable upon the conversion of Series B Preferred Stock and Series C Preferred Stock were
excluded from the diluted weighted average common shares outstanding as their effect would also have been anti-dilutive. The Company reports net loss per basic and diluted common share in
accordance with SFAS No. 128,Earnings Per Share, which establishes standards for computing and presenting earnings per share. Basic earnings per
share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company, except when the effect would be anti-dilutive.

99

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Table of Contents

SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

R. LOSS PER SHARE (Continued)

The
table below summarizes the option and warrants and convertible preferred stock that were excluded from the calculation above due to their effect being antidilutive:

Year Ended
December 31,2008

2007Common Stock issuable upon the exercise of:Options


10,147,996


5,210,374Warrants


25,350,932


27,111,262Total Options and Warrants excluded


35,498,928


32,321,636Common Stock issuable upon the conversion of redeemable convertible Series B Preferred Stock


935,484


1,096,774Common Stock issuable upon the conversion of redeemable convertible Series C Preferred Stock


25,336,538


24,134,615


The
table below details out shares of common stock underlying securities for which the securities would have been considered dilutive at December 31, 2008 and December 31,
2007 had the Company not been in a loss position:

# of Underlying Common SharesDecember 31, 2008

December 31, 2007Employee stock options


1,179,827


1,492,745Warrants to purchase common stock


19,863,054


4,640,824Series B Convertible Preferred Stock


935,484


1,096,774Series C Convertible Preferred Stock


25,336,538


24,134,615Total


47,314,903


31,364,958


S. SEGMENT DISCLOSURES

The Company's organizational structure is based on strategic business units that perform services and offer various products to the principal markets in which the Company's products are
sold. These business units equate to two reportable segments: Applied Technology and Renewable Energy Solutions. Applied Technology is run through the Company's subsidiary, Satcon Applied
Technology, Inc., and Renewable Energy Solutions is run through the Company's subsidiary, Satcon Power Systems, Canada, Ltd. The summary of continuing operations by operating segment
below has been adjusted due to the sale of the Power Systems US and Electronics divisions, each of which was previously reported as its own reportable segment, and no longer reflects the information
for either or these two segments.

Applied
Technology performs research and development services in collaboration with third parties. Renewable Energy Solutions specializes in the engineering and manufacturing of power
systems. The Company's principal operations and markets are located in the United States.

100

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

S. SEGMENT DISCLOSURES (Continued)

The
accounting policies of each of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on revenue and
profit and loss from operations, including amortization of intangibles. Common costs not directly attributable to a particular segment are included in the corporate segment. These costs include
corporate costs such as executive officer compensation, engineering, facility costs, legal, audit and tax and other professional fees.

The
following is a summary of the Company's continuing operations by operating segment:

Year Ended
December 31,2008

2007Applied Technology:Funded research and development and other revenue

$
8,228,769

$
8,994,582Loss from operations

$
(1,459,831
)
$
(393,672
)Renewable Energy Solutions:Product revenue

$
54,293,334

$
33,032,641Loss from operations

$
(3,074,944
)
$
(6,726,583
)Corporate:Loss from operations

$
(8,668,213
)
$
(3,207,172
)Consolidated:Product revenue

$
54,293,334

$
33,032,641Funded research and development and other revenue

$
8,228,769

$
8,994,582Total revenue

$
62,522,103

$
42,027,223Operating loss from continuing operations

$
(13,202,988
)
$
(10,327,427
)Change in fair value of Convertible Notes and Warrants

$
264,628

$
(2,252,264
)Other (loss) income

$
707,450

$
(545,895
)Interest income

$
216,238

$
280,392Interest expense

$
(329,459
)
$
(3,787,380
)Net loss from continuing operations

$
(12,344,131
)
$
(16,632,574
)Discontinued Operations:Loss from discontinued operations, net

$
(1,134,732
)
$
(1,133,203
)Gain on sale of discontinued operations, net

$
274,043

$
Net loss

$
(13,204,820
)
$
(17,765,777
)


101

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

S. SEGMENT DISCLOSURES (Continued)

Common
assets not directly attributable to a particular segment are included in the Corporate segment. These assets include cash and cash equivalents, prepaid and other corporate assets.
The following is a summary of the Company's assets by operating segment:

December 31,2008

2007Applied Technology:Segment assets

$
2,622,534

$
4,498,602Renewable Energy SolutionsSegment assets


24,462,978


20,897,103Corporate:Segment assets


9,811,763


13,897,794Discontinued operationsSegment assets





7,315,178Total assets

$
36,897,275

$
46,608,677


The
Company operates and markets its services and products on a worldwide basis with its principal markets as follows:

Year Ended
December 31,2008

2007Revenue by geographic region based on location of customer(1):United States

$
54,600,486

$
35,418,686Rest of World


7,921,617


6,608,537Total Revenue

$
62,522,103

$
42,027,223






December 31,
2008

December 31,
2007Long-lived assets (including goodwill and intangible assets) by geographic region based on location of operations(2):United States

$
906,209

$
1,383,163Rest of world


1,580,999


1,299,743Total long-lived assets (including goodwill and intangible assets)

$
2,487,208

$
2,682,906






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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007



T. RESTRUCTURING COSTS

In June 2008, the Company began its restructuring efforts by eliminating the position of divisional presidents in its Applied Technology and Renewable Energy Solutions divisions and
recorded a restructuring charge of approximately $0.6 million. During the third quarter of 2008 the Company consolidated its Applied Technology division into one facility. As a result, the
Company recorded an
additional restructuring charge of approximately $0.5 million. These restructuring charges are comprised of approximately $0.8 million in employee severance, which will be paid out over
the term of each specific employee agreement and $0.3 million in non-cash stock based compensation charges associated with the acceleration of certain unvested stock options and
extensions of time to exercise certain stock options from 90 days to 2 years. In addition, during the fourth quarter of 2008, as part of its restructuring efforts, the Company elected to
terminate the employment contract of its former president. As a result of this election, the Company recorded a restructuring charge of approximately $0.3 million, which will be paid in twenty
six equal bi-weekly installments beginning after March 1, 2009. As of December 31, 2008, the accrued restructuring balance was approximately $0.6 million.

During
the period the Company sold its Electronics and Power Systems divisions and recorded in its loss on sale of discontinued operations approximately $0.2 million in
restructuring charges related to these sales. (See Footnote D "Discontinued Operations" above).

On
September 19, 2006, the Board of Directors approved a plan to close the Company's Worcester, Massachusetts manufacturing facility by approximately December 31, 2006 in
furtherance of the Company's continuing efforts to streamline operations and reduce its operating costs. As of December 31, 2006, approximately $1.6 million had been incurred by the
Company related to the restructuring. This charge represents approximately $42,000 related to employee severance, $45,000 related to employee retention payments and $0.2 million in impairment
charges related to property, plant and equipment. In addition, on December 22, 2006 the Company came to an agreement with the landlord of the Worcester facility, whereby the Company would issue
850,000 shares of common stock in exchange for allowing the Company to terminate the lease early. The stock was issued to the landlord on January 3, 2007. The Company recorded a restructuring
charge in the period ended December 31, 2006 in the amount of $1.1 million related to this agreement and approximately $0.2 million related to the revaluation of investor warrants
and accounted for this as a change in fair value of the Convertible Notes and warrants at December 31, 2006. The Company incurred approximately $0.1 million of additional costs related
to the restructuring in 2007.

U. PRODUCT WARRANTIES

In its Renewable Energy Solutions division the Company provides a warranty to its customers for most of its products sold. In general the Company's warranties are for one year after the
sale of the product and five for photovoltaic inverter product sales. The Company reviews its warranty liability quarterly. The Company's estimate for product warranties is based on an analysis of
actual expenses by specific product line and estimated future costs related to warranty. Factors taken into consideration when evaluating the Company's warranty reserve are (i) historical
claims for each product, (ii) the development stage of the product, (iii) volume increases, (iv) life of warranty and (v) other factors. To the extent actual experience
differs from the Company's estimate, the provision for product warranties will be adjusted in future periods. Such differences may be significant.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

U. PRODUCT WARRANTIES (Continued)

The
following is a summary of the Company's accrued warranty activity for the following periods:

Year Ended
December 31,2008

2007Balance at beginning of year

$
2,001,757

$
328,332Provision


2,440,594


1,846,231Usage


(2,267,070
)

(172,806
)Balance at end of year

$
2,175,281

$
2,001,757


V. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS No. 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other existing
accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of this statement may change
the current practice for fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. However, in
February 2008, the FASB issued a final Staff Position to allow filers to defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB Staff Position ("FSP") does not defer recognition and disclosure requirements for financial assets
and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. The Company is currently evaluating the impact this statement will have on its
financial position and results of operations. For financial assets and liabilities adopted see Note C Significant Accounting Policies and Basis of Presentation, Fair Value Measurements.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS
No. 159. The fair value option established by SFAS No. 159 permits, but does not require, all entities to choose to measure eligible items at fair value at specified election dates. An
entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007. The Company Adopted SFAS 159 in 2008, making no such election to choose to measure eligible items at fair
value.

In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations("SFAS 141R"). SFAS 141R will
significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific items,
including:



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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

V. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)



SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R applies prospectively to business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company expects SFAS 141R will have an impact on
accounting for business combinations once adopted but the effect is dependent upon acquisitions completed after the adoption date January 1, 2009.

In
March 2008, the Financial Statement Accounting Board, or FASB, issued statement No. 161,Disclosures about Derivative Instruments and Hedging
Activities, which amends SFAS No. 133Accounting for Derivative Instruments and Hedging Activities. This standard
requires enhanced disclosures about an entity's derivative and hedging activities. Entities will be required to provide additional disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, and (c) how derivative instruments and related hedged items affect an
entity's financial position, financial performance, and cash flows. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, and encourages but does not require comparative disclosures for earlier periods at the initial adoption. The Company is currently in the process of assessing the expected impact of this standard
on its consolidated financial statements.

In
April 2008, the FASB issued FSP No. 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP No. 142-3"). FSP
No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142 and requires enhanced disclosures relating to: (a) the entity's accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset;
(b) in the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit), by major intangible asset class and (c) for
an entity that capitalizes renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term of a recognized intangible asset for each period for which a
statement of financial position is presented, by major intangible asset class. FSP No. 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to
fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact that FSP
No. 142-3 will have on its consolidated financial statements.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

V. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles. The purpose of this statement
is to improve financial reporting by providing a consistent framework for determining applicable accounting principles to be used in the preparation of financial statements presented in conformity
with accounting principles generally accepted in the United States of America. SFAS No. 162 will become effective 60 days after the SEC's approval. The Company believes that the adoption
of this standard on its effective date will not have a material effect on its consolidated financial statements.

In
June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force ("EITF") Issue No. 07-05,Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock("EITF No. 07-05"). EITF No. 07-05 clarifies the determination of whether an
instrument (or an embedded feature) is indexed to an entity's own stock, which would qualify as a scope exception under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. EITF No. 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption for an existing instrument is not
permitted. The Company is currently evaluating the impact of the pending adoption of EITF No. 07-05 on its consolidated financial statements.

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FINANCIAL STATEMENT SCHEDULE        SCHEDULE II        VALUATION AND QUALIFYING ACCOUNTS

Balance at
beginning
of period

Additions
charged to
costs and
expenses

Settlement
Amounts

Balance
at end
of periodYear Ended December 31, 2007:Allowance for uncollectible accounts

$
147,747


47,019


(70,487
)
$
124,279Reserve for product warranty expense

$
328,332


1,846,231


(172,806
)
$
2,001,757Accrued restructuring costs

$
1,200,326


81,644


(1,281,970
)
$
Year Ended December 31, 2008:Allowance for uncollectible accounts

$
124,279


80,142


(36,203
)
$
168,218Reserve for product warranty expense

$
2,001,757


2,440,594


(2,267,070
)
$
2,175,281Accrued restructuring costs

$



1,398,140


(795,358
)
$
602,782


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Table of Contents

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Item 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this
report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (who is also currently acting as our interim principal
financial officer) of the effectiveness of our disclosure controls and procedures as of December 31, 2008. Based upon that evaluation, the Chief Executive Officer, acting as both the principal
executive officer and the principal financial officer, concluded that our disclosure controls and procedures are effective as of December 31, 2008.

Management's Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our company's internal control over financial reporting is a process designed under the supervision of the
Chief Executive Officer and Corporate Controller to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:



There
are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management
assessed the effectiveness of our company's internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on management's assessment and those criteria, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2008.

Our
independent registered public accounting firm, Vitale, Caturano & Company, P.C., has issued an audit report on our internal control over financial reporting as of
December 31, 2008, which appears on page 37.

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Table of Contents

Changes in Internal Control Over Financial Reporting.

There was no change in our internal control over financial reporting that occurred during the fourth quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    OTHER INFORMATION.

Not applicable

PART III

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required under this item is incorporated herein by reference to the information regarding directors, executive officers
and corporate governance included in our proxy statement for our 2009 Annual Meeting of Stockholders.

Item 11.    EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by reference to information regarding executive compensation included
in our 2009 proxy statement.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required under this item is incorporated herein by reference to the information regarding security ownership of certain
beneficial owner and management and related stockholder matters included in our 2009 proxy statement.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required under this item is incorporated herein by reference to the information regarding certain relationships and
related transactions, and director independence included in our 2009 proxy statement.

Item 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required under this item is incorporated herein by reference to the information regarding principal accounting fees and
services included in our 2009 proxy statement.

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PART IV

Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Annual Report on Form 10-K:





3.     Exhibits:



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts on March 12, 2009.

SATCON TECHNOLOGY CORPORATIONBy:

/s/ CHARLES S. RHOADES Charles S. Rhoades President and Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.

Signature

Title

Date/s/ CHARLES S. RHOADES Charles S. Rhoades

Chief Executive Officer, President and Director (Principal Executive and Interim Principal Financial Officer)

March 12, 2009/s/ JOHN W. PEACOCK John W. Peacock

Controller and Chief Accounting Officer (Principal Accounting Officer)

March 12, 2009/s/ DAVID B. EISENHAURE David B. Eisenhaure

Director

March 12, 2009/s/ JAMES L. KIRTLEY, JR. James L. Kirtley, Jr.

Director

March 12, 2009/s/ DAVID J. PREND David J. Prend

Director

March 12, 2009/s/ JOHN M. CARROLL John M. Carroll

Chairman of the Board

March 12, 2009/s/ DANIEL R. DWIGHT Daniel R. Dwight

Director

March 12, 2009/s/ PHILIP J. DEUTCH Philip J. Deutch

Director

March 12, 2009/s/ ROBERT G. SCHOENBERGER Robert G. Schoenberger

Director

March 12, 2009


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EXHIBIT INDEX

Exhibit
No.

Description3.1

Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).3.2

Bylaws of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).3.3

Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on May 12, 1997, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 1-11512).3.4

Bylaws Amendment of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 1-11512).3.5

Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 17, 1999, is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated August 25, 1999 (File No. 1-11512).3.6

Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 15, 2000 is incorporated by reference to Exhibits to the
Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 1-11512).3.7

Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on May 4, 2001, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2001 (File No. 1-11512).3.8

Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock of the Registrant, dated as of February 14, 2003, is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated February 18, 2003 (File No. 1-11512).3.9

Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred Stock of the Registrant, dated as of October 31, 2003, is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K, as amended, dated October 31, 2003 (File No. 1-11512).3.10

Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 23, 2006, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended April 1, 2006 (File No. 1-11512).3.11

Amendment to Bylaws of the Registrant (Adopted by the Board of Directors on February 27, 2007) is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
February 27, 2007 (File No. 1-11512).3.12

Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on November 8, 2007, is
incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 7, 2007 (File No. 11512).


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Exhibit
No.

Description3.13

Certificate of Amendment of Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on December 20, 2007, is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated December 19, 2007 (File No. 1-11512).3.14

Certificate of Elimination of Series A Convertible Preferred Stock, as filed with the Secretary of State of the State of Delaware on December 20, 2007, is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated December 19, 2007 (File No. 1-11512).4.1

Specimen Certificate of Common Stock, $.01 par value, is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).10.1

Key Employee Agreement, dated July 1, 1992, between the Registrant and David B. Eisenhaure is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File
No. 33-49286).10.2

Amendment to Employment Agreement, dated March 31, 2004, between the Registrant and David B. Eisenhaure is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 (File No. 1-11512).10.3

Amendment to Employee Agreement dated January 15, 2008, between the Registrant and David B. Eisenhaure is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 (File No. 1-11512).10.4

Key Employee Agreement, dated September 13, 2007, between the Registrant and David E. O'Neil is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
September 13, 2007 (File No. 1-11512).10.5

Amendment to Key Employee Agreement between Registrant and David E. O'Neil, dated June 5, 2008, is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
period ended June 28, 2008 (File No. 1-11512).10.6

Charles S. Rhoades Employment Offer Letter, dated May 1, 2008, is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 28, 2008 (File
No. 1-11512).10.7

Charles S. Rhoades Incentive Stock Option Agreement, dated May 1, 2008, is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 28,
2008 (File No. 1-11512).10.8

1999 Stock Incentive Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1999 (File No. 1-11512).10.9

2000 Stock Incentive Plan is incorporated herein by reference to Exhibit C to the Registrant's Preliminary Schedule 14A filed March 19, 2001 (File No. 1-11512).10.10

2002 Stock Incentive Plan is incorporated herein by reference to Exhibit A to the Registrant's Definitive Schedule 14A filed January 28, 2002 (File No. 1-11512).10.11

2005 Incentive Compensation Plan is incorporated herein by reference to Exhibit A to the Registrant's Definitive Schedule 14A filed April 14, 2005 (File No. 1-11512).10.12

Amendment No. 1 to the Registrant's 2005 Incentive Compensation Plan is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2007
(File No. 1-11512).


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Exhibit
No.

Description10.13

Amendment No. 2 to the Registrant's 2005 Incentive Compensation Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2007 (File No. 1-11512).10. 14

Registration Rights Agreement, dated as of October 31, 2003, by and among the Registrant and the purchasers listed on Schedule I thereto is incorporated herein by reference to Exhibits to the Registrant's
Current Report on Form 8-K/A dated October 31, 2003 (File No. 1-11512).10.15

Facilities Lease, dated May 12, 2004, between the Registrant and Zoom Group, LLC is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended
September 30, 2004 (File No. 1-11512).10.16

Loan and Security Agreement, dated February 26, 2008, by and among the Registrant, SatCon Power Systems, Inc., SatCon Electronics, Inc., SatCon Applied Technology, Inc., SatCon Power Systems
Canada LTD. and Silicon Valley Bank is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 29, 2008 (File No. 1-11512).10.17

Second Loan Modification Agreement, dated as of September 26, 2008, between Silicon Valley Bank and the Registrant, SatCon Power Systems, Inc., SatCon Applied Technology, Inc., SatCon Electronics,
 Inc., and SatCon Power Systems Canada Ltd. is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended September 27, 2008 (File No. 1-11512).10.18

Form of Satcon Technology Corporation 2005 Incentive Compensation Plan, Incentive Stock Option agreement for Directors and Officer's of the Registrant is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended July 2, 2005 (File No. 1-11512).10.19

Form of Satcon Technology Corporation 2005 Incentive Compensation Plan, Non-Qualified Stock Option agreement for Directors and Officer's of the Registrant is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended July 2, 2005 (File No. 1-11512).10.20

Form of Warrant to purchase shares of Common Stock of the Registrant issued on December 22, 2004 is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
December 22, 2004 (File No. 1-11512).10.21

Form of Warrant to purchase shares of Common Stock of the Registrant issued on August 11, 2005 is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
August 11, 2005 (File No. 1-11512).10.22

Form of Warrant A is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated July 19, 2006 (File No. 1-11512).10.23

Form of Warrant B is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated July 19, 2006 (File No. 1-11512).10.24

Modification, Termination and Release of Lease, dated as of December 22, 2006, between the Company and Paul E. Hanlon, Trustee of C&M Realty Trust is incorporated herein by reference to Exhibits to the
Registrants Current Report on Form 8-K dated December 20, 2006 (File No. 1-11512).10.25

Amendment and Exercise Agreement, dated as of July 17, 2007, by and among the Registrant and the entities identified on the signature pages thereto is incorporated by reference to Exhibits to the Registrant's
Current Report on Form 8-K dated July 17, 2007 (File No. 1-11512).


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Exhibit
No.

Description10.26

Form of Warrant C is incorporated herein by reference to Exhibits to the Registrants Current Report on Form 8-K dated July 17, 2007 (File No. 1-11512).10.27

Offer to Sell Notes, dated as of October 19, 2007 by and among the Registrant and the entities identified on the signature pages thereto is herein incorporated by reference to the Registrant's Current Report on
Form 8-K dated October 19, 2007 and filed on October 22, 2007 (File No. 1-11512).10.28

Note Purchase Agreement, dated as of October 19, 2007, by and among the Registrant and the Purchasers named therein is herein incorporated by reference to the Registrant's Current Report on Form 8-K dated
October 19, 2007 and filed on October 25, 2007 (File No. 1-11512).10.29

Form of Note issued pursuant to Note Purchase Agreement, dated as of October 19, 2007, by and among the Registrant and the Purchasers named therein is herein incorporated by reference to Exhibit B of
Exhibits to the Registrant's Current Report on Form 8-K dated October 19, 2007 and filed on October 25, 2007 (File No. 1-11512).10.30

Stock and Warrant Purchase Agreement, dated as of November 8, 2007, by and among the Registrant and the Purchasers named therein is herein incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated November 7, 2007 (File No. 1-11512).10.31

Form of Tranche 1 Warrant to Purchase Common Stock, dated as of November 8, 2007 is herein incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 7,
2007 (File No. 1-11512)10.32

Form of Tranche 2 Warrant and Additional Warrant to Purchase Common Stock is herein incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 7, 2007 (File
No. 1-11512).10.33

Registration Rights Agreement dated as of November 8, 2007, by and among the Company and the Purchasers is herein incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
November 7, 2007 (File No. 1-11512).10.34

First Amendment to Registration Rights Agreement, dated as of January 24, 2008, by and among the Registrant and the Purchasers is incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated January 24, 2008 (File No. 1-11512).10.35

Satcon 2008 Incentive Plan for Senior Management is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated September 24, 2008 (File No. 1-11512).10.36

Asset Purchase Agreement by and between the Registrant, Satcon Electronics, Inc. and Spectrum Microwave, Inc., dated September 25, 2008, is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated September 25, 2008 (File No. 1-11512).14.1

Code of Ethics is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2004 (File No. 1-11512).21.1

Subsidiaries of the Registrant.23.1

Consent of Vitale, Caturano & Company, P.C.31.1

Certification by Principal Executive Officer and Interim Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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