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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K/A

Amendment No. 2 to Form 10-K

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

For the Fiscal Year Ended September 30, 2002

Commission file number 1-11512

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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)161 FIRST STREET,
CAMBRIDGE, MASSACHUSETTS(Address of principal executive offices)

02142(Zip Code)


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

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

Title of Class
Common Stock, $.01 Par Value

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

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

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

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

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

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PART I

Item 1. BUSINESS

Recent Developments

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

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

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

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

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

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

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

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

Overview

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

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

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

Since
1996, our revenue has increased from $9.4 million, primarily from funded research and development, to $41.6 million in 2002, of which $30.8 million, or 74%,
was derived from product sales

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and
the balance was from funded research and development and other revenue. We are also introducing new products, which we believe we can transition into commercial production over the next few years,
products such as our Rotary Uninterruptible Power Supplies, Power Conditioning Systems and Power Control Modules.

Since 1996, we have expanded our business and capabilities through several acquisitions. In January 1997, we acquired our MagMotor division, a manufacturer of custom and standard
electric motors. In April 1997, we acquired Film Microelectronics, Inc., a manufacturer of thin film substrates and hybrid microelectronics. In January 1999, we acquired Inductive
Components, Inc., a value-added supplier of customized electric motors, and Lighthouse Software, Inc., a supplier of control software for machine tools. We acquired HyComp, Inc.,
a manufacturer of hybrid microelectronics in April 1999 followed by Ling Electronics, Inc., a manufacturer of shaker vibration test systems, power converters, amplifiers and controllers,
which we acquired in October 1999. In November 1999, we acquired intellectual property, tooling and other assets from Northrop Grumman Corporation used in their power electronics
business area. In July 2001, we acquired substantially all of the assets of Inverpower Controls, Ltd., a manufacturer of power electronics and high-speed digital controls for
use in industrial power and power quality systems. Inverpower also has UL and CE certification capability. On September 27, 2002, we entered into an Asset Purchase Agreement to acquire the
machinery, inventory, backlog and intellectual property of Sipex Corporation's thin film and hybrid assembly operations that supplied product to the defense and aerospace industry. A significant
portion of our Electronics' revenue is derived from the defense and aerospace industries and the acquisition of Sipex assets provides access to some new customers and the opportunity to offer
additional products to Sipex's customer base.

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

PRODUCTS

MARKETSInverters, converters, high power electronics modules, standard and custom microcircuits, thin film substrates, and amplifiers

Distributed power generation, military applications, telecommunications, aircraft and medical instrumentsIndustrial automation motors, shaker systems, and hybri electric vehicle auxiliary motors

Semiconductor manufacturers, industrial automation, machine tools, military Applications and hybrid-electric vehiclesUninterruptible power supplies

UPS and Power Quality


Revenues for our fiscal years ended September 30, 2002, 2001 and 2000 were $41.6 million, $41.7 million and $31.1 million, respectively. We sell our products both
domestically and internationally, and our international sales for our fiscal years ended September 30, 2002, 2001 and 2000 were $7.2 million, $6.1 million and $3.4 million respectively.

We operate through three business units, which sell these products as follows:



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In 2002, we focused our new product development efforts on combining our high-power electronics and control systems into enabling components of critical power systems such as
our Rotary Uninterruptible Power Supply (UPS) and Power Quality System, our Power Conditioning Systems for distributed power generation and Power Control Modules for use in the U.S. Navy's future
"all-electric" ships. In concentrating our efforts on these critical power systems, we focused our resources toward completing product development and building and testing prototypes.

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

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

We also focused our efforts in fiscal 2002 toward streamlining our costs. In our first quarter, we expended $7.9 million in cash with a loss of $5.3 million on revenues of
$8.3 million. The cash burn was due in part to spending primarily on product development and capital expenses related to our UPS and Power Quality products.

We reduced our cash burn to $5.0 million in the second quarter, $3.5 million in the third quarter and $2.1 million in the final quarter. We also improved our
earnings position by reducing our loss to $5.0 million in the second quarter, including a $1.5 million charge for restructuring, and to approximately $3.5 million in the last two
quarters.

Industry Background

In the United States, we see several trends developing which will have the effect of increasing the demand for power electronics and alternative energy products
including:



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

Uninterruptible Power Supply and Power Quality Market

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

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

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Beacon Power Corporation, a former affiliate of the company, develops and market composite material based flywheels for telecommunications applications. Our UPS systems also use flywheel
energy storage devices. Beacon Power's flywheels are designed for different applications and are not appropriate for



our product line. The flywheels used in our UPS systems are large, steel flywheels, much larger and much lower cost than those manufactured by Beacon Power. In May 2001, we agreed to
collaborate on a smaller sized 250 kilowatt UPS system using a Beacon Power supplied steel flywheel; however in fiscal 2002, we decided to discontinue our collaboration with Beacon Power on the 250
kilowatt UPS system. We decided at this time that "going alone" on the development of larger UPS systems offered a higher opportunity for a return on investment. The Company has no current business
relationship with Beacon Power.

Distributed Power Generation Market

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

Defense Systems Market

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

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

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

Hybrid-Electric Vehicles

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

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convert,
condition and manage electricity, as well as high-performance motors, electric drive trains and energy storage systems.

In past years, we have attempted to enter the hybrid-electric vehicle drivetrain market; however, the market for our products in this field has not materialized. We continue to offer
hybrid-electric drivetrain products because we continue to believe that there is a potential market for hybrid-electric vehicles as a whole. To better take advantage of this potential market, we are
developing power electronics systems and components as well as auxiliary motors for use in hybrid-electric vehicles.

Our Solution

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



During the fiscal year 2001, low-cost was a key attribute based on the major products that we were marketing and manufacturing during the majority of that year. During fiscal year 2002,
we focused on higher priced products such as our UPS System, Power Conditioning Systems and Power Control Modules, and no longer believe that low-cost is a key attribute of our solution.

Strategy

Our strategy is to use our expertise and proprietary technologies to position SatCon to benefit from an increase in demand for power electronics and alternative
energy products. Our strategy to establish this positioning is two-fold: first, since the power control system is an enabler for critical power products, we believe that our control system
expertise positions us to be a valued supplier to the

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marketplace; second, we believe that we possess the enabling technology in power electronics, magnetics and software controls to position SatCon to compete as an integrator of critical power
systemsdeveloping innovative power systems using our power electronics and control software and integrating third party power generation and energy storage.

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



Products

We design, develop and manufacture high-efficiency, high-reliability and long-lived critical power products that convert,
store and manage electricity. We are using our electronics and manufacturing expertise to develop products that meet the high-reliability, high-efficiency, low-cost
and compact-size requirements of the distributed power generation and power quality markets. Our products have a wide range of prices from several cents for electronics resistors to
several thousand of dollars for complex packaged circuits; from several hundreds of dollars for precision industrial automation motors to tens of thousands of dollars for computer driven specialty
motor systems; from hundreds of thousands of dollars for smaller UPS systems to over one million dollars for larger UPS systems depending on the accessories ordered by our customers. Our funded
research and development is priced according to the level of complexity of the project, the amount of deliverable units and the time and effort entailed by each project. Prices charged can range from
a few hundreds of thousands of dollars to several million dollars for each project. Our products are sold through our three business units:

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SatCon Power Systems

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

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



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SatCon Electronics

SatCon Electronics designs and manufactures advanced electronic assemblies for the aerospace, defense, wireless and telecom industries including thin film
products and custom modules. Revenue for our fiscal years ended September 30, 2002, 2001 and 2000 from our Electronics business unit was approximately $10.9 million, $10.6 million
and $8.3 million, respectively. The following are descriptions of some of our products within the Electronics business unit:



SatCon Applied Technology

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

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

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

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Funded Research and Development

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

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

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

New Product Opportunities

Rotary Uninterruptible Power Supply (UPS) Systems

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

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GRAPHIC

SatCon's 2.2 Megawatt Rotary UPS System

Our Rotary UPS product combines a diesel generator, supplied by Cummins, Inc., who SatCon identified as its preferred supplier in March of 2002, a flywheel energy storage system,
electronics and a proprietary control system into an uninterruptible power supply. We believe that this system is an attractive alternative to lead-acid battery based UPS systems due to
its seamless transition during power outages, increased reliability, longer life and the ability to operate effectively in remote locations.

Power Conditioning System

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

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GRAPHIC

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

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

Power Control Modules

As part of a defense contractor team that includes General Atomics and Gibbs and Cox, we have been developing an Integrated-Fight-Through-Power System for
potential application to the U.S. Navy's "all-electric" ship. As part of the most recent program phase, awarded in late fiscal year 2002, we are under contract to deliver modular,
electrical power converter and control assemblies, or Power Control Modules for land testing. The next phase of the program requires us to deliver power control modules for installation on the RV
Triton, a British research vessel, for at-sea testing. In December of 2002, General Atomics issued a purchase order to us calling for $5.2 million in deliverables for the Triton
project over a two year period commencing in December of 2002. As is typical of government subcontracts of this nature, this purchase order is cancelable at any time for the convenience of General
Atomics. As part of the Navy's on-going development of the "all-electric" ship platform, we

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have been awarded approximately $12.0 million in product development funding to date, $8.9 million of which was awarded in fiscal 2002.

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

GRAPHIC

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

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

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Significant Customers

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

Research and Development

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

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

Sales and Marketing

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

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

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

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

Backlog

Our backlog consists primarily of product development contracts, orders for critical power systems, electronics and motion control products. At
September 30, 2002, our backlog was approximately $16 million. Of this amount, approximately $13 million is scheduled to be shipped during fiscal year

16

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2003. These amounts exclude approximately $2 million of UPS orders booked in November 2001. The initial UPS orders booked in November of 2001 had an October 2002 delivery date. The UPS systems
were unable to be delivered by the required date due to technical and regulatory difficulties. During the critical last test run of the first UPS unit in Q2 of 2002, the clutch failed. We immediately
initiated a design review process and brought in several outside consultants to assist in rectifying the problem. The design review process identified a number of technical issues that required
several months to resolve. The overhaul of the design set the program back four to six months. Additionally, during this period, California imposed new requirements under Rule 21 for products
such as our UPS systems to tie into the utility grid. Although we have resolved the technical issues and believes our units meet the regulatory requirements, we have not yet received approval from the
state that our UPS system complies with the rule. Because of the delay in delivery and uncertainty over meeting Rule 21 requirements, the order has been withdrawn. Many of our contracts and
sales orders may be canceled at any time with limited or no penalty. In addition, contract awards may be subject to funding approval from the U.S. government and commercial entities, which involves
political, budgetary and other considerations over which we have no control. Our backlog at September 30, 2001 was $21.0 million. We believe that our backlog at any time should not be
used as an indication of future revenue.

Competition

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



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

Manufacturing

We manufacture our products at our facilities located in Marlborough, Massachusetts; Worcester, Massachusetts and Burlington, Ontario, Canada. We believe our
existing manufacturing capacity is sufficient to meet our current needs. Our goal is to mass manufacture high volume, low-cost products as our products gain market acceptance and the
markets for our products develop. We believe that most of the raw materials used in our products are readily available from a variety of vendors. Additionally, we design and develop our products to
use commodity parts in order to simplify the

17

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manufacturing
process. We have a semi-automated production line in our Marlborough, Massachusetts facility. We intend to add additional production lines for our products in the future as
demand dictates and our revenues enable. We have made and expect to continue to make technological improvements that reduce the costs to manufacture our products.

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

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

Intellectual Property

Our success and competitiveness depend on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the
proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright law and contract restrictions to protect the proprietary aspects of our technologies. We seek to
limit disclosure of our intellectual property by requiring employees, consultants, and any third parties with access to our proprietary information to execute confidentiality agreements and by
restricting access to that information.

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

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

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

Government Regulation

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

18

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Government Contracts

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

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

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

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

Employees

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

Item 2. PROPERTIES

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

|Location                    |  | Primary Use                                         |  | Approximate Number
of Square Feet |  | Expiration
of Lease
|--------------------------- |  | --------------------------------------------------- |  | --------------------------------- |  | -------------------
|Cambridge, MA               |  | Corporate headquarters and research and development |  | 33,000                            |  | 2003               
|Worcester, MA               |  | Manufacturing                                       |  | 65,000                            |  | 2005               
|Marlborough, MA             |  | Manufacturing                                       |  | 24,000                            |  | 2005               
|Baltimore, MD               |  | Research and development                            |  | 16,000                            |  | 2005               
|Anaheim, CA                 |  | Sales and service                                   |  | 6,000                             |  | 2003               
|Burlington, Ontario, Canada |  | Manufacturing                                       |  | 63,000                            |  | 2003               

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

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

Item 3. LEGAL PROCEEDINGS

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

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

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

20

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PART II

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

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

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

High

LowYear Ended September 30, 2001First Quarter

$
36.75

$
8.00Second Quarter


15.50


8.69Third Quarter


18.50


8.51Fourth Quarter


10.90


4.70Year Ended September 30, 2002First Quarter


8.65


3.59Second Quarter


7.29


3.13Third Quarter


3.95


1.60Fourth Quarter


1.84


0.97


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

Dividend Policy

We have never paid cash dividends on our common stock. We currently intend to retain earnings, if any, to fund the development and growth of our business and do
not anticipate paying cash dividends for the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, the Loan and Security Agreement between Silicon Valley Bank and
us, dated as of September 13, 2002, provides for certain limitations on the payment of dividends by us on our common stock.

Recent Sales of Unregistered Securities

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

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

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

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

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|                                                                                                                                  |                                                            | Fiscal Year Ended September 30, |        
|--------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------- | -------
|
|
|Statement of Operations Data                                                                                                      |                                                            |                                 |        
|Revenue:                                                                                                                          |                                                            |                                 |        
|Product revenue                                                                                                                   |                                                            | $                               | 30,799 
|Funded research and development and other revenue                                                                                 |                                                            |                                 | 10,831 
|                                                                                                                                  |                                                            |                                 |        
|                                                                                                                                  | Total revenue                                              |                                 |        
|                                                                                                                                  |                                                            |                                 |        
|Operating costs and expenses:                                                                                                     |                                                            |                                 |        
|Cost of product revenue                                                                                                           |                                                            |                                 | 29,644 
|Research and development and other revenue expenses:                                                                              |                                                            |                                 |        
|                                                                                                                                  | Funded research and development and other revenue expenses |                                 |        
|                                                                                                                                  | Unfunded research and development expenses                 |                                 |        
|                                                                                                                                  |                                                            |                                 |        
|                                                                                                                                  | Total research and development and other revenue expenses  |                                 |        
|Selling, general and administrative expenses                                                                                      |                                                            |                                 | 15,851 
|Write-off of public offering costs                                                                                                |                                                            |                                 |       
|Amortization of goodwill                                                                                                          |                                                            |                                 |       
|Amortization of intangibles                                                                                                       |                                                            |                                 | 589    
|Restructuring costs                                                                                                               |                                                            |                                 | 1,500  
|                                                                                                                                  |                                                            |                                 |        
|                                                                                                                                  | Total operating costs and expenses                         |                                 |        
|                                                                                                                                  |                                                            |                                 |        
|Operating loss                                                                                                                    |                                                            |                                 | (18,981
|Net realized gain on sale of marketable securities                                                                                |                                                            |                                 | 17     
|Net unrealized loss on warrants to purchase common stock                                                                          |                                                            |                                 | (519   
|Write-down of investment in Beacon Power Corporation                                                                              |                                                            |                                 | (1,400 
|Other income (loss)                                                                                                               |                                                            |                                 | 122    
|                                                                                                                                  |                                                            |                                 |        
|Net loss before income taxes, equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                            |                                 | (20,761
|Provision for income taxes                                                                                                        |                                                            |                                 |       
|Equity loss from Beacon Power Corporation                                                                                         |                                                            |                                 |       
|                                                                                                                                  |                                                            |                                 |        
|Net loss before cumulative effect of changes in accounting principles                                                             |                                                            |                                 | (20,761
|Cumulative effect of changes in accounting principles                                                                             |                                                            |                                 |       
|                                                                                                                                  |                                                            |                                 |        
|Net loss                                                                                                                          |                                                            |                                 | (20,761
|Accretion of redeemable convertible preferred stock discount                                                                      |                                                            |                                 |       
|Cumulative effect of change in accounting principle                                                                               |                                                            |                                 |       
|                                                                                                                                  |                                                            |                                 |        
|Net loss attributable to common stockholders                                                                                      |                                                            | $                               | (20,761
|                                                                                                                                  |                                                            |                                 |        
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted               |                                                            | $                               | (1.25  
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                               |                                                            |                                 |       
|                                                                                                                                  |                                                            |                                 |        
|Net loss attributable to common stockholders per weighted average share, basic and diluted                                        |                                                            | $                               | (1.25  
|                                                                                                                                  |                                                            |                                 |        
|Weighted average number of common shares, basic and diluted                                                                       |                                                            |                                 | 16,597 
|                                                                                                                                  |                                                            |                                 |        

|                                                                                    |  | As of September 30,
|----------------------------------------------------------------------------------- |  | -------------------
|
|
|Balance Sheet Data                                                                  |  |                    
|Cash and cash equivalents                                                           |  | $                  
|Marketable securities                                                               |  |                    
|Investment in Beacon Power Corporation                                              |  |                    
|Assets transferred to Beacon Power Corporation                                      |  |                    
|Total assets                                                                        |  |                    
|Working capital                                                                     |  |                    
|Liabilities transferred to Beacon Power Corporation                                 |  |                    
|Total long-term liabilities, net of current portion                                 |  |                    
|Contingent obligation to Class D preferred stockholders of Beacon Power Corporation |  |                    
|Contingent obligation to common stock warrant holders                               |  |                    
|Redeemable convertible preferred stock                                              |  |                    
|Stockholders' equity                                                                |  |                    

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

Special Note Regarding Forward-Looking Information

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

Recent Developments

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

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

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

24

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the
conversion price of the preferred stock, and thereafter will be paid on a quarterly basis. The warrants will be exercisable for a five-year term and will have an exercise price of
$2.00 per share.

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

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

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

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

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

Overview

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

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



25

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

Critical Accounting Policies and Significant Judgments and Estimates

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

Revenue Recognition

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

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

26

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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. When the current estimates of total contract revenue and contract
costs for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development
projects are recognized as funded research and development expenses as incurred. As of September 30, 2002 and 2001, we have accrued $0.2 million and $0.1 million, respectively,
for anticipated contract losses on commercial contracts. For the fiscal year ended September 30, 2002 and 2001, revenue from commercial contracts, which represents other revenue, is included in
funded research and development and other revenue and amounted to $0.2 million and $0.7 million, respectively.

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

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

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

Accounts Receivable

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

Inventory

We value our inventory at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We
periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, as well as based on historical
usage. Due to the custom and specific nature of certain of our products, demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products
could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid
technological change, frequent new product development, and rapid product

27

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obsolescence
that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product
demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

Investment in Beacon Power Corporation

During substantially all of the fiscal year ended September 30, 2001, we accounted for our investment in Beacon Power Corporation under the equity method
of accounting and recorded $5.1 million of losses from Beacon Power. On September 28, 2001, we distributed 5,000,000 shares of Beacon Power common stock to our stockholders. Upon the
distribution of the 5,000,000 shares, we recorded the distribution of the 5,000,000 shares as a reduction of additional paid-in capital based on the book value per share prior to the
distribution, or $0.59 per share. After the distribution, we owned 4,705,910 shares, or approximately 11.0%, of Beacon Power's outstanding voting stock. Additionally, we have determined that we do not
have the ability to exercise significant influence over the operating and financial policies of Beacon Power and, therefore, now account for our investment in Beacon Power using the fair value method
as set forth in Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Debt and Equity Securities.We are no longer
required to record our share of any losses from Beacon Power and the investment is carried at fair value and designated as available for sale and any unrealized holding gains or losses are to be
included in stockholders' equity as a component of accumulated other comprehensive income/(loss) so long as any unrealized losses are deemed temporary in nature. If the decline in fair value is judged
to be other than temporary, the cost basis shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in the statement of operations. The
new cost basis shall not be changed for subsequent recoveries in fair value. Subsequent increases in the fair value shall be included in stockholders' equity as a component of accumulated other
comprehensive income/(loss). Subsequent decreases in fair value, if not an other-than-temporary impairment, also shall be included in stockholders' equity as a component of
accumulated other comprehensive income/(loss).

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

28

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The following summarizes our investment in Beacon Power Corporation:

|                       |  | As of September 30, 2002 |      | As of September 30, 2001
|---------------------- |  | ------------------------ | ---- | ------------------------
|
|Carrying Value         |  | $                        | 0.8  |                         
|Cost                   |  | $                        | 1.4  |                         
|Unrealized Gain/(Loss) |  | $                        | (0.6 | )                       
|Realized Loss          |  | $                        | (1.4 | )                       

Additionally,
we have a warrant to purchase 173,704 shares of Beacon Power's common stock that has an exercise price of $1.25 per share and expires in 2005. We account for this warrant
in accordance with SFAS No. 133 and, therefore, record the warrant at its fair value and record any changes in value in our statement of operations. As of September 30, 2002, the warrant
to purchase Beacon Power common stock had a fair value of $14,365 and is included in warrants to purchase common stock on the accompanying balance sheet.

Goodwill and Intangible Assets

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

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

We completed the first step of the transitional goodwill impairment test based on the amount of goodwill as of the beginning of fiscal year 2002, as required by SFAS No. 142. We
determined the fair value of each of the reporting units based on a discounted cash flow income approach. The income approach indicates the fair value of a business enterprise based on the discounted
value of the cash flows that the business can be expected to generate in the future. This analysis is based upon projections prepared by management and data from sources of publicly available
information available at the time of preparation. These projections were based on a strategic plans conducted by each business unit using financial projections for a 3 to 5 year time horizon
and represented managements best estimate of future results. In making these projections, the Company considered the markets it was addressing, the competitive environment and its 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
performed a macro assessment of the overall likelihood that it would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.
Based on the results of the first step of the transitional goodwill impairment test, we determined that the fair value of each of the reporting units exceeded their carrying amounts and, therefore, no
goodwill impairment existed as of October 1, 2001. As a result, the second step of the transitional goodwill impairment test was not required to be completed. We performed a goodwill impairment
test on the amount of goodwill as of the beginning of

29

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our fiscal fourth quarter 2002, as required by SFAS No. 142 on an annual basis. We again determined the fair value of each of the reporting units based on a discounted cash flow income approach
consistent with the initial test. Based on the results of the first step of the annual goodwill impairment test, we determined that the fair value of each of the reporting units exceeded their
carrying amounts and, therefore, no goodwill impairment existed as of the beginning of our fiscal fourth quarter 2002. As a result, the second step of the annual goodwill impairment test was not
required to be completed. We will continue to perform a goodwill impairment test on an annual basis and on an interim basis, if certain conditions exist.

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

Accounting for Income Taxes

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

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

Results of Operations



Product Revenue.

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

Within Power Systems, revenue from magnetic levitation and high performance motor products declined 35% from $7.2 million in 2001 to $4.7 million in 2002. This decrease was
due in large part to the decline in revenue from magnetic levitation products due to the weak semiconductor industry. In addition, revenue from vibration test equipment ("Shaker") was down 39% from
$12.2 million in 2001 to $7.5 million in 2002. This reduction in Shaker revenue was due in part to the disruption caused by the relocation of the business from Anaheim, CA to Worcester,
MA during the last half of 2002. These decreases were more than offset by an increase in revenue from power conversion products from $0.8 million in 2001 to $7.7 million in 2002. This
increase was due largely to the fact that Inverpower

30

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was acquired in July 2001 and, as a result, represented less than three months of business in 2001. Revenue from power conversion products in 2002 included $2.4 million from our StarSine
Power Conditioning System (PCS) to FuelCell Energy, $1.8 million from our Inverpower Brand Smart Predictive Line Controllers (SPLC) to Hatch Steltech, Ltd. and $0.3 million from a
250-kilowatt power conversion system to Siemens Westinghouse.

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

Funded research and development and other revenue.

Funded research and development and other revenue decreased by $0.1 million, or 1% from $10.9 million to $10.8 million. The largest change
was the increase of $1.7 million from $2.7 million to $4.4 million in funded research and development revenue from a program with General Atomics to develop high power converter
assemblies for the U.S. Navy's next generation of modern "all-electric" ships offset by decreases of $0.6 million from $3.1 million to $2.5 million from a Department
of Energy program to develop low-cost power conversion modules for electric and hybrid-electric vehicles and $0.6 million from $1.1 million to $0.5 million with
General Atomics from the U.S. Navy's electric missile air launch system program. During 2002, we received all of the funding under the Department of Energy contract of $10.0 million and expect to
complete final hardware deliveries in the first half of fiscal year 2003.

Cost of product revenue.

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

Within Power Systems, power products accounted for $6.1 million of the increase due primarily to the full year effect of the Inverpower acquisition. This increase was offset by a
decrease of $2.3 million in the Shaker, magnetic levitation and high performance motors cost of product revenue, which all experienced volume reductions in 2002. Inventory obsolescence charges
for Power Systems products totaled $1.9 million in 2002 compared with $0.2 million in 2001. These charges in 2002 represented $1.0 million in power conversion products,
$0.6 million in Shakers and $0.3 million in other products. We purchased significant quantities of inventory related to our power conversion products during 2001 and 2002. When the
primary customer for these products became insolvent in 2002, we determined not to continue in this line of business and as a consequence the inventory that we maintained was no longer salable in the
ordinary course of business and had to be substantially reserved. As a consequence, our reserves against inventory as a percentage of gross inventory rose from 15.2% at the end of fiscal 2001 to 23.6%
at the end of fiscal 2002. With the exception of certain materials that were scrapped, we have not disposed of the inventory that was the subject of the obsolescence charge. We intend to identify
other potential opportunities and markets for these products, however, until that is known we believe that the carrying value approximates fair value.

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

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

Funded research and development and other revenue expenses.

Funded research and development and other revenue expenses decreased by $0.3 million, or 4%, from $7.4 million in 2001 to $7.2 million in
2002. The largest change was the increase of $1.2 million from $1.9 million to $3.1 million in funded research and development revenue expenses from a program with General Atomics
to develop high power converter assemblies for the U.S. Navy's next generation of modern "all-electric" ships offset by a decrease of $0.4 million from $0.8 million to
$0.4 million from a program with General Atomics for the U.S. Navy's electric missile air launch system





program. In addition, we provided an additional provision of $0.1 million for contract losses during 2002. Although revenue from the Department of Energy program to develop low-cost
power conversion modules for electric and hybrid-electric vehicles decreased by $0.6 million, the costs remained flat at $1.9 million.

Unfunded research and development expenses.

Unfunded research and development expenses decreased by $0.4 million, or 6%, from $6.2 million in 2001 to $5.9 million in 2002. The decrease
is due to the near completion of the internally funded research and development projects including the power inverter for an on-site power generation system and our 250 kilowatt and 2.2
megawatt rotary UPS and power quality systems. The Company has not yet derived any revenue from this investment.

Selling, general and administrative expenses.

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

Write-off of public offering costs.

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

Amortization of goodwill and intangibles.

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

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Restructuring costs.

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

We believe that we have reduced our labor and overhead expense in excess of $6.0 million on an annual basis and first began to realize these savings in April of 2002. The majority
of these reductions occurred as a result of personnel layoffs and, to a lesser degree, from the closing of our Anaheim location and consolidating the Anaheim operation in our facility in Worcester,
MA. Since only a small portion of our labor and overhead spending varies directly with revenue this reduction had the effect of lowering our quarterly revenue breakeven point to approximately $15
million.

Net unrealized loss on warrants to purchase common stock.

Net unrealized loss on warrants to purchase common stock decreased by $1.0 million, or 65%, from $1.5 million in 2001 to $0.5 million in
2002. We account for our warrants to purchase Mechanical Technology Incorporated's common stock and to purchase Beacon Power's common stock in accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and, therefore, we have recorded these warrants at their fair value at
September 30, 2002 and recorded and unrealized loss of $0.5 million during 2002. The fair value of our warrants to purchase Mechanical Technology Incorporated's common stock decreased by
$0.3 million from $0.3 million to $0.0 million. The fair value





of our warrants to purchase Beacon Power's common stock decreased by $0.2 million from $0.2 million to $0.0 million.

Write-down of investment in Beacon Power Corporation.

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

Other income.

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

33

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Loss from Beacon Power Corporation.

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

Cumulative effect of change in accounting principle.

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



Product Revenue.

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

Funded research and development and other revenue.

Funded research and development and other revenue increased by $2.3 million, or 26%, from $8.6 million in 2000 to $10.9 million in 2001. This
increase was primarily attributable to $2.7 million in funded research and development revenue from a new program to develop high power converter assemblies for the U.S. Navy's next generation
of modern "all-electric" ships offset by a reduction of $0.4 million in funded research and development revenue from a Department of Energy program to develop low-cost
power conversion modules for electric and hybrid-electric vehicles.

Cost of product revenue.

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

Funded research and development and other revenue expenses.

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

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Unfunded research and development expenses.

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

Selling, general and administrative expenses.

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

Write-off of public offering costs.

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

Amortization of intangibles.

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

Net unrealized loss on warrants to purchase common stock.

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

Other income (loss).

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

Loss from Beacon Power Corporation.

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

35

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Cumulative effect of change in accounting principle.

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

Quarterly Results of Operations

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

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

36

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|                                                                                                                    |                                                            | Three Months Ended |       
|------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------ | ------
|
|
|Statement of Operations Data                                                                                        |                                                            |                    |       
|Revenue:                                                                                                            |                                                            |                    |       
|Product revenue                                                                                                     |                                                            | $                  | 8,451 
|Funded research and development and other revenue                                                                   |                                                            |                    | 2,785 
|                                                                                                                    |                                                            |                    |       
|                                                                                                                    | Total revenue                                              |                    |       
|                                                                                                                    |                                                            |                    |       
|Operating costs and expenses:                                                                                       |                                                            |                    |       
|Cost of product revenue                                                                                             |                                                            |                    | 8,038 
|Research and development and other revenue expenses:                                                                |                                                            |                    |       
|                                                                                                                    | Funded research and development and other revenue expenses |                    |       
|                                                                                                                    | Unfunded research and development expenses                 |                    |       
|                                                                                                                    |                                                            |                    |       
|                                                                                                                    | Total research and development and other revenue expenses  |                    |       
|Selling, general and administrative expenses                                                                        |                                                            |                    | 4,062 
|Write-off of public offering costs                                                                                  |                                                            |                    |      
|Amortization of goodwill                                                                                            |                                                            |                    |      
|Amortization of intangibles                                                                                         |                                                            |                    | 143   
|Restructuring costs                                                                                                 |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|                                                                                                                    | Total operating costs and expenses                         |                    |       
|                                                                                                                    |                                                            |                    |       
|Operating loss                                                                                                      |                                                            |                    | (4,045
|Net realized gain on sale of marketable securities                                                                  |                                                            |                    |      
|Net unrealized gain (loss) on warrants to purchase common stock                                                     |                                                            |                    | (7    
|Write-down of investment in Beacon Power Corporation                                                                |                                                            |                    | (1,400
|Other income (loss)                                                                                                 |                                                            |                    | 80    
|                                                                                                                    |                                                            |                    |       
|Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                            |                    | (5,372
|Equity loss from Beacon Power Corporation                                                                           |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|Net loss before cumulative effect of changes in accounting principles                                               |                                                            |                    | (5,372
|Cumulative effect of changes in accounting principles                                                               |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|Net loss                                                                                                            |                                                            |                    | (5,372
|Cumulative effect of change in accounting principle                                                                 |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|Net loss attributable to common stockholders                                                                        |                                                            | $                  | (5,372
|                                                                                                                    |                                                            |                    |       
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                                            | $                  | (0.32 
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                 |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|Net loss attributable to common stockholders per weighted average share, basic and diluted                          |                                                            | $                  | (0.32 
|                                                                                                                    |                                                            |                    |       
|Weighted average number of common shares, basic and diluted                                                         |                                                            |                    | 16,718
|                                                                                                                    |                                                            |                    |       

Liquidity and Capital Resources

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

37

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

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

In April 2002, we had a business goal of achieving $15 million of quarterly revenue, which would have enabled us to achieve a breakeven cash run rate. However, our revenue growth did not
materialize as projected and we achieved sales of only $11.2 million, well short of this goal. We experienced disappointing sales levels during the last half of calendar 2002. This experience, coupled
with the delayed introduction of our new UPS product line and the weak economy contributes to our belief that the fourth quarter of fiscal year 2003 will be the earliest we could reasonably achieve a
breakeven cash run rate. Given our current operating plan, we do not expect to achieve $15 million of quarterly revenue until the fourth quarter of fiscal year 2003 at the earliest. As a
result, because we had only $2.1 million in cash at the end of fiscal year 2002, we will need at least $9 million to $10 million in borrowing capacity and additional capital, in
the aggregate, in order to fund our current business plan for the next 12 months. We may also need additional future funds in order to fund unanticipated operating losses, to grow, to develop
new or enhance existing products and services and to respond to competitive pressures.

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

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

38

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On
December 19, 2002, we owed Silicon Valley Bank approximately $886,000 and had a cash balance of approximately $1 million. As a result of executing the forbearance
agreement, we are now able to return to borrowing from the bank, but are limited to the lesser of 75% of eligible receivables or $2 million. In addition, all collections can now be used by us
to fund operations or pay down the loan, as they had been prior to the default on December 1, 2002. Although the line of credit was up to $5 million prior to our default, it was limited
to 75% of eligible receivables which typically permitted borrowing in the October to November period of from approximately $2.2 million to $2.8 million outstanding at any one time.
However, at anytime prior to January 15, 2003, Silicon Valley Bank may discontinue lending funds to us if, in its business judgment, it decides to do so.

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

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

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

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

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

39

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

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

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

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

As of September 30, 2002, our cash, cash equivalents and marketable securities were $2.1 million, a decrease of $18.8 million from September 30, 2001. Cash
used in operating activities for the fiscal year ended September 30, 2002 was $15.3 million as compared to $11.0 million in 2001. Cash used in operating activities during the
fiscal year ended September 30, 2002 was primarily attributable to our net loss offset by non-cash items such as depreciation and amortization, increases in allowances for
uncollectible accounts and excess and obsolete inventory, realized gain on sale of marketable securities, net unrealized loss from warrants to purchase common stock, write-off of impaired
assets, write-down of investment in Beacon Power Corporation, non-cash compensation expense and changes in working capital. Our accounts receivables, net declined from
$8.6 million as of September 30, 2001 to $7.2 million as of September 30, 2002. The primary reason for this improvement was our focus on decreasing working capital and
improving liquidity.

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

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

40

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

Year Ended September 30,

Capital Leases

Operating Leases2003

$
366,733

$
2,214,8462004


341,786


739,5702005


236,456


501,1082006


316,762


262,3672007





264,000Thereafter





904,000Total (Operating lease commitments not reduced by minimum sublease rentals of $177,116)

$
1,261,737

$
4,885,891


Factors Affecting Future Results

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

Effects of Inflation

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

Recent Accounting Pronouncements

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

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

41

---

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

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

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

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

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

42

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Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS



|                                                                                                                                        |  | Page
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Financial Statements of SatCon Technology Corporation                                                                      |  |     
|Reports of Independent Public Accountants                                                                                               |  | 44  
|Consolidated Financial Statements:                                                                                                      |  |     
|Consolidated Balance Sheets as of September 30, 2002 and 2001                                                                           |  | 47  
|Consolidated Statements of Operations for the Years Ended September 30, 2002, 2001 and 2000                                             |  | 48  
|Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the Years Ended September 30, 2002, 2001 and 2000 |  | 49  
|Consolidated Statements of Cash Flows for the Years Ended September 30, 2002, 2001 and 2000                                             |  | 51  
|Notes to Consolidated Financial Statements                                                                                              |  | 52  
|Schedule II: Valuation and Qualifying Accounts for the Years Ended September 30, 2002, 2001 and 2000                                    |  | 88  

43

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To
the Board of Directors of
SatCon Technology Corporation:

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

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

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

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

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

44

---

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

| | /s/GRANT THORNTON LLP
| | ---------------------

Boston, Massachusetts
December 20, 2002

45

---

Provided below, pursuant to Rule 2-02(e) of Regulation S-X, is a copy of the accountants report issued by Arthur Andersen
LLP, our former independent public accountants, in connection with the filing of our Annual Report of Form 10-K for the fiscal year ended September 30, 2001.This audit report has not been reissued by Arthur
Andersen in connection with the filing of this Annual Report on Form 10-K for the fiscal year ended
September 30, 2002.Note that the previously issued Arthur Andersen report includes references to certain fiscal years which are not required to be presented in the
accompanying consolidated financial statements as of and for the year ended September 30, 2002. We are unable to obtain a reissued accountants report from Arthur Andersen, and we will be unable
to obtain future accountants reports from Arthur Andersen, because Arthur Andersen has discontinued its auditing practice. This means that we will also be unable to obtain consents to incorporate any
financial statements audited by Arthur Andersen into registration statements that we may file in the future or that we may have previously filed. Accordingly, investors will not be able to sue Arthur
Andersen pursuant to Section 11(a)(4) of the Securities Act with respect to any such registration statements and, therefore, ultimate recovery on a successful claim may be limited. The ability
of investors to recover from Arthur Andersen may also be limited as a result of Arthur Andersen's financial condition or other matters resulting from the various civil and criminal lawsuits against
that firm.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Board of Directors of
SatCon Technology Corporation:

We
have audited the accompanying consolidated balance sheets of SatCon Technology Corporation and its subsidiaries (the Company) (a Delaware corporation) as of September 30, 2001
and 2000 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive loss and cash flows for each of the three years in the period ended
September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SatCon Technology Corporation and its subsidiaries as of
September 30, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with auditing
standards generally accepted in the United States.

| | /s/ARTHUR ANDERSEN LLP
| | ----------------------

Boston, Massachusetts
December 4, 2001

46

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SATCON TECHNOLOGY CORPORATION    CONSOLIDATED BALANCE SHEETS

|                                                      |                                                                                                                                                   | September 30,
2002                         |           | September 30,
2001 |           
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------------ | ----------
|ASSETS                                                |                                                                                                                                                  
|Current assets:                                       |                                                                                                                                                   |                                            |           |                    |           
|                                                      | Cash and cash equivalents                                                                                                                         |                                            | $         | 2,120,306          |           
|                                                      | Marketable securities                                                                                                                             |                                            |           |                   |           
|                                                      | Accounts receivable, net of allowance of $898,322 and $775,706 at September 30, 2002 and 2001, respectively                                       |                                            |           | 7,227,006          |           
|                                                      | Unbilled contract costs and fees                                                                                                                  |                                            |           | 1,607,244          |           
|                                                      | Inventory                                                                                                                                         |                                            |           | 10,246,022         |           
|                                                      | Prepaid expenses and other current assets                                                                                                         |                                            |           | 988,040            |           
|                                                      |                                                                                                                                                   |                                            |           |                    |           
|                                                      |                                                                                                                                                   | Total current assets                       |           |                    | 22,188,618
|Investment in Beacon Power Corporation                |                                                                                                                                                   |                                            | 800,005   |                    |           
|Warrants to purchase common stock                     |                                                                                                                                                   |                                            | 15,988    |                    |           
|Property and equipment, net                           |                                                                                                                                                   |                                            | 9,239,363 |                    |           
|Goodwill, net                                         |                                                                                                                                                   |                                            | 6,234,653 |                    |           
|Intangibles, net                                      |                                                                                                                                                   |                                            | 3,729,483 |                    |           
|Other long-term assets                                |                                                                                                                                                   |                                            | 152,015   |                    |           
|                                                      |                                                                                                                                                   |                                            |           |                    |           
|                                                      |                                                                                                                                                   | Total assets                               |           | $                  | 42,360,125
|                                                      |                                                                                                                                                   |                                            |           |                    |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                  |                                                                                                                                                  
|Current liabilities:                                  |                                                                                                                                                   |                                            |           |                    |           
|                                                      | Current portion of long-term debt                                                                                                                 |                                            | $         | 266,808            |           
|                                                      | Accounts payable                                                                                                                                  |                                            |           | 5,877,805          |           
|                                                      | Accrued payroll and payroll related expenses                                                                                                      |                                            |           | 1,669,372          |           
|                                                      | Other accrued expenses                                                                                                                            |                                            |           | 1,772,180          |           
|                                                      | Deferred revenue                                                                                                                                  |                                            |           | 638,769            |           
|                                                      | Accrued restructuring costs                                                                                                                       |                                            |           | 992,496            |           
|                                                      |                                                                                                                                                   |                                            |           |                    |           
|                                                      |                                                                                                                                                   | Total current liabilities                  |           |                    | 11,217,430
|Long-term debt, net of current portion                |                                                                                                                                                   |                                            | 772,679   |                    |           
|Other long-term liabilities                           |                                                                                                                                                   |                                            | 444,406   |                    |           
|Contingent obligation to common stock warrant holders |                                                                                                                                                   |                                            |          |                    |           
|Commitments and contingencies (Note K)                |                                                                                                                                                   |                                            |           |                    |           
|Stockholders' equity:                                 |                                                                                                                                                   |                                            |           |                    |           
|                                                      | Preferred stock; $0.01 par value, 1,000,000 shares authorized; no shares issued                                                                   |                                            |           |                   |           
|                                                      | Common stock; $0.01 par value, 50,000,000 shares authorized; 16,741,646 and 16,539,597 shares issued at September 30, 2002 and 2001, respectively |                                            |           | 167,416            |           
|                                                      | Additional paid-in capital                                                                                                                        |                                            |           | 115,800,692        |           
|                                                      | Accumulated deficit                                                                                                                               |                                            |           | (85,220,361        | )         
|                                                      | Accumulated other comprehensive (loss) income                                                                                                     |                                            |           | (822,137           | )         
|                                                      |                                                                                                                                                   |                                            |           |                    |           
|                                                      |                                                                                                                                                   | Total stockholders' equity                 |           |                    | 29,925,610
|                                                      |                                                                                                                                                   |                                            |           |                    |           
|                                                      |                                                                                                                                                   | Total liabilities and stockholders' equity |           | $                  | 42,360,125
|                                                      |                                                                                                                                                   |                                            |           |                    |           

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

47

---



SATCON TECHNOLOGY CORPORATION    CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                    |                                                            | For the Years Ended September 30, |            
|------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------- | -----------
|
|Revenue:                                                                                                            |                                                            |                                   |            
|Product revenue                                                                                                     |                                                            | $                                 | 30,798,655 
|Funded research and development and other revenue                                                                   |                                                            |                                   | 10,831,004 
|                                                                                                                    |                                                            |                                   |            
|                                                                                                                    | Total revenue                                              |                                   |            
|                                                                                                                    |                                                            |                                   |            
|Operating costs and expenses:                                                                                       |                                                            |                                   |            
|Cost of product revenue                                                                                             |                                                            |                                   | 29,644,267 
|Research and development and other revenue expenses:                                                                |                                                            |                                   |            
|                                                                                                                    | Funded research and development and other revenue expenses |                                   |            
|                                                                                                                    | Unfunded research and development expenses                 |                                   |            
|                                                                                                                    |                                                            |                                   |            
|                                                                                                                    | Total research and development and other revenue expenses  |                                   |            
|Selling, general and administrative expenses                                                                        |                                                            |                                   | 15,850,332 
|Write-off of public offering costs                                                                                  |                                                            |                                   |           
|Amortization of goodwill                                                                                            |                                                            |                                   |           
|Amortization of intangibles                                                                                         |                                                            |                                   | 588,661    
|Restructuring costs                                                                                                 |                                                            |                                   | 1,500,000  
|                                                                                                                    |                                                            |                                   |            
|                                                                                                                    | Total operating costs and expenses                         |                                   |            
|                                                                                                                    |                                                            |                                   |            
|Operating loss                                                                                                      |                                                            |                                   | (18,980,812
|Net realized gain on sale of marketable securities                                                                  |                                                            |                                   | 16,956     
|Net unrealized loss on warrants to purchase common stock                                                            |                                                            |                                   | (518,676   
|Write-down of investment in Beacon Power Corporation                                                                |                                                            |                                   | (1,400,000 
|Other (loss) income                                                                                                 |                                                            |                                   | (10,000    
|Interest income                                                                                                     |                                                            |                                   | 291,679    
|Interest expense                                                                                                    |                                                            |                                   | (159,745   
|                                                                                                                    |                                                            |                                   |            
|Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                            |                                   | (20,760,598
|Equity loss from Beacon Power Corporation                                                                           |                                                            |                                   |           
|                                                                                                                    |                                                            |                                   |            
|Net loss before cumulative effect of changes in accounting principles                                               |                                                            |                                   | (20,760,598
|Cumulative effect of changes in accounting principles                                                               |                                                            |                                   |           
|                                                                                                                    |                                                            |                                   |            
|Net loss                                                                                                            |                                                            |                                   | (20,760,598
|Accretion of redeemable convertible preferred stock discount                                                        |                                                            |                                   |           
|Cumulative effect of change in accounting principle                                                                 |                                                            |                                   |           
|                                                                                                                    |                                                            |                                   |            
|Net loss attributable to common stockholders                                                                        |                                                            | $                                 | (20,760,598
|                                                                                                                    |                                                            |                                   |            
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                                            | $                                 | (1.25      
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                 |                                                            |                                   |           
|                                                                                                                    |                                                            |                                   |            
|Net loss attributable to common stockholders per weighted average share, basic and diluted                          |                                                            | $                                 | (1.25      
|                                                                                                                    |                                                            |                                   |            
|Weighted average number of common shares, basic and diluted                                                         |                                                            |                                   | 16,596,814 
|                                                                                                                    |                                                            |                                   |            

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

48

---



SATCON TECHNOLOGY CORPORATION  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS  For the Years Ended September 30, 2002, 2001 and 2000



|                                                                                                             |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   | Accumulated Other Comprehensive Loss |  
|------------------------------------------------------------------------------------------------------------ |  | ---------- | - | - | ------- | - | - | ----------- | - | ------- | - | - | -------- | - | - | ------------------------------------ | -
|
|Balance, September 30, 1999                                                                                  |  | 9,617,009  |   | $ | 96,170  |   | $ | 37,074,161  |   | 42,860  |   | $ | (428,600 | ) | $ | (1,816,667                           | )
|Net loss                                                                                                     |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Common stock issued in connection with Ling acquisition                                                      |  | 770,000    |   |   | 7,700   |   |   | 7,748,656   |   |        |   |   |         |   |   |                                     |  
|Common stock issued in connection with MTI investment                                                        |  | 1,030,000  |   |   | 10,300  |   |   | 6,964,926   |   |        |   |   |         |   |   |                                     |  
|MTI warrants received in connection with MTI investment                                                      |  |           |   |   |        |   |   | 3,495,438   |   |        |   |   |         |   |   |                                     |  
|Valuation adjustment for MTI warrants                                                                        |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Common stock issued in connection with NGC asset acquisition                                                 |  | 578,761    |   |   | 5,788   |   |   | 5,465,770   |   |        |   |   |         |   |   |                                     |  
|Conversion of redeemable convertible preferred stock into common stock                                       |  | 1,025,641  |   |   | 10,256  |   |   | 7,989,744   |   |        |   |   |         |   |   |                                     |  
|Exercise of common stock options                                                                             |  | 701,774    |   |   | 7,018   |   |   | 5,496,853   |   |        |   |   |         |   |   |                                     |  
|Exercise of common stock warrants                                                                            |  | 118,000    |   |   | 1,180   |   |   | 1,111,720   |   |        |   |   |         |   |   |                                     |  
|Payments on amounts receivable from exercise of stock options                                                |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   | 1,816,667                            |  
|Valuation adjustment for common stock held in escrow                                                         |  |           |   |   |        |   |   | 257,160     |   |        |   |   | (257,160 | ) |   |                                     |  
|Common stock released from escrow                                                                            |  |           |   |   |        |   |   |            |   | (42,860 | ) |   | 685,760  |   |   |                                     |  
|Accretion of redeemable convertible preferred stock discount                                                 |  |           |   |   |        |   |   | (3,105,888  | ) |        |   |   |         |   |   |                                     |  
|Foreign currency translation adjustment                                                                      |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|                                                                                                             |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   |                                      |  
|Comprehensive loss                                                                                           |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   |                                      |  
|Balance, September 30, 2000                                                                                  |  | 13,841,185 |   | $ | 138,412 |   | $ | 72,498,540  |   |        |   |   |         |   |   |                                     |  
|Net loss                                                                                                     |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Exercise of common stock options                                                                             |  | 88,484     |   |   | 885     |   |   | 676,192     |   |        |   |   |         |   |   |                                     |  
|Exercise of common stock warrants, net of issuance costs of $230,580                                         |  | 777,000    |   |   | 7,770   |   |   | 6,321,750   |   |        |   |   |         |   |   |                                     |  
|Termination of contingent put right granted to Class D preferred stockholders of Beacon Power Corporation    |  |           |   |   |        |   |   | 5,831,879   |   |        |   |   |         |   |   |                                     |  
|Net gain on investment in Beacon Power Corporation                                                           |  |           |   |   |        |   |   | 10,779,224  |   |        |   |   |         |   |   |                                     |  
|Distribution of Beacon Power Corporation common stock                                                        |  |           |   |   |        |   |   | (2,963,240  | ) |        |   |   |         |   |   |                                     |  
|Cumulative effect of accounting change for Mechanical Technology Incorporated warrants                       |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Reclassification of common stock warrants from equity to liability                                           |  |           |   |   |        |   |   | (1,505,421  | ) |        |   |   |         |   |   |                                     |  
|Common stock issued in connection with settlement agreement                                                  |  | 12,500     |   |   | 125     |   |   | 162,375     |   |        |   |   |         |   |   |                                     |  
|Retirement of treasury shares                                                                                |  | (44,500    | ) |   | (445    | ) |   | (249,259    | ) |        |   |   |         |   |   |                                     |  
|Sale of common stock, net of offering costs of $671,679                                                      |  | 1,464,928  |   |   | 14,649  |   |   | 17,075,924  |   |        |   |   |         |   |   |                                     |  
|Common stock issued in connection with Inverpower Controls Ltd. acquisition                                  |  | 400,000    |   |   | 4,000   |   |   | 3,913,600   |   |        |   |   |         |   |   |                                     |  
|Cumulative effect of accounting change to record beneficial conversion feature of redeemable preferred stock |  |           |   |   |        |   |   | 1,940,798   |   |        |   |   |         |   |   |                                     |  
|Record charge for acceleration of stock option vesting schedule                                              |  |           |   |   |        |   |   | 111,250     |   |        |   |   |         |   |   |                                     |  
|Change in unrealized gain on marketable securities                                                           |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Change in unrealized gain on Beacon Power Corporation common stock                                           |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Foreign currency translation adjustment                                                                      |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|                                                                                                             |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   |                                      |  
|Comprehensive loss                                                                                           |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   |                                      |  
|Balance, September 30, 2001                                                                                  |  | 16,539,597 |   | $ | 165,396 |   | $ | 114,593,612 |   |        |   |   |         |   |   |                                     |  
|Net loss                                                                                                     |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Change in unrealized gain on marketable securities                                                           |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Change in unrealized gain (loss) on Beacon Power Corporation common stock                                    |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Other than temporary write-down of investment in Beacon Power Corporation                                    |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|Reclassification of common stock warrants from liability to equity                                           |  |           |   |   |        |   |   | 192,448     |   |        |   |   |         |   |   |                                     |  
|Stock-based compensation related to options to purchase common stock to consultants                          |  |           |   |   |        |   |   | 49,741      |   |        |   |   |         |   |   |                                     |  
|Issuance of common stock to 401(k) Plan                                                                      |  | 202,049    |   |   | 2,020   |   |   | 421,071     |   |        |   |   |         |   |   |                                     |  
|Issuance of warrants to purchase common stock                                                                |  |           |   |   |        |   |   | 510,820     |   |        |   |   |         |   |   |                                     |  
|Record charge for acceleration of stock option vesting schedule                                              |  |           |   |   |        |   |   | 33,000      |   |        |   |   |         |   |   |                                     |  
|Foreign currency translation adjustment                                                                      |  |           |   |   |        |   |   |            |   |        |   |   |         |   |   |                                     |  
|                                                                                                             |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   |                                      |  
|Comprehensive loss                                                                                           |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   |                                      |  
|Balance, September 30, 2002                                                                                  |  | 16,741,646 |   | $ | 167,416 |   | $ | 115,800,692 |   |        |   |   |         |   |   |                                     |  
|                                                                                                             |  |            |   |   |         |   |   |             |   |         |   |   |          |   |   |                                      |  

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

49

---



SATCON TECHNOLOGY CORPORATION  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS  For the Years Ended September 30, 2002, 2001 and 2000 (continued)



|                                                                                                             |  | Accumulated Other Comprehensive Loss |            |   |   |          |   |   |            |   |        
|------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ---------- | - | - | -------- | - | - | ---------- | - | -------
|
|Balance, September 30, 1999                                                                                  |  | $                                    |           |   | $ |         |   | $ |           |   | 44,500 
|Net loss                                                                                                     |  |                                      |           |   |   |         |   |   |           |   |       
|Common stock issued in connection with Ling acquisition                                                      |  |                                      |           |   |   |         |   |   |           |   |       
|Common stock issued in connection with MTI investment                                                        |  |                                      |           |   |   |         |   |   |           |   |       
|MTI warrants received in connection with MTI investment                                                      |  |                                      |           |   |   |         |   |   |           |   |       
|Valuation adjustment for MTI warrants                                                                        |  |                                      | (1,021,725 | ) |   |         |   |   | (1,021,725 | ) |       
|Common stock issued in connection with NGC asset acquisition                                                 |  |                                      |           |   |   |         |   |   |           |   |       
|Conversion of redeemable convertible preferred stock into common stock                                       |  |                                      |           |   |   |         |   |   |           |   |       
|Exercise of common stock options                                                                             |  |                                      |           |   |   |         |   |   |           |   |       
|Exercise of common stock warrants                                                                            |  |                                      |           |   |   |         |   |   |           |   |       
|Payments on amounts receivable from exercise of stock options                                                |  |                                      |           |   |   |         |   |   |           |   |       
|Valuation adjustment for common stock held in escrow                                                         |  |                                      |           |   |   |         |   |   |           |   |       
|Common stock released from escrow                                                                            |  |                                      |           |   |   |         |   |   |           |   |       
|Accretion of redeemable convertible preferred stock discount                                                 |  |                                      |           |   |   |         |   |   |           |   |       
|Foreign currency translation adjustment                                                                      |  |                                      |           |   |   | (51,778  | ) |   | (51,778    | ) |       
|                                                                                                             |  |                                      |            |   |   |          |   |   |            |   |        
|Comprehensive loss                                                                                           |  |                                      |            |   |   |          |   |   |            |   |        
|                                                                                                             |  |                                      |            |   |   |          |   |   |            |   |        
|Balance, September 30, 2000                                                                                  |  | $                                    | (1,021,725 | ) | $ | (51,778  | ) | $ | (1,073,503 | ) | 44,500 
|Net loss                                                                                                     |  |                                      |           |   |   |         |   |   |           |   |       
|Exercise of common stock options                                                                             |  |                                      |           |   |   |         |   |   |           |   |       
|Exercise of common stock warrants, net of issuance costs of $230,580                                         |  |                                      |           |   |   |         |   |   |           |   |       
|Termination of contingent put right granted to Class D preferred stockholders of Beacon Power Corporation    |  |                                      |           |   |   |         |   |   |           |   |       
|Net gain on investment in Beacon Power Corporation                                                           |  |                                      |           |   |   |         |   |   |           |   |       
|Distribution of Beacon Power Corporation common stock                                                        |  |                                      |           |   |   |         |   |   |           |   |       
|Cumulative effect of accounting change for Mechanical Technology Incorporated warrants                       |  |                                      | 1,021,725  |   |   |         |   |   | 1,021,725  |   |       
|Reclassification of common stock warrants from equity to liability                                           |  |                                      |           |   |   |         |   |   |           |   |       
|Common stock issued in connection with settlement agreement                                                  |  |                                      |           |   |   |         |   |   |           |   |       
|Retirement of treasury shares                                                                                |  |                                      |           |   |   |         |   |   |           |   | (44,500
|Sale of common stock, net of offering costs of $671,679                                                      |  |                                      |           |   |   |         |   |   |           |   |       
|Common stock issued in connection with Inverpower Controls Ltd. acquisition                                  |  |                                      |           |   |   |         |   |   |           |   |       
|Cumulative effect of accounting change to record beneficial conversion feature of redeemable preferred stock |  |                                      |           |   |   |         |   |   |           |   |       
|Record charge for acceleration of stock option vesting schedule                                              |  |                                      |           |   |   |         |   |   |           |   |       
|Change in unrealized gain on marketable securities                                                           |  |                                      |           |   |   |         |   |   | 26,367     |   |       
|Change in unrealized gain on Beacon Power Corporation common stock                                           |  |                                      |           |   |   |         |   |   | 4,364,035  |   |       
|Foreign currency translation adjustment                                                                      |  |                                      |           |   |   | (126,799 | ) |   | (126,799   | ) |       
|                                                                                                             |  |                                      |            |   |   |          |   |   |            |   |        
|Comprehensive loss                                                                                           |  |                                      |            |   |   |          |   |   |            |   |        
|                                                                                                             |  |                                      |            |   |   |          |   |   |            |   |        
|Balance, September 30, 2001                                                                                  |  |                                      |           |   | $ | (178,577 | ) | $ | 4,211,825  |   |       
|Net loss                                                                                                     |  |                                      |           |   |   |         |   |   |           |   |       
|Change in unrealized gain on marketable securities                                                           |  |                                      |           |   |   |         |   |   | (26,367    | ) |       
|Change in unrealized gain (loss) on Beacon Power Corporation common stock                                    |  |                                      |           |   |   |         |   |   | (6,352,979 | ) |       
|Other than temporary write-down of investment in Beacon Power Corporation                                    |  |                                      |           |   |   |         |   |   | 1,400,000  |   |       
|Reclassification of common stock warrants from liability to equity                                           |  |                                      |           |   |   |         |   |   |           |   |       
|Stock-based compensation related to options to purchase common stock to consultants                          |  |                                      |           |   |   |         |   |   |           |   |       
|Issuance of common stock to 401(k) Plan                                                                      |  |                                      |           |   |   |         |   |   |           |   |       
|Issuance of warrants to purchase common stock                                                                |  |                                      |           |   |   |         |   |   |           |   |       
|Record charge for acceleration of stock option vesting schedule                                              |  |                                      |           |   |   |         |   |   |           |   |       
|Foreign currency translation adjustment                                                                      |  |                                      |           |   |   | (54,616  | ) |   | (54,616    | ) |       
|                                                                                                             |  |                                      |            |   |   |          |   |   |            |   |        
|Comprehensive loss                                                                                           |  |                                      |            |   |   |          |   |   |            |   |        
|                                                                                                             |  |                                      |            |   |   |          |   |   |            |   |        
|Balance, September 30, 2002                                                                                  |  | $                                    |           |   | $ | (233,193 | ) | $ | (822,137   | ) |       
|                                                                                                             |  |                                      |            |   |   |          |   |   |            |   |        

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

50

---



SATCON TECHNOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                       |                                                                                                          | For the Years Ended September 30,                                                                                                                                 |                                  
|---------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
|
|Cash flows from operating activities:                                  |                                                                                                          |                                                                                                                                                                   |                                  
|                                                                       | Net loss                                                                                                 |                                                                                                                                                                   | $                                
|                                                                       | Adjustments to reconcile net loss to net cash used in operating activities:                              |                                                                                                                                                                   |                                  
|                                                                       |                                                                                                          | Depreciation and amortization                                                                                                                                     |                                  
|                                                                       |                                                                                                          | Allowance for uncollectible accounts                                                                                                                              |                                  
|                                                                       |                                                                                                          | Allowance for excess and obsolete inventory                                                                                                                       |                                  
|                                                                       |                                                                                                          | Loss from Beacon Power Corporation                                                                                                                                |                                  
|                                                                       |                                                                                                          | Net realized gain on sale of marketable securities                                                                                                                |                                  
|                                                                       |                                                                                                          | Net unrealized loss on warrants to purchase common stock                                                                                                          |                                  
|                                                                       |                                                                                                          | Net unrealized loss on contingent obligation to common stock warrant holders                                                                                      |                                  
|                                                                       |                                                                                                          | Write-off of impaired assets                                                                                                                                      |                                  
|                                                                       |                                                                                                          | Write-down of investment in Beacon Power Corporation                                                                                                              |                                  
|                                                                       |                                                                                                          | Compensation expense related to release of stock from escrow, issuance of stock options and warrants to non-employees and issuance of common stock to 401(k) Plan |                                  
|                                                                       |                                                                                                          | Common stock issued in connection with settlement agreement                                                                                                       |                                  
|                                                                       |                                                                                                          | Compensation expense related to acceleration of stock option vesting schedule                                                                                     |                                  
|                                                                       |                                                                                                          | Cumulative effect of changes in accounting principles                                                                                                             |                                  
|                                                                       |                                                                                                          | Changes in operating assets and liabilities, net of effects of acquisitions:                                                                                      |                                  
|                                                                       |                                                                                                          |                                                                                                                                                                   | Accounts receivable              
|                                                                       |                                                                                                          |                                                                                                                                                                   | Unbilled contract costs and fees 
|                                                                       |                                                                                                          |                                                                                                                                                                   | Prepaid expenses and other assets
|                                                                       |                                                                                                          |                                                                                                                                                                   | Inventory                        
|                                                                       |                                                                                                          |                                                                                                                                                                   | Other long-term assets           
|                                                                       |                                                                                                          |                                                                                                                                                                   | Accounts payable                 
|                                                                       |                                                                                                          |                                                                                                                                                                   | Accrued expenses and payroll     
|                                                                       |                                                                                                          |                                                                                                                                                                   | Other current liabilities        
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|                                                                       |                                                                                                          | Total adjustments                                                                                                                                                 |                                  
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Net cash used in operating activities                                  |                                                                                                          |                                                                                                                                                                   | (15,339,425                      
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Cash flows from investing activities:                                  |                                                                                                          |                                                                                                                                                                   |                                  
|                                                                       | Purchases of marketable securities                                                                       |                                                                                                                                                                   |                                  
|                                                                       | Sales of marketable securities                                                                           |                                                                                                                                                                   |                                  
|                                                                       | Patent and intangible expenditures                                                                       |                                                                                                                                                                   |                                  
|                                                                       | Purchases of property and equipment                                                                      |                                                                                                                                                                   |                                  
|                                                                       | Acquisitions, net of cash acquired                                                                       |                                                                                                                                                                   |                                  
|                                                                       | Investment in Beacon Power Corporation                                                                   |                                                                                                                                                                   |                                  
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Net cash provided by (used in) investing activities                    |                                                                                                          |                                                                                                                                                                   | 6,821,073                        
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Cash flows from financing activities:                                  |                                                                                                          |                                                                                                                                                                   |                                  
|                                                                       | Proceeds from long-term debt                                                                             |                                                                                                                                                                   |                                  
|                                                                       | Repayment of long-term debt                                                                              |                                                                                                                                                                   |                                  
|                                                                       | Net proceeds from issuance of common stock                                                               |                                                                                                                                                                   |                                  
|                                                                       | Proceeds from exercise of stock options and payment of amounts receivable from exercise of stock options |                                                                                                                                                                   |                                  
|                                                                       | Proceeds from exercise of warrants                                                                       |                                                                                                                                                                   |                                  
|                                                                       | Deferred equity financing costs                                                                          |                                                                                                                                                                   |                                  
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Net cash (used in) provided by financing activities                    |                                                                                                          |                                                                                                                                                                   | (331,824                         
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Effect of foreign currency exchange rates on cash and cash equivalents |                                                                                                          |                                                                                                                                                                   | (80,983                          
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Net (decrease) increase in cash and cash equivalents                   |                                                                                                          |                                                                                                                                                                   | (8,931,159                       
|Cash and cash equivalents at beginning of year                         |                                                                                                          |                                                                                                                                                                   | 11,051,465                       
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  
|Cash and cash equivalents at end of year                               |                                                                                                          | $                                                                                                                                                                 | 2,120,306                        
|                                                                       |                                                                                                          |                                                                                                                                                                   |                                  

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

51

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SATCON TECHNOLOGY CORPORATION    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.    ORGANIZATION AND BASIS OF PRESENTATION

Organization

SatCon Technology Corporation (the "Company" or "SatCon") was organized as a Massachusetts corporation in February 1985 and reincorporated in Delaware in 1992.
SatCon is developing enabling technologies for the emerging critical power marketplace where power quality and uninterruptible power are important. SatCon designs, develops and manufactures
high-efficiency high power electronics and a variety of standard and custom high-performance machines for specific applications. SatCon's critical power products convert, store
and manage electricity for businesses and consumers, the U.S Government and military that require high-quality, uninterruptible power. SatCon is utilizing its engineering and manufacturing
expertise to develop products that it believes will be integral components of distributed power generation and power quality systems. SatCon's specialty motors are typically designed and manufactured
for unique customer requirements such as high power-to-size requirements or high efficiency.

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



All
of these acquisitions were accounted for using the purchase method of accounting. In addition, in November 1999, the Company acquired intellectual property, tooling and other
assets from Northrop Grumman Corporation and in September 2002, the Company acquired certain intellectual property, equipment and other assets from Sipex Corporation. See Note R.

Basis of Consolidation

The consolidated financial statements include the accounts of SatCon and its majority-owned subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.

B.    REALIZATION OF ASSETS AND LIQUIDITY

The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates
continuation of the Company as a going concern. However, the Company has sustained substantial

52

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losses
from operations in recent years. In addition, the Company has used, rather than provided, cash in its operations.

The
Company needs an infusion of equity capital to sustain its operations. The Company anticipates that its existing cash and cash resources will enable it to fund its operations through
only approximately January 15, 2003. As more fully discussed below, if Silicon Valley Bank, the Company's senior lender, decides to discontinue lending, which it has the right to do, or the
Company is unable to raise additional equity by January 15, 2003, it will be forced to furlough or permanently lay off a significant portion of its work force which will have a material adverse
impact. Under these circumstances, the Company may not be able to continue its operations. Further, without additional cash resources, the Company may not be able to keep all or significant portions
of its operations going for a sufficient period of time to enable it to sell all or portions of its assets or operations at other than distressed sale prices.

The
Company has incurred significant costs to develop its technologies and products. These costs have exceeded total revenue. As a result, the Company has incurred losses in each of the
past five years. As of September 30, 2002, it had accumulated deficit of $85.2 million. During the fiscal year ended September 30, 2002, the Company incurred a loss of $20.8
million and a reduction in is cash from $20.9 million to $2.1 million.

However,
even with a reduced cost structure, the Company needs to achieve levels of quarterly revenue, which it has failed to achieve in the past, in order to reach an estimated
breakeven cash run rate. Assuming the Company can execute its current operating plan, it does not expect to achieve a breakeven cash run rate until the fourth quarter of fiscal year 2003 at the
earliest. As a result, because the Company had only $2.1 million in cash at the end of fiscal 2002, it will need significant borrowing capacity and additional capital, in the aggregate, in
order to fund its current business plan for the next 12 months. It may also need additional future funds in order to fund unanticipated operating losses, to grow, to develop new or existing products
and services and to respond to competitive pressures.

During
December 2002, the Company became in default, as defined, of its Loan and Security Agreement, dated September 13, 2002 (the "Loan Agreement"). As of
September 30, 2002, no amount was payable under the Loan Agreement. As of December 19, 2002, $885,527 was outstanding. On December 19, 2002, the Company entered into a Forbearance
Agreement under which the Loan Agreement was extended until January 15, 2003, subject to certain terms and conditions, as defined.

In
view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is
dependent upon the continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, on a continuing basis, including raising permanent
equity, to maintain present financing, and to succeed in its future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Management
of the Company intends to take the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability
to continue its existence:



53

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However,
there can be no assurance that the Company will be successful in consummating the equity transaction with the institutional investor on schedule and the amount planned and
amending its Loan Agreement with the Bank on schedule with acceptable terms. If both of these transactions are not
completed with terms and the timetable envisioned, the Company will likely be forced to furlough or permanently lay off a significant portion of its workforce which will have a material adverse effect
on its financial position and results of operations. Further, without additional cash resources, the Company, may not be able to keep all or significant portions of its operations going for a
sufficient period of time to enable it to sell all or a portion of its assets or operations at other than distressed sale prices.

C.    SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 101,Revenue
Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has
occurred and the Company has determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped FOB shipping point
except for certain foreign shipments. If the product requires installation to be performed by 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. The Company provides for a warranty reserve at the time the product revenue is recognized.

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. Any losses incurred in performing funded research and development projects are
recognized as research and development expense as incurred. As of September 30, 2002 and 2001, the Company has accrued $150,000 and $75,000, respectively, for anticipated contract losses on
commercial contracts. For the fiscal years ended September 30, 2002, 2001 and 2000, revenue from commercial contracts, which represents other revenue, is included in funded research and
development and other revenue and amounted to $203,254, $662,614 and $763,023, respectively.

Cost
of product revenue includes cost of product revenue including material, labor and overhead. Costs incurred in connection with funded research and development and other revenue
arrangements are included in research and development and other revenue expenses. For the fiscal years ended September 30, 2002, 2001 and 2000, costs and expenses from commercial contracts,
which represents

54

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other
revenue expenses, are included in funded research and development and other revenue expenses and amounted to $182,406, $484,982 and $397,527, respectively.

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

Cash and Cash Equivalents

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

Marketable Securities

The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115, investments are classified as held to
maturity, available for sale or trading.

Management
determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such determination at each balance
sheet date. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale.

Securities
available for sale are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity except for unrealized losses determined to be permanent in nature. Such unrealized losses are included in the determination of net income in the period in which management
determines the decline to be permanent. The Company is not actively involved in the purchase and sale of investments classified as
trading. At September 30, 2002, the Company had no investments that qualified as trading or held to maturity.

The
amortized cost of debt securities classified as available for sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are
included in interest income. Realized gains and losses are included in other income or loss. The cost of securities sold is based on the specific identification method.

Inventory

Inventories are 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.

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 LivesComputer equipment and software

35 yearsElectronic laboratory and shop equipment

5 yearsMechanical laboratory and shop equipment

10 yearsSales and demonstration equipment

310 yearsFurniture and fixtures

710 yearsLeasehold improvements

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


55

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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 other income.

Long-lived Assets

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

The Company completed the first step of the transitional goodwill impairment test during the three months ended March 30, 2002 based on the amount of goodwill as of the beginning
of fiscal year 2002, as required by SFAS No. 142. The Company determined the fair value of each of the reporting units based on a discounted cash flow income approach. The income approach
indicates the fair value of a business enterprise based on the discounted value of the cash flows that the business can be expected to generate in the future. This analysis is based upon projections
prepared by the Company and data from sources of publicly available information available at the time of preparation. These projections were based on a strategic plans conducted by each business unit
using financial projections for a 3 to 5 year time horizon and represented managements best estimate of future results. In making these projections, the Company considered the markets it was
addressing, the competitive environment and its 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 performed a macro assessment of the overall likelihood that it would achieve the projected cash flows and performed sensitivity analysis
using historical data as the basis for projected cash flows. Based on the results of the first step of the transitional goodwill impairment test, the Company determined that the fair value of each of
the reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of October 1, 2001. As a result, the second step of the transitional goodwill impairment
test was not required to be completed. The Company performed a goodwill impairment test as of the beginning of its fiscal fourth quarter 2002, as required by SFAS No. 142 on an annual basis.
The Company again determined the fair value of each of the reporting units based on a discounted cash flow income approach consistent with the initial test. Based on the results of the first step of
the annual goodwill impairment test, the Company determined that the fair value of each of the reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of the
beginning of its fiscal fourth quarter 2002. As a result, the second step of



the annual goodwill impairment test was not required to be completed. The Company will continue to perform a goodwill impairment test on an annual basis and on an interim basis, if certain conditions
exist.

The
Company did not record expense related to the amortization of goodwill during the fiscal year ended September 30, 2002. The Company recorded expense related to the
amortization of goodwill of $638,864 during the fiscal year ended September 30, 2001. 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 of $618,118 and $674,732 during the fiscal year ended
September 30, 2002 and 2001, respectively.

56

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Goodwill
by reporting segment consists of the following:

September 30,Reporting Unit2002

2001Applied Technology

$
123,714

$
123,714Power Systems


5,530,291


5,530,291Electronics


580,648


580,648$
6,234,653

$
6,234,653


Intangible
assets consist of the following:

|                   |  |                                |  |       |  | As of September 30, 2002 |           | As of September 30, 2001
|------------------ |  | ------------------------------ |  | ----- |  | ------------------------ | --------- | ------------------------
|
|Applied Technology |  | Patents                        |  | 1520 |  | $                        | 755,748   |                         
|Applied Technology |  | Completed Technology           |  | 10    |  |                          | 3,142,882 |                         
|Applied Technology |  | Favorable Lease                |  | 5     |  |                          | 36,999    |                         
|Applied Technology |  | Transition Service Agreement   |  | 3     |  |                          | 101,542   |                         
|Power Systems      |  | Customer List                  |  | 5     |  |                          | 125,000   |                         
|Power Systems      |  | Drawings and Documentation     |  | 5     |  |                          | 194,250   |                         
|Power Systems      |  | Completed Technology           |  | 5     |  |                          | 260,000   |                         
|Electronics        |  | Customer List                  |  | 10    |  |                          | 250,000   |                         
|Electronics        |  | Drawings and Documentation     |  | 10    |  |                          | 300,000   |                         
|Electronics        |  | Design and Manufacturing Cert. |  | 10    |  |                          | 700,000   |                         
|                   |  |                                |  |       |  |                          |           |                         
|                   |  |                                |  |       |  | $                        | 5,866,421 |                         
|                   |  |                                |  |       |  |                          |           |                         

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

Year Ended September 30,2003

$
665,9192004

$
604,9382005

$
592,2122006

$
575,0752007

$
481,997


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The following table reconciles the Company's net loss and per weighted average share amounts before the cumulative effect of changes in accounting
to net loss and per weighted average share amounts adjusted for the amortization of goodwill.

For the Years Ended September 30,2002

2001

2000Net loss attributable to common stockholders before cumulative effect of changes in accounting principles

$
(20,760,598
)
$
(22,156,013
)
$
(13,047,033
)Amortization of goodwill





638,864


609,855Adjusted net loss attributable to common stockholders before cumulative effect of changes in accounting principles

$
(20,760,598
)
$
(21,517,149
)
$
(12,437,178
)Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted

$
(1.25
)
$
(1.51
)
$
(1.03
)Amortization of goodwill





0.04


0.05Adjusted net loss before cumulative effect of changes in accounting principles

$
(1.25
)
$
(1.47
)
$
(0.98
)


Foreign Currency Translation

The functional currency of the Company's foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries are translated at the rates in
effect at the balance sheet date, while stockholders' equity (deficit) 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 loss. Foreign currency gains and losses arising from transactions are reflected in the loss from
operations and were not significant during the fiscal years ended September 30, 2002, 2001 and 2000.

Treasury Stock

The Company was authorized to repurchase up to 5% of the Company's outstanding shares of common stock through July 2000. Under the repurchase program, the
Company purchased 44,500 shares of the Company's outstanding common stock at a cost of $249,704. During the fiscal year ended September 30, 2001, the Company retired the 44,500 shares purchased
under the repurchase program.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, 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. 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.

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Stock-based Compensation

SFAS No. 123,Accounting for Stock-Based Compensation, requires the measurement of the fair value of stock
options or warrants granted to employees to be included in the statement of operations or, alternatively, disclosed in the notes to consolidated financial statements. The Company accounts for
stock-based compensation of employees under the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to
Employees, and has elected the disclosure-only alternative under SFAS No. 123. The Company records the fair value as determined using the Black-Scholes
option-pricing model of stock options and warrants granted to non-employees in exchange for services in accordance with Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and is
amortized ratably over the period the service is performed in the consolidated statement of operations.

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 available 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.

Concentration of Credit Risk

Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, marketable securities, trade accounts
receivable, unbilled contract costs and amounts receivable from exercise of stock options.

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 or unbilled contract costs
and fees from individual customers or groups of customers in any particular industry or geographic area.

The
Company deposits its cash and invests in short-term investments primarily through a regional commercial bank and an investment company. Credit exposure to any one entity
is limited by Company policy.

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development and other revenue expenses include 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, change in unrealized gains and losses on marketable securities, change in unrealized gains and losses on investment
in Beacon Power and foreign currency translation adjustments.

59

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Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, unbilled contract costs and fees, warrants
to purchase shares of common stock, accounts payable, debt instruments and contingent obligation to the common stock warrant holders. The estimated fair values of these financial instruments
approximate their carrying values at September 30, 2002 and 2001. The estimated fair values have been determined through information obtained from market sources and management estimates.

Accounting for Derivative Instruments

On October 1, 2000, the Company adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities, which establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments at fair value. Upon adoption of SFAS No. 133, the Company recorded an unrealized loss on its investment in
derivatives, consisting of warrants to purchase Mechanical Technology Incorporated common stock in its results of operations as a cumulative effect of a change in accounting principle of $1,021,725 to
reflect the impact of adopting this accounting standard on October 1, 2000.

In September 2000, the Emerging Issues Task Force issued EITF 00-19,Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock, which requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be
designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value, with any
changes in fair value recorded in the results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required. In accordance
with EITF 00-19, the Company has determined that outstanding warrants as of September 30, 2001 to purchase 100,000 shares of the Company's Common Stock issued to Mechanical
Technology Incorporated should be designated as a liability and warrants to purchase 605,050 shares of the Company's Common Stock are designated as an equity instrument. Effective June 30,
2001, all warrants designated as a liability must be recorded as a liability and therefore, the Company reclassified the warrants designated as a liability from equity to liabilities, which had a fair
value on the issuance date of $1,505,421, using the Black-Scholes option-pricing model. At September 30, 2001, the outstanding warrants designated as a liability, as a result of the warrant
holders having rights that rank higher than those of common stockholders, have been recorded at a fair value of $234,699 through a reduction of $1,270,722 in the fair value included in the results of
operations of which $854,113 is included in cumulative effect of changes in accounting principles and $416,609 is included in net unrealized loss on warrants to purchase common stock. Effective
December 28, 2001, the Company amended these warrants, removing the provisions providing the warrant holders with rights that rank higher than those of common stockholders. As a result of the
amendment, these warrants meet the criteria of equity instruments in accordance with EITF 00-19 and, therefore, the Company reclassified the value of these warrants to equity from
liabilities.

To summarize, during the fiscal year ended September 30, 2001, the Company recorded a charge of $1,021,725 for the adoption of SFAS No. 133 offset by $854,113 for the
adoption of EITF No. 00-19, for a net charge to cumulative effect of changes in accounting principles of $167,612.

Accounting for Beneficial Conversion Feature

In November 2000, the Emerging Issues Task Force issued EITF 00-27,Application of Issue
No. 98-5 to Certain Convertible Instruments, which provides guidance on the calculation of a beneficial conversion feature on a convertible instrument as it
relates to measuring the intrinsic value using the effective conversion price based on the proceeds allocated to convertible instruments. Based upon this

60

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guidance, the Company has determined that the redeemable preferred stock issued in August 1999 and converted into the Company's Common Stock in March 2000 had a beneficial conversion
feature of $1,940,798. Under the guidance of EITF 00-27, the Company was required to record the beneficial conversion feature of $1,940,798 as a cumulative effect of a change in accounting
principle upon adoption during the fiscal year ended September 30, 2001.

Reclassifications

Certain prior-year balances have been reclassified to conform to current-year presentations.

Recent Accounting Pronouncements

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

In
April, 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 rescinds SFAS No. 4,Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that statement, SFAS No. 44,Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements. This statement amends SFAS No. 13,Accounting for
Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions and is
effective for fiscal years beginning after May 15, 2002. The Company is currently reviewing this statement to determine its effect on its consolidated financial statements.

61

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

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

D. MARKETABLE SECURITIES

At September 30, 2001, marketable securities have been categorized as available for sale, and as a result, are stated at fair value.

As
of September 30, 2001, marketable securities consisted of the following:

|Security Category         |  | Contracted
Maturities         |  | Amortized
Cost Basis |           | Aggregate
Fair Value |   | Gross
Unrealized
Gains |  | Gross
Unrealized
(Losses)
|------------------------- |  | ----------------------------- |  | -------------------- | --------- | -------------------- | - | ---------------------- |  | -------------------------
|Corporate Debt
Securities |  | May 2004 through October 2004 |  | $                    | 9,845,950 |                      | $ | 9,872,317              |  | $                        
|                          |  |                               |  |                      |           |                      |   |                        |  |                          
|Total                     |  |                               |  | $                    | 9,845,950 |                      | $ | 9,872,317              |  | $                        
|                          |  |                               |  |                      |           |                      |   |                        |  |                          

The
change in net unrealized gains during the fiscal year ended September 30, 2001 was $26,367 and is included in the balance sheet in a separate component of stockholders'
equity, net of tax effect. Proceeds from sales of marketable securities during fiscal year 2002, 2001 and 2000 were $9,889,273, $0 and $0, respectively. Gross realized gains from sale of securities
classified as available for sale during fiscal year 2002, 2001 and 2000 were $16,956, $0 and $0, respectively.

E.    UNBILLED CONTRACT COSTS AND FEES

Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not yet been
recognized as revenue or billed to the customer. These amounts included retained fee and unliquidated costs totaling $66,699 and $173,685 at September 30, 2002 and 2001, respectively.

62

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F.    INVENTORY

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

September 30,2002

2001Raw material

$
6,251,301

$
6,146,102Work-in-process


3,216,982


3,297,713Finished goods


777,739


1,969,801$
10,246,022

$
11,413,616


The
provision for excess and obsolete inventory for the fiscal years ended September 30, 2002, 2001 and 2000 was $2,598,190, $1,153,564 and $658,774, respectively. The fourth
quarter of the fiscal year ended September 30, 2002 includes a provision of $1,290,190 for excess and obsolete inventory as compared to $153,165 during the fourth quarter of the fiscal year
ended September 30, 2001. The fourth quarter of 2002 provision includes approximately $800,000 for inventory related to residential fuel cell and battery UPS products. Based on the Company's
strategic business plan to focus its efforts on its rotary UPS systems, the Company deemed it appropriate during the fourth quarter to establish these reserves.

G.    PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

September 30,2002

2001Machinery and equipment

$
10,130,300

$
9,506,275Furniture and fixtures


517,092


475,457Computer software


1,281,420


1,094,840Leasehold improvements


3,557,961


1,340,46315,486,773


12,417,035Less: accumulated depreciation and amortization


(6,247,410
)

(4,638,131
)$
9,239,363

$
7,778,904


Depreciation
and amortization expense relating to property and equipment for the fiscal years ended September 30, 2002, 2001 and 2000 was $1,652,500, $1,233,273 and $808,577,
respectively.

As
of September 30, 2002 and 2001, there was $1,810,503 of property under capital leases included in machinery and equipment, respectively. Of these capital leases, $1,459,750
relates to asset purchases made during the fiscal year ended September 30, 2000 for which the Company entered into a sale-leaseback transaction during the fiscal year ended
September 30, 2001. As of September 30, 2002 and 2001, there was $29,910 of property under capital leases that were included in computer software.

As of September 30, 2002 and 2001, accumulated depreciation and amortization included $329,915 and $138,894, respectively, associated with these capital leases.

During
the fiscal year ended September 30, 2001, the Company consolidated its Electronics manufacturing facilities, and as a result, had written-off the net book value
of the leasehold improvements of the vacated premise of $32,767, which has been included in cost of product revenue.

63

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H.    INVESTMENT IN BEACON POWER CORPORATION

During the fiscal years ended September 30, 2000 and substantially all of the fiscal year ended September 30, 2001, the Company accounted for its
investment in Beacon Power under the equity method of accounting. During the fiscal years ended September 30, 2001 and 2000, the Company recorded $5,065,034 and $899,493, respectively, of
losses from Beacon Power, representing the Company's share of losses up to the extent of committed capital.

On
November 17, 2000, Beacon Power listed its common stock on the NASDAQ National Market. In connection with the listing, the put right granted to the Class D preferred
stockholders of Beacon Power was terminated and the contingent obligation to Class D preferred stockholders of Beacon Power was reclassified to additional paid-in capital.

On
November 22, 2000, Beacon Power completed an initial public offering of its common stock and issued 8,000,000 shares of its common stock at $6.00 per share. Upon the closing of
Beacon Power's initial public offering, each share of Beacon Power's class A, C, D, E and F preferred stock was converted into two shares of Beacon Power's common stock, or 29,359,530 shares of
common stock, of which the Company received 9,691,440 shares of Beacon Power's common stock. In addition, upon the closing of Beacon Power's initial public offering, Beacon Power issued 873,794 shares
of common stock in payment for consulting fees and accrued dividends on Beacon Power's class D and E preferred stock, of which the Company received 11,098 shares of Beacon Power's common stock.
After these events, the Company owned approximately 25.0% of Beacon Power's outstanding voting stock. In accordance with SAB No. 51, the Company's investment in Beacon Power and additional
paid-in capital was written up to reflect its beneficial interest in the book value of the stockholders' equity of Beacon Power at November 22, 2000, which was $14,988,382, less
losses previously recorded in connection with the put right obligation in the amount of $5,831,879 for a net gain of $9,156,503. On December 19, 2000, Beacon Power issued an additional
1,200,000 shares of its common stock at $6.00 per share to cover over-allotments. Upon the issuance of the additional 1,200,000 shares, the Company owned approximately 24.2% of Beacon
Power's outstanding voting stock. The Company's investment in Beacon Power and additional paid-in capital was written up in accordance with SAB No. 51 to reflect its beneficial
interest in the increase in book value of the stockholders' equity of Beacon Power at December 19, 2000, which was $1,622,721. On December 20, 2000, Beacon Power issued 985,507 shares of
its common stock in connection with the cashless exercise of warrants to purchase shares of Beacon Power's common stock. Upon the issuance of the additional 985,507 shares, the Company owned
approximately 23.7% of Beacon Power's outstanding voting stock. On December 22, 2000, Beacon Power issued 997,369 shares of its common stock in connection with the
cashless exercise of warrants to purchase shares of Beacon Power's common stock. Upon the issuance of the additional 997,369 shares, the Company owned approximately 23.1% of Beacon Power's outstanding
voting stock.

After
the write-up of its investment in Beacon Power, the Company continued to account for its investment in Beacon Power under the equity method of accounting and recorded
its share of losses from Beacon Power on a one fiscal quarter trailing basis.

On September 28, 2001, the Company distributed 5,000,000 shares of Beacon Power common stock to its stockholders. Upon the distribution of the 5,000,000 shares, the Company
recorded the distribution of the 5,000,000 shares as a reduction of additional paid-in-capital based on the book value per share prior to the distribution, or $0.59 per share.
After the distribution, the Company owned approximately 11.0% of Beacon Power's outstanding voting stock. Additionally, the Company has determined that it does not have the ability to exercise
significant influence over the operating and financial policies of Beacon Power and, therefore, now accounts for its investment in Beacon Power using the fair value method as set forth in SFAS
No. 115,Accounting for Certain Debt and Equity Securities. The Company is no longer required to record its share of any losses from Beacon Power
and the investment is carried at fair value and designated as available for sale and any unrealized holding

64

---

gains or losses to be included in stockholders' equity as a component of accumulated other comprehensive income/(loss) so long as any unrealized losses are deemed temporary in nature. If the decline
in fair value is judged to be other than temporary, the cost basis shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in the statement of
operations. The new cost basis shall not be changed for subsequent recoveries in fair value. Subsequent increases in the fair value shall be included in stockholders' equity as a component of
accumulated other comprehensive income/(loss). Subsequent decreases in fair value, if not an other-than-temporary impairment, also shall be included in stockholders' equity as a component of
accumulated other comprehensive income/(loss).

As of September 30, 2002, the quoted fair market value of Beacon Power's common stock held by the Company was $0.17 per share, or $800,005. The Company's historical cost basis in its
investment in Beacon Power's common stock was approximately $0.59 per share, or $2,788,949, resulting in an unrealized loss of $1,988,944 as of September 30, 2002. The Company determined that of this
$1,988,044, $1,400,000 represented an other than temporary decline based on the extent and length of time the stock has been below its cost basis as well as its assessment of the financial condition
and near term prospects of Beacon Power. The Company recorded a charge of $1,400,000 in the statement of operations to realize this portion of the loss. This charge was measured based on the trading
value of Beacon Power's common stock during the month of November and early December and was less than the gross unrealized loss due to subsequent recovery of Beacon Power's stock price, as well as
the Company's ability and intent to hold the stock for a long enough period of time for it to recover to the new cost basis. After this write-down, the new cost basis of the Beacon Power common stock
held by the Company is approximately $0.30 per share and the unrealized loss of the Beacon Power common stock held by the Company was $588,944 as of September 30, 2002.

The following summarizes the Company's investment in Beacon Power Corporation:

|                       |  | As of September 30, 2002 |            | As of September 30, 2001
|---------------------- |  | ------------------------ | ---------- | ------------------------
|
|Carrying Value         |  | $                        | 800,005    |                         
|Cost                   |  | $                        | 1,388,949  |                         
|Unrealized Gain/(Loss) |  | $                        | (588,944   | )                       
|Realized Loss          |  | $                        | (1,400,000 | )                       

Additionally, the Company has a warrant to purchase 173,704 shares of Beacon Power's common stock that has an exercise price of $1.25 per share and expires in 2005. The Company accounts
for this warrant in accordance with SFAS No. 133 and, therefore, records the warrant at its fair value. As of September 30, 2002 and 2001, the warrant to purchase Beacon Power common
stock had a fair value of $14,365 and $201,436, respectively, and is included in warrants to purchase common stock on the accompanying balance sheets.

Beacon
Power accounted for $226,159, $242,460 and $470,996 of the Company's total revenue for the fiscal years ended September 30, 2002, 2001 and 2000, respectively. At
September 30, 2002 and 2001, the Company had $0 and $172,598, respectively, of accounts receivable and unbilled contract costs and fees from Beacon Power.

I.    LINE OF CREDIT

On September 13, 2002, the Company entered in a Loan and Security Agreement obtaining a $5 million revolving line of credit (the "Loan") with
Silicon Valley Bank (the "Bank"). Interest on outstanding borrowings accrues at a rate equal the greater of (i) 6.75% per annum or (ii) at the Bank's

65

---

prime
rate of interest plus 2%. The Loan is secured by most of the assets of the Company and is formula based with a 75% draw against eligible accounts receivables, as defined. As of
September 30, 2002, there were no amounts outstanding under the Loan. Based on eligible accounts receivables at September 30, 2002, the Company had $3 million available for
borrowing. The terms of the Loan require the Company to raise $4 million of subordinated debt or equity by December 1, 2002. In addition, the Loan contains certain financial covenants.
The Loan matures on September 12, 2003. See Note B.

J.    LONG-TERM DEBT

Long-term debt consists of the following:

September 30,2002

2001Capital lease obligations

$
1,039,487

$
1,371,311Less: Current portion


(266,808
)

(331,824
)$
772,679

$
1,039,487


At
September 30, 2002, maturities of these obligations are as follows:

Fiscal Year

Principal

Interest

Total2003

$
266,808

$
99,925

$
366,7332004


271,090


70,696


341,7862005


190,412


46,044


236,4562006


311,177


5,585


316,7622007








$
1,039,487

$
222,250

$
1,261,737


On
March 1, 1999, the Company reached a definitive settlement arrangement with Albert R. Snider (the "Settlement Agreement"), the holder of a note payable that commenced on
April 16, 1997, regarding a suit filed against Mr. Snider for breach of certain representations made by him, including statements of inventory balances in the Asset Purchase Agreement
dated as of April 3, 1997 between FMI and Mr. Snider relating to the purchase of the business of FMI and a counterclaim filed by Mr. Snider seeking, among other things, payments
allegedly due from the Company under a promissory note.

Pursuant
to the terms of the Settlement Agreement, the Company made a $100,000 cash payment to Mr. Snider on March 9, 1999 and the parties executed mutual general releases
dismissing any and all claims between them. In addition, the Settlement Agreement provides a right of first refusal in favor of the Company with respect to certain shares of the Company's Common
Stock, beneficially owned by Mr. Snider. Concurrently with the execution of the Settlement Agreement, the Company and Mr. Snider entered into a consulting agreement pursuant to which
Mr. Snider would perform certain consulting, advisory and related services as the Company may reasonably request from time to time between October 1, 1999 and October 1, 2002. In
exchange for these services, the Company issued 42,860 shares of its Common Stock to Mr. Snider, which were held by an escrow agent. The Company has recorded these shares held in escrow at
market value and as a reduction to stockholders' equity as of September 30, 1999.

On
April 26, 2000, the escrow agent, as authorized by the Company released the 42,860 shares of the Company's Common Stock that were held in escrow to Mr. Snider. The
Company recorded these securities at fair value until they were released from escrow at a market price of $16.00 per share or $685,760. The Company determined that the value of these securities
exceeded the net realizable value

66

---

of
the underlying services to be received by $235,760. The Company has charged this excess amount to selling, general and administrative expenses during the fiscal year ended September 30,
2000. The Company was amortizing the realizable asset of $450,000 over the three-year period of service through September 30, 2002. At September 30, 2001, the Company
determined that the services provided under the consulting agreement will no longer be requested and has written off the unamortized asset of $150,000 to selling, general and administrative expenses
during the fiscal year ended September 30, 2001.

K.    COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facilities under various operating leases that expire through October 2010. The Company has also entered into leasing agreements to
lease various items of equipment.

Future
minimum annual rentals under lease agreements at September 30, 2002 are as follows:

Fiscal Year2003

$
2,214,8462004


739,5702005


501,1082006


262,3672007


264,000Thereafter


904,000Total (not reduced by minimum sublease rentals of $177,116)

$
4,885,891


Total
rental expense including operating expenses and real estate taxes for operating leases amounted to $2,884,385, $2,727,286 and $2,157,506 for the fiscal years ended
September 30, 2002, 2001 and 2000, respectively.

Certain
of the facility leases contain escalation clauses, effective October 1, 1998 and rental expense has been recognized on a straight-line basis over the remaining
lease term. At September 30, 2002 and 2001, deferred rent expense amounted to $135,622 and $175,700, respectively.

Letters of Credit

The Company utilizes a standby letter of credit to satisfy security deposit requirements. This letter of credit is irrevocable and has a one-year
renewable term. Outstanding standby letters of credit as of September 30, 2002 and 2001 was $70,000. The Company is required to pledge cash as collateral on these outstanding letters of credit.
As of September 30, 2002 and 2001, the cash pledged as collateral for these letters of credit was $68,467 and $66,916, respectively, and is included in cash and cash equivalents on the balance
sheet.

Line of Credit Fees

In connection with the loan agreement entered into on September 13, 2002, the Company is committed to the following fees: (1) $1,500 ($750 when not
borrowing) per month; (2) an unused line fee in an amount equal to 0.50% per annum on the difference between $5 million and the average daily principal balance of the loans outstanding
during the month; and (3) a termination fee in the amount equal to (i) $50,000 if a Cancellation Event, as defined, occurs on or before March 13, 2003 or (ii) $25,000 if a
Cancellation Event occurs after March 13, 2003 but prior to September 12, 2003.

67

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Royalty Agreements

In connection with the purchase of certain intellectual property, equipment and other assets from Sipex Corporation ("Sipex") on September 27, 2002, Sipex
will receive royalty payments of up to $183,500 based on cash receipts from existing backlog and between $400,000 and $1,050,000 from cash receipts from new business of Sipex products by the Company
for the subsequent three years.

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 September 30, 2002, the Company's potential minimum obligation to these employees was approximately $1,265,000.

Litigation

From time to time, the Company is a party to routine litigation and proceedings in the ordinary course of business. The Company is not aware of any current or
pending litigation to which the Company is or may be a party that the Company believes could materially adversely affect the Company's results of operations or financial condition or net cash flows.

L.    EMPLOYEE BENEFIT PLAN

The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the Plan, any regular employee, as defined by the Plan, who has completed six months of
service and has attained the age of 21 years is eligible to participate. Under the terms of the Plan, an employee may defer up to 15% of his or her compensation through contributions to the
Plan. During 1999, the Company extended the Plan to its wholly-owned U.S. subsidiaries. During 2002, the Company amended the Plan to, among other things, (1) allow any employee to be eligible
to participate on his or her hire date; (2) allow an employee to defer up to 100% of his or her compensation, as limited under IRC Section 402(g), through contributions to the Plan;
(3) increase the Company's match to 100% in the Company's common stock up to the first 6% of an employee's pay that he or she contributes to the Plan; and (4) make matching contributions
in the Company's common stock which will be 100% vested. The match contribution will be determined in dollars and converted to shares of the Company's common stock using the share price of the last
business day of each calendar quarter. The Company recorded matching contributions to the Plan of $772,068, $398,281 and $366,264 during the fiscal years ended September 30, 2002, 2001 and
2000, respectively. During 2002, the Company issued 202,049 shares of the Company's common stock valued at $423,091 as matching contributions to the Plan.

68

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M.    INCOME TAXES

The provision for income taxes consists of the following:

For the Years Ended September 30,2002

2001

2000Current payable:Federal







$
(14,699
)State








Foreign








14,699





Deferred tax expense/(benefit):Federal

$
(6,097,603
)
$
(4,748,257
)
$
(2,962,183
)Foreign





(250,953
)

State


(1,870,065
)

(1,465,988
)

(890,122
)Change in valuation allowance


7,967,668


6,465,198


3,852,305














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 September 30, 2002 and 2001, the components of the net deferred tax assets/(liabilities) are as follows:

2002

2001Federal net operating loss

$
20,763,994

$
15,695,932State net operating loss, net of federal benefit


3,825,551


2,865,093Credits


771,861


572,646Depreciation


(1,231,734
)

(613,991
)Warrants to purchase common stock


625,474


410,235Write-down of investment in Beacon Power Corporation


580,970


Net unrealized gains (losses) on securities available for sale


825,368


(1,837,412
)Other


2,931,366


1,369,897Valuation allowance


(29,092,850
)

(18,462,400
)Net deferred income taxes








A
valuation allowance against the recoverability of net deferred tax assets has been established because more likely than not the Company will not be able to utilize
certain deferred tax assets in future years. The Company has offset certain deferred tax liabilities with deferred tax assets which are expected to generate offsetting deductions within the same
periods. The recognition of a portion of the valuation allowance on the deferred tax asset related to the net unrealized loss on the available for sale securities will subsequently be applied directly
to other comprehensive income

69

---

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

For the Years Ended
September 30,2001

2000

1999Tax at statutory rate

(34.0
)%
(34.0
)%
(34.0
)%State taxes, net of federal benefit

(6.3
)
(4.3
)
(6.2
)Other

(0.7
)
9.3

1.6Change in valuation allowance

41.0

29.0

38.6Effective tax rate


%

%

%


At
September 30, 2002, the Company had net operating loss carry-forwards of approximately $61,000,000 and $44,000,000 for federal and state income tax purposes,
respectively. The federal net operating losses expire beginning September 30, 2007 through 2022. The state net operating losses will expire beginning September 30, 2003 through 2007. The
use of these losses may be limited due to ownership change limitations under Section 382 of the Internal Revenue Code.

N.    STOCKHOLDERS' EQUITY

Investment from Mechanical Technology Incorporated

On October 21, 1999, the Company received a $7,070,000 investment from Mechanical Technology Incorporated ("MTI"). In consideration for MTI's investment,
MTI received 1,030,000 shares of the Company's Common Stock at a discounted price of approximately $6.80 per share, and warrants to
purchase an additional 100,000 shares of the Company's Common Stock at an exercise price of $8.80 per share and an expiration date four years from the date of issuance. MTI funded $2,570,000 of its
investment in the Company on October 21, 1999 and received 370,800 of the 1,030,000 shares of the Company's Common Stock and a warrant to purchase 36,000 of the 100,000 shares of the Company's
Common Stock. MTI made the remaining investment on January 31, 2000 of $4,500,000 and received the remaining 659,200 shares of the Company's Common Stock and a warrant to purchase the remaining
64,000 shares of the Company's Common Stock. The Company incurred approximately $95,000 of legal, accounting, consultation and filing fees in connection with this transaction. The Company has valued
the warrants issued to MTI on October 21, 1999 and January 31, 2000, at $231,912 and $1,273,509, respectively, using the Black-Scholes option-pricing model.

In
addition, the Company received a warrant to purchase 108,000 shares of MTI's common stock on October 21, 1999 and a warrant to purchase 192,000 shares of MTI's common stock on
January 31, 2000 at exercise prices of $12.56 per share, as adjusted to reflect a 3:1 stock split in April 2000, and expiration dates four years from the date of issuance. The Company
has valued the warrant received on October 21, 1999 and January 31, 2000 at $568,553 and $2,926,885, respectively, using the Black-Scholes option-pricing model, and has recorded the
warrants as an asset and additional paid in capital. In accordance with EITF No. 96-11,Accounting for Forward Contracts and Purchased Options to Acquire
Securities Covered by FASB Statement No. 115, options that are entered into to purchase securities that will be accounted for under SFAS No. 115 should, at
inception, be designated as held-to-maturity, available-for-sale, or trading and accounted for in a manner consistent with the accounting prescribed by
SFAS No. 115 for that category of securities. The Company has designated that the securities to be purchased under the warrant agreement will be available-for-sale
securities and, therefore, the Company has marked to market the fair value of the warrants at each reporting period date and has recorded any unrealized gains and losses as a component of accumulated
other comprehensive loss included in stockholders' equity. At September 30, 2000, the warrants have an unrealized loss of $1,021,725, which is included in accumulated other comprehensive loss
included in stockholders' equity.

70

---

On
October 1, 2000, the Company adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, which
establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position
and measure these instruments at fair value. Upon adoption of SFAS No. 133, the Company recorded the $1,024,725 unrealized loss on its investment in warrants to purchase MTI's common stock in
its results of operations as a cumulative effect of a change in accounting principle to reflect the impact of adopting this accounting standard on October 1, 2000. As of September 30,
2002 and 2001, the warrants to purchase MTI's common stock have a fair value of $1,623 and $375,479, respectively, using the Black-Scholes option-pricing model. During the fiscal year ended
September 30, 2002 and 2001, the Company recorded a unrealized loss in its statement of operations on the warrants to purchase MTI's common stock of $373,856 and $2,098,234, respectively.

Stock Options

Under the Company's 1992, 1994, 1996, 1998, 1999, 2000 and 2002 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 up to 5,250,000 shares of the Company's Common Stock. At September 30, 2002, 4,452,344 of the
5,250,000 stock options available for grant under the Plans have been granted.

The
Plans are subject to the following provisions:

The
aggregate fair market value (determined as of the date the option is granted) of the Company's Common Stock that any employee may purchase in any calendar year pursuant to the
exercise of qualified options may not exceed $100,000. No person who owns, directly or indirectly, at the time of the granting of a qualified option to him or her, more than 10% of the total combined
voting power of all classes of stock of the Company shall be eligible to receive any qualified options under the Plans unless the option price is at least 110% of the fair market value of the
Company's Common Stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this limitation.

Qualified
options are issued only to employees of the Company, while non-qualified options may be issued to non-employee directors, consultants and others, as
well as to employees of the Company. Options granted under the Plans may not be granted with an exercise price less than 100% of fair value of the Company's Common Stock, as determined by the Board of
Directors on the grant date.

Options
under the Plans must be granted within 10 years from the effective date of the Plan. Qualified options granted under the Plans cannot be exercised more than
10 years from the date of grant, except that qualified options issued to 10% or greater stockholders are limited to five-year terms. All options granted under the Plans provide for
the payment of the Company's exercise price in cash, or by delivery to the Company of shares of the Company's Common Stock already owned by the optionee having fair market value equal to the exercise
price of the options being exercised, or by a combination of such methods of payment. Generally, the options vest and become exercisable ratably over a four-year period.

The
Plans contain antidilutive provisions authorizing appropriate adjustments in certain circumstances. Shares of the Company's Common Stock subject to options that expire without being
exercised or that are canceled as a result of the cessation of employment are available for further grants.

71

---

A summary of the status of the Company's stock options as of September 30, 2002, 2001 and 2000 and changes for the fiscal years then ended are presented below.

|                                 |           | 2002      |           | 2001 |       | 2000 
|-------------------------------- | --------- | --------- | --------- | ---- | ----- | -----
|
|Outstanding at beginning of year |           | 2,708,073 |           | $    | 11.59 |      
|                                 | Granted   |           | 1,147,500 |      |       | 4.62 
|                                 | Exercised |           |          |      |       |     
|                                 | Canceled  |           | (563,158  | )    |       | 12.10
|                                 |           |           |           |      |       |      
|Outstanding at end of year       |           | 3,292,415 |           | $    | 9.08  |      
|                                 |           |           |           |      |       |      
|Options exercisable at year-end  |           | 1,470,116 |           | $    | 10.17 |      
|                                 |           |           |           |      |       |      

The
following table summarizes information about stock options outstanding as of September 30, 2002.

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$1.13$3.48   |  | 369,000             |  | 9.54               
|$5.00$6.38   |  | 922,225             |  | 8.42               
|$8.05$10.50  |  | 988,540             |  | 6.91               
|$10.56$13.38 |  | 600,800             |  | 7.23               
|$13.81$20.63 |  | 370,850             |  | 7.55               
|$27.06$31.25 |  | 41,000              |  | 7.82               
|              |  |                     |  |                    
|              |  | 3,292,415           |  | 7.77               
|              |  |                     |  |                    

At
September 30, 2002, an additional 797,656 shares were available under the Plans for future grants.

During
1999, the Company granted fully vested and immediately exercisable options to purchase 755,000 shares of the Company's Common Stock to consultants at exercise prices ranging from
$5.75 to $10.00 per share, of which 300,000 stock options were granted outside of the Plans. The Company has recorded the fair value of the options, as determined by the Black-Scholes option-pricing
model, of $2,152,277, to selling, general and administrative expenses during the fiscal year ended September 30, 1999. As of September 30, 1999, options to purchase 450,000 shares at an
exercise price of $7.00 per share were exercised. As of September 30, 1999, the Company received $1,333,333 of cash on these exercises and the remaining amount due from the stockholders is
classified within stockholders' equity as amounts receivable from exercise of stock options. As of September 30, 2001, options to purchase 750,000 shares at exercise prices ranging from $5.75
to $10.00 per share have been exercised. As of September 30, 2001, the Company has received full payment on these exercises.

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
September 30, 2002 and 2001, there were 41,000 and 197,250, respectively, options outstanding, which are included in the above table. As of September 30, 2002, an additional 175,000
shares were available outside of the Board approved Plans for future grants.

Warrants

On August 25, 1999, in connection with the $8 million private placement of 8,000 shares of the Company's Series A Convertible Preferred
Stock, $0.01 par value per share, with Brown Simpson Strategic Growth Funds (see Note O), the Company issued common stock warrants to purchase up to

72

---

120,000
and 675,000 shares of the Company's Common Stock at an exercise price of $7.80 and $8.54, respectively. These warrants expire on August 25, 2003. The Company has valued these warrants
at $2,369,292, using the Black-Scholes option-pricing model. At September 30, 2000, 18,000 shares of the Company's Common Stock had been purchased at an exercise price of $7.80 per share. On
May 25, 2001, the Company issued 675,000 shares of its Common Stock in connection with the exercise of the warrant to purchase 675,000 shares of the Company's Common Stock at an exercise price
of $8.54 per share. The aggregate gross proceeds to the Company as a result of the warrant exercised were $5,764,500. H.C. Wainwright & Co., Inc. received a commission of $230,580 upon
the exercise of these warrants. In connection with the warrant exercise, the Company issued a new warrant to purchase 438,750 shares of the Company's Common Stock at an exercise price of $16.70 per
share. The new warrant has a term of three years. The Company has valued this new warrant at $4,942,508 using the Black-Scholes option-pricing model and has designated the warrant as an equity
instrument in accordance with EITF 00-19. At September 30, 2001, none of these warrants were exercised. On June 1, 2001, the Company issued 102,000 shares of its Common Stock
in connection with the exercise of a warrant to purchase the Company's Common Stock at an exercise price of $7.80 per share. The aggregate gross proceeds to the Company as a result of the warrants
exercised were $795,600. In connection with the warrant exercises, the Company issued new warrants to purchase 66,300 shares of the Company's Common Stock at an exercise price of $16.70 per share. The
new warrants have a term of three years. The Company has valued these new warrants at $707,036 using the Black-Scholes option-pricing model and has designated the warrant as an equity instrument in
accordance with EITF 00-19. At September 30, 2002, none of these warrants were exercised.

On October 21, 1999, in connection with an investment by MTI, the Company issued a warrant to purchase up to 36,000 shares of the Company's Common Stock at an exercise price of
$8.80 per share. On November 26, 2001, pursuant to the antidilutive provisions of this warrant, the Company adjusted the exercise price to $7.84 per share to reflect the effect of the
distribution of the 5,000,000 shares of Beacon Power's common stock to its stockholders. This warrant expires on October 21, 2003. On January 31, 2000, in connection with a second
closing of this investment, the Company issued an additional warrant to purchase up to 64,000 shares of the Company's Common Stock at an exercise



price of $8.80 per share. On November 26, 2001, pursuant to the antidilutive provisions of this warrant, the Company adjusted the exercise price to $7.84 per share to reflect the effect of the
distribution of the 5,000,000 shares of Beacon Power's common stock to its stockholders. This warrant expires on January 31, 2004. The Company valued the warrants issued to MTI on
October 12, 1999 and January 31, 2000 at $231,912 and $1,273,509, respectively, using the Black-Scholes option-pricing model. At September 30, 2001, none of these warrants had
been exercised. At September 30, 2001, the Company valued these warrants at $234,699 and had designated the warrants as a liability in accordance with EITF 00-19, as a result of the
warrant holders having rights that rank higher than those of common stockholders. Effective December 28, 2001, the Company amended these warrants, removing the provisions providing the warrant
holders with right that rank higher than those of common stockholders. As a result of the amendment, these warrants meet the criteria of equity instruments in accordance with EITF 00-19
and, therefore, the Company reclassified the value of these warrants to equity from liabilities.

On
November 16, 1999, in connection with the acquisition of certain intellectual property, equipment and other assets from Northrop Grumman Corporation, the Company issued a
warrant to purchase up to 100,000 shares of the Company's Common Stock at an exercise price of $9.725 per share. The Company has valued this warrant at $631,000 using the Black-Scholes option-pricing
model and has designated the warrant as an equity instrument in accordance with EITF 00-19. As of September 30, 2002, all of this warrant had been exercised.

On
February 4, 2000, the Company issued to Northrop Grumman Corporation an additional warrant to purchase up to 100,000 shares of the Company's Common Stock at an exercise price
of $9.725 per share. This warrant was exercisable upon the occurrence of certain defined events. This

73

---

warrant
expires on December 31, 2006, but since these conditions were not met, this warrant is no longer exercisable.

On
August 23, 2002, in connection with the Investment Banking Agreement with J.P. Turner & Company, LLC, the Company issued a warrant to purchase up to 250,000 shares of
the Company's Common Stock at an exercise price of $1.75 per share and vests in four equal installments. This warrant expires on August 23, 2005. The Company has valued this warrant at $299,925
using the Black-Scholes option-pricing model and has designated the warrant as an equity instrument in accordance with EITF 00-19. At September 30, 2002, none of these warrants were
exercised.

On
September 13, 2002, in connection with the Loan and Security Agreement between the Company and Silicon Valley Bank, the Company issued a warrant to purchase up to 181,951
shares of the Company's Common Stock at an exercise price of $1.374 per share. This warrant expires on September 13, 2007. The Company has valued this warrant at $210,895 using the
Black-Scholes option-pricing model and has designated the warrant as an equity instrument in accordance with EITF 00-19. At September 30, 2002, none of these warrants were
exercised.

A summary of the status of the Company's warrants as of September 30, 2002, 2001 and 2000 and the changes for the fiscal years then ended are presented below.

|                                 |           | 2002      |          | 2001 |       | 2000
|-------------------------------- | --------- | --------- | -------- | ---- | ----- | ----
|
|Outstanding at beginning of year |           | 705,050   |          | $    | 14.45 |     
|                                 | Granted   |           | 431,951  |      |       | 1.59
|                                 | Exercised |           |         |      |       |    
|                                 | Canceled  |           | (100,000 | )    |       | 9.73
|                                 |           |           |          |      |       |     
|Outstanding at end of year       |           | 1,037,001 |          | $    | 9.55  |     
|                                 |           |           |          |      |       |     

Stock-based Compensation

During 2001, the Company accelerated the vesting schedule of a stock option award in connection with an employee termination and recorded a charge of $111,250 to
selling, general and administrative expenses, based on the intrinsic value of the stock options.

Had
compensation cost for the Company's stock-based compensation been determined based on fair value at the grant dates as calculated in accordance with SFAS No. 123, the
Company's net loss and loss per share for the fiscal years ended September 30, 2002, 2001 and 2000 would have been increased to the pro forma amounts indicated below:

|            |  | 2002 |             | 2001 |   | 2000  |  
|----------- |  | ---- | ----------- | ---- | - | ----- | -
|
|As reported |  | $    | (20,760,598 | )    | $ | (1.25 | )
|Pro forma   |  | $    | (25,654,880 | )    | $ | (1.55 | )

The
effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1996
and additional awards in future years are anticipated.

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 assumptions: an expected life of seven years,
expected volatility ranging from 86.0% to 114.4%, no dividends, and risk-free interest rate ranging from 4.00% to 4.50% for the fiscal year ended September 30, 2002; an expected
life of seven years, expected volatility ranging from 96.6% to 125.0%, no dividends, and risk-free interest rate ranging from 4.50% to 5.87% for the

74

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fiscal
year ended September 30, 2001; and an expected life of seven years, expected volatility ranging from 80.1% to 112.3%, no dividends, and risk-free interest rate of 6.17% for
the fiscal year ended September 30, 2000. The weighted average price of the fair value of options granted for the fiscal years ended September 30, 2002, 2001 and 2000 are $3.62, $9.64
and $14.05, respectively.

In
March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25."
This interpretation clarifies the application of APB Opinion No. 25, including (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business combination. The Interpretation is effective July 1, 2000, and the effects of applying the Interpretation
are recognized on a prospective basis. The adoption of this Interpretation did not have a material impact on the Company's financial condition or results of operations.

Common Stock Offering

On October 30, 2000, the Company filed for a public offering of its Common Stock. In connection with this offering, the Company incurred $1,325,606 of
equity financing costs as of March 31, 2001. On April 25, 2001, the Company announced that it would not proceed with this public offering and the Company filed an amendment to the
registration statement it initially filed, converting the filing to a shelf registration statement. Accordingly, the Company has expensed the $1,325,606 costs incurred associated with the initial
registration statement. On June 1, 2001, the Company completed its shelf registration statement and incurred an additional $95,021 in expenses in connection with the shelf registration
statement and has expensed these costs as incurred during the three months ended June 30, 2001.

On
June 6, 2001, the Company issued 1,464,928 shares of its Common Stock at a price of $12.125 per share for gross proceeds of $17,762,252. The Company incurred issuance costs of
$671,679 related to this transaction.

O.    PREFERRED STOCK

The Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.01 par value per share ("Preferred Stock"). 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.

On
August 25, 1999, the Company completed an $8 million private placement of 8,000 shares of its Series A Redeemable Convertible Preferred Stock, $0.01 par value per
share (the "Series A Preferred Stock"), with Brown Simpson Strategic Growth Funds ("Brown Simpson"). The Series A Preferred Stock was convertible into 1,025,641 shares of the Company's
Common Stock, $0.01 par value per share (the "Common Stock").

In
connection with the transaction, Brown Simpson also received warrants to purchase up to 675,000 fully vested and immediately exercisable additional shares of Common Stock at $8.54 per
share (the "Brown Simpson Warrants"). The Brown Simpson Warrants expire on August 25, 2003. The Company has valued these warrants at $1,818,558 based on the fair value of these warrants, as
determined by the Black-Scholes option-pricing model, and has recorded this amount as a discount to the Preferred Stock. In addition, the Company incurred direct costs of $1,338,234 in connection with
this preferred stock offering which have also been recorded as a discount to the Series A Preferred Stock.

H.C.
Wainwright & Co., Inc. ("H.C. Wainwright") served as placement agent for the transaction and received a commission of $560,000 and warrants to purchase 120,000 shares
of the Company's

75

---

Common
Stock at $7.80 per share. These warrants expire on August 25, 2003. H.C. Wainwright will also receive a future fee in the amount of 4% of any monies received by the Company upon the
exercise of the Brown Simpson Warrants. The Company has recorded the fair value of these warrants, as determined by the Black-Scholes option-pricing model, of $550,734 as a discount to the
Series A Preferred Stock.

The
Company valued the Series A Preferred Stock at issuance to be $4,843,208 based on the relative fair market values of the financial instruments issued in connection with this
placement and net of offering costs. The Company was accreting the carrying value of the preferred stock to its redemption value of $8,000,000 at August 25, 2003, using the effective interest
method.

On
March 7, 2000, the preferred stockholders elected to convert all 8,000 shares of the Series A Preferred Stock into 1,025,641 shares of the Company's Common Stock, which
resulted in the accretion of an additional $3,105,888 of the discount on the redeemable preferred stock during the fiscal year ended September 30, 2000.

In
November 2000, the Emerging Issues Task Force issued EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments," which provides guidance on the calculation of a beneficial conversion feature on a convertible instrument. Based upon the guidance provided in EITF
00-27, the Company has determined that the redeemable preferred stock issued in August 1999 and converted into the Company's Common Stock in March 2000 had a beneficial
conversion feature of $1,940,798. Under the guidance of EITF 00-27, the Company is required to record the beneficial conversion feature of $1,940,798 as a cumulative effect of a change in
accounting principle upon adoption during the fiscal year ended September 30, 2001.

P.    SIGNIFICANT CUSTOMERS

Significant customers, 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 year, were as follows:

|                  |                            | Percentage of Total Revenue
Year Ended September 30, |   | Percentage of Accounts Receivable and Unbilled Contract Costs and Fees at
September 30,
|----------------- | -------------------------- | ---------------------------------------------------- | - | ---------------------------------------------------------------------------------------
|
|
|U.S. government:  |                            |                                                      |   |                                                                                        
|                  | U.S. Department of Defense |                                                      | * |                                                                                        
|                  | U.S. Department of Energy  |                                                      | * |                                                                                        
|Applied Materials |                            | *                                                    |   | *                                                                                      
|General Atomics   |                            | 12.0                                                 | % | *                                                                                      

---

76

---

Q.    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Non-Cash Investing and Financing Activities

|                                                                                    |  | Year Ended September 30, |           
|----------------------------------------------------------------------------------- |  | ------------------------ | ----------
|
|Accretion of redeemable convertible preferred stock discount                        |  |                          |          
|Acquisition of equipment under capital leases                                       |  |                          |          
|Contingent obligation to Class D preferred stockholders of Beacon Power Corporation |  |                          |          
|Conversion of redeemable convertible preferred stock to common stock                |  |                          |          
|Common stock held in escrow issued in connection with settlement agreement          |  |                          |          
|Valuation adjustment for common stock held in escrow                                |  |                          |          
|Warrants issued in connection with MTI investment                                   |  |                          |          
|MTI warrant received in connection with MTI investment                              |  |                          |          
|Valuation adjustment for warrants to purchase common stock                          |  | $                        | (560,927  
|Net gain on investment in Beacon Power Corporation                                  |  |                          |          
|Contingent obligation to common stock warrant holders                               |  | $                        | (42,251   
|Retirement of treasury shares                                                       |  |                          |          
|Distribution of Beacon Power Corporation common stock                               |  |                          |          
|Change in unrealized gain (loss) on marketable securities                           |  | $                        | (26,367   
|Change in unrealized gain (loss) on Beacon Power Corporation common stock           |  | $                        | (6,352,979
|Write-down of investment in Beacon Power Corporation                                |  | $                        | (1,400,000

Net
cash paid for the acquisitions of Ling Electronics, Inc., certain intellectual property, equipment and other assets from Northrop Grumman Corporation,
Inverpower Controls Ltd. and certain intellectual property, equipment and other assets from Sipex Corporation was as follows:

|                                                        |  | Year Ended September 30, |         
|------------------------------------------------------- |  | ------------------------ | --------
|
|Fair value of assets acquired                           |  | $                        | 416,747 
|Cost in excess of net assets of companies acquired, net |  |                          |        
|Liabilities assumed, including transaction costs        |  |                          | (416,747
|Fair value of common stock issued                       |  |                          |        
|                                                        |  |                          |         
|Cash paid                                               |  |                          |        
|Less: Cash acquired                                     |  |                          |        
|                                                        |  |                          |         
|Net cash (received) paid for the acquisitions           |  |                          |        
|                                                        |  |                          |         

Interest and Income Taxes Paid

Cash paid for interest and income taxes was as follows:

For the Years Ended
September 30,2002

2001

2000Interest

$
159,745

$
104,994

$
3,176Income taxes











R.    ACQUISITIONS

Ling Electronics, Inc.

On October 21, 1999, the Company acquired Ling Electronics, Inc. and Ling Electronics, Ltd. (collectively, "Ling Electronics") from MTI. In
consideration for the acquisition of Ling Electronics, MTI received $70,000 and 770,000 shares of the Company's Common Stock valued at $9.8438 per share

77

---

or
$7,579,726. In addition, the Company incurred approximately $177,000 of legal, accounting, consultation and filing fees as a cost of this transaction. The purchase price of the acquisition has been
allocated as follows:

Cash and cash equivalents

$
45,946Accounts receivable


1,937,023Inventory


3,127,991Prepaid expenses and other assets


260,239Property and equipment


250,000Goodwill


3,754,910Accounts payable


(641,687
)Accrued payroll and payroll related expenses


(334,129
)Deferred revenue


(13,500
)Other accrued expenses


(560,437
)$
7,826,356


The
following unaudited pro forma financial information combines SatCon and Ling's results of operations as if the acquisition had taken place on October 1, 1998.
The pro forma results are not necessarily indicative of what the results of operations actually would have been if the transaction had occurred on the applicable dates indicated and are not intended
to be indicative of future results of operations.

Year Ended
September 30,2000

1999(unaudited)Revenue

$
31,194,618

$
23,849,881Operating loss

$
(9,822,203
)
$
(11,316,689
)Net loss

$
(10,260,029
)
$
(15,881,125
)Net loss attributable to common stockholders

$
(13,365,917
)
$
(15,932,029
)Net loss per share, basic and diluted

$
(1.06
)
$
(1.60
)


Northrop Grumman Corporation

On November 16, 1999, the Company purchased certain intellectual property, equipment and other assets from Northrop Grumman Corporation ("NGC"). These
assets were used by NGC in connection with its power electronics product business. The Company is amortizing the purchase price allocated to completed technology on a straight-line basis
over a 10-year period. The Company is depreciating the purchase price allocated to property and equipment on a straight-line basis over a 10-year period. The
Company also entered into (i) a sublease with NGC pursuant to which it agreed to a five-year sublease for approximately 14,863 square feet of rentable space in the Baltimore,
Maryland area and (ii) a three-year Transition Services Agreement providing the Company access to certain test facilities and personnel of NGC on a fee basis. In consideration for
these foregoing assets and agreements, NGC received 578,761 shares of the Company's Common Stock valued at $8.3438 per share or $4,829,066. In addition, the Company issued to NGC a warrant to purchase
an additional 100,000 shares of the Company's Common Stock at an exercise price of $9.725 per share. The Company has recorded the fair value of this warrant, as determined by the Black-Scholes
option-pricing model, of approximately $631,000 and approximately $119,000 of legal, accounting, consultation and filing fees as a cost of this transaction. On February 4, 2000, the Company
issued to NGC an additional warrant to purchase 100,000 shares of the Company's Common Stock at an exercise price of $9.725 per share. This warrant

78

---

is
exercisable upon the occurrence of certain defined events, none of which had occurred as of September 30, 2000. The purchase price of the asset purchase has been allocated as follows:

Inventory




$
1,206,000Property and equipment





1,091,643Intangibles:Completed technology

$
3,142,882Transition services agreement


101,542Favorable lease


36,999Total intangibles





3,281,423$
5,579,066


The
pro forma financial information has not been presented, as this transaction is the purchase of assets rather than as a business combination. The Company has
determined that this transaction was the acquisition of assets and not the acquisition of a business as this business ceased operations more than 12 months prior to this acquisition of assets,
the Company did not acquire facilities, employees or customer base and there is not sufficient continuity of the acquired entity's operations prior to and after the transaction.

For
the fiscal year ended September 30, 2002, 2001 and 2000, the Company recognized $603,303, $239,532 and $413,991, respectively, of revenue, primarily related to funded research
and development arrangements, from NGC. At September 30, 2002 and 2001, the Company had $61,711 and $64,437, respectively, of accounts receivable and unbilled contract costs and fees from NGC.

Inverpower Controls Ltd.

On July 13, 2001, the Company acquired substantially all of the assets and assumed certain liabilities of Inverpower Controls Ltd., a corporation
based in Burlington, Ontario, Canada ("Inverpower"). Inverpower is a manufacturer of power electronics modules and advanced high-speed digital controls for use in industrial power-supply,
power conversion and power quality systems. As a result of this acquisition, SatCon has the ability to expand its product lines into higher power ranges and provide broader market opportunities for
its power technologies. The acquired assets, including plant, equipment and other physical property, were used by Inverpower in connection with its power electronics and controls business.

In
consideration for the acquisition of Inverpower, SatCon paid $100,000 in cash and issued 400,000 shares of its Common Stock, $0.01 par value per share.

The
aggregate purchase price of $4,351,160 consists of $100,000 of cash, Common Stock valued at $3,917,600 and transaction costs of $333,560 and has been allocated as follows:

Current assets

$
2,425,865Fixed assets and other long term assets


440,773Developed technology


260,000Goodwill


2,695,992Liabilities assumed


(1,471,470
)Total

$
4,351,160


79

---

The unaudited pro forma information combines (1) the historical statement of operations of SatCon for the fiscal year ended September 30, 2001 and the historical statement
of operations of Inverpower for the period August 1, 2000 to July 13, 2001 and (2) the historical statement of operations of SatCon for the fiscal year ended September 30,
2000 and the historical statement of operations of Inverpower for the fiscal year ended July 31, 2000. All financial information for Inverpower is presented in U.S. dollars and is presented in
accordance with accounting principles generally accepted in the United States.

|                                                                                                                    |                                                           | Year Ended September 30, 2001 (Unaudited) |            
|------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------------- | -----------
|
|Revenue:                                                                                                            |                                                           |                                           |            
|Product revenue                                                                                                     |                                                           | $                                         | 30,779,861 
|Funded research and development and other revenue                                                                   |                                                           |                                           | 10,904,375 
|                                                                                                                    |                                                           |                                           |            
|Total revenue                                                                                                       |                                                           |                                           | 41,684,236 
|                                                                                                                    |                                                           |                                           |            
|Operating costs and expenses:                                                                                       |                                                           |                                           |            
|Cost of product revenue                                                                                             |                                                           |                                           | 27,827,909 
|Research and development and other revenue expenses:                                                                |                                                           |                                           |            
|                                                                                                                    | Funded research and development revenue                   |                                           |            
|                                                                                                                    | Unfunded research and development expenses                |                                           |            
|                                                                                                                    |                                                           |                                           |            
|                                                                                                                    | Total research and development and other revenue expenses |                                           |            
|Selling, general and administrative expenses                                                                        |                                                           |                                           | 13,593,197 
|Write-off of public offering costs                                                                                  |                                                           |                                           | 1,420,627  
|Amortization of goodwill                                                                                            |                                                           |                                           | 638,864    
|Amortization of intangibles                                                                                         |                                                           |                                           | 723,501    
|                                                                                                                    |                                                           |                                           |            
|Total operating expenses                                                                                            |                                                           |                                           | 57,878,624 
|                                                                                                                    |                                                           |                                           |            
|Operating loss                                                                                                      |                                                           |                                           | (16,194,388
|Other loss                                                                                                          |                                                           |                                           | (1,480,190 
|Interest income                                                                                                     |                                                           |                                           | 688,593    
|Interest expense                                                                                                    |                                                           |                                           | (104,994   
|                                                                                                                    |                                                           |                                           |            
|Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                           |                                           | (17,090,979
|Equity loss from Beacon Power Corporation                                                                           |                                                           |                                           | (5,065,034 
|                                                                                                                    |                                                           |                                           |            
|Net loss before cumulative effect of changes in accounting principles                                               |                                                           |                                           | (22,156,013
|Cumulative effect of changes in accounting principles                                                               |                                                           |                                           | (167,612   
|                                                                                                                    |                                                           |                                           |            
|Net loss                                                                                                            |                                                           | $                                         | (22,323,625
|                                                                                                                    |                                                           |                                           |            
|Cumulative effect of change in accounting principle                                                                 |                                                           |                                           | (1,940,798 
|                                                                                                                    |                                                           |                                           |            
|Net loss attributable to common stockholders                                                                        |                                                           | $                                         | (24,264,423
|                                                                                                                    |                                                           |                                           |            
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                                           | $                                         | (1.51      
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                 |                                                           |                                           | (0.14      
|                                                                                                                    |                                                           |                                           |            
|Net loss per weighted average share, basic and diluted                                                              |                                                           | $                                         | (1.65      
|                                                                                                                    |                                                           |                                           |            
|Weighted average number of common shares, basic and diluted                                                         |                                                           |                                           | 14,665,683 

80

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|                                                             |                                                              | Year Ended September 30, 2000 (Unaudited) |            
|------------------------------------------------------------ | ------------------------------------------------------------ | ----------------------------------------- | -----------
|
|Revenue:                                                     |                                                              |                                           |            
|Product revenue                                              |                                                              | $                                         | 22,427,428 
|Funded research and development and other revenue            |                                                              |                                           | 8,627,601  
|                                                             |                                                              |                                           |            
|Total revenue                                                |                                                              |                                           | 31,055,029 
|                                                             |                                                              |                                           |            
|Operating costs and expenses:                                |                                                              |                                           |            
|Cost of product revenue                                      |                                                              |                                           | 19,069,192 
|Research and development and other revenue expenses:         |                                                              |                                           |            
|                                                             | Funded research and development expense                      |                                           |            
|                                                             | Unfunded research and development and other revenue expenses |                                           |            
|                                                             |                                                              |                                           |            
|                                                             | Total research and development and other revenue expenses    |                                           |            
|Selling, general and administrative expenses                 |                                                              |                                           | 9,969,580  
|Amortization of goodwill                                     |                                                              |                                           | 609,855    
|Amortization of intangibles                                  |                                                              |                                           | 607,635    
|                                                             |                                                              |                                           |            
|Total operating costs and expenses                           |                                                              |                                           | 40,557,027 
|                                                             |                                                              |                                           |            
|Operating loss                                               |                                                              |                                           | (9,501,998 
|Other income, net                                            |                                                              |                                           | 9,891      
|Interest income                                              |                                                              |                                           | 453,631    
|Interest expense                                             |                                                              |                                           | (3,176     
|                                                             |                                                              |                                           |            
|Net loss before equity loss fron Beacon Power Corporation    |                                                              |                                           | (9,041,652 
|Equity loss from Beacon Power Corporation                    |                                                              |                                           | (899,493   
|                                                             |                                                              |                                           |            
|Net loss                                                     |                                                              |                                           | (9,941,145 
|Accretion of redeemable convertible preferred stock discount |                                                              |                                           | (3,105,888 
|                                                             |                                                              |                                           |            
|Net loss attributable to common stockholders                 |                                                              | $                                         | (13,047,033
|                                                             |                                                              |                                           |            
|Net loss per weighted average share, basic and diluted       |                                                              | $                                         | (1.03      
|                                                             |                                                              |                                           |            
|Weighted average number of common shares, basic and diluted  |                                                              |                                           | 12,629,822 

The
following is a summary of adjustments reflected in the unaudited pro forma combined consolidated statements of operations for the fiscal years ended
September 30, 2001 and 2000:

81

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Sipex Corporation

On September 27, 2002, the Company purchased certain intellectual property, equipment and other assets from Sipex Corporation ("Sipex"). These assets were
used by Sipex in connection with its thin film and hybrid assembly business. In consideration for these foregoing asset, Sipex will receive royalty payments up to $183,500 based on cash receipts from
existing backlog and between $400,000 and $1,050,000 from cash receipts from new business of Sipex products by the Company for the subsequent three years. The purchase price was determined based on
the sum of (1) the present value of the minimum payments required under the purchase and sale agreement of $309,608 and (2) the royalty payments related to the backlog as of September
27, 2002 of $107,139. The Company has recorded these amounts as a liability and will accrete them by charging interest expense until paid. The Company will charge, to the extent of the liability
established for that year, contingent payments against the liability. Payments in excess of that year's liability will be charged as a royalty expense in the statement of operations. The purchase
price of the asset purchase has been allocated as follows:

Inventory

$
330,708Property and equipment


86,039$
416,747


The
pro forma financial information has not been presented, as this transaction is the purchase of assets rather than a business combination.

S.    LOSS PER SHARE

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

|                                                                                                          |                                                                                                                                                         | For the Years Ended
September 30, |            
|--------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | -----------
|
|Net loss attributable to common shareholders before cumulative effect of changes in accounting principles |                                                                                                                                                         | $                                 | (20,760,598
|Cumulative effect of changes in accounting principles                                                     |                                                                                                                                                         |                                   |           
|                                                                                                          |                                                                                                                                                         |                                   |            
|Net loss attributable to common shareholders                                                              |                                                                                                                                                         | $                                 | (20,760,598
|                                                                                                          |                                                                                                                                                         |                                   |            
|Basic and diluted:                                                                                        |                                                                                                                                                         |                                   |            
|                                                                                                          | Common shares outstanding, beginning of year                                                                                                            |                                   |            
|                                                                                                          | Weighted average common shares issued during the year                                                                                                   |                                   |            
|                                                                                                          |                                                                                                                                                         |                                   |            
|                                                                                                          | Weighted average shares outstandingbasic and diluted                                                                                                   |                                   |            
|                                                                                                          |                                                                                                                                                         |                                   |            
|                                                                                                          | Net loss attributable to common shareholders before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                   | $          
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted       |                                                                                                                                                         |                                   |           
|                                                                                                          |                                                                                                                                                         |                                   |            
|Net loss attributable to common shareholders per weighted average share, basic and diluted                |                                                                                                                                                         | $                                 | (1.25      
|                                                                                                          |                                                                                                                                                         |                                   |            

For
the fiscal years ended September 30, 2000, 44,500 common shares were excluded from common shares outstanding as they were held in treasury.

82

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At September 30, 2002, 2001 and 2000, options and warrants to purchase 4,329,416, 3,418,123 and 2,854,105 shares of common stock, respectively, were excluded from the diluted
weighted average common shares outstanding as their effect would be antidilutive.

T.    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 three reportable segments: Applied Technology, Power Systems and Electronics.

The
Company's Technology Center and its Electronic Power Products operation in Maryland perform research and development services in collaboration with third parties. The MagMotor
Division, Ling Electronics and Advanced Fuel Cell Power products operations specialize in the engineering and manufacturing of power systems. Film Microelectronics, Inc designs and manufactures
electronic products. The Company's principal operations and markets are located in the United States.

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, excluding the effects of the write-off of the public offering costs, amortization of goodwill and intangible assets associated with acquisitions and
restructuring costs. Common costs not directly attributable to a particular segment are included in the Applied Technology segment. These costs include corporate costs such as executive and officer
compensation, facility costs, legal, audit and tax and other professional fees and totaled $4,194,338 and $4,025,800 for the fiscal year ended September 30, 2002 and 2001, respectively.

83

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

|                                                                      |                                                                                                                     | Year Ended September 30, |         
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------ | --------
|
|Applied Technology:                                                   |                                                                                                                     |                          |         
|                                                                      | Product revenue                                                                                                     |                          |         
|                                                                      | Funded research and development and other revenue                                                                   |                          | $       
|                                                                      |                                                                                                                     |                          |         
|                                                                      | Total revenue                                                                                                       |                          | $       
|                                                                      |                                                                                                                     |                          |         
|                                                                      | Loss from operations, net of amortization of goodwill and intangibles                                               |                          | $       
|                                                                      |                                                                                                                     |                          |         
|Power Systems:                                                        |                                                                                                                     |                          |         
|                                                                      | Product revenue                                                                                                     |                          | $       
|                                                                      |                                                                                                                     |                          |         
|                                                                      | Loss from operations, net of amortization of goodwill and intangibles                                               |                          | $       
|                                                                      |                                                                                                                     |                          |         
|Electronics:                                                          |                                                                                                                     |                          |         
|                                                                      | Product revenue                                                                                                     |                          | $       
|                                                                      |                                                                                                                     |                          |         
|Loss from operations, net of amortization of goodwill and intangibles |                                                                                                                     | $                        | (169,301
|                                                                      |                                                                                                                     |                          |         
|Consolidated:                                                         |                                                                                                                     |                          |         
|                                                                      | Product revenue                                                                                                     |                          | $       
|                                                                      | Funded research and development and other revenue                                                                   |                          |         
|                                                                      |                                                                                                                     |                          |         
|                                                                      | Total revenue                                                                                                       |                          | $       
|                                                                      |                                                                                                                     |                          |         
|                                                                      | Loss from operations, net of amortization of goodwill and intangibles                                               |                          | $       
|                                                                      | Write-off of public offering costs                                                                                  |                          |         
|                                                                      | Amortization of goodwill                                                                                            |                          |         
|                                                                      | Amortization of intangibles                                                                                         |                          |         
|                                                                      | Restructuring costs                                                                                                 |                          |         
|                                                                      |                                                                                                                     |                          |         
|                                                                      | Operating loss                                                                                                      |                          |         
|                                                                      | Net realized gain on sale of marketable securities                                                                  |                          |         
|                                                                      | Net unrealized loss on warrants to purchase common stock                                                            |                          |         
|                                                                      | Write-down of investment in Beacon Power Corporation                                                                |                          |         
|                                                                      | Other (loss) income                                                                                                 |                          |         
|                                                                      | Interest income                                                                                                     |                          |         
|                                                                      | Interest expense                                                                                                    |                          |         
|                                                                      |                                                                                                                     |                          |         
|                                                                      | Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                          | $       
|                                                                      |                                                                                                                     |                          |         

Common assets not directly attributable to a particular segment are included in the Applied Technology segment. These assets include cash and cash
equivalents, marketable securities, prepaid and other corporate assets and amounted to $3,009,770 and $21,024,038 at September 30, 2002 and 2001, respectively. The following is a summary of the
Company's operations by operating segment:

September 30,2002

2001Applied Technology:Segment assets

$
9,876,954

$
29,223,705Power Systems:Segment assets


22,504,958


21,835,106Electronics:Segment assets


9,162,220


9,987,749Consolidated:Segment assets


41,544,132


61,046,560Investment in Beacon Power Corporation


800,005


7,152,984Warrants to purchase common stock


15,988


576,915Total assets

$
42,360,125

$
68,776,459


84

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

|                                                            |               | Year Ended September 30,
|----------------------------------------------------------- | ------------- | ------------------------
|
|Revenue by geographic region based on location of customer: |               |                         
|                                                            | United States |                         
|                                                            | Rest of world |                         
|                                                            |               |                         
|                                                            | Total revenue |                         
|                                                            |               |                         

U.    RESTRUCTURING COSTS

During April 2002, the Company commenced a restructuring plan designed to streamline its production base, improve efficiency and enhance its competitiveness and
recorded a restructuring charge of $1.5 million. The restructuring charge includes approximately $655,000 for severance costs associated with the reduction of approximately 60 employees, or 17%
of the work force. The reductions occurred in the following business segments: Applied Technology9: Corporate2; Electronics16; and Power Systems33.
On a functional basis, the reductions were: manufacturing45; research and development4; and selling, general and administrative11. As of September 30,
2002, the accrued restructuring costs amounts to $992,496. As of September 30, 2002, 56 employees have been terminated and the remaining 4 are expected to be terminated by March 2003. In
addition, as of September 30, 2002, $507,504 of the severance has been paid and the remaining severance will be paid by March 2003. The balance of the restructuring charge relates to the
closing of the Anaheim, CA facility. These costs include approximately $270,000 of cash charges primarily related to rent, real estate taxes and operating costs to be paid from October 1, 2002
through June 30, 2003, the remainder of the lease, and an estimated $350,000 of other cash charges for restoration and clean-up. As of September 30, 2002, no amounts have been paid
nor charged against these amounts. In addition, approximately $225,000 of the restructuring charge relates to non-cash charges on assets to be disposed of. As of September 30, 2002, no
assets have been disposed of nor have any amounts been charged against this amount. The Company anticipates the Anaheim, CA manufacturing facility will be closed during the second quarter of fiscal
year 2003.

The following is a status of the Company's accrued restructuring costs and the changes for the periods then ended:

|                            |  | At Inception of Restructuring Plan |           | Amounts Paid or Deductions |   | Balance September 30, 2002
|--------------------------- |  | ---------------------------------- | --------- | -------------------------- | - | --------------------------
|Severance costs             |  | $                                  | 655,000   |                            | $ | (507,504                  
|Facility costs              |  |                                    | 620,000   |                            |   |                          
|Equipment costs             |  |                                    | 225,000   |                            |   |                          
|                            |  |                                    |           |                            |   |                           
|Accrued restructuring costs |  | $                                  | 1,500,000 |                            | $ | (507,504                  
|                            |  |                                    |           |                            |   |                           

85

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE

To
the Board of Directors of SatCon Technology Corporation:

We have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated financial statements of SatCon Technology Corporation and its
subsidiaries, included in this Form 10-K, and have issued our report thereon dated December 20, 2002. Our audit was made for the purpose of forming an opinion on those
consolidated financial statements taken as a whole. The schedule listed in the financial statement schedule index is the responsibility of the Company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule for the year ended September 30, 2002 has been
subjected to auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken as a whole.

|                                        |  | /s/GRANT THORNTON LLP
|--------------------------------------- |  | ---------------------
|Boston, Massachusetts
December 20, 2002 |  |                      

86

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Provided below, pursuant to Rule 2-02(e) of Regulation S-X, is a copy of the accountants report
issued by Arthur Andersen LLP, our former independent public accountants, in connection with the filing of our Annual Report of Form 10-K for the fiscal year ended
September 30, 2001.This audit report has not been reissued by Arthur Andersen in connection with the filing of this Annual Report on Form 10-K for
the fiscal year ended September 30, 2002.Note that the previously issued Arthur Andersen report includes references to certain fiscal years which are not required to be
presented in the accompanying consolidated financial statements as of and for the year ended September 30, 2002. We are unable to obtain a reissued accountants report from Arthur Andersen, and
we will be unable to obtain future accountants reports from Arthur Andersen, because Arthur Andersen has discontinued its auditing practice. This means that we will also be unable to obtain consents
to incorporate any financial statements audited by Arthur Andersen into registration statements that we may file in the future or that we may have previously filed. Accordingly, investors will not be
able to sue Arthur Andersen pursuant to Section 11(a)(4) of the Securities Act with respect to any such registration statements and, therefore, ultimate recovery on a successful claim may be
limited. The ability of investors to recover from Arthur Andersen may also be limited as a result of Arthur Andersen's financial condition or other matters resulting from the various civil and
criminal lawsuits against that firm.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE

To
the Board of Directors of SatCon Technology Corporation:

We
have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of SatCon Technology Corporation and its
subsidiaries, included in this Form 10-K, and have issued our report thereon dated December 4, 2001. Our audit was made for the purpose of forming an opinion on those
consolidated financial statements taken as a whole. The schedule listed in the financial statement schedule index is the responsibility of the Company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to auditing procedures applied in the
audit of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

|                                       |  | /s/ARTHUR ANDERSEN LLP
|-------------------------------------- |  | ----------------------
|Boston, Massachusetts
December 4, 2001 |  |                       

87

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FINANCIAL STATEMENT SCHEDULE

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                               |                                               | Balance at
beginning
of period |   | Additions
charged to
costs and
expenses |  | Additions
from
Acquisitions |            | Deductions
and Adjustments |   | Balance
at end
of period
|------------------------------ | --------------------------------------------- | ------------------------------ | - | --------------------------------------- |  | --------------------------- | ---------- | -------------------------- | - | ------------------------
|Year Ended September 30, 2000: |                                               |                                |   |                                         |  |                             |            |                            |   |                         
|                               | Allowance for uncollectible accounts          |                                | $ | 386,686                                 |  | $                           | 265,742    |                            |   |                        
|                               | Allowance for unbilled contract costs         |                                | $ | 746,121                                 |  |                             |           |                            |   |                        
|                               | Deferred tax valuation allowance              |                                | $ | 11,590,106                              |  | $                           | 9,668,342  |                            |   |                        
|                               | Allowance for excess and obsolete inventory   |                                | $ | 1,078,797                               |  | $                           | 658,774    |                            |   |                        
|                               | Reserve for product warranty expense          |                                | $ | 36,000                                  |  | $                           | 264,096    |                            | $ | 195,384                 
|                               | Accrued costs for consolidation of facilities |                                | $ | 100,000                                 |  |                             |           |                            |   |                        
|Year Ended September 30, 2001: |                                               |                                |   |                                         |  |                             |            |                            |   |                         
|                               | Allowance for uncollectible accounts          |                                | $ | 320,220                                 |  | $                           | 540,977    |                            |   |                        
|                               | Deferred tax valuation allowance              |                                | $ | 21,258,448                              |  |                             | 5,355,184  |                            |   |                        
|                               | Allowance for excess and obsolete inventory   |                                | $ | 1,193,950                               |  | $                           | 1,153,564  |                            |   |                        
|                               | Reserve for product warranty expense          |                                | $ | 465,115                                 |  | $                           | 38,436     |                            | $ | 722,483                 
|                               | Accrued costs for consolidation of facilities |                                | $ | 100,000                                 |  | $                           | 175,000    |                            |   |                        
|Year Ended September 30, 2002: |                                               |                                |   |                                         |  |                             |            |                            |   |                         
|                               | Allowance for uncollectible accounts          |                                | $ | 775,706                                 |  | $                           | 287,630    |                            |   |                        
|                               | Deferred tax valuation allowance              |                                | $ | 18,462,400                              |  | $                           | 10,630,450 |                            |   |                        
|                               | Allowance for excess and obsolete inventory   |                                | $ | 2,049,889                               |  | $                           | 2,598,190  |                            |   |                        
|                               | Reserve for product warranty expense          |                                | $ | 950,996                                 |  | $                           | 301,252    |                            |   |                        
|                               | Accrued costs for consolidation of facilities |                                | $ | 175,000                                 |  |                             |           |                            |   |                        
|                               | Accrued restructuring costs                   |                                |   |                                        |  | $                           | 1,500,000  |                            |   |                        

88

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

The Audit Committee of the Board of Directors (the "Audit Committee) of the Registrant annually considers and recommends to the Registrant's Board of Directors
the selection of the Registrant's independent auditors. As recommended by the Audit Committee, the Board of Directors on June 21, 2002 dismissed the Registrant's independent auditors, Arthur
Andersen LLP ("Andersen"), and engaged Grant Thornton LLP ("Grant Thornton") as its independent auditors and to audit the Registrant's financial statements for the fiscal year ended
September 30, 2002.

Andersen's
reports on the financial statements of the Registrant for the two most recent fiscal years ended September 30, 2001 and September 30, 2000 did not contain an
adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During
the two most recent fiscal years ended September 30, 2001 and September 30, 2000, and the subsequent interim period through the date of Andersen's dismissal, there
were (i) no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's
satisfaction, would have caused Andersen to make reference to the subject matter of such disagreement in connection with its reports on the financial statements of the Registrant, and (ii) no
reportable events as listed in Item 304(a)(1)(v) of Regulation S-K.

During
the two most recent fiscal years ended September 30, 2001 and September 30, 2000, and the subsequent interim period through the date of Grant Thornton's engagement,
neither the Registrant nor anyone on its behalf has consulted Grant Thornton regarding either (i) the application of accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the Registrant's financial statements, and neither a written report was provided to the Registrant nor oral advice was provided to the
Registrant that Grant Thornton concluded was an important factor considered by the Registrant in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any
matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304(a) of
Regulation S-K), or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).

89

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PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of the Corporation

The Corporation has a classified Board of Directors (the "Board") consisting of three Class I directors, two Class II directors and two
Class III directors. Thomas A. Hurkmans served as a Class III director from his election to the Board on March 15, 2000 until his resignation from the Board on December 31,
2001. On January 25, 2002, Anthony J. Villiotti was appointed to the Board to fill the vacancy resulting from the resignation of Mr. Hurkmans. At each Annual Meeting of Stockholders,
directors are elected for a full term of three years to succeed those whose terms are expiring.

For
each member of the Board there follows information given by each concerning his principal occupation and business experience for the past five years, the name of other publicly held
companies on which he serves as a director and his age and length of service as a director of the Corporation.

No
director or executive officer is related by blood, marriage or adoption to any other director or executive officer.

Pursuant
to the Securities Purchase Agreement (the "1997 Securities Purchase Agreement"), dated as of May 28, 1997, by and among the Corporation, Beacon Power Corporation ("Beacon
Power"), an affiliate of the Corporation, and DQE Enterprises, Inc. ("DQE Enterprises"), Mr. Villiotti was first elected to the Board on June 30, 1997. On January 13, 2000,
Mr. Villiotti resigned from his position as a director of the Corporation, and the Board appointed Mr. Hurkmans, as the representative of DQE Enterprises, to fill the vacancy resulting
from the resignation of Mr. Villiotti. Mr. Hurkmans was elected
to the Board by the stockholders on March 15, 2000 and served as a director of the Corporation until his resignation on December 31, 2001. Pursuant to the terms of the 1997 Securities
Purchase Agreement, as long as DQE Enterprises owned five percent (5%) of the Corporation's Common Stock (the "Common Stock"), the Corporation was required to recommend that the Corporation's
stockholders vote for DQE Enterprises' representative and cause to be voted for such representative the shares of Common Stock for which the Corporation's management or Board holds proxies or are
otherwise entitled to vote. DQE Enterprises no longer owns 5% of the Common Stock and, since the resignation of Mr. Hurkmans in December 2001, has no representative on the Board.
Mr. Villiotti's appointment to the Board on January 25, 2002 to fill the vacancy resulting from the resignation of Mr. Hurkmans was not pursuant to, or in connection with, the
1997 Securities Purchase Agreement or any other arrangement between the Corporation and DQE Enterprises.

Pursuant
to the Securities Purchase Agreement (the "1999 Securities Purchase Agreement"), dated as of October 21, 1999, between the Corporation and Mechanical Technology
Incorporated, Mr. Goldberg was elected to the Board as of November 15, 1999. Pursuant to the terms of the 1999 Securities Purchase Agreement, as long as Mechanical Technology
Incorporated owns five percent (5%) of the Common Stock, the Corporation must recommend that the Corporation's stockholders vote for Mechanical Technology Incorporated's representative. The
Corporation has also agreed to appoint an additional member to the Board based on recommendations by Mechanical Technology Incorporated.

Current DirectorsTerms Expiring in 2004 (Class I Directors)

David B. Eisenhaure, age 57, became a director in 1985.

David B. Eisenhaurejoined the Corporation as President, Chief Executive Officer and Chairman of the Board in 1985. Prior to founding the
Corporation, Mr. Eisenhaure was associated with the Charles Stark Draper Laboratory, Incorporated from 1974 to 1985, and with its predecessor, the Massachusetts Institute of Technology's
Instrumentation Laboratory, from 1967 to 1974. Mr. Eisenhaure holds S.B., S.M. and an Engineer's Degree in Mechanical Engineering from the Massachusetts Institute of

90

---

Technology
("M.I.T."). In addition to his duties at the Corporation, Mr. Eisenhaure holds an academic position at M.I.T., serving as a lecturer in the Department of Mechanical Engineering.
Mr. Eisenhaure also serves on the board of directors of Mechanical Technology Incorporated and Implant Sciences Corporation.

Alan P. Goldberg, age 58, became a director in 1999.

Alan P. Goldbergjoined the Corporation as a director in 1999. Mr. Goldberg has served as President and as a director of First
Albany Companies Inc., an investment bank, since 1993. Mr. Goldberg is active in industry and civic organizations and serves on the board of several non-profit institutions.
He received a B.A. degree in Government from Tufts University.

James L. Kirtley, Jr., age 57, became a director in 1992.

James L. Kirtley, Jr.,joined the Corporation as a consultant in 1985 and became a director in 1992. On March 1, 1998,
Dr. Kirtley commenced employment with the Corporation on a full-time basis as the Vice President and General Manager of the Corporation's Technology Center. In February 2000,
Dr. Kirtley was appointed Vice President and Chief Scientist of the Corporation, a position he serves as a part-time employee. Dr. Kirtley is also a Professor of Electrical
Engineering at M.I.T. and became a member of the M.I.T. faculty in 1971. Dr. Kirtley received his S.B., S.M., E.E. and Ph.D. degrees in Electrical Engineering from M.I.T.

Current DirectorsTerms Expiring in 2005 (Class II Directors)

Michael C. Turmelle, age 44, became a director in 1993.

Michael C. Turmellejoined the Corporation in September 1987, where he served as Controller from September 1987 until
November 1991, as Secretary from June 1993 until May 2001 and as Vice President, Chief Financial Officer and Treasurer from November 1991 until January 2000.
Mr. Turmelle became a director in June 1993. In January 2000, Mr. Turmelle was promoted from Chief Financial Officer to Chief Operating Officer. From July 1984 to
August 1987, Mr. Turmelle held several positions with HADCO Corporation, a manufacturer of circuit boards. From February 1982 to June 1984, Mr. Turmelle was employed
by the aerospace division of General Electric Corporation and held several positions, including internal auditor. Mr. Turmelle holds a B.A. degree in Economics from Amherst College.

Gerald L. Wilson, age 64, became a director in 2000.

Gerald L. Wilsonjoined the Corporation as a director in July 2000. Dr. Wilson is the former Dean of the School of
Engineering at M.I.T. and the Vannevar Bush Professor of Engineering at M.I.T. Dr. Wilson has served on M.I.T.'s faculty since 1965 and currently serves as a Professor of Electrical and
Mechanical Engineering. Dr. Wilson also served as the Chairman of the Science Advisory Board of General Motors Corporation and currently serves as the Chairman of the Science Advisory Board of
Pratt and Whitney, a division of United Technologies Corporation, and as a member of the science



advisory board for Cummins Engine Company, Inc. He is a director of NSTAR, a company formed by the merger of BEC Energy and Commonwealth Energy System. Dr. Wilson is also a director of
Analogic Corporation. Dr. Wilson received his S.B. and S.M. in Electrical Engineering and his Sc.D. in Mechanical Engineering from M.I.T.

Current DirectorsTerms Expiring in 2003 (Class III Directors)

Marshall J. Armstrong, age 68, became a director in 1994.

Marshall J. Armstrongjoined the Corporation as a director in 1994. Mr. Armstrong previously served as Chief Executive Officer and
Chairman of the Board of Thermo Power Corporation from 1992 through 1997. Thermo Power provides research and development relating to engines, cogeneration and

91

---

refrigeration
equipment to the marine, food processing, transportation, power generating, petrochemical and pharmaceutical industries. From January 1998 to September 1999,
Mr. Armstrong served as Senior Vice President of Thermo Electron Corporation, where he has been employed since 1968 in various capacities including management of Thermo Electron's government
affairs. Mr. Armstrong also served as a director of Thermo Sentron, Inc. Mr. Armstrong holds an M.S. degree from George Washington University and a B.S. degree in Mechanical
Engineering from the University of Vermont.

Anthony J. Villiotti, age 56, became a director in 2002.

Anthony J. Villiottifirst joined the Corporation as a director in June 1997. Following his resignation from the Board in
January 2000, Mr. Villiotti re-joined the Corporation as a director in January 2002. Since May 1999, Mr. Villiotti has served as Vice President and Chief
Financial Officer at AquaSource, Inc., where he is responsible for all financial and information technology activities. AquaSource is a water resource management company that acquires, develops
and manages water and waste water systems. From October 1993 until May 1999, Mr. Villiotti served as Vice President, Treasurer and Controller of DQE Enterprises, where he was
responsible for identifying and implementing investment opportunities and for all financial and administrative activities. From June 1990 through October 1993, Mr. Villiotti
served as Treasurer and Controller of DQE Enterprises. Mr. Villiotti holds a B.S. degree in accounting from Pennsylvania State University.

Executive Officers of the Corporation

Ralph M. Norwood, age 60, became an Executive Officer in 2002

Ralph M. Norwoodjoined the Corporation in February 2002 and serves as Vice President of Finance, Chief Financial Officer and
Treasurer. Prior to joining the Corporation, Mr. Norwood served as an independent financial consultant from June 2000 until February 2002. From 1976 to June 2000,
Mr. Norwood was employed by the Polaroid Corporation, an instant imaging company and manufacturer of instant cameras, where he served in several financial positions including as Vice President
and Corporate Controller from 1989 to 1996 and as Vice President and Treasurer from 1996 until his departure in June 2000. Mr. Norwood is a Certified Public Accountant and received his
M.B.A. degree from the Darden School at the University of Virginia.

For
additional information relating to Executive Officers of the Corporation, see disclosure regarding Messrs. Eisenhaure and Turmelle and Dr. Kirtley set forth under the
heading "Directors of the Corporation."

For
information relating to shares of Common Stock owned by each of the directors and executive officers of the Corporation, see "Security Ownership of Certain Beneficial Owners and
Management."

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors, executive officers and holders of more than 10% of the Common
Stock to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership of the Common Stock and other equity securities on a Form 3 and reports of changes in such
ownership on a Form 4 or Form 5. Officers, directors and 10% stockholders are required by SEC regulations to furnish the Corporation with copies of all Section 16(a) forms they
file. To the Corporation's knowledge, based solely on a review of the Corporation's records and written representations by the persons required to file such reports, all filing requirements of
Section 16(a) were satisfied with respect to the Corporation's most recent fiscal year.

92

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Item 11. EXECUTIVE COMPENSATION

Compensation of Executive Officers

Summary Compensation Table.The following table sets forth information concerning the annual and long-term
compensation for services rendered to the Corporation for the fiscal years ended September 30, 2002, 2001 and 2000, of those persons who were at September 30, 2002 (i) the chief
executive officer of the Corporation and (ii) each other executive officer of the Corporation whose annual compensation exceeded $100,000.

SUMMARY COMPENSATION TABLE

|                                                                                     |  |                |  | Annual Compensation |                         | Long-Term
Compensation |   |             | 
|------------------------------------------------------------------------------------ |  | -------------- |  | ------------------- | ----------------------- | ---------------------- | - | ----------- | 
|
|
|David B. Eisenhaure
President, Chief Executive Officer and Chairman of the Board     |  | 2002
2001
2000 |  | $$$                 | 304,008
284,381
225,500 |                        | $ | 
100,000
 | 
|Michael C. Turmelle(1)
Vice President, Chief Operating Officer and Director          |  | 2002
2001
2000 |  | $$$                 | 230,004
209,628
148,500 |                        | $ | 
60,000
  | 
|Ralph M. Norwood(2)
Vice President of Finance, Chief Financial Officer and Treasurer |  | 2002           |  | $                   | 134,886                 |                        |   |            | 

---

93

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Option Grants Table.The following table sets forth information concerning individual grants of stock options to purchase the
Common Stock made to the executive officers named in the Summary Compensation Table during Fiscal 2002.

OPTION GRANTS IN LAST FISCAL YEAR

|                    |  | Individual Grants |  | Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation For
Option Term(3)
|------------------- |  | ----------------- |  | -------------------------------------------------------------------------------------------------
|
|David B. Eisenhaure |  |                  |  |                                                                                                 
|Michael C. Turmelle |  |                  |  |                                                                                                 
|Ralph M. Norwood    |  | 150,000           |  | 13.25                                                                                            

---

Aggregated Option Exercises and Fiscal Year-End Option Value Table.The following table sets
forth certain information regarding stock options exercised during Fiscal 2002 and held as of September 30, 2002 by the executive officers named in the Summary Compensation Table.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR  AND FISCAL YEAR-END OPTION VALUES

|                    |  |   |  |   |  | Number of Securities
Underlying
Unexercised
Options at Fiscal
Year-End(#) |  | Value of
Unexercised
In-The-Money
Options at Fiscal
Year-End($)(2)
|------------------- |  | - |  | - |  | ------------------------------------------------------------------------- |  | ------------------------------------------------------------------
|
|David B. Eisenhaure |  |  |  |  |  | 187,500/125,000                                                           |  | $ /$                                                            
|Michael C. Turmelle |  |  |  |  |  | 169,576/115,874                                                           |  | $ /$                                                            
|Ralph M. Norwood    |  |  |  |  |  | 30,000/120,000                                                            |  | $ /$                                                            

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94

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Compensation of Directors

From November 1992 to April 2002, each of the Corporation's directors received a fee of $200 for each Board meeting attended, as well as a retainer
of $900 per quarter. As of April 11, 2002, outside (non-employee) directors receive $2,500 per quarter as a retainer for serving as a director. Outside directors receive an additional $1,000
per Board meeting if attended in person, or $500 per Board meeting if attended by telephone. The Corporation also pays all out of pocket expenses reasonably incurred by outside directors in attending
Board meetings. Employee directors continue to receive a fee of $200 for each Board meeting attended, as well as a retainer of $900 per quarter.

During Fiscal 2002, the Corporation granted stock options to purchase shares of the Corporation's Common Stock to the members of the Board as follows: Mr. Armstrong: 20,000;
Mr. Goldberg: 23,000; Mr. Villiotti, 23,000; and Dr. Wilson: 20,000. The stock option exercise price for Messrs. Armstrong and Goldberg and Dr. Wilson is $3.48 per
share, and these stock options were immediately exercisable upon grant. The stock option exercise price for Mr. Villiotti is $5.80 with respect to 15,000 shares and $3.48 with respect to 8,000
shares.

On
April 11, 2002, to encourage ownership in the Corporation by outside directors, to provide such directors with a further incentive to remain as directors and to align the
interests of such directors with the interests of the Corporation's stockholders, the Board adopted a director stock option program. Pursuant to this program, (i) each individual who first
becomes an outside director of the Corporation will receive a nonstatutory stock option to purchase 15,000 shares of the Common Stock on the date of his or her initial election to the Board; and
(ii) on the date of each Annual Meeting of Stockholders of the Corporation commencing with the 2002 Annual Meeting of Stockholders (other than a director who was initially elected to the Board
at any such Annual Meeting of Stockholders or, if previously, at any time after the prior year's Annual Meeting of Stockholders), provided that he or she is serving as a director immediately following
the date of such Annual Meeting of Stockholders, (a) each outside director who is serving on the Corporation's Audit Committee will be granted a nonstatutory stock option to purchase an
additional 5,000 shares of the Common Stock and (b) each outside director who is serving on the Compensation Committee will be granted a nonstatutory stock option to purchase an additional
3,000 shares of the Common Stock. These nonstatutory stock options will be immediately
exercisable and will have exercise prices equal to the closing price of the Common Stock on the NASDAQ National Market on the date of grant.

Employment Contracts, Termination of Employment and Change-in-Control Arrangements

The Corporation has entered into Key Employee Agreements (the "Employee Agreements") with Messrs. Eisenhaure and Turmelle which expire on June 30,
2004. The Employee Agreements provide for automatic renewal for three-year periods unless written notice of termination is given by either party not less than three months prior to the
expiration date. In addition, pursuant to the Employee Agreements, each of Messrs. Eisenhaure and Turmelle is entitled to receive benefits offered to the Corporation's employees generally as
well as a severance payment equal to 100% of his annual salary, payable in twelve equal monthly installments if (i) the Corporation or a substantial portion of the Corporation is acquired
without the approval of the Board; (ii) his employment is terminated without cause or (iii) without his consent, his salary is reduced, there is a substantial change in his position,
there is a change in his principal place of employment from the greater Boston, Massachusetts area or the Employee Agreement is not renewed following the expiration of its term. The Employee
Agreements also contain provisions prohibiting Messrs. Eisenhaure and Turmelle from competing with the Corporation for a one-year period following termination of employment.

Mr. Sean
F. Moran served as Vice President of Finance, Chief Financial Officer and Treasurer until his resignation on March 1, 2002. Mr. Ralph M. Norwood assumed the
position of Vice President of Finance, Chief Financial Officer and Treasurer on February 8, 2002. In addition, on February 11,

95

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2002,
the Corporation entered into a Change in Control Letter Agreement with Mr. Norwood pursuant to which Mr. Norwood is entitled to receive severance payments equal to 100% of his
salary for a period of six months in the event of the termination of Mr. Norwood's employment within his first year of employment. As a condition to receiving these severance payments,
Mr. Norwood must deliver a general release to the Corporation within 30 days of his termination.

Compensation Committee Interlocks and Insider Participation

During Fiscal 2002, Messrs. Goldberg, Hurkmans and Villiotti served as members of the Compensation Committee. Mr. Hurkmans served on the
Compensation Committee until his resignation from the Board on December 31, 2001, and Mr. Villiotti has served on the Compensation Committee since his appointment to the Board on
January 25, 2002. For information regarding Mr. Goldberg's relationship with Mechanical Technology Incorporated, see "Certain Relationships and Related Transactions."

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

Equity Compensation Plans

The following table provides information about the securities authorized for issuance under the Corporation's equity compensation plans as of September 30,
2002.

EQUITY COMPENSATION PLAN INFORMATION

|                                                           |       |           |           |   |       | (c)  |        
|---------------------------------------------------------- | ----- | --------- | --------- | - | ----- | ---- | -------
|
|
|
|Equity compensation plans approved by security holders     |       | 3,251,415 |           | $ | 8.97  |      | 797,656
|Equity compensation plans not approved by security holders |       | 41,000    | (2)       | $ | 17.56 |      | 175,000
|                                                           | Total |           | 3,292,415 |   | $     | 9.08 |        

---

96

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On January 19, 2000, the Board granted to four of the Corporation's employees options exercisable in the aggregate of up to 216,000 shares of Common Stock outside of the
Corporation's stockholder-approved equity compensation plans. The terms of these options are substantially similar to those of nonstatutory stock options issued under the Corporation's
shareholder-approved 1999 Stock Incentive Plan.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of January 23, 2003, certain information concerning the beneficial ownership of the Common Stock by (i) each
person known by the Corporation to own beneficially five percent (5%) or more of the outstanding shares of the Common Stock; (ii) each of the Corporation's executive officers and directors and
(iii) all executive officers and directors as a group.

The
number of shares beneficially owned by each 5% stockholder, director or executive officer is determined under rules of the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and also
any shares which the individual or entity has the right to acquire on or before March 24, 2003 through the exercise of any stock option, warrant or other right. Unless otherwise indicated, each
person or entity has sole investment and voting power (or shares such power with his spouse) with respect to the shares set forth in the following table. The inclusion herein of any shares deemed
beneficially owned does not constitute an admission of beneficial ownership of those shares.

|Name and Address of Beneficial Owner(1)                                                |  | Number of Shares
Beneficially Owned(2) |  | Percentage of Common Stock Beneficially Owned |  
|-------------------------------------------------------------------------------------- |  | -------------------------------------- |  | --------------------------------------------- | -
|5% Stockholders                                                                        |  |                                        |  |                                               |  
|Mechanical Technology Incorporated(3)
431 New Karner Road
Albany, NY 12205             |  | 847,600                                |  | 5.0                                           | %
|Directors and Named Executive Officers                                                 |  |                                        |  |                                               |  
|Marshall J. Armstrong                                                                  |  | 52,000                                 |  | *                                             |  
|David B. Eisenhaure(4)                                                                 |  | 3,799,345                              |  | 21.9                                          |  
|Alan P. Goldberg(5)
c/o First Albany Corporation
30 Pearl Street, #P1
Albany, NY 12207 |  | 51,500                                 |  | *                                             |  
|James L. Kirtley, Jr.                                                                  |  | 129,673                                |  | *                                             |  
|Ralph M. Norwood                                                                       |  | 67,435                                 |  | *                                             |  
|Michael C. Turmelle                                                                    |  | 289,629                                |  | 1.7                                           |  
|Gerald L. Wilson                                                                       |  | 41,500                                 |  | *                                             |  
|Anthony J. Villiotti                                                                   |  | 23,000                                 |  |                                               |  
|All executive officers and directors as a group (eight persons)(4)(5)                  |  | 4,454,082                              |  | 25.0                                          | %

---

97

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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



In October 1999, the Corporation acquired Ling Electronics, Inc. and Ling Electronics, Ltd. from Mechanical Technology Incorporated ("MTI").
In consideration for the acquisition of Ling Electronics, MTI received 770,000 shares of the Common Stock. Also in October 1999, the Corporation received an investment by MTI. In consideration for its
investment, MTI received a total of 1,030,000 shares of Common Stock and warrants to purchase an additional 100,000 shares of the Common Stock at an exercise price of $8.80 per share. On
October 21, 1999, MTI funded $2,570,000 of its investment in the Corporation and received 370,800 of the 1,030,000 shares of the Company's Common Stock and a warrant to purchase 36,000 of the
100,000 shares of the Company's Common Stock. MTI made the remaining investment on January 31, 2000 of $4,500,000 and received the remaining 659,200 shares of the Common Stock and a warrant to
purchase the remaining 64,000 shares of the Company's Common Stock. In addition, the Company received a warrant to purchase 108,000 shares of MTI's common stock on October 21, 1999 and a
warrant to purchase 192,000 shares of MTI's common stock on January 31,





2000 at an exercise prices of $12.56 per share. In connection with these transactions, Alan P. Goldberg, then a director of MTI and President of First Albany Companies Inc., was elected a
member of the Board on November 15, 1999. Mr. Goldberg resigned from the board of directors of MTI in December 2002. The Corporation has also agreed to appoint an additional member to
the Board based on recommendations by MTI, and MTI agreed to appoint Mr. Eisenhaure to its board of directors. Mr. Eisenhaure currently serves on the board of directors of MTI.



On July 19, 2000, the Corporation entered into a consulting agreement with Marshall J. Armstrong, one of its directors. In consideration for
Mr. Armstrong providing consulting, advisory and related services under the consulting agreement, the Corporation has agreed to pay Mr. Armstrong $2,000 per day (which amount will be
proportionately less for partial days) for services performed as well as reimbursement of reasonable and necessary expenses incurred by Mr. Armstrong in connection with the consulting
agreement. To date, the Corporation has paid Mr. Armstrong $3,000 under the terms of the consulting agreement since entering into the consulting agreement in July 2000.

The
Corporation believes that each of the transactions described above was carried out on terms that were no less favorable to the Corporation than those that would have been obtained
from unaffiliated third parties.

For
executive officer compensation and option exercise information, see "Compensation of Executive Officers."

Item 14. CONTROLS AND PROCEDURES

(a)Evaluation of disclosure controls and procedures.Based on their evaluation of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities

98

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Exchange
Act of 1934) as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Company's chief executive officer and chief financial officer
have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner.

(b)Changes in internal controls.There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K









99

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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 Amendment No. 2 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth of Massachusetts on August 5, 2003.

| |  | SATCON TECHNOLOGY CORPORATION
| |  | -----------------------------
| |  | By:                          

100

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CERTIFICATIONS

I,
David B. Eisenhaure, certify that:

|Dated: August 5, 2003 | /s/DAVID B. EISENHAUREDavid B. Eisenhaure
President and Chief Executive Officer
|--------------------- | -------------------------------------------------------------------------------

101

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I,
Ralph M. Norwood, certify that:

|Dated: August 5, 2003 | /s/RALPH M. NORWOODRalph M. Norwood
Chief Financial Officer
|--------------------- | -----------------------------------------------------------

102

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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.

|Name                                          |  | Capacity                                                                                                |  | Date          
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | --------------
|                                              |  |                                                                                                         |  |               
|/s/DAVID B. EISENHAUREDavid B. Eisenhaure     |  | Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) |  | August 5, 2003
|/s/RALPH M. NORWOODRalph M. Norwood           |  | Vice President of Finance, Chief Financing Officer and Treasurer (Principal Financial Officer)          |  | August 5, 2003
|/s/JOHN J. MCCABEJohn J. McCabe               |  | Controller and Chief Accounting Officer (Principal Accounting Officer)                                  |  | August 5, 2003
|/s/MICHAEL C. TURMELLEMichael C. Turmelle     |  | Director, Vice President and Chief Operating Officer                                                    |  | August 5, 2003
|/s/JAMES L. KIRTLEY, JR.James L. Kirtley, Jr. |  | Director, Vice President and Chief Scientist                                                            |  | August 5, 2003
|/s/MARSHALL J. ARMSTRONGMarshall J. Armstrong |  | Director                                                                                                |  | August 5, 2003
|/s/ALAN P. GOLDBERGAlan P. Goldberg           |  | Director                                                                                                |  | August 5, 2003
|/s/ANTHONY J. VILLIOTTIAnthony J. Villiotti   |  | Director                                                                                                |  | August 5, 2003
|/s/GERALD L. WILSONGerald L. Wilson           |  | Director                                                                                                |  | August 5, 2003

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EXHIBIT INDEX

|Exhibit No. |     | Description                                                                                                                                                                                                                                                                                                         
|----------- | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |     | Stock Purchase Agreement, dated as of October 21, 1999, by and among the Registrant, Mechanical Technology Incorporated, Ling Electronics, Inc. and Ling Electronics, Ltd. is incorporated herein by reference
to Exhibits to the Registrant's Current Report on Form 8-K dated October 21, 1999 (File No. 1-11512).
|2.2         |     | Asset Purchase Agreement, dated as of November 16, 1999, by and between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 16, 1999 (File No. 1-11512).                                                  
|2.3         |     | Asset Purchase Agreement by and among Inverpower Controls Ltd., the Registrant and SatCon Power Systems Canada Ltd., dated June 25, 2001, is incorporated herein by reference to Exhibits to the Registrant's
Current Report on Form 8-K dated July 13, 2001 (File No. 1-11512).                                    
|2.4         |     | Asset Purchase Agreement, dated September 27, 2002, by and between Sipex Corporation and the Registrant.                                                                                                                                                                                                            
|3.1         |     | 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 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). 
|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        | (*) | Employment 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).                                                                                                
|            |     |                                                                                                                                                                                                                                                                                                                     

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|10.2  | (*) | Employment Agreement, dated July 1, 1992, between the Registrant and Michael C. Turmelle is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File
No. 33-49286).                                                                                                                                                                                                                                                                                              
|----- | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3  | (*) | 1992 Stock Option Plan is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).                                                                                                                                                                                                                                                                                                                                                                
|10.4  | (*) | 1994 Stock Option Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994 (File No. 1-11512).                                                                                                                                                                                                                                                                                                                                   
|10.5  | (*) | 1996 Stock Option Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996 (File No. 1-11512).                                                                                                                                                                                                                                                                                                                                   
|10.6  | (*) | 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit B to the Registrant's Definitive Schedule 14A filed January 26, 1999 (File No. 1-11512).                                                                                                                                                                                                                                                                                                                                                 
|10.7  | (*) | 1999 Stock Incentive Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1999 (File No. 1-11512).                                                                                                                                                                                                                                                                                                                                
|10.8  | (*) | 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).                                                                                                                                                                                                                                                                                                                                                  
|10.9  | (*) | 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).                                                                                                                                                                                                                                                                                                                                                 
|10.10 |     | Lease, dated October 21, 1993, between the Registrant and Gunwyn/First Street Limited Partnership is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File
No. 33-49286) and First Amendment to Lease, dated June 22, 1998, by and between the Registrant and Gunwyn/First Street Limited Partnership is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1998 (File No. 1-11512).
|10.11 | () | Manufacturing Agreement between Applied Materials, Inc. and its wholly- owned subsidiaries and the Registrant, dated as of February 20, 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).                                                                                                                                                                                                           
|10.12 |     | Amended and Restated License Agreement, dated as of October 23, 1998, by and between the Registrant and Beacon Power Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated October 23, 1998 (File No. 1-11512).                                                                                                                                                                                                                                        
|10.13 |     | Asset Purchase Agreement, dated as of January 4, 1999, among K&D MagMotor Corp., the Registrant, Inductive Components, Inc., Lighthouse Software, Inc. and Thomas Glynn is incorporated herein by
reference to Exhibits to the Registrant's Current Report on Form 8-K dated January 4, 1999 (File No. 1-11512).                                                                                                                                                                                                  
|10.14 |     | Asset Purchase Agreement, dated as of March 31, 1999, by and between HyComp, Inc. and HyComp Acquisition Corp., a wholly-owned subsidiary of the Registrant, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999 (File No. 1-11512).                                                                                                                                                                                             
|10.15 |     | Note Purchase Agreement, dated as of June 22, 1999, by and among Beacon Power Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant is
incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999 (File No. 1-11512).                                                                                                                                                   
|      |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

105

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|10.16 |  | Note and Warrant Purchase Agreement, dated as of August 2, 1999, by and among Beacon Power Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant
is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999 (File No. 1-11512).
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Registration Rights Agreement, dated as of August 25, 1999, among the Registrant and the investors named on the signature pages thereof 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).                                                                                            
|10.18 |  | Amendment No. 1 to Registration Rights Agreement, dated as of May 25, 2001, among the Registrant and the parties whose names appear on Schedule I thereto is incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated May 25, 2001 (File No. 1-11512).                                                                                         
|10.19 |  | Form of Warrants issued on August 25, 1999 in connection with the sale of the Series A Preferred Stock 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).                                                                                                                             
|10.20 |  | Warrant, dated May 25, 2001, issued to Brown Simpson Partners I, Ltd. is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated May 25, 2001 (File
No. 1-11512).                                                                                                                                                                 
|10.21 |  | Securities Purchase Agreement, dated as of October 21, 1999, between the Registrant and Mechanical Technology Incorporated is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated October 21, 1999 (File No. 1-11512).                                                                                                        
|10.22 |  | SatCon Registration Rights Agreement, dated as of October 21, 1999, between the Registrant and Mechanical Technology Incorporated is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated October 21, 1999 (File No. 1-11512).                                                                                                 
|10.23 |  | MTI Registration Rights Agreement, dated as of October 21, 1999, between Mechanical Technology Incorporated and the Registrant is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated October 21, 1999 (File No. 1-11512).                                                                                                    
|10.24 |  | Form of Stock Purchase Warrant issued on October 21, 1999 by the Registrant to Mechanical Technology Incorporated is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K
dated October 21, 1999 (File No. 1-11512).                                                                                                                 
|10.25 |  | Form of Stock Purchase Warrant issued on October 21, 1999 by Mechanical Technology Incorporated to the Registrant is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K
dated October 21, 1999 (File No. 1-11512).                                                                                                                 
|10.26 |  | Sublease, dated November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 16,
1999 (File No. 1-11512).                                                                                                                                       
|10.27 |  | Transition Services Agreement, dated as of November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 16, 1999 (File No. 1-11512).                                                                                                            
|10.28 |  | Memorandum of Understanding, entered into on November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 16, 1999 (File No. 1-11512).                                                                                                          
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|10.29 |  | Registration Rights Agreement, dated as of November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 16, 1999 (File No. 1-11512).                                                                                                       
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30 |  | Stock Purchase Warrant issued on February 4, 2000 by the Registrant to Northrop Grumman Corporation is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended
December 31, 1999 (File No. 1-11512).                                                                                                                   
|10.31 |  | Consulting Agreement, dated July 19, 2000, between the Registrant and Marshall J. Armstrong is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2000 (File No. 1-11512).                                                                                                                               
|10.32 |  | Agreement between the Department of Energy and the Registrant is incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000 (File
No. 1-11512).                                                                                                                                                        
|10.33 |  | Master Lease Agreement, dated as of August 31, 2000, by and between General Electric Corporation and the Registrant is incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for
the period ended December 31, 2000 (File No. 1-11512).                                                                                              
|10.34 |  | Cooperation Agreement by and between the Registrant and Beacon Power Corporation, dated April 25, 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).                                                                                                      
|10.35 |  | Strategic Collaboration Agreement between Chevron Energy Solutions, LP and the Registrant, dated January 23, 2002, is incorporated herein by referenced to Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 30, 2002 (File No. 1-11512).                                                                                          
|10.36 |  | Co-Operation, License and Supply Agreement by and among Hatch Steltech Ltd., Siemens AG and SatCon Power Systems Canada Ltd., dated April 26, 2002, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 29, 2002 (File No. 1-11512).                                                           
|10.37 |  | Forbearance Agreement, dated December 19, 2002, 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 Current Report on Form 8-K dated December 19, 2002 (File No. 1-11512).
|10.38 |  | Co-Operation, License and Supply Agreement by and between Hatch Steltech Ltd. and SatCon Power Systems Canada Ltd., dated October 11, 2001 is incorporated herein by reference to Exhibits to Registrant's Annual Report
on Form 10-K for the year ended September 30, 2002 (File No. 1-11512).                                                                        
|10.39 |  | Change of Control Letter, dated February 11, 2002, between the Registrant and Ralph M. Norwood is incorporated herein by reference to Exhibits to Registrant's Annual Report on Form 10-K for the year ended
September 30, 2002 (File No. 1-11512).                                                                                                                    
|10.40 |  | Investment Banking Agreement, by and between J.P. Turner & Company, LLC and the Registrant, dated August 23, 2002 is incorporated herein by reference to Exhibits to Registrant's Annual Report on Form 10-K
for the year ended September 30, 2002 (File No. 1-11512).                                                                                                 
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|10.41 |  | Loan and Security Agreement, dated September 13, 2002, between the Registrant, SatCon Power Systems, Inc., SatCon Electronics, Inc., SatCon Applied Technology, Inc., SatCon Power Systems Canada LTD.
and Silicon Valley Bank together with Negative Pledge Agreement, dated as of September 13, 2002, 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 Registrant's Annual Report on Form 10-K for the year ended September 30, 2002 (File No. 1-11512).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.42 |  | Stock Purchase Warrant issued on September 13, 2002 by the Registrant to Silicon Valley Bank together with Registration Rights Agreement, dated September 13, 2002, by and between the Registrant and Silicon
Valley Bank is incorporated herein by reference to Exhibits to Registrant's Annual Report on Form 10-K for the year ended September 30, 2002 (File No. 1-11512).                                                                                                                                                                                                                                                           
|10.43 |  | Stock Purchase Warrant issued on December 19, 2002 by the Registrant to Silicon Valley Bank together with Amendment No. 1 to Registration Right Agreement, dated December 19, 2002, by and among Silicon
Valley Bank, Silicon Valley Bancshares and the Registrant is incorporated herein by reference to Exhibits to Registrant's Annual Report on Form 10-K for the year ended September 30, 2002 (File No. 1-11512).                                                                                                                                                                                                                  
|10.44 |  | Teaming Agreement by and between General Atomics and the Registrant, dated February 20, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.45 |  | Global Supply Agreement by and between Applied Materials, Inc. and the Registrant, dated as of November 21, 2002 together with Technology Escrow Agreement among Applied Materials, Inc., DSI Technology
Escrow Services, Inc. and any additional party signing the Acceptance Form attached to this Agreement.                                                                                                                                                                                                                                                                                                                          
|21.1  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|23.1  |  | Consent of Grant Thornton LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|23.2  |  | Notice Regarding Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|99.1  |  | Risk Factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|99.2  |  | 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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