<PAGE>
 
================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                             ____________________

                                   FORM 10-K
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
                        COMMISSION FILE NUMBER 1-11512
                             
                             ____________________

                         SATCON TECHNOLOGY CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                              __________________

               DELAWARE                             04-2857552
    (STATE OR OTHER JURISDICTION OF              (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)            IDENTIFICATION NUMBER)

                                           
      161 FIRST STREET, CAMBRIDGE, MASSACHUSETTS       02142         
            
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)             (ZIP CODE) 
                              __________________

                                (617) 661-0540
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                              __________________

      SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:   NONE.

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT

                                TITLE OF CLASS
                                --------------

                         COMMON STOCK, $.01 PAR VALUE
                         ----------------------------

          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  X     NO
                                  -----    ------

          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. [_]

          As of December 2, 1996, 7,379,817 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding. The aggregate market value
of the registrant's voting stock held by non-affiliates of the registrant as of
December 2, 1996, based upon the closing price of such stock on the Nasdaq
National Market on that date ($7.328) was $31,944,474.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
                                     Statement for its 1997 Annual Meeting of
                                     Stockholders are incorporated by reference 
                                     into Part III of this Form 10-K

================================================================================

                                       1
<PAGE>
 
                                    PART I

  ITEM 1.  BUSINESS

  GENERAL

  SatCon Technology Corporation (the "Company" or "SatCon") was organized as a
  Massachusetts corporation in February 1985 and reincorporated in Delaware in
  1992. SatCon designs, develops and manufactures intelligent, electro-
  mechanical products for aerospace, transportation, industrial, and utility
  applications. SatCon's electro-mechanical products are being developed for a
  wide variety of U.S. government and commercial markets. For the government,
  SatCon's electro-mechanical systems provide low vibration and high power for
  applications ranging from satellite attitude control to high speed drives for
  shipboard systems. In the transportation segment SatCon is developing electric
  and hybrid electric drive components, auxiliary power units, and advanced
  steering, suspension, and braking systems. SatCon is working with major
  equipment producers to develop process equipment drives, high speed and
  precision machine tools, manipulators, and machinery isolation equipment.
  SatCon's electro-mechanical systems may offer to the utility industry
  advantages in power generation, energy storage, and power quality. In the
  consumer market SatCon is developing freon-free compressors for refrigerators,
  variable speed motors, and other long-life, high-efficiency machinery.

  STRATEGY

  The transition to a new generation of products being developed by SatCon is
  being fueled by a combination of market demand for higher performance and
  improved efficiency, and by the potential to satisfy these needs made possible
  by advances in materials and electronics technologies. It is the Company's
  strategy to accelerate leading edge developments by continuing to expand its
  externally funded contract research and development from both government and
  commercial sources. The Company believes that this funding can be used to
  develop products which can be sold to government agencies and possibly
  transition into viable commercial products. In most instances individual
  components have multiple applications across these markets.

  These product developments typically progress through a technology and concept
  development phase and, if appropriate, into a prototype build phase. Once
  demonstrated, the Company intends to leverage these prototype developments
  into 'beta site' units that can be purchased by, or jointly developed with,
  commercial customers for evaluation. Upon completion of beta site testing,
  decisions by potential customers will determine the viability of continuing
  into pre-production manufacturing and further testing and evaluation. In the
  past two years, SatCon has been successful in developing relationships with
  potential commercial customers for its technology and prototype demonstration
  units. These relationships can provide a foundation for the Company's
  continuing product development efforts while building a potential market base
  for those products in production quantities.

  To date, the Company has entered into discussions with such companies as 
  Delco-Remy, General Motors, TRW, Applied Materials, Westinghouse and Allied
  Signal and intends to seek to form relationships that can utilize the sales,
  marketing and distribution channels as well as manufacturing capabilities of
  these organizations to further the commercialization of SatCon's technologies.

  DEVELOPMENTS DURING 1996

  General

  During Fiscal 1996, the Company was involved in a number of activities
  including the following:

  The Company delivered five "beta-site" units of an integrated suspension and
  motor system to Applied Materials, a manufacturer of semiconductor wafer
  fabrication equipment, for evaluation.  If this evaluation is successful, the
  components could be used in a next-generation wafer processing system.

  The Company also developed an  alpha demonstration unit of it's flywheel
  "Inertial Battery" intended for use as a replacement for lead-acid batteries
  in uninterruptible power supply systems.  Potential customers include
  telecommunications companies such as cable television and telephony service
  suppliers.

                                      2  
<PAGE>
 
  The Company also participated in several efforts with various commercial
  customers to develop new products and product improvements including an
  improved performance alternator for commercial vehicles;  control electronics
  for a commercial manufacturer of turbines that will provide power regulation
  for a turbine being developed for potential applications in alternative fuel
  vehicles; and flywheel integrated power and attitude control systems for
  commercial satellite applications.

  Organizational Developments

  In September 1996, the Company further refined its organizational structure.
  The Technology Division and Energy Systems Division remained relatively
  unchanged with a new division, Tucson Space and Electro-Optics Division being
  created.  The Company also opened a sales office in the Detroit, Michigan area
  to better service its automotive customers.

  The TECHNOLOGY DIVISION, located in Cambridge, continues the research and
  development work that has historically been conducted at SatCon.  It will
  concentrate on developing advanced technologies through "integrated product
  teams" in motors and high speed drives, power electronics, magnetic bearings
  and suspension systems, and propulsion systems.  As technology developments
  mature into potential products, product divisions may be created to further
  advance the applications and marketing efforts.  At the end of fiscal 1996,
  SatCon had two such divisions.

  The ENERGY SYSTEMS DIVISION, located in SatCon's Cambridge offices, is focused
  on the product development and marketing of flywheel "Inertial Battery"
  systems for such markets as utilities, cable television and
  telecommunications, where uninterruptible power supplies (UPS) are critical to
  maintaining service.  Although these markets represent a major opportunity
  base, other industrial users will be pursued as well.  Power outages can be
  costly to many major industries which experience downtime and lost throughput
  whenever outages cause production line shut-down. SatCon's flywheel systems
  may provide a cost effective alternative to battery systems which have limited
  life and whose disposal is potentially hazardous to the environment.

  The TUCSON SPACE AND ELECTRO-OPTICS DIVISION is located in Tucson, AZ and is
  focused on two major product areas.  The first is a flywheel energy storage
  system to be used as a new integrated power and attitude control system for
  satellites that eliminates chemical batteries and combines their function with
  that of satellite steering.  The second is electro-optic sensing systems for
  applications such as earth mapping, mine hunting, commercial fishing and food
  inspection devices.

  FUNDED RESEARCH AND DEVELOPMENT

  The Company continued its funded research and development with various U.S.
  Government agencies during Fiscal 1996.  Projects included a flywheel energy
  storage system for NASA for use in future satellite applications; a
  terrestrial based flywheel energy storage system for the Marine Corps;
  potentially cost effective permanent magnet variable speed drives for
  auxiliary applications on U.S. Navy Ships that can integrate high density
  drive electronics with innovative permanent magnet motors for hydraulic pump
  motors, circulating pumps and compressors; a lightweight, low volume
  alternator and a high efficiency power electronics drive for the Army, and
  several reaction mass actuator application programs for helicopters.  SatCon
  is also working with the Air Force to investigate the use of new specialty
  shape memory alloys in air foil controls for greater fuel efficiency and with
  several other agencies on the development of high power density electronics
  modules called Power Electronic Building Blocks or PEBB's.

  COMMERCIALIZATION

  The Company intends to continue directing its commercialization efforts in the
  following product areas:

  Flywheel Energy Storage Systems

  By integrating energy-storing flywheels made of high-strength materials with
  high-power, permanent magnet motor/generators, SatCon has developed electro-
  mechanical storage systems that management believes have the potential to
  offer practical solutions for mobile and stationary applications.  SatCon
  flywheel systems are anticipated to provide extremely high power output and
  energy storage in compact packages.  They may be a long-lasting, light-weight,
  and environmentally sound alternative to conventional batteries.

                                      3  
<PAGE>
 
  SatCon's Flywheel Energy Storage (FES) systems offer an alternative to lead-
  acid batteries as uninterruptible power supplies for the telecommunications
  industry, including cable television and telephone service providers, which
  are required to maintain service during power outages.  In addition these
  systems can be used to provide backup for critical industrial processes and
  machines, as power supplies for satellites and as energy recovery systems for
  electric and hybrid electric vehicle drive trains.

  While flywheels have been used for centuries, practical, compact systems are a
  recent development. Their arrival coincides with the commercial availability
  of high-strength-to-weight composite materials, high energy permanent magnets,
  extremely efficient switching power supplies, and active electromagnetic
  bearings.

  During 1996, the Company made internal research and development investments in
  this technology by designing and building an alpha demonstration unit of its
  Inertial Battery 20C1000 series flywheel energy storage system for
  uninterruptible power supply applications for the telecommunications market.

  Motors and High Speed Drives

  SatCon designs and builds high-performance motors and drives that capitalize
  on advances in materials and semiconductor technology to achieve high power
  density. SatCon designs are characterized by power densities as high as 7
  hp/lb for the motors and 25 hp/lb for the drive electronics. Through the use
  of high-performance materials and careful design of the magnetic circuits,
  SatCon has demonstrated electric motor prototypes that are light weight and
  have provided efficiencies in excess of 97 percent.  SatCon's motor designs
  are being evaluated for a wide variety of applications including electric
  vehicles, shipboard motors and general industrial applications.

  During 1996, the Company made internal research and development investments in
  this product area by developing and demonstrating an advanced automotive
  alternator that can provide more power at lower speeds.  The issue with
  current automotive alternators is the ability to match power requirements at
  idle speeds.  By addressing key limitations of current alternators, SatCon is
  attempting to enter the automotive alternator market.

  Power Electronics

  SatCon has developed proprietary, custom-built high-voltage hybrid modules
  based on advanced power semiconductor technology at a fraction of the weight
  of conventional packages.  The high-density topology and innovative cooling
  schemes utilized allow for higher throughput in smaller, lighter weight
  packages.  These electronics support SatCon's high-speed drive and flywheel
  product development.  This high-density topology and innovative cooling scheme
  has created power throughput in excess of 1 Megawatt in a 65-pound package.

  Magnetic Bearings and Suspension Systems

  Improvements in magnetic materials and electronic control systems have led the
  way to advances in electromagnetic bearings and suspension systems. SatCon has
  participated in the development of such systems for spacecraft and ground-
  based systems. SatCon's magnetic bearing systems feature innovative
  electromagnetic and permanent magnet actuators and advance digital control
  systems. These systems have been developed for both commercial and military
  applications.

  By injecting electromagnetic forces along a selected bearing axis in concert
  with shaft rotation, the magnetic bearings can balance a dynamic machine,
  resulting in smooth and quiet operation. Similar principles guide the
  application of electromagnetic suspension systems. These automated systems
  provide a significant reduction of structure-borne vibration transmittal,
  providing either low-vibration machinery operation, low detection, or
  vibration isolation.  In addition, these systems provide lubrication-free
  support for rotating, reciprocating, and stationary systems.  Also, through
  active electronic control, these systems provide quiet, smooth, and non-
  contaminating machinery operation and isolation.

  During 1996, the Company made internal investments in this product area by
  building several beta site units of its magnetic actuation system for
  semiconductor processing that can eliminate unwanted debris, provide higher
  throughput potential, and is more easily maintained than existing mechanical
  systems.  This entry into the semiconductor processing equipment market may
  represent SatCon's first step toward realizing the market potential for
  electro-mechanical actuation systems.

  Propulsion Systems

                                       4
<PAGE>
 
  SatCon is developing commercial prototype prime propulsion and auxiliary power
  units that combine advanced gas turbine drives with high-speed electrical
  alternators. The result is compact, lightweight electrical power generation
  that can operate on a variety of fuels. This system, called the Turbine
  Alternator Unit ("TAU"), integrates a high-speed gas turbine and a highly
  efficient, high-frequency AC induction alternator on the same shaft. With
  innovative electrical, structural and thermal design, a TAU can operate at
  high speeds, resulting in high power output with reduced system size.

  These Turbine-Alternators, which are appropriate for a wide variety of primary
  or auxiliary power applications, are expected to operate on a variety of fuels
  and to offer attractive power-to-weight benefits compared to conventional
  power generation options.

  MARKETING/MARKETS

  SatCon's objective is to capitalize on the technology developments from its
  internal and contract research and development to be a leading supplier of a
  new generation of intelligent, electro-mechanical products for aerospace,
  transportation, industrial, and utility applications. These products, spawned
  by a revolution in the size, weight and efficiency of machines, provide
  competitive advantages in performance. Management believes the following list
  to be representative of market opportunities as they exist today for the
  Company's products.

  Flywheel Energy Storage ("FES") Systems:  Electromechanical storage in
  SatCon's flywheel energy storage systems may replace batteries in a variety of
  industries including uninterruptible power supplies for telecommunications
  providers and industrial systems, power quality for utilities, and integrated
  power and attitude control for satellites.

  Motors and High Speed Drives:  Management believes that SatCon's electric
  motors, generators, and drives may offer advantages to a variety of industries
  including automotive components, vehicle propulsion systems, industrial
  drives, machine tools, satellites and consumer products.

  Power Electronics:  Lightweight, high power density electronics may offer
  advantages to several markets and are key components in SatCon's system
  products including  motor and drive systems, electric and hybrid vehicles,
  aerospace, industrial controls and power management, and a variety of military
  subsystems.

  Magnetic Bearings and Suspension Systems:  SatCon's magnetic bearing and
  suspension systems have the potential to be applied to a variety of
  applications such as aircraft gas turbine engines, flywheel systems,
  compressors, high speed machine tools, vibration isolators and computer chip
  manufacturing processing equipment.

  Propulsion Systems:  Lightweight, low-cost, long-life turbine alternators may
  offer advantages for a variety of applications including hybrid vehicle
  primary propulsion, auxiliary power and portable power systems, and military
  vehicle propulsion and remote power supplies.

  COMPETITION

  The Company is aware of direct and indirect competitors which employ magnetics
  technology and have extensive research and development facilities in both
  government and commercial markets. The Company believes its principal
  competitors in government sponsored research and development include Aura
  Systems, Inc., American Flywheel, U.S. Flywheel, and Unique Mobility, Inc. The
  Company is aware of large companies, as well as smaller companies, entering
  this market and expects competition to intensify either through direct
  competition or via alternative technologies.

  Although the Company is not as well capitalized as some of its competitors and
  is more limited in terms of its facilities and number of personnel, its
  strategy is to compete with larger companies on the basis of its technical
  skills, proprietary know-how, access to university researchers in the greater
  Boston area conducting ongoing research, and key personnel, many of whom are
  experts in the field of magnetics technology.

  The industries served by the Company are highly competitive and a number of
  companies are involved in extensive research and development programs designed
  to address the technological challenges which the Company is seeking to
  address through its development programs. Many of these companies are larger
  and better financed than the Company. As a result, there can be no assurance
  that customers will not select technologies developed by or under development
  by other companies or that potential customers will select the 

                                       5
<PAGE>
 
  Company's technologies to address both existing and potential markets.
  Virtually all of the Company's revenues to date from commercial contracts have
  been derived in connection with prototype development contracts. As a result,
  the Company will need to develop technologies which address customers' needs
  in a cost-effective and timely manner. There can be no assurance that the
  Company will be successful in these efforts, that technologies developed by
  other companies will not be selected, or that potential customers for the
  Company's technologies will adopt the Company's technologies in a timely
  manner, if at all.

  PATENTS AND PROPRIETARY INFORMATION

  The Company currently owns nine United States patents which expire between
  2007 and 2013.  The Company has twelve patent applications pending with the
  U.S. Patent and Trademark Office.

  As a qualifying small business, the Company has retained commercial ownership
  rights to proprietary technology developed under various U.S. Government
  contracts and grants, including Small Business Innovation Research ("SBIR")
  contracts.

  In addition to its patent rights, the Company also relies upon treatment of
  its technology as trade secrets and upon confidentiality agreements, which all
  of its employees are required to execute, assigning to the Company all patent
  rights and technical or other information developed by the employees during
  their employment with the Company. The Company's employees have also agreed
  not to disclose any trade secret or confidential information without the prior
  written consent of the Company. Notwithstanding these confidentiality
  agreements, there can be no assurances that other companies will not acquire
  information which the Company considers to be proprietary. Moreover, while the
  Company intends to defend vigorously its patents against infringement by third
  parties, there can be no assurance that the Company's patents will be
  enforceable or provide the Company with meaningful protection from competitors
  or that patent applications will be allowed. No assurance can be given as to
  the issuance of additional patents or, if so issued, as to their scope.
  Patents granted may not provide meaningful protection from competitors. Even
  if a competitor's products were to infringe patents owned by the Company, it
  would be very costly for the Company to pursue its rights in an enforcement
  action, which would also divert funds and resources which otherwise could be
  used in the Company's operations. Furthermore, there can be no assurance that
  the Company would be successful in enforcing intellectual property rights or
  that the Company may not infringe patent or intellectual property rights of
  third parties, although the Company, to date, has not been required to defend
  its patents or proprietary information against claims by third parties.

  RESEARCH AND DEVELOPMENT

  All of the Company's revenues during Fiscal year 1996 are 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 the Company retains exclusive
  rights to the technology for commercial and industrial applications.  In
  addition to the research and development conducted under contract, the Company
  expended $893,628 on internally funded research and development in 1996.  This
  is primarily related to continued development of drive train components for
  hybrid electric vehicles in the automotive industry as well as further
  development of flywheel energy storage systems for the cable industry.

  GOVERNMENT REGULATION

  The Company has entered into certain U.S. Government contracts which require
  compliance with applicable U.S. Government regulations. The Company's
  contracts with the U.S. Government consist primarily of research and
  development contracts, many of which are awarded under the SBIR Program. The
  research and development contracts are generally subject to competitive
  bidding and extensive regulation and are generally subject to cancellation at
  the U.S. Government's sole discretion. In addition, the Company has been
  awarded certain classified U.S. Government contracts. Certain of the Company's
  employees and directors have been required to obtain security clearance from
  the federal government.

  As a party to a number of contracts with the U.S. Government and its agencies,
  the Company must comply with extensive regulations, including regulations with
  respect to bid proposals and billing practices. As research and development
  contracts are generally subject to cancellation at the U.S. Government's sole
  discretion, should the 

                                       6
<PAGE>
 
  U.S. Government or its agencies conclude that the Company has not adhered to
  federal regulations, any contracts to which the Company is a party could be
  canceled and/or could prohibit the Company from bidding on future contracts,
  which would have a material adverse effect on the Company. All payments to the
  Company for work performed on contracts with agencies of the U.S. government
  are subject to adjustment upon audit by the U.S. Government Defense Contract
  Audit Agency, the General Accounting Office, and other agencies. The Company
  could be required to disgorge any payments received from U.S. Government
  agencies if it is found to have violated federal regulations.

  The commercialization of the Company's technologies for use in various
  industries may also be affected by federal and state legislative and
  regulatory changes affecting such industries.

  MANUFACTURING AND SUPPLIERS

  To date, the Company has manufactured all of its prototype products at its
  facility in Cambridge, Massachusetts. The Company anticipates investing in
  manufacturing equipment to further develop the manufacturing capabilities at
  this facility. If the Company is successful in obtaining market penetration of
  its products, the Company will be required to deliver large volumes of quality
  products or components to its customers on a timely basis at reasonable costs
  to the Company. The Company intends to seek to supplement its manufacturing
  capabilities by establishing relationships with manufacturing organizations to
  deliver large volumes of its products until such time as the Company can
  develop its own manufacturing expertise and capacity.  No assurance can be
  given that the Company will be able to successfully establish relationships
  with third party manufacturing organizations, or if such relationships are
  established, that they will be successful.

  The principal materials and supplies used by the Company are available from
  several commercial sources, and the Company does not depend on any single
  source for a significant portion of its materials or supplies. Component parts
  of the Company's active control systems are readily available.

  BACKLOG

  The Company's backlog consists primarily of research and development
  contracts.  At September 30, 1996, the backlog was approximately $7,400,000
  for work to be performed in the Fiscal year ending September 30, 1997.  Many
  of the Company's contracts may be canceled at any time with limited or no
  penalty.  Also, 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 the Company has no control. The Company's
  backlog at September 30, 1995 was approximately $10,000,000.  At September 30,
  1996, the Company also had $10,000,000 in conditional purchase orders and
  letters of intent for flywheel energy storage systems.

  SIGNIFICANT CUSTOMERS

  Chrysler accounted for approximately 38% of the Company's Fiscal 1996 sales.
  See "Footnote L" of Notes to Financial Statements.  The Company's revenues
  from Chrysler decreased by approximately $3.9 million from 1995 to 1996.  See
  "Management's Discussion and Analysis of Financial Condition and Results of
  Operations."

  EMPLOYEES

  At September 30, 1996, the Company employed a total of 102 people; 98 on a
  regular full-time basis, one on a regular part-time basis, and three student
  interns.  Many of the Company's employees are affiliated with large
  universities located in the greater Boston area.  Seventy-eight persons are
  employed in engineering, 23 in administration and 7 in marketing
  and sales.  None of these employees are represented by a union.  The Company
  believes that its relations with its employees are satisfactory.


  ITEM 2.   DESCRIPTION OF PROPERTIES

  The Company's office and laboratory space is 45,820 square feet located at 161
  First Street, Cambridge, Massachusetts, under a primary lease expiring on
  October 31, 1998.  The Company leases an additional 8,343 square feet located
  at 6245 East Broadway Boulevard, Suite 350, Tucson, Arizona, under a primary
  lease expiring on March 31, 2001. The Company believes its facilities are
  adequate for its current needs and that 

                                       7
<PAGE>
 
  adequate facilities for expansion, if required, are available in the immediate
  areas. See "Footnote F" on Notes to Financial Statements.


  ITEM 3.   LEGAL PROCEEDINGS

  The Company is not involved in any material legal proceedings.


  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 the Fiscal year covered by this report through the solicitation of
  proxies or otherwise.

                                       8
<PAGE>
 
                                    PART II


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

  The Company's Common Stock is traded on the Nasdaq National Market ("NNM") 
  under the trading symbol "SATC." As of December 2, 1996 there were
  approximately 190 shareholders of record.

  For the periods reported below, the following table sets forth the range of
  high and low bid quotations for the Common Stock as reported by NNM.  Such
  quotations represent interdealer quotations without adjustment for retail
  markups, markdowns or commissions and may not represent actual transactions.
  As of December 2, 1996 the closing price for the Company's Common Stock, as
  quoted in the Wall Street Journal, was $7.328.

<TABLE>
<CAPTION>
                          FISCAL YEAR 1996            FISCAL YEAR 1995
                      ------------------------    ------------------------
                                 BID                         BID
                      ------------------------    ------------------------
                            HIGH      LOW               HIGH      LOW
                      ------------  ----------    ------------  ----------
     <S>              <C>           <C>           <C>           <C>
     First Quarter...    $11.375       $7.750        $13.000      $ 8.250
     Second Quarter..    $12.750       $6.250        $11.000      $ 8.625
     Third Quarter...    $12.750       $8.625        $15.125      $ 8.875
     Fourth Quarter..    $ 9.250       $7.000        $15.125      $10.375
</TABLE>


  DIVIDEND POLICY

  The Company has not paid cash dividends on its Common Stock since its
  inception and has no intention of paying any cash dividends to its
  stockholders in the foreseeable future.  The Company intends to reinvest
  earnings, if any, in the development and expansion of its business.  Any
  declaration of dividends in the future will be at the election of the Board of
  Directors and will depend upon the earnings, capital requirements and
  financial position of the Company, general economic conditions, requirements
  of any bank lending arrangements which may then be in place and other
  pertinent factors.

                                       9
<PAGE>
 
  ITEM 6. SELECTED FINANCIAL DATA

  The selected financial data set forth below for the years ended September 30,
  1996, 1995, 1994, 1993, and 1992 has been derived from the financial
  statements of the Company which have been audited by Coopers & Lybrand L.L.P.,
  independent accountants.  This information should be read in conjunction with
  the financial statements and notes thereto set forth elsewhere in this Report.


  STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
 
                                                              YEARS ENDED SEPTEMBER 30,
                                        -------------------------------------------------------------------
                                              1996           1995          1994         1993         1992
                                        -------------    -----------   -----------  ----------   -----------
<S>                                     <C>              <C>           <C>          <C>          <C>
Revenue.................................  $ 9,384,588    $11,475,427   $18,016,987  $5,306,680    $2,465,767
                                        -------------    -----------   -----------  ----------  ------------
Cost of Sales...........................    3,940,674      6,522,768    11,281,239   2,652,533       897,099
Selling, General and Administrative                                      
     Expenses...........................    8,023,441      5,483,194     4,655,769   2,363,370     1,510,612
Research and Development................      893,628      1,937,241       461,068     119,663         9,472
                                        -------------    -----------   -----------  ----------  ------------
     Total Operating Expenses...........   12,857,743     13,943,203    16,398,076   5,135,566     2,417,183
Interest Income/(Expense), Net..........      463,840        451,034       409,337     119,100       (47,324)
                                        -------------    -----------   -----------  ----------  ------------
Income/(loss) Before Income Taxes.......   (3,009,315)    (2,016,742)    2,028,248     290,214         1,260
Provision/(benefit) for Income Taxes....     (144,479)      (806,697)      803,356     101,288           290
                                        -------------    -----------   -----------  ----------  ------------
Net Income/(loss).......................  $(2,864,836)   $(1,210,045)  $ 1,224,892  $  188,926    $      970
                                        =============    ===========   ===========  ==========  ============
Earnings/(loss)  per Common and Common     
 Equivalent Share.......................        $(.39)         $(.17)         $.17        $.03             - 
                                        =============    ===========   ===========  ==========  ============
Weighted Average Shares Outstanding.....    7,285,756      7,079,855     7,347,098   5,628,641     3,892,132
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>

                                                          AT SEPTEMBER 30,
                                ---------------------------------------------------------------------
                                     1996         1995          1994            1993        1992
                                -----------    -----------    -----------    ----------    ----------
<S>                             <C>            <C>            <C>            <C>           <C>
Total Assets.................   $17,182,455    $19,792,966    $22,274,534    $8,430,630    $1,320,501
Total Long Term Obligations..   $         0    $         0    $         0    $   11,229    $   45,929
Total Liabilities............   $ 1,083,287    $ 1,040,251    $ 2,768,493    $1,241,426    $  997,570
Working Capital..............   $11,011,170    $15,615,645    $18,172,529    $6,715,989    $   33,350
Stockholders' Equity.........   $16,099,168    $18,752,715    $19,506,041    $7,189,204    $  322,931
</TABLE>

                                      10
<PAGE>
 
  ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

  INTRODUCTION

  SatCon Technology Corporation (the "Company" or "SatCon") was organized as a
  Massachusetts corporation in February 1985 and reincorporated in Delaware in
  1992. SatCon designs, develops, and manufactures intelligent, electro-
  mechanical products for aerospace, transportation, industrial, and utility
  applications. SatCon's electro-mechanical products are being developed for a
  wide variety of U.S. government and commercial markets. For the government,
  SatCon's electro-mechanical systems provide low vibration and high power for
  applications ranging from satellite attitude control to high speed drives for
  shipboard systems. In the transportation segment, SatCon is developing
  electric and hybrid electric drive components, auxiliary power units, and
  advanced steering, suspension, and braking systems. SatCon is working with
  major equipment producers to develop process equipment drives, high speed and
  precision machine tools, manipulators, and machinery isolation equipment.
  SatCon's electro-mechanical systems may offer to the utility industry
  advantages in power generation, energy storage, and power quality. In the
  consumer market, SatCon is developing freon-free compressors for
  refrigerators, variable speed motors, and other long-life, high-efficiency
  machinery.

  It is the Company's strategy to accelerate leading edge developments by
  continuing to expand its externally funded contract research and development
  from both government and commercial sources. The Company can then leverage
  this funding to develop products which the Company believes can both be sold
  to government agencies and transition into high volume commercial products.
  Recent changes in the Small Business Innovative Research program provide a new
  mechanism to pursue government Phase III pre-production programs on a sole
  source non-competitive basis. In most instances, individual components have
  multiple applications across these markets.

  This Annual Report on Form 10-K contains forward-looking statements. For this
  purpose, any statements contained herein that are not statements of historical
  fact may be deemed to be forward-looking statements. Without limiting the
  foregoing, the words "believes," "anticipates," "plans," "expects" and
  similar expressions are intended to identify forward-looking statements. There
  are a number of important factors that could cause the Company's actual
  results to differ materially from those indicated by such forward-looking
  statements. These factors include, without limitation, those set forth below
  under the caption "Factors Affecting Future Results."

  RESULTS OF OPERATIONS

  The following table sets forth, for the periods indicated, the Percentage of
  Revenues for certain items in the Company's Statement of Operations for each
  period:

<TABLE>
<CAPTION>
                                                 YEAR ENDED SEPTEMBER 30,
                                              ------------------------------
                                                 1996     1995     1994
                                              --------- -------- -----------
     <S>                                      <C>       <C>      <C>
     Revenues................................   100.0%   100.0%     100.0%
     Cost of sales...........................    42.0     56.8       62.6
     Selling, general and administrative
      expenses...............................    85.5     47.8       25.8
     Research and development expenses.......     9.5     16.9        2.6
     Total operating expenses (excluding
      cost of sales).........................    95.0     64.7       28.4
     Operating income/(loss).................   (37.0)   (21.5)       9.0
     Interest income/(expense) net...........     4.9      3.9        2.3
     Income /(loss) before income taxes......   (32.1)   (17.6)      11.3
     Provision/(benefit) for income taxes....    (1.5)    (7.0)       4.5
     Net income/(loss).......................   (30.6)   (10.6)       6.8
</TABLE>

                                      11
<PAGE>
 
 
  YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1995

 
  Revenues.  The Company's revenues decreased $2,090,839, or 18.2%, from 1995 to
  1996. The decrease is primarily due to a decrease in revenue of approximately
  $3,945,253 from contracts with Chrysler Corporation for the development of
  drive train components as part of the Patriot Hybrid Vehicle Program.  During
  the year, Chrysler Corporation announced the cancellation of the Patriot
  Hybrid Vehicle Program. Chrysler has announced that it intends to transition
  technologies utilized in the Patriot Program to their Hybrid Electric Vehicle
  (HEV) program being sponsored by the U.S. Government's Super Car Initiative.
  The Company expects involvement with Chrysler in this effort; however as of
  December 20, 1996, no contractual agreement has been entered between SatCon
  and Chrysler Corporation relating to the HEV program.  The Company can give no
  assurance that it will receive additional work related to the HEV program.
  The Company has not to date recorded any revenues associated with the Chrysler
  HEV Program. This decrease in revenue was partially offset by increased
  revenues of approximately $2,355,000 related to work on various government
  development contracts.

  Cost of Sales.  Cost of sales decreased $2,582,094, or 39.5%, from 1995 to
  1996.  The decrease is primarily due to a decrease in work during 1996 on
  contracts with Chrysler Corporation for the development of drive train
  components as part of the Patriot Hybrid Vehicle Program.  As a percentage of
  revenue, cost of sales decreased from 56.8% for 1995 to 42.0.% for 1996. The
  decrease in cost of sales, as a percent of revenue, was primarily due to a
  decrease in direct material and subcontract costs and an increase in direct
  labor costs directly related to the shift from work on the Chrysler Patriot
  Program, which had high material costs, as a percentage of revenue, to work on
  several labor intensive research and development contracts funded by the U.S
  Government which typically have higher margins.

  Selling, General and Administrative. Selling, general and administrative
  expenses increased $2,540,247, or 46.3%, from 1995 to 1996, a change as a
  percentage of revenue from 47.8% in 1995 to 85.5% in 1996. Approximately
  $500,000 is attributable to the establishment of the Company's Space Division
  in Tucson, Arizona. Approximately $600,000 was expensed in establishing the
  Company's Flywheel Energy Storage Division. Cambridge facilities expense
  increased approximately $277,000 due to the exercise of an option in the
  Company's lease for additional space. The Company now occupies the entire
  building at 161 First Street, Cambridge, Massachusetts. Depreciation expense
  increased approximately $373,000 due to purchases of computer, laboratory,
  inspection, test, and manufacturing equipment during fiscal 1995 and 1996.
  Marketing expenses increased approximately $500,000 in efforts to broaden the
  customer base in anticipation of the cancellation of the Patriot Program.

  Research and Development.  Research and development expenses decreased
  $1,043,613, or 53.9% from 1995 to 1996.  As a percentage of revenue, internal
  research and development decreased from 16.9% in 1995 to 9.5% in 1996.  The
  decrease in research and development spending is primarily the result of a
  reallocation of engineering resources from internally funded research and
  development to construction of a pre-production flywheel, additional marketing
  efforts and development efforts on contracts from the U.S. Government and
  commercial contracts.  Virtually all of 1996 revenues were for sponsored
  research and development.  As a small business under government contracts,
  SatCon retains commercial rights to work developed.  For commercial contracts,
  intellectual property is negotiated on a case-by-case basis.

  Net Income/(Loss).  As a result of decreased revenues and increased investment
  in marketing, facilities, and associated fringe costs,  the Company realized a
  net loss of $2,864,836 in 1996 versus a net loss of $1,210,045 in 1995.


  YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1994

  Revenues.  The Company's revenues decreased $6,541,560, or 36.3%, from 1994 to
  1995. The decrease is primarily due to a decrease in revenue of approximately
  $5,700,000 from contracts with Chrysler Corporation for the development of
  drive train components as part of the Patriot Hybrid Vehicle Program.  During
  the year, performance testing began of first generation drive train components
  to identify possible design improvements to be incorporated in subsequent
  units.  This testing resulted in a delay in revenue from 

                                      12

<PAGE>
 
  the Patriot Program. At the close of the fiscal year the Company continued to
  support Chrysler in these test and design improvement efforts on a time and
  materials basis. In addition, the company realized a decrease in revenue of
  approximately $2,700,000, due to the completion of a contract with Itek
  Optical Systems for design work for a U.S. Government program. These decreases
  in revenue were partially offset by increased revenues of approximately
  $1,800,000 related to work on various commercial and government development
  contracts.

  Cost of Sales.  Cost of sales decreased $4,758,471, or 42.2%, from 1994 to
  1995.  The decrease is primarily due to a decrease in work during 1995 on
  contracts with Chrysler Corporation for the development of drive train
  components as part of the Patriot Hybrid Vehicle Program.  As a percentage of
  revenue, cost of sales decreased from 62.6% for 1994 to 56.8% for 1995. The
  decrease in cost of sales as a percent of revenue was primarily due to a
  decrease in direct material and subcontract costs as a percentage of cost of
  sales related to a shift in efforts on the Patriot Program from material
  procurement and subcontract production to assembly and test of first
  generation drive train components.  This decrease is partially offset by an
  increase in material procurement and subcontract production cost for long lead
  time parts for second generation drive train components for the Patriot
  Program.

  Selling, General and Administrative.  Selling, general and administrative
  expenses increased $827,425, or 17.8%, from 1994 to 1995, a change as a
  percentage of revenue from 25.8% in 1994 to 47.8% in 1995.  This increase is
  primarily the result of the addition of business support personnel (marketing,
  engineering, and administrative) added to support the Company's transition to
  a supplier of products to commercial markets.  This increase was partially
  offset by a decrease in costs related to contract employees and consultants
  replaced by permanent employees.  In addition, depreciation expense increased
  primarily due to the purchases of computer, laboratory, inspection and test,
  and manufacturing equipment during fiscal year 1994 and 1995.

  Research and Development.  Research and development expenses increased
  $1,476,173, or 320.2% from 1994 to 1995.  As a percentage of revenue, internal
  research and development increased from 2.6% in 1994 to 16.9% in 1995.  The
  increase in expenditures is primarily associated with projects to develop
  technology for products for the automotive and other commercial markets. The
  majority of the increase is associated with projects related to the develop of
  three pre-production prototype systems.  The systems developed and built
  include a flywheel energy storage system aimed at stationary uninterruptable
  power supply markets, an advanced replacement alternator for automotive
  applications, and an advanced actuation system for semiconductor processing
  equipment. The Company continues to increase efforts in the pursuit of
  commercial product opportunities capitalizing on the Company's Active Motion
  Control technology base.

  Net Income/(Loss).  As a result of decreased revenues and increased selling,
  general and administrative and research and development expenses, the Company
  realized a net loss of $1,210,045 in 1995 versus a net income of $1,224,892 in
  1994.

  LIQUIDITY AND CAPITAL RESOURCES

  The Company's cash and cash equivalents was $3,770,925 as of September 30,
  1996, an increase of $1,582,938 from September 30, 1995.  Cash used in
  operating activities was $3,072,434 during 1996, as compared to cash provided
  by operating activities of $5,751,991 during 1995. The cash used in operations
  was primarily the result of a net increase of approximately $972,675 in
  accounts receivable and unbilled contract costs due primarily to extended
  billing and payment terms with two commercial customers.  The remainder of the
  cash used by operating activities is primarily a result of an increase in
  other assets, a decrease in prepaid expenses, an increase in accrued expenses
  and payroll, and the net loss net of income tax benefit for the period.

  Cash provided by investing activities as of September 30, 1996, was
  $4,450,724. The cash provided relates primarily to the sale and maturity of
  approximately $8,407,185 of marketable securities to fund operations prior to
  collection of outstanding invoices.  The cash provided was partially offset by
  purchases of marketable securities of approximately $1,450,000  and capital
  expenditures of approximately $2,293,305.  The capital expenditures primarily
  relate to the purchase of inspection equipment, furniture and fixtures,
  leasehold improvements, computer equipment, and sales and demonstration
  equipment.   

                                      13

<PAGE>
 
  The Company has a $3,000,000 bank line of credit. Borrowings under the line
  will be unsecured and charged interest at prime rate.  The line of credit
  expires January 31, 1997.  The Company has entered into negotiations to
  replace this line of credit.  No funds have as yet been advanced under this
  facility.  The Company is required to maintain certain covenants including
  certain financial ratios as described in the line of credit agreement.

  The Company anticipates that its existing cash resources, cash flow from
  operations and the continued availability of its bank line of credit will be
  sufficient to fund its operations through September 30, 1997, provided it
  meets its operating plan and remains in compliance with its credit agreement,
  although no funds have as yet been advanced.  The Company is currently in
  default of its line of credit facility with the bank. However, the Company has
  received a written waiver of this default for the year ended September 30,
  1996. The Company's ability to finance its operations will be dependent on its
  ability to renegotiate its bank line of credit for a continued availability of
  borrowing thereunder. There can be no assurance that the Company will be
  successful in renegotiating its line of credit. To the extent cash flow from
  operations is insufficient to fund the Company's activities, it may be
  necessary to raise additional funds through equity or debt financing. The
  Company's ability to generate cash from operations depends upon, among other
  things, revenue growth, its credit and payments terms with vendors, and
  collections of accounts receivable. The Company's ability to borrow under this
  facility is dependent upon satisfying certain financial covenants, among other
  things, and there can be no assurances that the Company will remain in
  compliance. If such sources of cash prove insufficient, the Company will be
  required to make changes in its operations or to seek additional debt or
  equity financing. There can be no assurances that cash generated from
  operations and borrowings under its credit facility will be sufficient to meet
  its operating requirements, or if required, that additional debt or equity
  financing will be available on terms acceptable to the Company.

  FACTORS AFFECTING FUTURE RESULTS

  The Company's future results remain difficult to predict and may be affected
  by a number of factors which could cause actual results to differ materially
  from the 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 automotive, telecommunications,
  industrial machinery and semiconductor industries and the world economies as a
  whole, and competitive pressures that may impact research and development
  spending. The Company's 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 such investments will continue or
  that the Company can successfully obtain such funds. In addition, the
  Company's future growth opportunities are dependent on the introduction on new
  products that must penetrate automotive, telecommunications, industrial, and
  computer market segments. 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 the
  Company; or that the Company can achieve or maintain profits in these markets.
  Because of these and other factors, past financial performances 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
  Company's stock price frequently experiences significant volatility.


                                      14

<PAGE>
 
  EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

  In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
  "Accounting for Stock-Based Compensation," which encourages companies to
  recognize compensation expense in the income statement based on the fair value
  of the underlying common stock at the date the awards are granted .  However,
  it will permit continued accounting under APB Opinion 25, "Accounting for
  Stock Issued to Employees," accompanied by a disclosure of the pro forma
  effects on net income and earnings per share had the new accounting rules been
  applied. The statement is effective for Fiscal 1997. The Company plans to
  account for stock based compensation in accordance with APB Opinion 25.


  EFFECTS OF INFLATION

  The Company believes that inflation over the past three years has not had a
  significant impact on the Company's sales or operating results.


                                      15
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of Independent Accountants.........................................   17

Financial Statements:

  Balance Sheets as of September 30, 1996 and 1995........................   18

  Statements of Operations for the Years Ended September 30, 1996,
     1995, and 1994.......................................................   19

  Statements of Changes in Stockholders' Equity for the Years Ended
     September 30, 1996, 1995, and 1994...................................   20

  Statements of Cash Flows for the Years Ended September 30, 1996,
     1995, and 1994.......................................................   21

  Notes to Financial Statements...........................................   22

  Schedule II; Valuation and Qualifying Accounts for the Years Ended
     September 30, 1996, 1995, and 1994...................................   32

  Index to Exhibits.......................................................   38
</TABLE>

                                       16
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS


     We have audited the accompanying balance sheets and financial statement
schedule of SatCon Technology Corporation as of September 30, 1996 and 1995, and
the related statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended September 30, 1996. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. 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 as of September 30, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1996 in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.


                                            Coopers & Lybrand L.L.P.


Boston, Massachusetts
December 3, 1996

                                       17
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION

                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  SEPTEMBER 30,     SEPTEMBER 30,
                                                                                       1996             1995
                                                                                ----------------  ----------------
                                           ASSETS
<S>                                                                             <C>               <C>
Current assets:
     Cash and cash equivalents................................................     $ 3,770,925       $ 2,187,987
     Marketable securities (Note B)...........................................       3,435,743        10,386,288
     Accounts receivable, net of allowance of $130,900 in 1996 and 1995.......       2,881,790         2,076,002
     Unbilled contract costs, net of allowance of $432,500 in 1996 and
          $66,500 in 1995 (Note C)............................................       1,563,254         1,396,367
     Prepaid expenses and other assets........................................         442,745           609,252
                                                                                ----------------  ----------------
          Total current assets................................................      12,094,457        16,655,896
Property and equipment, net (Note D)..........................................       4,347,784         2,772,018
Other assets..................................................................         740,214           365,052
                                                                                ----------------  ----------------
          Total assets........................................................     $17,182,455       $19,792,966
                                                                                ================  ================

                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable.........................................................     $   605,048       $   624,955
     Accrued payroll and payroll related expenses.............................         183,747           153,989
     Other accrued expenses...................................................         294,492            88,025
     Deferred income taxes (Note H)...........................................            -              173,282
                                                                                ----------------  ----------------
          Total current liabilities...........................................       1,083,287         1,040,251
Commitments (Note F)..........................................................            -                 -   

                                       STOCKHOLDERS' EQUITY
Preferred stock; $.01 par value, 1,000,000 shares authorized; none issued
   (Note J)...................................................................            -                 -   
Common stock, $.01 par value, 10,000,000 shares authorized; 7,359,074 and
   7,166,601 shares at September 30, 1996 and 1995, respectively, issued
   and outstanding (Note I)...................................................          73,591            71,666
Additional paid-in capital....................................................      18,487,209        18,284,486
Retained earnings/(loss)......................................................      (2,421,697)          443,139
Unrealized losses on marketable securities, net of tax effect (Note B)........         (39,935)          (46,576)
                                                                                ----------------  ----------------
          Total stockholders' equity..........................................      16,099,168        18,752,715
                                                                                ----------------  ----------------
               Total liabilities and stockholders' equity.....................     $17,182,455       $19,792,966
                                                                                ================  ================
</TABLE>

   The accompanying notes are an integral part of the financial statements.

                                       18
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION

                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
 
                                                   YEARS ENDED SEPTEMBER 30,
                                          ------------------------------------------
                                              1996           1995           1994        
                                          ------------   ------------   ------------    
<S>                                       <C>            <C>            <C>            
Revenue.................................  $ 9,384,588    $11,475,427    $18,016,987    
                                          ------------   ------------   ------------   
Cost of sales...........................    3,940,674      6,522,768     11,281,239    
Selling, general and administrative         
 expenses...............................    8,023,441      5,483,194      4,655,769                                                
Research and development expenses.......      893,628      1,937,241        461,068    
                                          ------------   ------------   ------------   
Total operating expenses................   12,857,743     13,943,203     16,398,076    
                                          ------------   ------------   ------------   
Operating income/(loss).................   (3,473,155)    (2,467,776)     1,618,911    
Interest income, net....................      463,840        451,034        409,337    
                                          ------------   ------------   ------------   
Income/(loss) before income taxes.......   (3,009,315)    (2,016,742)     2,028,248    
Provision/(benefit) for income taxes....     (144,479)      (806,697)       803,356    
                                          ------------   ------------   ------------   
Net income/(loss).......................   (2,864,836)    (1,210,045)     1,224,892    
                                          ============   ============   ============   
Earnings/(loss) per common and common                                                  
 equivalent share.......................  $      (.39)   $      (.17)    $      .17    
                                          ============   ============   ============   
Weighted average shares outstanding.....    7,285,756      7,079,855      7,347,098     
</TABLE>

   The accompanying notes are an integral part of the financial statements.

                                       19
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION

                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                                                     UNREALIZED
                                                                                                      LOSS ON             TOTAL
                                    COMMON     COMMON    ADDITIONAL PAID-IN    RETAINED EARNINGS    MARKETABLE       STOCKHOLDERS'
                                    SHARES      STOCK         CAPITAL               (LOSS)          SECURITIES (1)       EQUITY
                                  ---------   --------   ------------------    -----------------    --------------    -------------
<S>                               <C>         <C>        <C>                   <C>                  <C>               <C>
Balance, September 30, 1993....   5,153,633   $51,536         $ 6,709,376          $   428,292        $      -         $ 7,189,204
Net income.....................       -         -                   -                1,224,892               -           1,224,892
Sale of common stock...........   1,715,505    17,155          11,050,723                -                   -          11,067,878
Exercise of stock options......     144,588     1,446             158,488                -                   -             159,934
Change in unrealized losses                            
on marketable securities(1)....       -         -                   -                    -               (135,867)        (135,867)
                                  ---------   -------     -----------------        ------------     --------------    -------------
Balance, September 30, 1994....   7,013,726    70,137          17,918,587            1,653,184           (135,867)      19,506,041
Net loss.......................       -         -                   -               (1,210,045)              -          (1,210,045)
Exercise of stock options......     152,875     1,529             365,899                -                   -             367,428
Change in unrealized losses                            
  on marketable securities(1)..       -         -                   -                    -                 89,291           89,291
                                  ---------   -------     -----------------        ------------     --------------    -------------
Balance, September 30, 1995....   7,166,601    71,666          18,284,486              443,139            (46,576)      18,752,715
Net Loss.......................       -         -                   -               (2,864,836)              -          (2,864,836)
Exercise of stock options......     192,473     1,925             202,723                -                   -             204,648
Change in unrealized losses                            
  on marketable securities(1)..       -         -                   -                    -                  6,641            6,641
                                  ---------   -------     -----------------        ------------     --------------    -------------
Balance, September 30, 1996....   7,359,074   $73,591         $18,487,209          $(2,421,697)       $   (39,935)     $16,099,168
                                  =========   =======     =================        ============     ==============    =============
</TABLE>

________

(1) Net of tax effect

   The accompanying notes are an integral part of the financial statements.

                                       20
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION

                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     YEARS ENDED SEPTEMBER 30,
                                                                     -------------------------------------------------------
                                                                           1996                1995                  1994
                                                                     -------------         ------------         ------------   
<S>                                                                  <C>                   <C>                  <C>    
Cash flows from operating activities:
     Net income/(loss)..............................................   $(2,864,836)        $(1,210,0 45)        $  1,224,892
     Adjustments to reconcile net income/(loss) to net
       cash provided by/(used in) operating activities:
        Depreciation and amortization...............................       820,991              352,143              306,935
        Reserve for unbilled........................................       390,500              -                    100,000
        Changes in operating assets and liabilities:
            Accounts receivable.....................................      (905,787)           3,020,582           (4,089,438)
            Prepaid expenses and other assets.......................       222,821              (61,958)            (149,388)
            Unbilled contract costs.................................      (557,386)           5,290,655           (6,146,396)
            Other assets............................................      (221,772)              88,856                4,328
            Accounts payable........................................       (19,907)            (754,935)             701,238
            Accrued expenses and payroll............................       236,225             (166,610)              76,399
            Income taxes payable....................................       -                    -                    (12,997)
            Deferred income taxes...................................      (173,283)            (806,697)             803,356
                                                                     -------------         ------------         ------------
Total adjustments...................................................      (207,598)           6,962,036           (8,405,963)
                                                                     -------------         ------------         ------------
Net cash provided by/(used in) operating activities.................    (3,072,434)           5,751,991           (7,181,071)
                                                                     -------------         ------------         ------------
Cash flows from investing activities:
     Purchases of marketable securities.............................    (1,450,000)          (9,465,938)         (34,466,181)
     Sales and maturities of marketable securities..................     8,407,185            6,148,814           30,396,663
     Patent & trademark expenditures................................      (156,843)            (245,140)             (32,386)
     Deferred financing fees........................................       (56,313)            (277,764)                   -
     Capital expenditures...........................................    (2,293,305)            (999,415)          (1,127,947)
                                                                     -------------         ------------         ------------
Net cash provided by/(used in) investing activities.................     4,450,724           (4,839,443)          (5,229,851)
                                                                     -------------         ------------         ------------
Cash flows from financing activities:
     Repayment of short-term borrowings.............................             -                    -               (5,000)
     Proceeds from exercise of stock options........................       204,648              367,428              159,934
     Payments under capital lease obligations.......................             -                    -              (35,929)
     Proceeds from issuance of common stock.........................             -                    -           11,067,878
                                                                     -------------         ------------         ------------
Net cash provided by financing activities...........................       204,648              367,428           11,186,883
                                                                     -------------         ------------         ------------
Net increase/(decrease) in cash.....................................     1,582,938            1,279,976           (1,224,039)
                                                                     -------------         ------------         ------------
Cash at beginning of period.........................................     2,187,987              908,011            2,132,050
                                                                     -------------         ------------         ------------
Cash and cash equivalents at end of period..........................   $ 3,770,925          $ 2,187,987          $   908,011
                                                                     =============         ============         ============
</TABLE>

   The accompanying notes are an integral part of the financial statements.

                                       21
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION

                         Notes to Financial Statements
  

  A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

  Organization

  SatCon Technology Corporation (the "Company" or "SatCon") was organized as a
  Massachusetts corporation in February 1985 and reincorporated in Delaware in
  1992. SatCon designs, develops and manufactures intelligent, electro-
  mechanical products for aerospace, transportation, industrial, and utility
  applications. SatCon's electro-mechanical products are being developed for a
  wide variety of U.S. government and commercial markets. For the government,
  SatCon's electro-mechanical systems provide low vibration and high power for
  applications ranging from satellite attitude control to high speed drives for
  shipboard systems. In the transportation segment SatCon is developing electric
  and hybrid electric drive components, auxiliary power units, and advanced
  steering, suspension, and braking systems. SatCon is working with major
  equipment producers to develop process equipment drives, high speed and
  precision machine tools, manipulators, and machinery isolation equipment.
  SatCon's electro-mechanical systems may offer to the utility industry
  advantages in power generation, energy storage, and power quality. In the
  consumer market SatCon is developing freon-free compressors for refrigerators,
  variable speed motors, and other long-life, high-efficiency machinery.


  It is the Company's strategy to accelerate leading edge developments by
  continuing to expand its externally funded contract research and development
  from both government and commercial sources. The Company can then leverage
  this funding to develop products which the Company believes can both be sold
  to government agencies transition into high volume commercial products. Recent
  changes in the Small Business Innovative Research program provide a new
  mechanism to pursue government Phase III preproduction programs on a sole
  source non-competitive basis. In most instances, individual components have
  multiple applications across these markets.

  Revenue Recognition

  The Company performs research under cost type, fixed price, and time and
  material contracts and sells product prototypes.  Revenue is recognized on the
  percentage-of-completion method based on the proportion of costs incurred to
  total estimated costs for each contract.  Revenues recognized in excess of
  amounts billed are classified in current assets as unbilled contract costs.
  Certain contracts contain provisions for performance incentives.  Such
  incentives are included in revenues when realization is assured.  If a current
  contract estimate indicates a loss, a provision is made for the total
  anticipated loss.

  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.

                                      22

<PAGE>
 
  Cash and Cash Equivalents

  Cash and cash equivalents include cash on hand, demand deposits and highly
  liquid investments with a maturity of three months or less when acquired.  At
  September 30, 1996, $67,632 of cash and cash equivalents is reserved as
  collateral for a letter of credit drawn for the deposit on a facility lease.

  Marketable Securities

  The Company accounts for marketable securities in accordance with the
  Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting
  for Certain Investments in Debt and Equity Securities."

  Management determines the appropriate classification of its investments in
  debt 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 shareholders' 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, 1996, 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
  or, in the case of mortgage-backed securities, over the estimated life of the
  security.  Such amortization and interest are included in interest income.
  Realized gains and losses are included in other income or expense.  The cost
  of securities sold is based on the specific identification method.

  Property and Equipment

  Property and equipment are stated at cost.  Depreciation is computed using the
  straight-line method over the asset's estimated useful life.  Effective
  October 1, 1994 the estimated useful lives of property and equipment are as
  follows:

<TABLE>
<CAPTION>
                                                             ESTIMATED LIVES
                                                            -------------------
          <S>                                                <C>
          Computer equipment and software..................       3 Years
          Electronic laboratory and shop equipment.........       5 Years
          Mechanical laboratory and shop equipment.........      10 Years
          Sales and demonstration equipment................    3 - 10 Years
          Furniture and fixtures...........................      10 Years  
          Leasehold improvements...........................  Lesser of the life
                                                             of the lease or the
                                                             useful life of the
                                                             improvement
</TABLE>

  Previously, the estimated useful lives of property and equipment were three
  years.  These changes were made to better reflect the estimated periods during
  which such assets will remain in service.

  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.

  Intangibles

  The Company periodically reviews the propriety of carrying amounts of its
  intangible assets as well as the amortization periods to determine whether
  current events and circumstances warrant adjustment to the carrying value or
  estimated useful lives.  At each balance sheet date, management evaluates
  whether there has been a permanent impairment in the value of intangibles by
  assessing the carrying value of intangibles 

                                       23
<PAGE>
 
  against anticipated future cash flows from related operating activities.
  Factors which management considers in performing this assessment include
  current operating results, trends and prospects and, in addition, demand,
  competetion and other economic factors.

  Other intangibles, which consist of patents and trademarks are being amortized
  on a straight-line basis over 7 years.

  Use of estimates

  The preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  and disclosure of contingencies at the date of the financial statements.
  Actual results could differ from these estimates.

  Income Taxes

  The Company accounts for income taxes in accordance with  Financial Accounting
  Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires a
  balance sheet approach for accounting for income taxes.  Under SFAS 109,
  deferred tax assets and deferred tax liabilities are recognized based on
  temporary differences between the basis of assets and liabilities using
  statutory rates.  The Company has, as required under the Internal Revenue
  Code, switched from the cash to accrual method for tax reporting purposes.

  Earnings/(loss) Per Common and Common Equivalent Share

  Earnings/(loss) per common and common equivalent share is based upon the
  weighted average number of common shares outstanding during each year,
  adjusted to include the dilutive effects of stock options and warrants.  For
  the current year ended September 30, 1996 common share equivalents have not
  been included because their effect would have been antidilutive.  For all
  periods presented, fully diluted earnings per share is not materially
  different from primary earnings per share.

  Concentration of Credit Risk

  Financial instruments which subject the Company to concentrations of credit
  risk consist principally of cash equivalents, investments in marketable
  securities, trade accounts receivable, and unbilled contract costs.

  The Company's trade accounts receivable and unbilled contract costs are
  primarily from sales to U.S. Government agencies and two commercial customers.
  The Company does not require collateral and has not historically experienced
  significant credit losses related to receivables or unbilled contract costs
  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 and
  marketable securities primarily through one regional commercial bank and one
  investment company.  Credit exposure to any one entity is limited by Company
  policy.

  Reclassifications

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


  B.    MARKETABLE SECURITIES

  At September 30, 1996, debt securities have been categorized as available for
  sale and as a result are stated at fair value.


                                       24

<PAGE>
 
  As of September 30, 1996 marketable securities consist of the following:

<TABLE>
<CAPTION>
                                                                                         GROSS   
                SECURITY                    AMORTIZED     AGGREGATE    BALANCE SHEET   UNREALIZED 
                CATEGORY                   COST BASIS     FAIR VALUE   CARRYING VALUE  GAIN/(LOSS) 
                --------                  ------------- ------------- ---------------  ----------
<S>                                       <C>           <C>           <C>              <C> 
Corporate debt securities...............  $  693,867     $  648,874      $  648,874    $(44,993)
Debt securities issued by U.S.
 Government and its agencies............     700,000        681,038         681,038     (18,962)
 
Debt securities issued by states of the
 U.S. and political subdivisions of the    
 states.................................   1,950,825      1,951,198       1,951,198         373 
 
Mortgage-backed securities..............     157,609        154,633         154,633      (2,976)
                                                                       ------------- -----------
                                                                         $3,435,743    $(66,558)
                                                                       ============= ===========
</TABLE> 

  The contractual maturities of debt securities available for sale at September
  30, 199 are as follows:
 
<TABLE> 
<CAPTION> 
                                                         AGGREGATE      AMORTIZED 
                                                        FAIR VALUE      COST BASIS 
                                                       ------------    ------------ 
          <S>                                          <C>             <C> 
          Due within one year.....................     $  1,951,197    $  1,950,824
          Due after one year through five years...          681,038         700,000
          Due after five years through 10 years...          326,875         347,124
          Due after 10 years......................          476,633         504,353
                                                       ------------    ------------ 
                                                       $  3,435,743    $  3,502,301
                                                       ============    ============
</TABLE>

  Gross unrealized holding losses at September 30, 1996 were $66,558 and are
  included on the balance sheet as a separate component of stockholder equity
  net of tax effect. Proceeds from sales and maturities of marketable securities
  during Fiscal 1996 were $8,407,185. Gross realized losses from the sale of
  securities classified as available for sale during Fiscal 1996 and 1995 were
  $1,461 and $58,360, respectively. For the purpose of determining gross
  realized gains and losses, the cost of securities sold is based upon specific
  identification.


  C.    UNBILLED CONTRACT COSTS

  Unbilled contract costs include retention arising from contractual provisions
  of $111,745 and $153,617 at September 30, 1996 and 1995, respectively. It is
  anticipated that substantially all of these unbilled retention amounts will be
  collected during the Fiscal year ending September 30, 1997. Unbilled contract
  costs are net of advance billings of $95,062 and $85,361 at September 30, 1996
  and 1995, respectively.

                                      25

<PAGE>
 
  D.    PROPERTY AND EQUIPMENT

        Property and equipment consist of the following:

<TABLE> 
<CAPTION> 
                                                          SEPTEMBER 30,      
                                                    ------------------------ 
                                                         1996        1995    
                                                    ------------ ----------- 
            <S>                                       <C>         <C>        
            Machinery and equipment.................  $3,118,538  $2,534,511 
            Sales and demonstration Units...........   1,885,274     292,500
            Furniture and fixtures..................     219,204     188,559 
            Computer software.......................     385,987     259,045 
            Leasehold improvements..................     315,327     256,410 
                                                    ------------ -----------   
                                                       5,924,330   3,531,025 
            Less accumulated depreciation and          
             amortization                              1,576,546     759,007
                                                    ------------ -----------   
                                                      $4,347,784  $2,772,018 
                                                    ============ =========== 
</TABLE>

  Depreciation expense for the years ended September 30, 1996, 1995, and 1994
  was $817,539, $343,775, and $301,724, respectively.

  For Fiscal 1996 and 1995 there was no equipment under capital lease.

  E.    NOTES PAYABLE

  In January 1995 the Company established a $3,000,000 line of credit with
  Citizen's Bank replacing the existing $1,500,000 line established on December
  8, 1993. Borrowings under the line will be unsecured and charged interest at
  the bank's prime rate. The line of credit expires January 31, 1997. The
  Company has entered into negotiations to replace this line of credit. No funds
  have been as yet advanced under this facility. The Company is required to
  maintain certain covenants including certain financial ratios as described in
  the line of credit agreement. The Company received a waiver in December 1996
  of certain financial covenants for the period ended September 30, 1996.

  F.    COMMITMENTS AND CONTINGENCIES

  The Company's office and laboratory space is 45,820 square feet located at 161
  First Street, Cambridge, Massachusetts, under a primary lease expiring on
  October 31, 1998. The monthly payment is $42,002 plus its pro rata share of
  operating expenses and real estate taxes. Effective April 1996, the Company
  occupies 8,343 square feet located at 6245 East Broadway Boulevard, Suite 350,
  Tucson, Arizona, under a primary lease expiring June 30, 2001. The monthly
  payment is $10,430 including its pro rata share of operating expenses. The
  Company believes its facilities are adequate for its current needs and that
  adequate facilities for expansion, if required, are available in the immediate
  areas.

     Future minimum annual rentals under all lease agreements at September 30,
  1996 are as follows:

<TABLE> 
<CAPTION> 
            FISCAL                           OPERATING
             YEAR                             LEASES
             ----                          -----------
            <S>                            <C>
            1997.......................... $1,090,624
            1998..........................  1,062,210
            1999..........................  1,062,740
            2000..........................  1,060,221
            2001..........................  1,063,085
                                           ----------
                                           $5,388,880
                                           ==========
</TABLE>


  Total rental expense including operating expenses and real estate taxes for
  operating leases amounted to $1,000,802, $725,750, and $507,816
  respectively, for the years ended September 30, 1996, 1995 and 1994.

                                      26

<PAGE>
 
  In fiscal year 1996 the Company had a dispute of contractual terms in the
  amount of $344,000. Management believes that the financial statements properly
  reflect the ultimate impact of this matter.

  G.    EMPLOYEE BENEFIT PLAN

  The Company offers a 401(k) Employee Benefit Plan (the "401(k) Plan"). Under
  the 401(k) Plan, any employee who has completed one year of service and has
  attained the age of 21 years is eligible to participate. Under the terms of
  the 401(k) Plan, an employee may defer up to 15% of his or her compensation
  through contributions to the 401(k) Plan. Prior to October 1, 1995 the Company
  made discretionary contributions on behalf of the participating employees. The
  Company made a matching contribution to the 401(k) during fiscal year 1996 in
  the amount of $128,458. The Company did not make a voluntary contribution to
  the Plan during Fiscal 1995, however, a profit-sharing contribution was made
  during Fiscal 1994 of $102,529. Amounts contributed to the 401(k) Plan are
  subject to a six year vesting schedule.

  H.    INCOME TAXES

      The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                       YEARS ENDED SEPTEMBER 30,
                                                  --------------------------------- 
                                                     1996        1995       1994    
                                                  ---------- ----------- ---------- 
          <S>                                     <C>        <C>         <C>       
          Current Payable:                                                          
               Federal........................... $   9,775   $   4,000       -     
               State.............................      -           -          -     
                                                  ---------- ----------- ---------- 
                                                      9,775       4,000       -     
          Deferred tax expenses/(benefit):                                          
               Federal........................... $(116,485)  $(603,233)  $600,673  
               State.............................   (37,769)   (207,464)   202,683  
                                                  ---------- ----------- ----------  
                                                   (154,254)   (810,697)   803,356  
                                                  ---------- ----------- ----------  
                                                  $(144,479)  $(806,697)  $803,356  
                                                  ========== =========== ========== 
</TABLE>

  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, the
  components of the net deferred tax asset is as follows:

<TABLE>
<CAPTION>
                                                       1996          1995
                                                  ------------- -------------
          <S>                                     <C>           <C>
          Accrual to cash adjustment.............. $(2,351,252)  $(3,526,878)
          Federal Net Operating Loss..............   3,180,017     2,853,791
          State Net Operating Loss, net of                                   
          federal benefit.........................     539,304       500,457 
          Tax effect of unrealized losses on                                 
          marketable securities...................      26,632        31,051 
          Credits.................................     268,143       235,141
          Other...................................      (1,515)     (235,793)
          Valuation Allowance.....................  (1,661,329)         -   
                                                  ------------- ------------- 
          Net Deferred Income Taxes...............        -      $  (142,231)
                                                  ============= =============
</TABLE> 

  A deferred tax asset of $31,051 is included in other assets as of September
  30, 1995.

                                       27
<PAGE>
 
  The provision for income taxes differs from the Federal statutory rate due to
  the following:

<TABLE>
<CAPTION>
                                                    YEARS ENDED SEPTEMBER 30,
                                                ---------------------------------- 
                                                  1996         1995         1994  
                                                --------     --------     --------  
          <S>                                    <C>         <C>          <C>     
          Tax at statutory rate................. (34.0)%      (34.0)%       34.0 %
          State taxes - net of federal benefit..  (0.8)%       (6.8)%        6.6 %
          Other.................................   2.1 %        0.8 %       (1.0)%
          Change in valuation allowance.........  27.9 %          -            -
                                                --------     --------     ---------   
          Effective tax rate....................  (4.8)%      (40.0)%       39.6 %
                                                ========     ========     =========
</TABLE>

     At September 30, 1996 the Company had Net Operating Loss Carryforwards of
  $9,352,991 and $8,601,334 for federal and state income tax purposes,
  respectively, of which $949,568 relates to deductions attributable to the
  exercise of non-qualified stock options and employees early disposition of
  stock acquired through incentive stock options. The federal net operating
  losses expire beginning September 30, 2006 through 2011. The state net
  operating losses expire beginning September 30, 1996 through 2001. The use of
  these losses may be limited due to ownership change limitations under Section
  382 of the Internal Revenue Code of 1986.

  Research and experimental credit carryforward at September 30, 1996 was
  $169,837 for federal income tax purposes.


  I.    STOCK OPTIONS

  Under the Company's 1986 Stock Option Plan, both qualified and nonqualified
  stock options may be granted to certain officers and key employees. Options
  under the 1986 Plan become exercisable as vested over four years, and expire
  December 31, 1996.  At September 30, 1996 and 1995, all of the 553,196 stock
  options available for grant under the Company's 1986 Stock Option Plan had
  been granted.

  In June 1992, the Company adopted its 1992 Stock Option Plan which provides
  for the grant to employees, officers, directors and consultants of qualified
  and nonqualified stock options to purchase up to 450,000 shares of the
  Company's Common Stock.  At September 30, 1996 and 1995, 440,866 and 447,196,
  respectively, of the 450,000 stock options available for grant under the
  Company's 1992 Stock Option Plan had been granted.

  In February 1994, the Company adopted its 1994 Stock Option Plan which was
  subsequently adopted by the Company's stockholders in June 1994. The Plan
  provides for the grant to employees, officers, directors, and consultants of
  qualified and nonqualified stock options to purchase up to 300,000 shares of
  the Company's Common Stock. At September 30, 1996 and 1995, 277,092 and
  276,100, respectively, of the 300,000 stock options available for grant under
  the Company's 1994 Stock Option Plan had been granted.

  During fiscal year 1996, the Company adopted its 1996 Stock Option Plan which
  provides for the grant to employees, officers, directors, and consultants of
  qualified and non qualified stock options to purchase up to 300,000 shares of
  the Company's Common Stock. At September 30, 1996, none of the 300,000 stock
  options available for grant under the Company's 1996 Stock Option Plan had
  been granted.

  The 1986, 1992, 1994, and 1996 Stock Option Plans (collectively the "Plans")
  are subject to the following provisions:

  The aggregate fair market value (determined as of the date the option is
  granted) of the Common Stock that any employee may purchase in any calendar
  year pursuant to the exercise of incentive stock options may not exceed
  $100,000. No person who owns, directly or indirectly, at the time of the
  granting of an incentive stock 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 incentive stock options under the Plans unless the

                                      28

<PAGE>
 
  option price is at least 110% of the fair market value of the Common Stock
  subject to the option, determined on the date of grant. Nonqualified options
  are not subject to this limitation.

  Incentive stock options are issuable only to employees of the Company, while
  nonqualified options may be issued to nonemployee directors, consultants, and
  others, as well as to employees of the Company. Options granted under the
  Stock Option 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. Incentive stock options granted under the Plans cannot be
  exercised more than 10 years from the date of grant except that incentive
  stock 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
  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. Therefore, an optionee may be able to tender shares of
  Common Stock to purchase additional shares of Common Stock and may
  theoretically exercise all of his stock options with no additional investment
  other than his original shares.

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


  The following is a summary of stock option activity:

<TABLE>
<CAPTION>
                                                         NUMBER OF OPTIONS                   
                                                      -----------------------                 
                                                                               EXERCISE PRICE   
                                                          NON                      RANGE        
                                                       QUALIFIED   QUALIFIED     PER OPTION     
                                                     ------------ ----------- ---------------   
          <S>                                        <C>          <C>         <C>              
          Outstanding at September 30, 1993........      225,034     654,493    $ 0.25-$ 9.25
               Granted.............................       51,000     102,500    $ 9.50-$12.88
               Exercised...........................            -    (131,183)   $ 0.25-$ 5.00
               Canceled............................            -           -                -
                                                     ------------ ----------- ---------------
          Outstanding at September 30, 1994........      276,034     625,810    $0.25-$ 12.88
               Granted.............................       10,200     146,000    $ 9.25-$13.38
               Exercised...........................      (25,500)   (127,375)   $0.25-$ 10.50
               Canceled............................            -        (666)   $       10.50
                                                     ------------ ----------- ---------------
          Outstanding at September 30, 1995........      260,734     643,769    $ 0.25-$13.38
               Granted.............................            -      20,000    $ 7.75-$10.50
               Exercised...........................     (121,677)    (64,096)   $ 0.25-$10.50
               Canceled............................            -     (25,338)   $ 9.25-$13.25
                                                     ------------ ----------- ---------------
          Outstanding at September 30, 1996........      139,057     574,335    $ 0.25-$13.38
                                                     ============ ===========                   
                                                         
</TABLE>                                                                       

  All outstanding option vest at various rates over periods up to four years and
  expire at various dates from December 31, 1996 to December 26, 2005.

  In addition to options granted pursuant to the Plans, the Company in March
  1992 issued non-qualified options to purchase up to 33,500 shares of Common
  Stock to certain of its professional advisors. These options are exercisable
  at a price of $5.25 per share and expire in March 1997. At September 30, 1996,
  21,110 options had been exercised.
  
  In connection with its initial public offering in November 1992, the Company
  also issued to the underwriter warrants to purchase up to (i) 150,000 shares
  of Common Stock at an exercise price of $8.25 per share and (ii) 150,000
  shares of Common Stock at an exercise price of $11.55 per share. At September
  30, 1996, none of these warrants had been exercised.                 
                                                                       
                                      29

<PAGE>
 
  J.    PREFERRED STOCK                                                
                                                                       
  The Company is authorized to issue up to 1,000,000 shares of Preferred Stock,
  $.01 par value. 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. No Preferred Stock is currently outstanding and
  the Company has no present plans for the issuance thereof. However, the
  issuance of any such preferred Stock could affect the rights of the holders of
  Common Stock, and therefore, reduce the value of the Common Stock. In
  particular, specific rights granted to future holders of Preferred Stock could
  be used to restrict the Company's ability to merge with or sell its assets to
  a third party, thereby preserving control of the Company by present owners.


  K.    RECENT PRONOUNCEMENTS

  In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
  "Accounting for Stock-Based Compensation," which encourages companies to
  recognize compensation expense in the income statement based on the fair value
  of the underlying common stock at the date the awards are granted . However,
  it will permit continued accounting under APB Opinion 25, "Accounting for
  Stock Issued to Employees," accompanied by a disclosure of the pro forma
  effects on net income and earnings per share had the new accounting rules been
  applied. The statement is effective for fiscal year 1997. The Company plans to
  account for stock based compensation in accordance with APB Opinion 25.


  L.    SIGNIFICANT CUSTOMERS

  Significant customers, defined as those customers whose gross sales account
  for 10% or more of total gross sales in a Fiscal year, were as follows:

<TABLE>
<CAPTION>
                                                 YEARS ENDED SEPTEMBER 30,  
                                                --------------------------  
                                                  1996      1995     1994   
                                                --------   ------   ------  
           <S>                                  <C>        <C>      <C>     
           U.S. Government:
              Classified Defense Contract.....        --       --    14.98%
              N.A.S.A.........................     18.16%   13.30%    4.66
              U.S. Department of Defense......     33.62     6.97     4.13
                                                --------   ------   ------
                                                   51.78    20.27    23.77
           Commercial:
              Automotive......................     38.17    72.90    75.76
                                                --------   ------   ------ 
           Other..............................     10.05     6.83     0.47
                                                --------   ------   ------ 
                                                  100.00%  100.00%  100.00%
                                                ========   ======   ======
</TABLE>

                                       30
<PAGE>
 
  M.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   Interest and Income Taxes Paid

  Cash paid for interest and income taxes were as follows:

<TABLE>
<CAPTION>
                                      YEARS ENDED SEPTEMBER 30,
                                    ----------------------------  
                                      1996      1995      1994          
                                    --------  --------  --------        
          <S>                       <C>       <C>       <C>             
          Interest...............    $   330   $1,277    $ 2,499          
                                    ========  ========  ========            
          Income taxes...........    $36,900   $8,620    $32,140          
                                    ========  ========  ========            
</TABLE>

  Non-Cash Transaction

  During Fiscal year 1996 plant equipment with the fair market value of 
  $100,000 was received in exchange for the relief of $100,000 of accounts
  receivable.


                                      31

<PAGE>
 
                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                  ADDITIONS  
                                                                  CHARGED TO                    BALANCE              
                                                   BALANCE AT     PROFIT AND    DEDUCTIONS      AT END               
                                                   BEGINNING       LOSS OR         FROM           OF                 
                                                   OF PERIOD        INCOME       RESERVES       PERIOD               
                                                 -------------   ------------   -----------   ----------            
<S>                                              <C>             <C>            <C>           <C> 
Year Ended September 30, 1994:
   Allowance for Doubtful Accounts...............   $ 80,000      $  100,000      ($49,100)   $  130,900
   Reserve for Unbilled Contract Costs...........   $ 66,500           -              -       $   66,500
Year Ended September 30, 1995:                    
   Allowance for Doubtful Accounts...............   $130,900           -              -       $  130,900
   Reserve for Unbilled Contract Costs...........   $ 66,500           -              -       $   66,500
Year Ended September 30, 1996:                    
   Allowance for Doubtful Accounts...............   $130,900            -             -       $  130,900
   Reserve for Unbilled Contract Costs...........   $ 66,500      $  390,500      ($24,500)   $  432,500
   Deferred tax valuation allowance..............       -         $1,661,329          -       $1,661,329
</TABLE>


                                      32

<PAGE>
 
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE

  Not Applicable.

                                      33

<PAGE>
 
                                   PART III


  ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

  The information with respect to directors required under this item is
  incorporated herein by reference to the information set forth under the
  section entitled "Election of Directors" in the Company's Proxy Statement for
  the 1997 Annual Meeting of Stockholders to be held February 26, 1997, (the
  "1997 Proxy Statement"). Information relating to certain filings of Forms 3,
  4, and 5 of the Company is contained in the 1997 Proxy Statement under the
  caption "Compliance with Section 16 Reporting Requirements."

  ITEM 11.  EXECUTIVE COMPENSATION

  The information required under this item is incorporated by reference to the
  section entitled "Compensation of Executive Officers" in the 1997 Proxy
  Statement.

  The sections entitled "Compensation Committee Report on Executive
  Compensation" and "Comparative Stock Performance Graph" in the 1997 Proxy
  Statement are not incorporated herein by reference.

  ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required under this item is incorporated by reference to the
  section entitled "Security Ownership of Certain Beneficial Owners and
  Management" in the 1997 Proxy Statement.


  ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required under this item is incorporated by reference to the
  section entitled "Certain Relationships and Related Transactions" in the
  1997 Proxy Statement.

                                      34

<PAGE>
 
                                    PART IV


  ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  The following documents are filed as part of this Report:

     1.  Financial Statements:

     Balance Sheets as of September 30, 1996 and 1995

     Statements of Operations for the Years Ended September 30, 1996, 1995, and
     1994

     Statements of Changes in Stockholders' Equity for the Years Ended September
     30, 1996, 1995, and 1994

     Statements of Cash Flows for the Years Ended September 30, 1996, 1995, and
     1994

     Notes to Financial Statements.

     2.  Financial Statement Schedule:

     Schedule II; Valuation and Qualifying Accounts

     All other financial statement schedules not listed have been omitted
     because they are either not required, not applicable, or the information
     has been included elsewhere in the financial statements or notes thereto.

     3.  Exhibits.



                                      35

<PAGE>
 
     EXHIBIT                                                           
     NUMBER                             DESCRIPTION OF EXHIBIT         
   ----------                           ----------------------         
      3.1 (1)    -     Certificate of Incorporation
      3.2 (1)    -     Bylaws                                          
      4.1 (1)    -     Specimen certificate for Common Stock $.01 par value
      4.2 (1)    -     Warrant Agreement between the Company and Continental
                       Stock Transfer and Trust Company (including specimen
                       warrant certificate)
     10.1 (1)    -     Employment Agreement dated July 1, 1992 between the
                       Company and Mr. Eisenhaure
     10.2 (1)    -     Employment Agreement dated July 1, 1992 between the
                       Company and Mr. Turmelle
     10.3 (1)    -     Employment Agreement dated July 1, 1992 between the
                       Company and Mr. Stanton
   10.4(1)(*)    -     1986 Stock Option Plan                              
   10.5(1)(*)    -     1992 Stock Option Plan                              
   10.6(2)(*)    -     1994 Stock Option Plan                              
      10.7(1)    -     Lease dated October 1993 between the Company and    
                       Gunwyn/First Street Limited Partnership             
      10.8(3)    -     Line of Credit Agreement dated January 13, 1995 between
                       the Company and First NH Bank
      10.9(1)    -     Subcontract No. 9770-A-0012 dated October 5, 1992 between
                       the Company and Itek Optical Systems, as amended
     10.10(*)    -     1996 Stock Option Plan                            
        10.11    -     Amendment to Credit Agreement between the Company and
                       First NH Bank, dated March 13, 1996
           11    -     Statement re Computation of Earnings Per Share 
           23    -     Consent of Coopers & Lybrand L.L.P.            
           27    -     Financial Data Schedule 

   ________________

   (*)  Management contract or compensatory plan or arrangement filed as an
        exhibit to this Annual Report pursuant to Items 14 (a) and 14 (c) of
        Form 10-K.

   (1)  Incorporated by reference from the Company's Registration Statement on
        Form S-1 Filed on July 7, 1992.

   (2)  Incorporated by reference from the Company's Annual Report on Form 10-K
        for the fiscal year ended September 30, 1994.

   (3)  Incorporated by reference from the Company's Annual Report on Form 10-K
        for the fiscal year ended September 30, 1995

(b) Reports on Form 8-K

No reports on Form 8-K were filed for the period covered by this report.

                                      36
<PAGE>
 
                               INDEX TO EXHIBITS

     EXHIBIT                                                           
     NUMBER                             DESCRIPTION OF EXHIBIT         
   ----------                           ----------------------         
      3.1 (1)    -     Certificate of Incorporation
      3.2 (1)    -     Bylaws                                          
      4.1 (1)    -     Specimen certificate for Common Stock $.01 par value
      4.2 (1)    -     Warrant Agreement between the Company and Continental
                       Stock Transfer and Trust Company (including specimen
                       warrant certificate)
     10.1 (1)    -     Employment Agreement dated July 1, 1992 between the
                       Company and Mr. Eisenhaure
     10.2 (1)    -     Employment Agreement dated July 1, 1992 between the
                       Company and Mr. Turmelle
     10.3 (1)    -     Employment Agreement dated July 1, 1992 between the
                       Company and Mr. Stanton
   10.4(1)(*)    -     1986 Stock Option Plan                              
   10.5(1)(*)    -     1992 Stock Option Plan                              
   10.6(2)(*)    -     1994 Stock Option Plan                              
      10.7(1)    -     Lease dated October 1993 between the Company and    
                       Gunwyn/First Street Limited Partnership             
      10.8(3)    -     Line of Credit Agreement dated January 13, 1995 between
                       the Company and First NH Bank
      10.9(1)    -     Subcontract No. 9770-A-0012 dated October 5, 1992 between
                       the Company and Itek Optical Systems, as amended
     10.10(*)    -     1996 Stock Option Plan                            
        10.11    -     Amendment to Credit Agreement between the Company and
                       First NH Bank, dated March 13, 1996
           11    -     Statement re Computation of Earnings Per Share 
           23    -     Consent of Coopers & Lybrand L.L.P.            
           27    -     Financial Data Schedule

   ________________

   (*)  Management contract or compensatory plan or arrangement filed as an
        exhibit to this Annual Report pursuant to Items 14 (a) and 14 (c) of
        Form 10-K.

   (1)  Incorporated by reference from the Company's Registration Statement on
        Form S-1 Filed on July 7, 1992.

   (2)  Incorporated by reference from the Company's Annual Report on Form 10-K
        for the fiscal year ended September 30, 1994.

   (3)  Incorporated by reference from the Company's Annual Report on Form 10-K
        for the fiscal year ended September 30, 1995

(b) Reports on Form 8-K

No reports on Form 8-K were filed for the period covered by this report.

                                      38