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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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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, 2001

Commission file number 1-11512

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

DELAWARE(State or other Jurisdiction of
Incorporation or Organization)

04-2857552(I.R.S. Employer
Identification Number)161 FIRST STREET,
CAMBRIDGE, MASSACHUSETTS(Address of principal executive offices)

02142(ZIP CODE)


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

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

Securities
registered pursuant to Section 12(g) of the Act

Title of Class
Common Stock, $.01 Par Value

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /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. / /

The
aggregate market value of the Registrant's Common Stock, $.01 par value per share, held by non-affiliates of the Registrant was $84,587,222 based on the last reported
sale price of the Registrant's Common Stock on the Nasdaq National Market as of the close of business on October 25, 2001 ($7.19). There were 16,539,597 shares of Common Stock outstanding as of
December 19, 2001.

DOCUMENTS INCORPORATED BY REFERENCE:Portions of the Registrant's Proxy Statement for its 2002 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.

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PART I

Item 1. BUSINESS

Overview

SatCon was organized as a Massachusetts corporation in 1985 and reincorporated as a Delaware corporation in 1992. SatCon's strategic goal is to leverage its
expertise in power electronics, software and controls to establish SatCon as a leading provider of technology, power electronics products and power systems to support the emerging global need for
"digital" power. Digital power is the fast growing, high-quality, high-reliability, environmentally clean electrical power required by today's digital economy. Digital power
uses new silicon powerchips and control networks in the switching, control, storage and generation of electricity. It is used in automobiles, wireless telecommunications, hospitals, factory floors,
routers, data centers and even in our living rooms. Digital power is electricity the way we need it today and the way it will be generated tomorrow. It is digital, distributed, clean, reliable and
smart electricity. Products for the digital power market have been made possible by faster and more powerful digital power chipsthe semiconductors that drive everything from
high-speed computers and communications to industrial automation to new distributed power generation systems. At SatCon, we have been working on these power systems and their component
groups since our inception. Today we offer a variety of digital power products from power electronics and control components to complete power systems that meet the needs of digital power markets.

Since
our inception, we have been pursuing a dual approach for growth in these digital power markets. The first strategy is to develop technology that meets a market demand and then
transition that technology into commercial products. The second strategy is to expand our manufacturing capabilities and product base through acquisitions.

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

Beginning
in 1996 we introduced our first two commercial products, the "Inertial Battery 20C1000" and the "Century 1 ISAM", which were transitioning from the laboratory to the
marketplace. The "Inertial Battery 20C1000" evolved into the 2kWh (kilowatt hour) flywheel energy storage device upon which we spun out our affiliate, Beacon Power Corporation. In
November 2000, Beacon Power became a publicly traded company. In September 2001 we made a 5,000,000 share distribution of our Beacon Power ownership to our stockholders and currently own
approximately 11% of Beacon Power following that distribution. Our second product, the "Century 1 ISAM," or integrated suspension and motor system, now called MagLev, is used in Applied
Materials' rapid thermal processing equipment, and represents a significant source of product revenue for our Power Systems business unit which manufactures the MagLev under the MagMotor
brand name.

Since
1996, we have continued to transition our technology into new products that are sold commercially, including our RF, or radio frequency, satellite uplinks, aluminum nitride
power resistors for cellular telephones, high efficiency motors for industrial automation, StarSine power electronics and amplifiers and Ling brand vibration test equipment. Since 1996, our revenue
has increased from $9.4 million, primarily from funded research and development, to $41.7 million in 2001, of which $30.8 million, or 74%, was derived from product sales. We are
also introducing new products, which we

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expect to transition into commercial production over the next few years, products such as our PowerGate and MegaVerter power conversion systems, GridLink utility
grid interface, and our 250 kilowatt and 2.0 megawatt StarSine MegaPower UPS (uninterruptible power supply), which was introduced in January 2001.

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

These
acquisitions have provided us with increased revenues, a manufacturing capability to transition our technology into commercial products, and a market presence from which we can
derive the need for new products based on our technology. Since 1996, we have sought to expand our markets in power and energy management to include UPS and power quality, distributed power
generation, wireless telecommunications, industrial automation, semiconductor manufacturing, aircraft, satellites, electric and hybrid-electric vehicles. The acquisition of Inverpower provided us with
immediate product offerings in higher range UPS and power quality products including new customers such as Siemens Westinghouse.

In
fiscal year 2001, we organized SatCon into three business units: SatCon Power Systems, SatCon Semiconductor Products, and SatCon Applied Technology. We combined MagMotor, Ling
Electronics and Inverpower into the Power Systems business unit. We combined our FMI and HyComp divisions into the Semiconductor Products business unit. We combined our Technology Center in Cambridge
and Electronic Power Products in Baltimore into the Applied Technology business unit.

We
are focusing our development and manufacturing efforts on power and energy management products with high-growth potential in the following categories:

|PRODUCT CATEGORY       |  | PRODUCTS                                                                                                                           |  | MARKETS                                                                                                                                         
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Power Systems          |  | Power conversion systems, power electronics systems, digital control software, high performance motors, and vibration test systems |  | UPS and power quality, distributed power generation, hybrid-electric vehicles, industrial automation, machine tools, semiconductor manufacturers
|Semiconductor Products |  | Hybrid microcircuits, RF components, thin film substrates, and amplifiers                                                          |  | Wireless telecommunications, aircraft, satellites, defense systems and medical instruments                                                      
|Applied Technology     |  | Funded commercial and government research and product development                                                                  |  | UPS and power quality, distributed power generation, hybrid-electric vehicles, wireless telecommunications and industrial automation            

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

Industry Background

Digital power is the high-quality, high-reliability electrical power required by today's digital technology. It is the use of new
silicon powerchips and control networks in the switching, control, storage and generation of electricity. It is used in automobiles, wireless base stations, routers, factory floors and data centers.
It is electricity the way we are using it today and the way it will be generated tomorrow. It is digital, distributed and smart electricity. Products for the digital power market have been made
possible by faster and more powerful digital power chipsthe semiconductors that drive everything from high-speed computers and communications to industrial automation to new
distributed power generation systems.

The
digital power markets are entering a period of rapid expansion, as products in distributed power generation and power quality industries, hybrid-electric vehicles and RF
telecommunications have approached or realized commercialization and mass production. In the United States, this expansion is being driven by several factors, including:



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As
a result of these market dynamics, power generation uncertainty and environmental concerns, business and residential consumers are seeking more reliable, cleaner and
cost-effective solutions to the breadth of their digital power needs. We believe that our UPS and power quality, distributed power generation, industrial automation, advanced wireless
telecommunications and hybrid-electric vehicle products will meet these demands.

Uninterruptible Power Supplies and Power Quality

Uninterruptible power supply, or UPS, systems maintain a predictable quality of electricity during power outages or periods of low power quality. These systems
can be used to as a replacement to the grid for an unlimited time, needing only to be refueled. In addition to their primary role of providing uninterruptible power in the absence of the grid, the UPS
system also works in conjunction with the grid to provide high quality power, absent of the fluctuations caused by power surges, sags and brownouts. These troublesome disturbances can also cause
system malfunctions within automated industrial processes, data centers or other industries with computer driven systems.

As
a result, UPS systems are used to support the operation of computers, manufacturing facilities and communication and other electronic networks in the event of power losses. A UPS
system consists of power electronics and switches combined with an energy storage device and, for long duration outages, a power generation source. These systems are connected to the utility grid and
can operate both independently and in parallel with the grid. Low power quality presents problems for industries where equipment can lose synchronization and shut down during brief power disruptions.
Estimates place the UPS market in excess of $5 billion. We believe large UPS systems (2 megawatts and greater), for industrial and manufacturing operations represent the most significant market
potential for our UPS and power quality systems. The growth of the computer based economy and automated manufacturing is driving the demand for large UPS systems. We estimate the market potential for
this size UPS systems to be approximately $500 million annually.

Distributed Power Generation

With the deregulation of the electric utility industry, the ability to offer new forms of electrical power generation such as distributed power generation is
creating new markets, products and opportunities. Distributed power, or on-site power independent of the electric utility grid, locates power-generating capability closer to the end user.
The distributed generation of electrical power from

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clean diesels, microturbines, solar arrays, wind turbines or fuel cell systems is potentially an environmentally cleaner, more efficient and more reliable means of producing electricity compared to
conventional generation and distribution methods. Distributed power generation systems can also alleviate congestion on highly loaded utility distribution networks and offer an alternative to power
line extensions in remote regions. In response to the many power outages in 1999, the U.S. Department of Energy's Power Outage Study Team recommended the increased use of distributed power. Fuel
cells, microturbines and photovoltaics are technologies that are being developed to address the distributed power generation market.

Industrial Automation

Global competition and the need for increased throughput and decreased downtime has required companies to become more efficient in their manufacturing
processes and automated systems. Touch labor is being replaced by robotics and complex mechanical systems that can perform routines precisely, efficiently and repeatedly without failure. With the
introduction of computer based automation systems, processes have become smart. However, these smart processes need smart mechanical systems to perform the ever more complex routines required by
today's manufacturing systems. Digital controls and software are being combined with older technologies such as motors, actuators and positioning systems to create smart manufacturing centers. These
centers represent the basic foundation of
industrial automation. According to National Manufacturing Week, industrial automation today represents a $150 billion market.

Industrial
automation spans the breadth of manufacturing systems and markets, from simple pick and place machines to semiconductor manufacturing equipment. These systems provide
opportunities for high reliability motors and actuators, magnetic suspension systems and compact digital drives and controls. The industrial automation market also represents another opportunity for
high reliability uninterruptible power supplies and power quality systems to protect the automated systems installed in today's factories. We believe that the systems that require the protection are
also the basic system components that will provide the protection. Factories using complex motors, computers and software controls will need UPS systems that are built with complex motors, computers
and controls, providing suppliers of these systems with multiple revenue opportunities.

Wireless Telecommunications

Wireless telecommunications is a fast-growing market that spans applications from personal cellular telephones to high-speed satellite uplinks. The
National Telecommunications and Information Administration of the Department of Commerce estimates the telecommunications industry at $300 billion per year. According to a Galluadet University
report, industry trends indicate steady progress "toward the goal of being able to communicate anywhere, anytime, and in any modevoice, data, image, or video. Although there are daunting
challenges associated with operations in the technically hostile mobile environment, it appears (1) that these capabilities will eventually include multimedia and even broadband capabilities as
well and (2) that radio communications devices will increasingly be embedded in all types of equipment, just as computer chips have become pervasive today."

Today
wireless telecommunications includes not only cellular mobile radio but high-speed uplinks for secure military communications, wireless LANs, data links, a
substitute for building wiring, personal communications, remote control of lighting and other functions. According to the IGI GroupWireless Telecommunications
Newsletterwebsite, "The FCC is considering opening new regions of the spectrum or shifting users to new frequency bands. New technology, such as digital and spread spectrum
will allow users to co-exist in existing bands allowing greater frequency efficiency." We believe these trends will provide significant market opportunities in high-speed,
high-reliability RF (radio frequency) uplinks, embedded microcircuits, amplifiers, and other semiconductor products.

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Hybrid-Electric Vehicles

Prices of oil and refined products will strongly influence the demand for hybrid-electric vehicles. We believe high prices, if sustained, will increase demand
for substitute fuel sources and may result in regulatory incentives to develop and commercialize vehicles powered by alternative fuel sources. In addition, automobiles are a major contributor to air
pollution, and we believe that new hybrid-electric vehicles can help to solve this problem. The Clean Air Act Amendments of 1990 and the National Energy Policy Act of 1992 have caused automobile
manufacturers to concentrate on the development of low-emission vehicles and zero-emission vehicles such as hybrid-electric or electric vehicles. The California Air Resource
Board also has adopted regulations that require 10% of a manufacturer's new car sales in California be zero-emission vehicles by 2003.

Hybrid-electric
vehicles can reduce air pollution while offering greater driving range and performance than electric vehicles. Hybrid-electric vehicles function by creating energy
from a source, such as an internal combustion engine or fuel cell. The mechanical energy is then transformed into electricity by a generator and transferred to an electric drivetrain that propels the
vehicle. All hybrid-electric vehicles require complex power and control electronics to convert, condition and manage electricity, as well as high-performance motors, electric drivetrains
and energy storage systems.

Our Opportunity

The increased demand for reliable, high-quality, cleaner power has created a growing market for high performance power electronics, power quality
systems and distributed power generation. All of these systems require power and energy management products to convert, store and manage electricity. In order to be commercially viable and operate
effectively, these power and energy management products must be highly reliable, efficient, low-cost and compact. Many of these products must be highly customized to meet the evolving
needs of the distributed power generation and power quality marketplace. We believe that a significant opportunity exists to manufacture and supply power and energy management products that meet these
criteria.

We
believe that the ideal system to produce this digital power is one that is highly distributed with power generation, energy storage, and control systems located near the user load,
with capabilities for overall management, reconfiguration and system optimization. This evolving system will use a new generation of power semiconductors, software and machine-based control systems to
seamlessly combine power from the traditional utility grid with power generated on-site from sources such as natural gas engines, fuel cells and micro turbines and from energy storage
devices such as flywheels and advanced batteries. We believe that the control systems that manage the flow of electrical power, which includes electronics, software and system controls, are the key
enablers to the successful commercialization of this technology. Our strategy is to use our expertise and proprietary technologies in this area to leverage us into a position of leadership as a global
provider of digital power systems.

Our Solution

Our solution is to provide critical power products and systems necessary to meet the growing demands of the digital power marketplace, including high
performance power electronics, power quality products and distributed power generation systems. Our products and systems include our StarSine MegaPower UPS; PowerGate and
MegaVerter power electronics; our control software; our GridLink utility interface; high-performance motors; and high-speed telecommunications
electronics. We believe our solution encompasses the following key attributes demanded by the emerging digital power marketplace:



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Strategy

Our objective is to be a leading provider of power and energy management products necessary for digital power systems, power quality and UPS systems, and
distributed power generation systems, including cogeneration systems, natural gas engines, fuel cells and microturbines. Our strategy to leverage ourselves into this leadership position is
two-fold. First, since the power control system is the key enabler for these digital power products, we are in a position to be a key supplier to several competing power generation
manufacturers, such as fuel cells, microturbines, flywheels and advanced battery systems. In addition, possessing the enabling technology in power electronics, magnetics and software controls,
positions SatCon to be a strong competitor and integrator of power systems. Developing innovative power systems based on our power electronics and control software and the integration of third party
"best of breed" power generation and energy storage is a key strategy. Second, most of the markets that SatCon is addressing today, while important, are niche opportunities below the radar screens of
larger companies. However, many of these market opportunities have substantial growth potential. If we carefully choose, we can both grow and become firmly established in these markets in the early
stages. The early adopters of digital power include semiconductor fabrication, industrial automation, financial institutions, transportation systems, communication systems

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and the military. We have already established supplier relationships with many of these early adopters and have substantial sales and backlog within these markets. We believe that by designing and
developing our products across multiple markets and multiple applications, our success should be less dependent upon the adoption of a specific application or on the business of a single market
participant. To accomplish our objective, we are pursuing the following key strategies:



Our Operating Divisions

We have positioned ourselves as a leader in power electronics and controls for both distributed energy and high reliability components for the aerospace,
medical and industrial automation sectors. To successfully implement this strategy, we have established and maintained a high quality design

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engineering, marketing, manufacturing and service capability through both internal corporate development and acquisitions. We currently develop and market our products and services through the
following three operating segments, which were established in our June 2001, reorganization:

SatCon Power Systems

SatCon's MagMotor, Ling and Advanced Fuel Cell Power Products operations were grouped together with the Inverpower acquisition to form SatCon Power Systems.

SatCon
Power Systems manufactures and sells SatCon's line of commercial StarSine MegaPower UPS Systems for back-up power and power quality;
MegaVerter and PowerGate100 power conversion systems for distributed power generation; StarSine amplifiers; MagLev integrated suspension and motor systems;
Inverpower's industrial and commercial power conversion and conditioning products; MagMotor high-performance motors for the industrial machinery, factory automation and automotive markets;
and Ling Electronics shaker vibration test systems and amplifiers.

SatCon Semiconductor Products

SatCon's Film Microelectronics, Inc. and HyComp operations were combined to form SatCon Semiconductor Products in Marlborough, Massachusetts.

SatCon
Semiconductor Products manufactures and sells power chip components; power switches; RF devices, including SatCon's satellite uplink amplifiers; aluminum nitride power
resistors for telecommunications; and standard and custom hybrid microcircuits for commercial and government aerospace, industrial, medical and automotive markets. SatCon Semiconductor Products also
manufactures various multi-chip modules and the power switches for the power electronics products sold through the Power Systems business unit.

SatCon Applied Technology

SatCon's Technology Center in Cambridge, Massachusetts and its Electronic Power Products operations in Maryland were grouped together to form SatCon Applied
Technology.

SatCon
Applied Technology develops advanced technologies in digital power electronics, motors and controls, and seeks to transition those technologies into products to be manufactured
and sold through SatCon's manufacturing divisions. It will also continue to pursue revenue producing development contracts from both government and commercial sources. Emphasis will be placed on
contracts that lead to products that can be manufactured and sold by SatCon's two manufacturing business units.

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Products

We design, develop and manufacture high-efficiency, high-reliability and long-lived power and energy management products
that convert, store and manage electricity. We are using our electronics and manufacturing expertise to develop products that meet the high-reliability, high-efficiency,
low-cost and compact-size requirements of the digital power marketplace. The following chart details the basic elements of digital power systems.

LOGO

Our
digital power products are sold through our business units in the following segments:

SatCon Power Systems

The Power Systems business unit includes high-performance motors, magnetic levitation systems, vibration test equipment, industrial automation and
machine tool motors, AC and DC power supplies, static transfer switches and voltage regulators and a Smart Predictive Line Controller. These products are used in several markets and applications
including, but not limited to, UPS and power quality systems, for distributed power generation, industrial automation and hybrid electric vehicles. Revenue for our fiscal years ended
September 30, 2001, 2000 and 1999 from our Power Systems business unit was approximately $20.2 million, $14.1 million and $2.8 million, respectively.

UPS and Power Quality

Currently, when electrical power is lost or its quality drops, lead-acid batteries provide back-up electricity until a generator can be
engaged. Batteries have poor reliability and reduced life expectancy. The dangers of explosion and acid spills are additional environmental concerns associated with lead-acid batteries.
Our StarSine MegaPower UPS product combines a diesel generator with a flywheel energy storage system, our StarSine electronics and a proprietary control system into an
uninterruptible power
supply (UPS) which we believe is an attractive alternative to lead-acid battery based UPS systems due to increased reliability, longer life and the ability to operate effectively in remote
locations. An electric motor spins a flywheel to its operating speed. While the flywheel spins, it stores kinetic energy, or energy created by motion. During power outages or periods of low power
quality, the flywheel motor converts to a generator and, like a battery, transfers the stored electricity to the end user. While the flywheel maintains the power to the end user, the diesel generator
turns on and replaces the flywheel and the grid as the prime power source until the utility grid is restored. SatCon's StarSine® MegaPower systems can provide both power
quality and UPS functions in power ranges from 250 kilowatts to 2.0 megawatts and beyond.

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Distributed Power Generation

We have developed a PowerGate residential fuel cell power conversion system that combines DC to DC converters, a DC to AC inverter and a
controller with control software. We have also developed our GridLink utility interface which is designed to allow distributed power generation systems such as fuel cells, microturbines,
UPS systems and others to operate in either grid-parallel (connected to the grid) or grid-independent (disconnected from the grid) modes. Our products have been developed for
use in both residential and larger industrial fuel cell power generation systems. Several fuel cell manufacturers are evaluating our PowerGate power electronics and control software for
use in their residential fuel cell power generation systems.

We
have also developed a technology to make modular inverter units that can be combined and scaled to handle high-power requirements. Using this technology, we developed
the MegaVerter for use in connection with large, commercial sized, fuel cell or microturbine power generation systems that produce power ranging from 200 kilowatts to 5 megawatts. We
recently delivered a 250 kilowatt system to Siemens Westinghouse for use in a solid oxide fuel cell system and have supplied FuelCell Energy with a demonstration unit for a molten carbonate fuel cell
to power their Danbury, CT facility.

Industrial Automation

We design and manufacture a variety of standard and custom high-performance motors to suit specific applications. Our specialty motors are
typically designed and manufactured for unique customer requirements such as high power-to-size requirements or high efficiency. We believe that our technical and design
expertise enables us to shorten the time between receiving customer specifications and designing and building motors that meet these specifications. Some of our products include:



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SatCon Semiconductor Products

The semiconductor products business unit includes RF or radio frequency components, hybrid microcircuits, thin film substrates and amplifiers. Revenue for our
fiscal years ended September 30, 2001, 2000 and 1999 from our Semiconductor Products business unit was approximately $10.6 million, $8.3 million and $6.3 million,
respectively. The following are descriptions of our product categories within the Semiconductor Products segment.

RF or Radio Frequency.RF components including amplifiers that are currently used in satellite uplink systems such as
the Mobil SpeedPass, satellite television, wireless Internet service and secure commercial and military communications. In September 2001 we introduced a new line of high-power
aluminum nitride RF (radio frequency) termination products. Capitalizing on our aluminum nitride processing, RF design and high volume assembly capabilities, the devices will be available in a variety
of form factors and, we believe, will take power terminations to a new level of sophistication and
versatility. Our in house RF designers can also tailor the devices to accommodate specific frequencies and applications. We manufacture a variety of RF products for secure military communications and
satellite uplink electronics.

Aluminum Nitride Power Resistors.We manufacture power resistors for cellular telephones using aluminum nitride as the
thin film substrate instead of beryllium oxide. Beryllium oxide is hazardous, and its use in manufacturing is restricted in the United States and banned in Europe.

Amplifiers.We sell amplifiers that take an input signal and replicate it using amplified power to boost the signal. We
sell amplifiers for a variety of applications, including telecommunications uplinks, power amplifiers for aircraft applications and video amplifiers for cruise missiles.

Hybrid Microcircuits.We manufacture standard and custom hybrid microcircuits, which are a combination of several
electronic components imbedded in a miniature printed circuit board. Due to their size, versatility and high reliability, these hybrid microcircuits are used in a broad spectrum of applications
including communications, industrial, medical, military and aerospace. Our customers have employed some of our microcircuit products as follows:



Thin Film Substrates.Thin film substrates are miniature printed circuits onto which small electronic components are
mounted, such as those used in hybrid microcircuits. Our thin film products are integrated into electronic devices that require small, high-reliability components such as cellular
telephones and other wireless communications devices. In addition to producing thin film substrates for other manufacturers, we use our thin film substrates in our own hybrid microcircuit products.

SatCon Applied Technology

We perform funded research and development in connection with government programs and for third parties. We pursue funded research and development in areas
where we have technical expertise and where we believe there is significant commercial application for the developed technology. Through the
integration of diverse technologies, SatCon Applied Technology offers dedicated multidisciplinary teams, focused on providing effective solutions to challenging problems. Technical disciplines
represented include electromechanics, digital and analog electronics, power electronics and electronic packaging, thermal control, motor dynamics, materials, software development and control
technology, electro-optics and system integration. Areas of product development include distributed power

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generation, energy storage and power quality, high performance electric machinery, special purpose electric machinery, transportation systems, "all electric" ships and aircraft.

We
have performed funded research and development in connection with the development of each of our product areas. Revenue for our fiscal years ended September 30, 2001, 2000
and 1999 from funded research and development was approximately $10.9 million, $8.7 million and $6.4 million, respectively.

We
have a contract with the U.S. Department of Energy (DOE) for the research, development and demonstration of a power conversion system for a new generation of hybrid-electric
vehicles. Under this government contract, we expect to design a power conversion system that can be manufactured at high volume and low cost. We believe that the resulting design will enable us to
enhance our manufacturing capabilities to produce our power conversion products for hybrid-electric vehicles and distributed power generation systems. This program has been funded half by us and half
by DOE. The total DOE approved budget for this program is $10.0 million through September 29, 2002. As of September 30, 2001, DOE has funded $7.5 million of this budget.
Revenue for our fiscal years ended September 30, 2001, 2000 and 1999 for this program totaled $3.1, $3.4 million and $1.0 million, respectively. The additional DOE funding of
$2.5 million is subject to congressional appropriation and DOE approval. Our Semiconductor Products business unit will manufacture these electronics in production quantities when they become
commercialized.

In
2001, we worked on the development of a line of high-performance motors for auxiliary uses, such as fuel pumps, in fuel cell hybrid-electric vehicles. We are also
developing these high-performance motors for use in commercial and residential fuel cell power generation systems. Our Power Systems business unit will manufacture these motors in
production quantities when they become commercialized. We also received $3.0 million in development revenue for high performance motors, as well as electronics and control systems, for the DD21
"all electric" ship, and, in September, delivered a power conversion and control system for a military hybrid-electric vehicle.

Significant Customers

The U.S. Department of Defense accounted for 6.8%, 9.8% and 20.6% of our total revenue for our fiscal years ended September 30, 2001, 2000 and 1999,
respectively. For our fiscal years ended September 30, 2001 and 2000, revenue from the U.S. Department of Energy accounted for 7.4% and
11.5% of our total revenue, respectively. For our fiscal years ended September 30, 2001 and 2000, revenue from Applied Materials accounted for 8.3% and 10.6% of our total revenue, respectively.

Research and Development

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

$10.9 million,
or 26%, of our revenue during the fiscal year ended September 30, 2001 was attributable to research and development activities funded by commercial
customers and U.S. government agency sponsors. Under the agreements funded by the U.S. government, the government retains a royalty-free license to use the technology developed for
government purposes and we retain exclusive rights to the technology for commercial and industrial applications. The rights to technology developed under contracts funded by commercial customers are
negotiated on a case-by-case basis. We expended $6.2 million, $3.5 million and $726,000 on internally-funded research and development during our fiscal years
ended September 30, 2001, 2000 and 1999, respectively. During our fiscal year ended

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September 30, 2001, our most concentrated effort was directed toward building the power inverter for an on-site power generation system and our 250kW and 2.0MW UPS and power quality
systems.

Sales and Marketing

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

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

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

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

Backlog

Our backlog consists primarily of research and development contracts and orders for power electronic and motion control products. At September 30, 2001,
the backlog was $21.0 million for work to be performed and products to be shipped during our fiscal year ending September 30, 2002 and beyond. Many of our contracts and sales orders may
be canceled at any time with limited or no penalty. In addition, contract awards may be subject to funding approval from the U.S. government and commercial entities, which involves political,
budgetary and other considerations over which we have no control. Our backlog at September 30, 2000 was $23.3 million.

Competition

The market for our products is competitive and subject to rapid technological change. The market is significantly affected by new product introductions and
other market activities of industry participants. We currently or potentially compete with:



15

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Many
of our competitors have significantly greater financial resources than we do and are able to devote greater resources to the development, promotion, sale and support of their
products and may have more manufacturing expertise and capacity. In addition, many of our competitors have more extensive customer bases and broader customer relationships than we do.

We
believe that competitive factors for our products include:



We
believe that we are positioned to compete favorably on the basis of each of these factors in each of our markets.

Manufacturing

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

Intellectual Property

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

16

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We currently own 75 U.S. patents and have 13 patent applications pending with the U.S. Patent and Trademark Office. We have also obtained 88 corresponding patents in Europe and Asia.
In addition, we have a non-exclusive, royalty-free license for non-automotive applications for 38 other patents that were issued to our employees and assigned to
DaimlerChrysler in connection with the completed Chrysler Patriot racecar project. Our patents are distributed among the following six application areas:



The
expiration dates of these patents range from 2007 to 2021, with the majority expiring after 2016.

In
1997, we granted Beacon Power a perpetual, worldwide, royalty-free, exclusive right and license to our flywheel technology for stationary, terrestrial applications. As
a qualifying small business, we have retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants, including small business innovation
research contracts. Our patent and trade secret rights are of material importance to us and to our future prospects.

Many
of the U.S. patents described above are the result of retaining ownership of inventions made under U.S. government-funded research and development programs. With respect to any
invention made with government assistance, the government has a nonexclusive, nontransferable, irrevocable,
paid-up license to use the technology or have the technology employed for or on behalf of the U.S. government throughout the world. Under certain conditions, the U.S. government also has
"march-in rights." These rights enable the U.S. government to require us to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to responsible applicants,
upon terms that are reasonable under the circumstances. If we refuse, the government can grant the license itself, provided that it determines that such action is necessary because we have not
achieved practical application of the invention, or to alleviate health or safety needs, or to meet requirements for public use specified by federal regulations, or because products using such
inventions are not being produced substantially in the United States. The exercise of these rights by the government could create potential competitors for us if we later determine to further develop
the technologies and utilize the inventions in which the government has exercised these rights.

Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products or technologies is difficult. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such resulting litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business, results of operations and financial condition.

We
cannot assure you that third parties will not claim infringement with respect to our current or future products. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful claim of intellectual property

17

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infringement against us and our failure or inability to license the infringed technology or develop or license technology with comparable functionality could have a material adverse effect on our
business, results of operations and financial condition.

We
depend upon intellectual property developments that sometimes derive in whole or in part from U.S. government contracts and subcontracts. Our rights to these intellectual property
developments vary by contract, depending upon such factors as whether the government wholly or only partly funded the contract, and the terms of the negotiation between the government department and
us. Some contracts may give us exclusive rights to commercialize the invention, reserving to the government only those rights which it needs for government functions. Other contracts may give broader
rights to the government. At the least, most of these contracts provide us with a non-exclusive, non-assignable license to use a development for commercial purposes, however
most of our technology developed through government-funded contracts is protected through patents and exclusive rights.

Government Regulation

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

Government Contracts

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

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

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

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

Employees

At September 30, 2001, we had a total of 364 full-time employees, 8 part-time employees and 19 contract employees. Of the total,
126 persons were employed in engineering, 185 in manufacturing, 53 in administration and 27 in sales and marketing. None of our employees are represented by a union. We believe that our relations with
our employees are good.

18

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Beacon Power Corporation

In May 1997, we formed Beacon Power to develop stationary, terrestrial flywheel energy storage systems for commercial applications. At that time, DQE
Enterprises, Inc., who is currently one of our investors, made a $5 million investment in SatCon, and we were required to contribute the $5 million to the capital of Beacon Power
to fund its development efforts. As a condition of DQE Enterprises' investment in us, we granted Beacon Power a perpetual, worldwide, royalty-free, exclusive right and license to our
flywheel technology for stationary, terrestrial applications.

Beacon
Power has been developing stationary flywheel energy storage systems to offer customers an environmentally cleaner, more reliable alternative to lead-acid batteries
for energy storage and power quality management. Lead-acid batteries have three primary deficiencies. Weather extremes and frequent discharging and recharging limit their reliability and
useful lives, they cannot be remotely monitored currently, and they represent an environmental risk due to the threat of explosion and battery acid spills.

Beacon
Power is developing its flywheel energy storage system to operate in all weather conditions, to offer remote monitoring, to have no limitations on charge and discharge cycles
and to have a longer useful life than batteries. Beacon Power's flywheel energy storage system consists of a rotating, composite rim that spins on magnetic bearings in a vacuum. The flywheel is
powered up to its operational speed by an internal motor. Because of negligible friction, little power is required to maintain the flywheel's operating speed. During power outages or periods of low
power quality, the flywheel motor converts to a generator and, like a battery, transfers the stored electricity to the end user.

On
October 23, 1998, Beacon Power completed a $4.8 million private placement of its class D preferred stock and warrants to Perseus Capital L.L.C., DQE
Enterprises and Micro-Generation Technology Fund, L.L.C. At that time, we relinquished significant control of Beacon Power and Beacon Power came under the control of its third-party investors. From
June 1999 through March 31, 2000, Beacon Power was financed through the issuance of approximately $4.7 million of bridge notes and warrants to its investors, including
approximately $1.0 million from us. On April 7, 2000, Beacon Power issued 1,226,141 shares of its class E preferred stock and warrants to purchase 306,535 shares of its
class E preferred stock in exchange for the conversion of all of its outstanding bridge notes of which we received 347,407 shares of Beacon Power's class E preferred stock and a warrant
to purchase 86,852 shares of its class E preferred stock.

On
April 21, 2000, Beacon Power raised an additional $4.1 million through the sale of additional bridge notes and warrants to purchase 82,000 shares of Beacon Power's
common stock. We did not participate
in this financing. On May 23, 2000, Beacon Power issued 6,785,711 shares of its class F preferred stock and additional warrants to purchase shares of Beacon Power's common stock. The
exercise price and the number of shares subject to these additional warrants were based on the initial public offering price of Beacon Power's common stock. The shares of class F preferred
stock and the additional warrants were issued in consideration for the cancellation of $5.2 million in bridge notes and an additional $23.3 million cash investment by existing and new
investors. We did not participate in this financing either.

Beacon
Power's class D preferred stock, class E preferred stock and class F preferred stock accrue quarterly dividends in arrears at a rate of 12.5% through
May 23, 2000 and 6% thereafter. Beacon Power also has consulting arrangements with Perseus, DQE Enterprises and Micro pursuant to which Beacon Power must pay consulting fees in shares of its
class A preferred stock.

On
November 22, 2000, Beacon Power completed an initial public offering of its common stock and issued 8,000,000 shares of its common stock at $6.00 per share. Upon the closing
of Beacon Power's initial public offering, each share of Beacon Power's class A, C, D, E and F preferred stock

19

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was converted into two shares of Beacon Power's common stock or 29,359,530 shares of common stock. In addition, upon the closing of Beacon Power's initial public offering, Beacon Power issued 873,794
shares of common stock in payment for consulting fees and accrued dividends on Beacon Power's class D and E preferred stock. On December 19, 2000, Beacon Power issued an additional
1,200,000 shares of its common stock at $6.00 per share to cover over-allotments. On December 20, 2000, Beacon Power issued 985,507 shares of its common stock in connection with the
cashless exercise of warrants to purchase shares of Beacon Power's common stock. On December 22, 2000, Beacon Power issued 997,369 shares of its common stock in connection with the cashless
exercise of warrants to purchase shares of Beacon Power's common stock.

On
September 28, 2001 we distributed 5,000,000 shares of SatCon's ownership in Beacon Power to our stockholders. As of September 30, 2001, we continued to beneficially
own 4,705,910 shares, or approximately 11%, of Beacon Power's common stock. We also own a warrant to purchase 173,704 shares of Beacon Power's common stock at an exercise price of $1.25 per share.
David B. Eisenhaure, our chairman of the board, president and chief executive officer serves on the Board of Directors of Beacon Power.

Item 2. PROPERTIES

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

|Location                    |  | Primary Use                                         |  | Approximate Number
of Square Feet |  | Expiration
of Lease
|--------------------------- |  | --------------------------------------------------- |  | --------------------------------- |  | -------------------
|Cambridge, MA               |  | Corporate headquarters and research and development |  | 33,000                            |  | 2003               
|Worcester, MA               |  | Manufacturing                                       |  | 65,000                            |  | 2005               
|Marlborough, MA             |  | Manufacturing                                       |  | 24,000                            |  | 2005               
|Baltimore, MD               |  | Research and development                            |  | 16,000                            |  | 2005               
|Anaheim, CA                 |  | Manufacturing                                       |  | 85,000                            |  | 2003               
|Burlington, Ontario, Canada |  | Manufacturing                                       |  | 62,500                            |  | 2002               

Our
Cambridge, Massachusetts lease contains an additional 13,000 square feet of space, which is subleased to a third party until December 31, 2002. We also lease 15,000 square
feet in North Andover, Massachusetts which were vacated in July 2001 when we consolidated operations into the Marlborough, Massachusetts facility. We are seeking a sublet tenant for the
remainder of the lease term through July 2002. We also lease 17,000 square feet in Worcester, Massachusetts which has been vacated and operations relocated to the newly leased Coppage Drive
Worcester, Massachusetts facility in July 2001. We are seeking a sublet tenant for January 1, 2002 through the remainder of the lease term of March 2003.

We
believe our facilities are adequate for our current needs and that adequate facilities for expansion, if required, are available. See also "BusinessOur Operating
Divisions."

20

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Item 3. LEGAL PROCEEDINGS

Sean Moran, our Chief Financial Officer, served as Chief Financial Officer for Anika Therapeutics, Inc. from February 1993 to January 2000. Anika reported, in
May 2000, that it was the subject of a formal investigation by the SEC. Anika reported that in connection with the formal investigation, the SEC required Anika to provide information in connection
with certain revenue recognition matters. Anika reported that these matters related to Anika's historical accounting for sales of its product under a long-term supply and distribution
agreement. In March 2000, Anika restated its financial results for 1998 and the first three quarters of 1999 to change its revenue recognition policy under this long-term supply
contract. In August 2001, Anika again restated its financial results for the fourth quarter of 1998 and the first quarter of 1999.

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

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

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

21

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PART II

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

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

The
following table sets forth the range of high and low sales prices of our common stock as reported on the Nasdaq National Market for our fiscal years ended September 30,
2000 and 2001:

High

LowYear Ended September 30, 2000First Quarter

$
10.44

$
7.31Second Quarter


44.75


8.00Third Quarter


28.81


10.50Fourth Quarter


41.00


23.50Year Ended September 30, 2001First Quarter

$
36.75

$
8.00Second Quarter


15.50


8.69Third Quarter


18.50


8.51Fourth Quarter


10.90


4.70


On
December 19, 2001, the last reported sale price of our common stock as reported on the Nasdaq National Market was $4.95 per share. As of December 19,
2001, there were 16,539,597 shares of our common stock outstanding held by approximately 205 holders of record.

Dividend Policy

We have never paid dividends on our common stock. We currently intend to retain earnings, if any, to fund the development and growth of our business and do not
anticipate paying cash dividends for the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

22

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

You should read the data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data set forth below for our fiscal
years ended September 30, 2001, 2000 and 1999 and the consolidated balance sheet data as of September 30, 2001 and 2000 are derived from our audited consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for our fiscal years ended September 30, 1998 and 1997 and the
consolidated balance sheet data as of September 30, 1999, 1998 and 1997 are derived from our audited consolidated financial statements that are not included in this Annual Report on
Form 10-K. The statement of operations for our fiscal year ended September 30, 2001 includes the results of the acquisition of assets from Inverpower Controls Ltd.
beginning from July 13, 2001, the date which we acquired assets from Inverpower Controls Ltd.

|                                                                                                                                  |                                                            | Fiscal Year Ended September 30, |        
|--------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------- | -------
|
|
|Statement of Operations Data                                                                                                      |                                                            |                                 |        
|Revenue:                                                                                                                          |                                                            |                                 |        
|Product revenue                                                                                                                   |                                                            | $                               | 30,780 
|Funded research and development and other revenue                                                                                 |                                                            |                                 | 10,904 
|                                                                                                                                  |                                                            |                                 |        
|                                                                                                                                  | Total revenue                                              |                                 |        
|                                                                                                                                  |                                                            |                                 |        
|Operating costs and expenses:                                                                                                     |                                                            |                                 |        
|Cost of product revenue                                                                                                           |                                                            |                                 | 27,828 
|Research and development and other revenue expenses:                                                                              |                                                            |                                 |        
|                                                                                                                                  | Funded research and development and other revenue expenses |                                 |        
|                                                                                                                                  | Unfunded research and development expenses                 |                                 |        
|                                                                                                                                  |                                                            |                                 |        
|                                                                                                                                  | Total research and development and other revenue expenses  |                                 |        
|Selling, general and administrative expenses                                                                                      |                                                            |                                 | 13,593 
|Write-off of public offering costs                                                                                                |                                                            |                                 | 1,421  
|Amortization of intangibles                                                                                                       |                                                            |                                 | 1,362  
|                                                                                                                                  |                                                            |                                 |        
|                                                                                                                                  | Total operating costs and expenses                         |                                 |        
|                                                                                                                                  |                                                            |                                 |        
|Operating loss                                                                                                                    |                                                            |                                 | (16,195
|Net unrealized loss on warrants to purchase common stock                                                                          |                                                            |                                 | (1,480 
|Other income (loss)                                                                                                               |                                                            |                                 | 584    
|                                                                                                                                  |                                                            |                                 |        
|Net loss before income taxes, equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                            |                                 | (17,091
|Provision for income taxes                                                                                                        |                                                            |                                 |       
|Equity loss from Beacon Power Corporation                                                                                         |                                                            |                                 | (5,064 
|                                                                                                                                  |                                                            |                                 |        
|Net loss before cumulative effect of changes in accounting principles                                                             |                                                            |                                 | (22,155
|Cumulative effect of changes in accounting principles                                                                             |                                                            |                                 | (168   
|                                                                                                                                  |                                                            |                                 |        
|Net loss                                                                                                                          |                                                            |                                 | (22,323
|Accretion of redeemable convertible preferred stock discount                                                                      |                                                            |                                 |       
|Cumulative effect of change in accounting principle                                                                               |                                                            |                                 | (1,941 
|                                                                                                                                  |                                                            |                                 |        
|Net loss attributable to common stockholders                                                                                      |                                                            | $                               | (24,264
|                                                                                                                                  |                                                            |                                 |        
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted               |                                                            | $                               | (1.51  
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                               |                                                            |                                 | (0.14  
|                                                                                                                                  |                                                            |                                 |        
|Net loss attributable to common stockholders per weighted average share, basic and diluted                                        |                                                            | $                               | (1.65  
|                                                                                                                                  |                                                            |                                 |        
|Weighted average number of common shares, basic and diluted                                                                       |                                                            |                                 | 14,666 
|                                                                                                                                  |                                                            |                                 |        

23

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

24

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

Overview

We are developing enabling technologies for the emerging digital power marketplace which includes UPS systems, distributed power generation and power quality
products. We manufacture power and energy management products that convert, store and manage electricity for businesses and consumers that require high-quality, uninterruptible power. We
are utilizing our engineering and manufacturing expertise to develop products that serve the digital power marketplace, including UPS systems, power generation and power quantity products, industrial
automation motors and controls, power electronics and controls, components for fuel cell and microturbine power generation systems, hybrid-electric vehicles and flywheel energy storage systems. We
believe the family of products we are developing will be integral components of distributed power generation and power quality systems.

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



All
of these acquisitions were accounted for using the purchase method of accounting. In addition, in November 1999, we acquired intellectual property, tooling and other assets
from Northrop Grumman Corporation. See Note O to our Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding our acquisitions.

In
May 1997, we formed Beacon Power Corporation ("Beacon Power") to develop stationary, terrestrial flywheel energy storage systems for commercial applications. On
October 23, 1998, Beacon Power completed a $4.8 million private placement of its class D preferred stock and warrants to third-party investors, and we relinquished significant
control of Beacon Power. As of October 23, 1998, we owned 0.1% of Beacon Power's voting stock and 67.0% of Beacon Power's outstanding capital stock. From June 1999 through
March 31, 2000, Beacon Power was financed through the issuance of approximately $4.7 million of bridge notes and warrants to its investors, including $1.0 million from us. On
April 7, 2000, Beacon Power issued 1,226,141 shares of its class E redeemable preferred stock and warrants to purchase 306,535 shares of its class class E preferred stock in
exchange for the conversion of all of its outstanding bridge notes of which we received 347,407 shares of Beacon Power's Class E preferred stock and a warrant to purchase 86,852 shares of its
class E preferred stock. As of April 7, 2000, we owned 11.0% of Beacon Power's voting stock and 61.0% of Beacon Power's outstanding capital stock. On April 21, 2000, Beacon Power
raised an additional $4.1 million through the sale of additional bridge notes and warrants to purchase 82,000 shares of Beacon Power's common stock. We did not participate in this financing. On
May 23, 2000, Beacon Power issued 6,785,711 shares of its

25

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class F preferred stock and additional warrants to purchase shares of Beacon Power's common stock. The shares of class F preferred stock and the additional warrants were issued in
consideration for the cancellation of $5.2 million in bridge notes and an additional $23.3 million cash investment by existing and new investors. We did not participate in this financing
either. As of May 23, 2000, we owned 3.5% of Beacon Power's voting stock and 33.0% of Beacon Power's outstanding capital stock. As of September 30, 2000, we owned 3.5% of Beacon Power's
voting stock and 32.1% of Beacon Power's outstanding capital stock on a common equivalent basis after taking all dividend accruals into account. On November 22, 2000, Beacon Power completed an
initial public offering of its common stock and issued 8,000,000 shares of its common stock at $6.00 per share. Upon the closing of Beacon Power's initial public offering, each share of Beacon Power's
class A, C, D, E and F preferred stock was converted into two shares of Beacon Power's common stock, or 29,359,530 shares of common stock, of which we received 9,691,440 shares of Beacon
Power's common stock. In addition, upon the closing of
Beacon Power's initial public offering, Beacon Power issued 873,794 shares of common stock in payment for consulting fees and accrued dividends on Beacon Power's class D and E preferred stock,
of which we received 11,098 shares of Beacon Power's common stock. After these events, we owned approximately 25.0% of Beacon Power's outstanding voting stock. On December 19, 2000, Beacon
Power issued an additional 1,200,000 shares of its common stock at $6.00 per share to cover over-allotments. As of December 19, 2000, we owned approximately 24.2% of Beacon Power's
outstanding voting stock. On December 20, 2000, Beacon Power issued 985,507 shares of Beacon Power's common stock in connection with the cashless exercise of warrants to purchase common stock.
As of December 20, 2000, we owned approximately 23.7% of Beacon Power's outstanding voting stock. On December 22, 2000, Beacon Power issued 997,369 shares of Beacon Power's common stock
in connection with the cashless exercise of warrants to purchase common stock. As of December 22, 2000, we owned approximately 23.1% of Beacon Power's outstanding voting stock. On
September 28, 2001, we distributed 5,000,000 shares of Beacon Power common stock to our stockholders. After the distribution, we owned approximately 11.0% of Beacon Power's outstanding voting
stock. As of September 30, 2001, the Beacon Power common stock held by us had a fair value of $7,152,983.

The
results of our operations include a $3.1 million loss of Beacon Power from May 8, 1997 to December 24, 1997 under the consolidation method of accounting. On
December 24, 1997, we began accounting for our investment in Beacon Power in accordance with SEC Staff Accounting Bulletin No. 30/Topic 5.E (SAB 30), "Accounting for Divestiture of a
Subsidiary or Other Business Operation," and have included 100% of Beacon Power's $7.1 million loss for the period from December 25, 1997 through May 1999 in a manner similar to
the equity method of accounting, at which time, our initial investment of $1.9 million, the $30,000 additional investment and the additional deemed investment of $4.8 million and accrued
dividends of $410,000 had been written down to zero. In June 1999, we committed up to $1.0 million of additional financing to Beacon Power, representing a minority share of a funding
commitment received by Beacon Power, and we began accounting for our investment in Beacon Power under the equity method of accounting and have included in our results through November 16, 2000
our share of Beacon Power's losses of $1.7 million. As of November 16, 2000, our additional investment in Beacon Power had been reduced to zero and our contingent obligation to Beacon
Power's Class D preferred stockholders was $5.8 million. On November 17, 2000, Beacon Power listed its common stock on the Nasdaq National Market. In connection with the listing,
the put right granted to the Class D preferred stockholders of Beacon Power was terminated and the contingent obligation to Class D preferred stockholders of Beacon Power was
reclassified to additional paid-in capital. On November 22, 2000, Beacon Power completed an initial public offering of its common stock. In accordance with SEC Staff Accounting
Bulletin No. 51, our investment in Beacon Power and additional paid-in capital was written up to reflect our beneficial interest in the book value of the stockholders' equity of
Beacon Power on November 22, 2000, which was approximately $15.0 million, less losses previously recorded in connection with the put right obligation in the amount of
$5.8 million, for a net gain of $9.1 million. On December 19, 2000, Beacon Power issued an

26

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additional 1,200,000 shares of its common stock at $6.00 per share to cover over-allotments. Our investment and additional paid-in capital was written up by $1.6 million
in accordance with SAB No. 51 to reflect our beneficial interest in the increase in book value of the stockholders' equity of Beacon Power at December 19, 2000. After the
write-up of our investment in Beacon Power, we continued to account for our investment in Beacon Power through September 28, 2001 under the equity method of accounting and recorded
our share of losses of $5.1 million from Beacon Power.

Upon
the distribution of the 5,000,000 shares, we recorded the distribution of the 5,000,000 shares as a reduction of additional paid-in-capital based on the
book value per share prior to the distribution, or $0.59 per share. After the distribution, we owned approximately 11.0% of Beacon Power's outstanding voting stock. Additionally, we have determined
that we do not have the ability to exercise significant influence over the operating and financial policies of Beacon Power and, therefore, now account for our investment in Beacon Power using the
fair value method as set forth in SFAS No. 115, "Accounting for Certain Debt and Equity Securities". We are no longer required to record our share of any losses from Beacon Power and the
investment is carried at fair value and designated as available for sale and any unrealized holding gains or losses to be included in stockholders' equity as a component of accumulated other
comprehensive income/(loss). As of September 30, 2001, the Beacon Power common stock had a fair value of $7,152,983 and we recorded an unrealized gain of $4,364,035 in stockholders' equity as a
component of accumulated other comprehensive income/(loss). Additionally, we have a warrant to purchase 173,704 shares of Beacon Power's common stock that has an exercise price of $1.25 per share and
expires in 2005. We account for this warrant in accordance with SFAS No. 133 and, therefore, record the warrant at its fair value. As of September 30, 2001, the warrant to purchase
Beacon Power common stock had a fair value of $201,436 and is included in warrants to purchase common stock on the accompanying balance sheet.

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

We
perform funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost
reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or
decreases in the fee depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs
incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each type of contract, we receive periodic progress payments or
payment upon reaching interim milestones and retain the rights to the intellectual property developed in government contracts. All payments to us for work performed on contracts with agencies of the
U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue and
contract costs for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and
development projects are recognized as funded research and development expenses as incurred.

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

27

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We have incurred significant costs to develop our technology and products. These costs have exceeded total revenue. As a result, we have incurred net losses in each of the past five
years. As of September 30, 2001, we had an accumulated deficit of $64.5 million. We intend to increase our capital expenditures and operating expenses to expand our manufacturing
capabilities and for general corporate purposes, including product development activities, sales and marketing and administrative activities. Because we expect to continue to invest in our business
ahead of anticipated future revenue, we expect to incur operating losses for at least the next two years.

Special Note Regarding Forward-Looking Information

This Annual Report on Form 10-K contains or incorporates forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 and section 21E of the Securities Act of 1934. You can identify these forward-looking statement by our use of the words "believes," "anticipates," "plans," "expects,"
"may," "will," "intends," "estimates," and similar expressions, whether in the negative or in the affirmative. Although we believe that these forward-looking statements reasonably reflect our plans,
intentions and expectations, our actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important
factors in the cautionary statements below under the heading "Factors Affecting Future Results" that we believe could cause our actual results to differ materially from the forward-looking statements
that we make. These factors also include, without limitation, those set forth in Exhibit 99 to this Form 10-K, which are expressly incorporated by reference herein. We do not
intend to update information contained in any forward-looking statements we make.

Results of Operations



Product Revenue.Product revenue increased by $8.4 million or 37% from $22.4 million to
$30.8 million. The increase was attributable to $6.1 million of increased revenue from Power Systems, of which Ling
Electronics accounted for $4.9 million, magnetic levitation products and high-performance motors accounted for $666,000 and power products accounted for $521,000, primarily as a result of our
acquisition of Inverpower. $2.3 million of increased revenue was attributable to Semiconductor Products.

Funded research and development and other revenue.Funded research and development and other revenue increased by
$2.3 million or 26% from $8.6 million to $10.9 million. This increase was primarily attributable to $2.7 million in funded research and development revenue from a new
program to develop high power converter assemblies for the U.S. Navy's next generation of modern "all-electric" ships offset by a reduction of $400,000 in funded research and development
revenue from a Department of Energy program to develop low-cost power conversion modules for electric and hybrid-electric vehicles. For the fiscal years ended September 30, 2001 and
2000, revenue from commercial contracts, which represents other revenue, is included in funded research and development and other revenue and amounted to $663,000 and $763,000, respectively.

Cost of product revenue.Cost of product revenue increased by $8.8 million or 46% from $19.1 million to
$27.8 million. The increase was primarily attributable to the increase in product revenue. In addition, for the fiscal year ended September 30, 2001, we provided a $1.2 million
reserve for excess and obsolete inventory as compared to $659,000 for the fiscal year ended September 30, 2000. Gross margin from product revenue as a percentage of product revenue decreased
from 15% to 10%.

Funded research and development and other revenue expenses.Funded research and development and other revenue expenses
increased by $598,000 or 9%from $6.8 million to $7.4 million. The

28

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increase was primarily attributable to $1.9 million in funded research and development expenses from the U.S. Navy program offset by the reduction of $1.0 million of research and
development expenses related to the Department of Energy program. For the fiscal years ended September 30, 2001 and 2000, costs and expenses from commercial contracts, which represents other
revenue expenses, are included in funded research and development and other revenue and amounted to $485,000 and $398,000, respectively.

Unfunded research and development expenses.Unfunded research and development expenses increased by $2.8 million
or 80% from $3.5 million to $6.2 million. The increase is due to increased focus on internally funded research and development projects including the power inverter for an
on-site power generation system and our 250 kilowatt and 2.0 megawatt UPS and power quality systems.

Selling, general and administrative expenses.Selling, general and administrative expenses increased by
$3.6 million or 36% from $10.0 million to $13.6 million. The increase was primarily due to an increase in selling expenses associated with the $10.6 million increase in
total revenue and the inclusion of Ling Electronics for the entire fiscal year ended September 30, 2001 and Inverpower from July 13, 2001 to
September 30, 2001. For the fiscal year ended September 30, 2001, we provided a $541,000 reserve for doubtful accounts as compared to $266,000 for the fiscal year ended
September 30, 2000. In addition, we recorded charges of $223,000, $175,000, $150,000 and $111,000 in settlement of litigation, consolidation of facilities, write-off of impaired
assets and for acceleration of a stock option award vesting schedule, respectively, during the fiscal year ended September 30, 2001.

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

Amortization of intangibles.Amortization of intangibles increased by $145,000 or 12% from $1.2 million to
$1.4 million. The increase was the result of amortization of intangibles recorded in connection with the acquisitions of Ling Electronics in October 1999, certain intellectual property
and other intangible assets from Northrop Grumman in November 1999 and certain intangible assets from Inverpower Controls Ltd. in July 2001. In addition, during 2001, we
wrote-off an impaired intangible asset with a net book value of $61,000.

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

Other income (loss).Other income increased to $584,000 or 27% from $460,000. The increase is the result of cash and
cash equivalents being maintained in interest bearing accounts offset by an increase in interest expense associated with the increase in debt.

Loss from Beacon Power Corporation.Loss from Beacon Power Corporation increased by $4.2 million from $899,000
to $5.1 million. In connection with Beacon Power's initial public offering in November 2000, our investment in Beacon Power and additional paid-in-capital was
written up to reflect our beneficial interest in the book value of the stockholders' equity of Beacon Power, which was approximately $16.6 million, less losses previously recorded in connection
with the put right obligation in the amount of $5.8 million for a net gain of $10.7 million. After the write-up of our investment in Beacon Power, we continued to account for
our investment in Beacon Power under the equity method

29

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of accounting and recorded our share of losses of $5.1 million from Beacon Power for the fiscal year ended September 30, 2001.

Cumulative effect of change in accounting principle.On October 1, 2000, we began accounting for our warrants to
purchase Mechanical Technology Incorporated common stock in accordance with SFAS No. 133 and, therefore, recorded a cumulative unrealized loss of $1.0 million as of October 1,
2000. On June 30, 2001, we began accounting for warrants to purchase our common stock that are designated as a liability in accordance with EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", and, therefore, recorded a cumulative unrealized gain of $854,000 as of June 30, 2001 to record the
warrants at fair value.



Product revenue.Product revenue increased by $13.3 million or 146% from $9.1 million to
$22.4 million. The increase was attributable to $11.3 million of increased revenue from Power Systems, of which Ling Electronics accounted for $7.4 million, magnetic levitation
products accounted for $2.3 million, high-performance motors accounted for $1.3 million and power products accounted for $287,000. $2.0 million of increased revenue was
attributable to Semiconductor Products.

Funded research and development and other revenue.Funded research and development and other revenue increased by
$2.3 million or 36% from $6.4 million to $8.6 million. This increase was attributable to an additional $2.4 million in funded research and development revenue from a
Department of Energy program to develop low-cost power conversion modules for electric and hybrid-electric vehicles and was partially offset by our increased focus on internally funded
research projects including the development of power conversion products for the distributed power generation market. For the fiscal years ended September 30, 2000 and 1999, revenue from
commercial contracts, which represents other revenue, is included in funded research and development and other revenue and amounted to $763,000 and $768,000, respectively.

Cost of product revenue.Cost of product revenue increased by $9.6 million or 100.5% from $9.5 million to
$19.1 million. The increase was primarily attributable to the increase in product revenue offset by improved plant utilization at MagMotor and Film Microelectronics. Gross margin from product
revenue as a percentage of product revenue increased to 15% from (4%).

Funded research and development and other revenue expenses.Funded research and development and other revenue expenses
increased by $1.0 million or 17.5% from $5.8 million to $6.8 million. The increase was primarily attributable to an additional $1.8 million in funded research and
development expenses related to the Department of Energy program. For the fiscal years ended September 30, 2000 and 1999, costs and expenses from commercial contracts, which represents other
revenue expenses, are included in funded research and development and other revenue expenses and amounted to $398,000 and $704,000, respectively.

Unfunded research and development expenses.Unfunded research and development expenses increased by $2.7 million
or 375.5% from $726,000 to $3.5 million. The increase was primarily attributable to an additional $1.1 million in unfunded research and development expenses related to the Department of
Energy program.

Selling, general and administrative expenses.Selling, general and administrative expenses increased by
$1.2 million or 13% from $8.8 million to $10.0 million. The increase was primarily due to the inclusion of $2.9 million of costs from Ling Electronics, $800,000 of costs
for facilities and staffing in an effort to meet expected growth and demand for our products and the inclusion of a full year of expenses related to Inductive Components and Lighthouse Software which
were acquired in January 1999 and HyComp which was acquired in April 1999. These increases were offset by the

30

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recording of $2.2 million of non-cash stock-based compensation expense related to the issuance of stock options and warrants to consultants and $1.0 million of additional
reserves for unbilled contract costs and fees and accounts receivable in 1999. Based on the facts and circumstances during 1999, we established a reserve of $521,000 for unbilled contract costs and
fees related to a contract with the Department of the Air Force which was terminable by the Department of the Air Force if it determined that we were in default under the contract as discussed in
Note H to our financial statements. In addition during 1999, we provided $513,000 in reserve for unbilled contract costs and fees and accounts receivable to properly reflect the reserve
requirements.

Amortization of intangibles.Amortization of intangibles increased $846,000 or 228% from $371,000 to
$1.2 million. This increase was the result of amortization of intangibles recorded in connection with the acquisitions of Inductive Components and Lighthouse Software in January 1999,
Ling Electronics in October 1999 and certain intellectual property and other intangible assets from Northrop Grumman in November 1999.

Other income (loss).Other income increased to $460,000 from $224,000 of other loss. The increase was the result of an
increase in cash and cash equivalents being maintained in interest-bearing accounts and a decrease of interest expense associated with our line of credit.

Loss from Beacon Power Corporation.Loss from Beacon Power decreased by $3.4 million or 79% from
$4.3 million to $899,000. During the fiscal year ended September 30, 2000, we recorded our share of Beacon Power's losses of $899,000, under the equity method of accounting. As of
December 31, 1999, our investment in Beacon Power had been reduced to zero, however, we continued to record losses from Beacon Power to the extent of additional interest accrued on the
contingent obligation to the class D preferred stockholders of Beacon Power. During the fiscal year ended September 30, 1999, we recorded 100% of Beacon Power's losses of
$3.6 million in accordance with SAB Topic 5.E., in a manner similar to the equity method of accounting through May 1999 and in June 1999, we began
accounting for our investment in Beacon Power under the equity method of accounting and recorded our share of Beacon Power's losses of $734,000 from June 1999 to September 1999.

31

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Quarterly Results of Operations

The following table presents unaudited quarterly statement of operations data for the eight quarters ended September 30, 2001. This data has been
prepared on a basis consistent with our audited financial statements included elsewhere in this Annual Report on Form 10-K. This data includes all adjustments, consisting solely of
normal recurring adjustments, that we believe necessary for a fair presentation of this information. The operating results for any quarter are not necessarily indicative of results to be expected for
any future period.

|                                                                                                                    |                                                            | Three Months Ended |       
|------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------ | ------
|
|
|Statement of Operations Data                                                                                        |                                                            |                    |       
|Revenue:                                                                                                            |                                                            |                    |       
|Product revenue                                                                                                     |                                                            | $                  | 7,290 
|Funded research and development and other revenue                                                                   |                                                            |                    | 2,725 
|                                                                                                                    |                                                            |                    |       
|                                                                                                                    | Total revenue                                              |                    |       
|                                                                                                                    |                                                            |                    |       
|Operating costs and expenses:                                                                                       |                                                            |                    |       
|Cost of product revenue                                                                                             |                                                            |                    | 8,744 
|Research and development and other revenue expenses:                                                                |                                                            |                    |       
|                                                                                                                    | Funded research and development and other revenue expenses |                    |       
|                                                                                                                    | Unfunded research and development expenses                 |                    |       
|                                                                                                                    |                                                            |                    |       
|                                                                                                                    | Total research and development and other revenue expenses  |                    |       
|Selling, general and administrative expenses                                                                        |                                                            |                    | 4,185 
|Write-off of public offering costs                                                                                  |                                                            |                    |      
|Amortization of intangibles                                                                                         |                                                            |                    | 394   
|                                                                                                                    |                                                            |                    |       
|                                                                                                                    | Total operating costs and expenses                         |                    |       
|                                                                                                                    |                                                            |                    |       
|Operating loss                                                                                                      |                                                            |                    | (6,874
|Net unrealized gain (loss) on warrants to purchase common stock                                                     |                                                            |                    | (1,255
|Other income                                                                                                        |                                                            |                    | 241   
|                                                                                                                    |                                                            |                    |       
|Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                            |                    | (7,888
|Equity loss from Beacon Power Corporation                                                                           |                                                            |                    | (1,368
|                                                                                                                    |                                                            |                    |       
|Net loss before cumulative effect of changes in accounting principles                                               |                                                            |                    | (9,256
|Cumulative effect of changes in accounting principles                                                               |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|Net loss                                                                                                            |                                                            |                    | (9,256
|Accretion of redeemable convertible preferred stock discount                                                        |                                                            |                    |      
|Cumulative effect of change in accounting principle                                                                 |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|Net loss attributable to common stockholders                                                                        |                                                            | $                  | (9,256
|                                                                                                                    |                                                            |                    |       
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                                            | $                  | (0.56 
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                 |                                                            |                    |      
|                                                                                                                    |                                                            |                    |       
|Net loss attributable to common stockholders per weighted average share, basic and diluted                          |                                                            | $                  | (0.56 
|                                                                                                                    |                                                            |                    |       
|Weighted average number of common shares, basic and diluted                                                         |                                                            |                    | 16,473
|                                                                                                                    |                                                            |                    |       

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Liquidity and Capital Resources

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

As
of September 30, 2001, our cash, cash equivalents and marketable securities were $20.9 million, an increase of $12.1 million from September 30, 2000.
Cash used in operating activities for the fiscal year ended September 30, 2001 was $11.0 million as compared to $5.5 million in 2000. Cash used in operating activities during the
fiscal year ended September 30, 2001 was primarily attributable to our net loss offset by non-cash items such as depreciation and amortization, increases in allowances for
uncollectible accounts and excess and obsolete inventory, loss from Beacon Power, net unrealized loss from warrants to purchase common stock, write-off of impaired assets, amortization of prepaid
consulting costs, non-cash compensation expense, common stock issued in connection with a settlement agreement, cumulative effect of changes in accounting principles and changes in working capital.

Cash
used in investing activities during the fiscal year ended September 30, 2001 was $11.8 million as compared to $2.9 million in 2000. Net cash used in
investing activities during the fiscal year ended September 30, 2001 included purchases of marketable securities of $9.8 million and capital expenditures of $2.2 million. We
estimate that we will spend an additional $2.0 million on capital expenditures through fiscal year 2002 primarily at our Power Systems Division to expand our capacity to manufacture our power
conversion products. We expect these additions will be financed principally from lease financing and, to a lesser extent, cash on hand.

Cash
provided by financing activities for the fiscal year ended September 30, 2001 was $25.1 million as compared to $14.7 million in 2000. Net cash provided by
financing activities during the fiscal year ended September 30, 2001 includes $17.1 million of proceeds from the sale of common stock, $7.0 million from the exercise of common
stock options and warrants and $1.5 million of proceeds from lease financing offset by $446,000 of repayment of long-term debt. In December 2000, we completed financing under
an agreement for the lease of certain production equipment in the amount of $1.5 million previously entered into in August 2000. Payments are due in monthly installments of $40,000 from
October 2001 through January 2002 and $19,705 from February 2002 through November 2005.

We
anticipate that the existing $20.9 million in cash, cash equivalents and marketable securities will be sufficient to fund operations for at least the next twelve months.
However, there can be no assurance that we will not require additional financings within this time frame or that any additional financing, if needed, will be available to us on terms acceptable to us,
if at all.

Factors Affecting Future Results

Our future results remain difficult to predict and may be affected by a number of factors which could cause actual results to differ materially from
forward-looking statements contained in this Annual Report on Form 10-K and presented elsewhere by management from time to time. These factors include business conditions within the
distributed power, power quality, aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive industries and the world
economies as a whole, and competitive pressures that may impact research and development spending. Our revenue growth is dependent on technology developments and contract research and development for
both the government and commercial sectors and no assurance can be given that these investments will continue or that we will be able to obtain such funds. In addition, our growth opportunities are
dependent on the introduction of new products that must penetrate distributed power, power quality, aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing,
factory automation, aircraft and automotive markets. No assurance can be given that new products can be developed, or if developed, will be successful; that

33

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competitors will not force prices to an unacceptably low level or take market share from us; or that we can achieve or maintain profits in these or any new markets. Because of these and other factors,
past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the market
price of our common stock experiences significant volatility.

Effects of Inflation

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

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Accounting for Business Combinations", and Statement
No. 142, "Goodwill and Other Intangible Assets." These statements modify accounting for business combinations after June 30, 2001 and will affect our treatment of goodwill and other
intangible assets at the start of the fiscal year ending September 30, 2002; however, business combinations completed after June 30, 2001 should apply the new accounting guidelines. The
statements require that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair
value. Additionally, existing goodwill and intangible assets must be assessed and classified
within the Statement's criteria. Intangible assets with estimated useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable
lives will cease. At this time, we have not determined the complete impact of SFAS No. 142.

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

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

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

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Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

|                                                                                                                                        |  | Page
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Part I: Financial Statements of SatCon Technology Corporation                                                                           |  |     
|Report of Independent Public Accountants                                                                                                |  | 36  
|Consolidated Financial Statements:                                                                                                      |  |     
|Consolidated Balance Sheets as of September 30, 2001 and 2000                                                                           |  | 37  
|Consolidated Statements of Operations for the Years Ended September 30, 2001, 2000 and 1999                                             |  | 38  
|Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the Years Ended September 30, 2001, 2000 and 1999 |  | 39  
|Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999                                             |  | 41  
|Notes to Consolidated Financial Statements                                                                                              |  | 42  
|Schedule II: Valuation and Qualifying Accounts for the Years Ended September 30, 2001, 2000 and 1999                                    |  | 72  

35

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Board of Directors of
SatCon Technology Corporation:

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

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

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



Boston,
Massachusetts
December 4, 2001

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SATCON TECHNOLOGY CORPORATION        CONSOLIDATED BALANCE SHEETS

|                                                                                    |                                                                                                                                                   | September 30,
2001                         |            | September 30,
2000 |           
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------------ | ----------
|ASSETS                                                                              |                                                                                                                                                   |                                            |            |                    |           
|Current assets:                                                                     |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    | Cash and cash equivalents                                                                                                                         |                                            | $          | 11,051,465         |           
|                                                                                    | Marketable securities                                                                                                                             |                                            |            | 9,872,317          |           
|                                                                                    | Accounts receivable, net of allowance of $775,706 and $320,222 at September 30, 2001 and 2000, respectively                                       |                                            |            | 8,636,740          |           
|                                                                                    | Unbilled contract costs and fees                                                                                                                  |                                            |            | 578,098            |           
|                                                                                    | Inventory                                                                                                                                         |                                            |            | 11,413,616         |           
|                                                                                    | Prepaid expenses and other current assets                                                                                                         |                                            |            | 913,860            |           
|                                                                                    |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    |                                                                                                                                                   | Total current assets                       |            |                    | 42,466,096
|Investment in Beacon Power Corporation                                              |                                                                                                                                                   |                                            | 7,152,984  |                    |           
|Warrants to purchase common stock                                                   |                                                                                                                                                   |                                            | 576,915    |                    |           
|Property and equipment, net                                                         |                                                                                                                                                   |                                            | 7,778,904  |                    |           
|Intangibles, net                                                                    |                                                                                                                                                   |                                            | 10,582,254 |                    |           
|Other long-term assets                                                              |                                                                                                                                                   |                                            | 219,306    |                    |           
|                                                                                    |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    |                                                                                                                                                   | Total assets                               |            | $                  | 68,776,459
|                                                                                    |                                                                                                                                                   |                                            |            |                    |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                |                                                                                                                                                   |                                            |            |                    |           
|Current liabilities:                                                                |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    | Current portion of long-term debt                                                                                                                 |                                            | $          | 331,824            |           
|                                                                                    | Accounts payable                                                                                                                                  |                                            |            | 7,419,898          |           
|                                                                                    | Accrued payroll and payroll related expenses                                                                                                      |                                            |            | 1,437,665          |           
|                                                                                    | Other accrued expenses                                                                                                                            |                                            |            | 2,271,502          |           
|                                                                                    | Deferred revenue                                                                                                                                  |                                            |            | 1,381,040          |           
|                                                                                    |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    |                                                                                                                                                   | Total current liabilities                  |            |                    | 12,841,929
|Long-term debt, net of current portion                                              |                                                                                                                                                   |                                            | 1,039,487  |                    |           
|Other long-term liabilities                                                         |                                                                                                                                                   |                                            | 149,274    |                    |           
|Contingent obligation to common stock warrant holders                               |                                                                                                                                                   |                                            | 234,699    |                    |           
|Contingent obligation to Class D preferred stockholders of Beacon Power Corporation |                                                                                                                                                   |                                            |           |                    |           
|Commitments and contingencies (Note H)                                              |                                                                                                                                                   |                                            |            |                    |           
|Stockholders' equity:                                                               |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    | Preferred stock; $0.01 par value, 1,000,000 shares authorized; no shares issued                                                                   |                                            |            |                   |           
|                                                                                    | Common stock; $0.01 par value, 50,000,000 shares authorized; 16,539,597 and 13,841,185 shares issued at September 30, 2001 and 2000, respectively |                                            |            | 165,396            |           
|                                                                                    | Additional paid-in capital                                                                                                                        |                                            |            | 114,593,612        |           
|                                                                                    | Accumulated deficit                                                                                                                               |                                            |            | (64,459,763        | )         
|                                                                                    | Accumulated other comprehensive income (loss)                                                                                                     |                                            |            | 4,211,825          |           
|                                                                                    | Treasury stock, at cost; 44,500 shares at September 30, 2000                                                                                      |                                            |            |                   |           
|                                                                                    |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    |                                                                                                                                                   | Total stockholders' equity                 |            |                    | 54,511,070
|                                                                                    |                                                                                                                                                   |                                            |            |                    |           
|                                                                                    |                                                                                                                                                   | Total liabilities and stockholders' equity |            | $                  | 68,776,459
|                                                                                    |                                                                                                                                                   |                                            |            |                    |           

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

37

---



SATCON TECHNOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                    |                                                            | For the Years Ended September 30, |            
|------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------- | -----------
|
|Revenue:                                                                                                            |                                                            |                                   |            
|Product revenue                                                                                                     |                                                            | $                                 | 30,779,861 
|Funded research and development and other revenue                                                                   |                                                            |                                   | 10,904,375 
|                                                                                                                    |                                                            |                                   |            
|                                                                                                                    | Total revenue                                              |                                   |            
|                                                                                                                    |                                                            |                                   |            
|Operating costs and expenses:                                                                                       |                                                            |                                   |            
|Cost of product revenue                                                                                             |                                                            |                                   | 27,827,909 
|Research and development and other revenue expenses:                                                                |                                                            |                                   |            
|                                                                                                                    | Funded research and development and other revenue expenses |                                   |            
|                                                                                                                    | Unfunded research and development expenses                 |                                   |            
|                                                                                                                    |                                                            |                                   |            
|                                                                                                                    | Total research and development and other revenue expenses  |                                   |            
|Selling, general and administrative expenses                                                                        |                                                            |                                   | 13,593,197 
|Write-off of public offering costs                                                                                  |                                                            |                                   | 1,420,627  
|Amortization of intangibles                                                                                         |                                                            |                                   | 1,362,365  
|                                                                                                                    |                                                            |                                   |            
|                                                                                                                    | Total operating costs and expenses                         |                                   |            
|                                                                                                                    |                                                            |                                   |            
|Operating loss                                                                                                      |                                                            |                                   | (16,194,388
|Net unrealized loss on warrants to purchase common stock                                                            |                                                            |                                   | (1,480,190 
|Other income (loss)                                                                                                 |                                                            |                                   |           
|Interest income                                                                                                     |                                                            |                                   | 688,593    
|Interest expense                                                                                                    |                                                            |                                   | (104,994   
|                                                                                                                    |                                                            |                                   |            
|Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                            |                                   | (17,090,979
|Equity loss from Beacon Power Corporation                                                                           |                                                            |                                   | (5,065,034 
|                                                                                                                    |                                                            |                                   |            
|Net loss before cumulative effect of changes in accounting principles                                               |                                                            |                                   | (22,156,013
|Cumulative effect of changes in accounting principles                                                               |                                                            |                                   | (167,612   
|                                                                                                                    |                                                            |                                   |            
|Net loss                                                                                                            |                                                            |                                   | (22,323,625
|Accretion of redeemable convertible preferred stock discount                                                        |                                                            |                                   |           
|Cumulative effect of change in accounting principle                                                                 |                                                            |                                   | (1,940,798 
|                                                                                                                    |                                                            |                                   |            
|Net loss attributable to common stockholders                                                                        |                                                            | $                                 | (24,264,423
|                                                                                                                    |                                                            |                                   |            
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                                            | $                                 | (1.51      
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                 |                                                            |                                   | (0.14      
|                                                                                                                    |                                                            |                                   |            
|Net loss attributable to common stockholders per weighted average share, basic and diluted                          |                                                            | $                                 | (1.65      
|                                                                                                                    |                                                            |                                   |            
|Weighted average number of common shares, basic and diluted                                                         |                                                            |                                   | 14,665,683 
|                                                                                                                    |                                                            |                                   |            

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

38

---

SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
For the Years Ended September 30, 2001, 2000 and 1999

|                                                                                    |  | Common Shares |  | Common Stock |        | Additional Paid-in Capital |   | Common Shares Held in Escrow |   | Common Stock Held in Escrow |   | Amounts Receivable From Exercise of Stock Options |          | Accumulated Deficit |   | Accumulated Other Comprehensive Income (Loss) |   | Treasury Shares |             | Treasury Stock |   | Total Stockholders' Equity |   | Comprehensive Loss | 
|----------------------------------------------------------------------------------- |  | ------------- |  | ------------ | ------ | -------------------------- | - | ---------------------------- | - | --------------------------- | - | ------------------------------------------------- | -------- | ------------------- | - | --------------------------------------------- | - | --------------- | ----------- | -------------- | - | -------------------------- | - | ------------------ | 
|Balance, September 30, 1998                                                         |  | 9,018,549     |  | $            | 90,185 |                            | $ | 28,377,718                   |   |                            |   | $                                                 |         |                     | $ |                                              |   | $               | (15,912,442 | )              | $ | (10,380                    | ) | 28,300             | 
|Net loss                                                                            |  |              |  |              |       |                            |   |                             |   |                            |   |                                                   |         |                     |   |                                              |   |                 | (14,341,753 | )              |   |                           |   |                   | 
|Exercise of stock options                                                           |  | 455,600       |  |              | 4,556  |                            |   | 3,173,445                    |   |                            |   |                                                   |         |                     |   | (1,816,667                                    | ) |                 |            |                |   |                           |   |                   | 
|Treasury stock purchased                                                            |  |              |  |              |       |                            |   |                             |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   | 16,200             | 
|Common stock issued in acquisitions                                                 |  | 100,000       |  |              | 1,000  |                            |   | 567,800                      |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Common stock issued in connection with settlement agreement which is held in escrow |  | 42,860        |  |              | 429    |                            |   | 189,762                      |   | 42,860                      |   |                                                   | (190,191 | )                   |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Compensation expense related to stock options and warrants issued to non-employees  |  |              |  |              |       |                            |   | 2,208,639                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Valuation adjustment for common stock held in escrow                                |  |              |  |              |       |                            |   | 238,409                      |   |                            |   |                                                   | (238,409 | )                   |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Warrants issued in connection with the sale of redeemable preferred stock           |  |              |  |              |       |                            |   | 2,369,292                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Change in net unrealized losses on marketable securities                            |  |              |  |              |       |                            |   |                             |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   | 10,380                     |   |                   | 
|Accretion of redeemable convertible preferred stock discount                        |  |              |  |              |       |                            |   | (50,904                      | ) |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|                                                                                    |  |               |  |              |        |                            |   |                              |   |                             |   |                                                   |          |                     |   |                                               |   |                 |             |                |   |                            |   |                    | 
|Comprehensive loss                                                                  |  |               |  |              |        |                            |   |                              |   |                             |   |                                                   |          |                     |   |                                               |   |                 |             |                |   |                            |   |                    | 
|                                                                                    |  |               |  |              |        |                            |   |                              |   |                             |   |                                                   |          |                     |   |                                               |   |                 |             |                |   |                            |   |                    | 
|Balance, September 30, 1999                                                         |  | 9,617,009     |  | $            | 96,170 |                            | $ | 37,074,161                   |   | 42,860                      |   | $                                                 | (428,600 | )                   | $ | (1,816,667                                    | ) | $               | (30,254,195 | )              |   |                           |   | 44,500             | 
|Net loss                                                                            |  |              |  |              |       |                            |   |                             |   |                            |   |                                                   |         |                     |   |                                              |   |                 | (9,941,145  | )              |   |                           |   |                   | 
|Common stock issued in connection with Ling acquisition                             |  | 770,000       |  |              | 7,700  |                            |   | 7,748,656                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Common stock issued in connection with MTI investment                               |  | 1,030,000     |  |              | 10,300 |                            |   | 6,964,926                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|MTI warrants received in connection with MTI investment                             |  |              |  |              |       |                            |   | 3,495,438                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Valuation adjustment for MTI warrants                                               |  |              |  |              |       |                            |   |                             |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   | (1,021,725                 | ) |                   | 
|Common stock issued in connection with NGC asset acquisition                        |  | 578,761       |  |              | 5,788  |                            |   | 5,465,770                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Conversion of redeemable convertible preferred stock into common stock              |  | 1,025,641     |  |              | 10,256 |                            |   | 7,989,744                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Exercise of common stock options                                                    |  | 701,774       |  |              | 7,018  |                            |   | 5,496,853                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Exercise of common stock warrants                                                   |  | 118,000       |  |              | 1,180  |                            |   | 1,111,720                    |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Payments on amounts receivable from exercise of stock options                       |  |              |  |              |       |                            |   |                             |   |                            |   |                                                   |         |                     |   | 1,816,667                                     |   |                 |            |                |   |                           |   |                   | 
|Valuation adjustment for common stock held in escrow                                |  |              |  |              |       |                            |   | 257,160                      |   |                            |   |                                                   | (257,160 | )                   |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Common stock released from escrow                                                   |  |              |  |              |       |                            |   |                             |   | (42,860                     | ) |                                                   | 685,760  |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Accretion of redeemable convertible preferred stock discount                        |  |              |  |              |       |                            |   | (3,105,888                   | ) |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   |                           |   |                   | 
|Foreign currency translation adjustment                                             |  |              |  |              |       |                            |   |                             |   |                            |   |                                                   |         |                     |   |                                              |   |                 |            |                |   | (51,778                    | ) |                   | 
|                                                                                    |  |               |  |              |        |                            |   |                              |   |                             |   |                                                   |          |                     |   |                                               |   |                 |             |                |   |                            |   |                    | 
|Comprehensive loss                                                                  |  |               |  |              |        |                            |   |                              |   |                             |   |                                                   |          |                     |   |                                               |   |                 |             |                |   |                            |   |                    | 
|                                                                                    |  |               |  |              |        |                            |   |                              |   |                             |   |                                                   |          |                     |   |                                               |   |                 |             |                |   |                            |   |                    | 

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

39

---

SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
For the Years Ended September 30, 2001, 2000 and 1999

|                                                                                                             |  | Common Shares |   | Common Stock |         | Additional Paid-in Capital |   | Common Shares Held in Escrow |   | Common Stock Held in Escrow |  | Amounts Receivable From Exercise of Stock Options |  | Accumulated Deficit |  | Accumulated Other Comprehensive Income (Loss) |             | Treasury Shares |   | Treasury Stock |   | Total Stockholders' Equity |   | Comprehensive Loss |         
|------------------------------------------------------------------------------------------------------------ |  | ------------- | - | ------------ | ------- | -------------------------- | - | ---------------------------- | - | --------------------------- |  | ------------------------------------------------- |  | ------------------- |  | --------------------------------------------- | ----------- | --------------- | - | -------------- | - | -------------------------- | - | ------------------ | --------
|Balance, September 30, 2000                                                                                  |  | 13,841,185    |   | $            | 138,412 |                            | $ | 72,498,540                   |   |                            |  |                                                  |  |                    |  | $                                             | (40,195,340 | )               | $ | (1,073,503     | ) | 44,500                     |   | $                  | (249,704
|Net loss                                                                                                     |  |              |   |              |        |                            |   |                             |   |                            |  |                                                  |  |                    |  |                                               | (22,323,625 | )               |   |               |   |                           |   |                    |        
|Exercise of common stock options                                                                             |  | 88,484        |   |              | 885     |                            |   | 676,192                      |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Exercise of common stock warrants, net of issuance costs of $230,580                                         |  | 777,000       |   |              | 7,770   |                            |   | 6,321,750                    |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Termination of contingent put right granted to Class D preferred stockholders of Beacon Power Corporation    |  |              |   |              |        |                            |   | 5,831,879                    |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Net gain on investment in Beacon Power Corporation                                                           |  |              |   |              |        |                            |   | 10,779,224                   |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Distribution of Beacon Power Corporation common stock                                                        |  |              |   |              |        |                            |   | (2,963,240                   | ) |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Cumulative effect of accounting change for Mechanical Technology Incorporated warrants                       |  |              |   |              |        |                            |   |                             |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   | 1,021,725      |   |                           |   |                    |        
|Reclassification of common stock warrants from equity to liability                                           |  |              |   |              |        |                            |   | (1,505,421                   | ) |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Common stock issued in connection with settlement agreement                                                  |  | 12,500        |   |              | 125     |                            |   | 162,375                      |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Retirement of treasury shares                                                                                |  | (44,500       | ) |              | (445    | )                          |   | (249,259                     | ) |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   | (44,500                    | ) |                    | 249,704 
|Sale of common stock, net of offering costs of $671,679                                                      |  | 1,464,928     |   |              | 14,649  |                            |   | 17,075,924                   |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Common stock issued in connection with Inverpower Controls Ltd. acquisition                                  |  | 400,000       |   |              | 4,000   |                            |   | 3,913,600                    |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Cumulative effect of accounting change to record beneficial conversion feature of redeemable preferred stock |  |              |   |              |        |                            |   | 1,940,798                    |   |                            |  |                                                  |  |                    |  |                                               | (1,940,798  | )               |   |               |   |                           |   |                    |        
|Record charge for acceleration of stock option vesting schedule                                              |  |              |   |              |        |                            |   | 111,250                      |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   |               |   |                           |   |                    |        
|Change in unrealized gain on marketable securities                                                           |  |              |   |              |        |                            |   |                             |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   | 26,367         |   |                           |   |                    |        
|Change in unrealized gain on Beacon Power Corporation common stock                                           |  |              |   |              |        |                            |   |                             |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   | 4,364,035      |   |                           |   |                    |        
|Foreign currency translation adjustment                                                                      |  |              |   |              |        |                            |   |                             |   |                            |  |                                                  |  |                    |  |                                               |            |                 |   | (126,799       | ) |                           |   |                    |        
|                                                                                                             |  |               |   |              |         |                            |   |                              |   |                             |  |                                                   |  |                     |  |                                               |             |                 |   |                |   |                            |   |                    |         
|Comprehensive loss                                                                                           |  |               |   |              |         |                            |   |                              |   |                             |  |                                                   |  |                     |  |                                               |             |                 |   |                |   |                            |   |                    |         
|                                                                                                             |  |               |   |              |         |                            |   |                              |   |                             |  |                                                   |  |                     |  |                                               |             |                 |   |                |   |                            |   |                    |         
|Balance, September 30, 2001                                                                                  |  | 16,539,597    |   | $            | 165,396 |                            | $ | 114,593,612                  |   |                            |  |                                                  |  |                    |  | $                                             | (64,459,763 | )               | $ | 4,211,825      |   |                           |   |                    |        
|                                                                                                             |  |               |   |              |         |                            |   |                              |   |                             |  |                                                   |  |                     |  |                                               |             |                 |   |                |   |                            |   |                    |         

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

40

---



SATCON TECHNOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                       |                                                                                                          | For the Years Ended September 30,                                                                                        |                                  
|---------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ---------------------------------
|
|Cash flows from operating activities:                                  |                                                                                                          |                                                                                                                          |                                  
|                                                                       | Net loss                                                                                                 |                                                                                                                          | $                                
|                                                                       | Adjustments to reconcile net loss to net cash used in operating activities:                              |                                                                                                                          |                                  
|                                                                       |                                                                                                          | Depreciation and amortization                                                                                            |                                  
|                                                                       |                                                                                                          | Allowance for unbilled contract costs and fees                                                                           |                                  
|                                                                       |                                                                                                          | Allowance for uncollectible accounts                                                                                     |                                  
|                                                                       |                                                                                                          | Allowance for excess and obsolete inventory                                                                              |                                  
|                                                                       |                                                                                                          | Loss from Beacon Power Corporation                                                                                       |                                  
|                                                                       |                                                                                                          | Net unrealized loss on warrants to purchase common stock                                                                 |                                  
|                                                                       |                                                                                                          | Loss on sale of marketable securities                                                                                    |                                  
|                                                                       |                                                                                                          | Write-off of impaired assets                                                                                             |                                  
|                                                                       |                                                                                                          | Compensation expense related to release of stock from escrow and issuance of stock options and warrants to non-employees |                                  
|                                                                       |                                                                                                          | Common stock issued in connection with settlement agreement                                                              |                                  
|                                                                       |                                                                                                          | Compensation expense related to acceleration of stock option vesting schedule                                            |                                  
|                                                                       |                                                                                                          | Cumulative effect of changes in accounting principles                                                                    |                                  
|                                                                       |                                                                                                          | Changes in operating assets and liabilities, net of effects of acquisitions:                                             |                                  
|                                                                       |                                                                                                          |                                                                                                                          | Accounts receivable              
|                                                                       |                                                                                                          |                                                                                                                          | Unbilled contract costs and fees 
|                                                                       |                                                                                                          |                                                                                                                          | Prepaid expenses and other assets
|                                                                       |                                                                                                          |                                                                                                                          | Inventory                        
|                                                                       |                                                                                                          |                                                                                                                          | Other long-term assets           
|                                                                       |                                                                                                          |                                                                                                                          | Accounts payable                 
|                                                                       |                                                                                                          |                                                                                                                          | Accrued expenses and payroll     
|                                                                       |                                                                                                          |                                                                                                                          | Other current liabilities        
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|                                                                       |                                                                                                          | Total adjustments                                                                                                        |                                  
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Net cash used in operating activities                                  |                                                                                                          |                                                                                                                          | (10,984,581                      
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Cash flows from investing activities:                                  |                                                                                                          |                                                                                                                          |                                  
|                                                                       | Purchases of marketable securities                                                                       |                                                                                                                          |                                  
|                                                                       | Sales and maturities of marketable securities                                                            |                                                                                                                          |                                  
|                                                                       | Patent and intangible expenditures                                                                       |                                                                                                                          |                                  
|                                                                       | Purchases of property and equipment                                                                      |                                                                                                                          |                                  
|                                                                       | Acquisitions, net of cash acquired                                                                       |                                                                                                                          |                                  
|                                                                       | Investment in Beacon Power Corporation                                                                   |                                                                                                                          |                                  
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Net cash used in investing activities                                  |                                                                                                          |                                                                                                                          | (11,841,440                      
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Cash flows from financing activities:                                  |                                                                                                          |                                                                                                                          |                                  
|                                                                       | Proceeds from long-term debt                                                                             |                                                                                                                          |                                  
|                                                                       | Repayment of long-term debt                                                                              |                                                                                                                          |                                  
|                                                                       | Borrowings under line of credit                                                                          |                                                                                                                          |                                  
|                                                                       | Repayment of borrowings under line of credit                                                             |                                                                                                                          |                                  
|                                                                       | Net proceeds from issuance of redeemable convertible preferred stock                                     |                                                                                                                          |                                  
|                                                                       | Net proceeds from issuance of common stock                                                               |                                                                                                                          |                                  
|                                                                       | Proceeds from exercise of stock options and payment of amounts receivable from exercise of stock options |                                                                                                                          |                                  
|                                                                       | Proceeds from exercise of warrants                                                                       |                                                                                                                          |                                  
|                                                                       | Purchase of treasury stock                                                                               |                                                                                                                          |                                  
|                                                                       | Deferred equity financing costs                                                                          |                                                                                                                          |                                  
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Net cash provided by financing activities                              |                                                                                                          |                                                                                                                          | 25,110,467                       
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Effect of foreign currency exchange rates on cash and cash equivalents |                                                                                                          |                                                                                                                          | (47,305                          
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Net increase in cash and cash equivalents                              |                                                                                                          |                                                                                                                          | 2,237,141                        
|Cash and cash equivalents at beginning of year                         |                                                                                                          |                                                                                                                          | 8,814,324                        
|                                                                       |                                                                                                          |                                                                                                                          |                                  
|Cash and cash equivalents at end of year                               |                                                                                                          | $                                                                                                                        | 11,051,465                       
|                                                                       |                                                                                                          |                                                                                                                          |                                  

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

41

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SATCON TECHNOLOGY CORPORATION    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.  
ORGANIZATION AND 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 develops enabling technologies for the emerging digital power marketplace which includes UPS systems, distributed power generation and power quality markets. SatCon also manufactures
power and energy management products that convert, store and manage electricity for businesses and consumers that require high-quality, uninterruptible power. SatCon is utilizing its
engineering and manufacturing expertise to develop products that serve the digital power marketplace, including UPS systems, power generation and power quality products, industrial automation motors
and controls, power electronics and controls, components for fuel cell and microturbine power generation systems, hybrid-electric vehicles and flywheel energy storage systems. SatCon believes the
family of products it is developing will be integral components of distributed power generation and power quality systems.

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



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

Basis of Consolidation

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

Foreign Currency Translation

The functional currency of the Company's foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries are translated at the rates
in effect at the balance sheet date, while stockholders' equity (deficit) is translated at historical rates. Statements of operations and cash flow amounts are translated at the average rate for the
period. Translation adjustments are included as a component of accumulated other comprehensive loss. Foreign currency gains and losses arising from transactions are reflected in the loss from
operations and were not significant during the fiscal years ended September 30, 2001 and 2000.

42

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Revenue Recognition

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

The
Company performs funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts.
Product development revenue is included in product revenue. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts
may contain incentive clauses providing for increases or decreases in the fees depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage
of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In
each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. All payments to the Company for work performed on contracts with agencies of the
U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue for
commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are
recognized as research and development expense as incurred. As of September 30, 2001 and 2000, the Company has accrued $75,000 and $150,000, respectively, for anticipated contract losses on
commercial contracts. For the fiscal years ended September 30, 2001, 2000 and 1999, revenue from commercial contracts, which represents other revenue, is included in funded research and
development and other revenue and amounted to $662,614, $763,023 and $767,954, respectively.

Cost
of product revenue includes cost of product revenue including material, labor and overhead. Costs incurred in connection with funded research and development and other revenue
arrangements are included in research and development and other revenue expenses. For the fiscal years ended September 30, 2001, 2000 and 1999, costs and expenses from commercial contracts,
which represents other revenue expenses, are included in funded research and development and other revenue expenses and amounted to $484,982, $397,527 and $704,347, respectively.

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

Cash and Cash Equivalents

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

Marketable Securities

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

43

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

Securities
available for sale are carried at fair value, based on quoted market prices, with the unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity except for unrealized losses determined to be permanent in nature. Such unrealized losses are included in the determination of net income in the period in which management
determines the decline to be permanent. The Company is not actively involved in the purchase and sale of investments classified as trading. At September 30, 2001, the Company had no investments
that qualified as trading or held to maturity.

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

Inventory

Inventories are stated at the lower of cost or market and costs are determined based on the first-in, first-out method of accounting
and include material, labor and manufacturing overhead costs.

Property and Equipment

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

Estimated LivesComputer equipment and software

35 yearsElectronic laboratory and shop equipment

5 yearsMechanical laboratory and shop equipment

10 yearsSales and demonstration equipment

310 yearsFurniture and fixtures

710 yearsLeasehold improvements

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


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

Long-lived Assets

The Company periodically evaluates the potential impairment of its long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. At the occurrence of a certain event or change in circumstances or at each balance sheet date, the Company evaluates the potential impairment of an
asset based on future undiscounted cash flows. In the event that impairment exists, the Company will measure the amount of such impairment based on the present value of estimated future cash flows
using a discount rate commensurate with the risks involved.
Factors that management considers in performing this assessment include current operating results, trends and prospects and, in addition, demand, competition and other economic factors. At
September 30, 2001, the Company determined that the unamortized non-compete agreement component of identifiable intangible assets from the FMI acquisition of $60,737 was no

44

---

longer recoverable and, accordingly, has written this asset off and charged amortization expense. At September 30, 2000, the Company determined that there had been no impairment of its
long-lived assets, except as disclosed in Notes E and G.

Intangibles
consisted of the following:

|                                                                     |  |             |  | September 30,
|-------------------------------------------------------------------- |  | ----------- |  | -------------
|
|Patents                                                              |  | 1520 years |  | $            
|Identifiable intangible assets from MagMotor acquisition             |  | 5 years     |  |              
|Goodwill from MagMotor acquisition                                   |  | 7 years     |  |              
|Identifiable intangible assets from FMI acquisition                  |  | 510 years  |  |              
|Goodwill from FMI acquisition                                        |  | 15 years    |  |              
|Identifiable intangible assets from Inductive/Lighthouse acquisition |  | 5 years     |  |              
|Goodwill from Inductive/Lighthouse acquisition                       |  | 10 years    |  |              
|Goodwill from Ling acquisition                                       |  | 7 years     |  |              
|Identifiable intangible assets from NGC acquisition                  |  | 310 years  |  |              
|Identifiable intangible asset from Inverpower acquisition            |  | 5 years     |  |              
|Goodwill from Inverpower acquisition                                 |  | Indefinite  |  |              
|                                                                     |  |             |  |              
|                                                                     |  |             |  |              
|Less: accumulated amortization                                       |  |             |  |              
|                                                                     |  |             |  |              
|                                                                     |  |             |  | $            
|                                                                     |  |             |  |              

Amortization
expense related to intangibles for the fiscal years ended September 30, 2001, 2000 and 1999 was $1,374,333, $1,229,815 and $389,685, respectively.

Treasury Stock

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

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the period reported. Actual results could differ from these estimates.

Income Taxes

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

45

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Stock-based Compensation

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

Net Loss per Basic and Diluted Common Share

The Company reports net loss per basic and diluted common share in accordance with SFAS No. 128, "Earnings Per Share," which establishes standards for
computing and presenting earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

Concentration of Credit Risk

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

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

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

Research and Development Costs

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

Comprehensive Income (Loss)

Comprehensive income (loss) includes net loss, unrealized gains and losses on marketable securities, valuation adjustment for warrants to purchase shares of
Mechanical Technology Incorporated's common stock and foreign currency translation adjustments.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, unbilled contract costs and fees,
warrants to purchase shares of common stock,

46

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accounts payable, debt instruments and contingent obligation to Class D preferred stockholders of Beacon Power Corporation. The estimated fair values of these financial instruments approximate
their carrying values at September 30, 2001 and 2000. The estimated fair values have been determined through information obtained from market sources and management estimates.

Accounting for Derivative Instruments

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

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

Accounting for Beneficial Conversion Feature

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

47

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Reclassifications

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

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Accounting for Business Combinations," and Statement
No. 142, "Goodwill and Other Intangible Assets." These statements modify accounting for business combinations after June 30, 2001 and will affect the Company's treatment of goodwill and
other intangible assets at the start of the fiscal year 2002; however, business combinations completed after June 30, 2001 should apply the new accounting guidelines. The statements require
that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally,
existing goodwill and intangible assets must be assessed and classified within the Statement's criteria. Intangible assets with estimated useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminable lives will cease. At this time, the Company has not determined the complete impact of SFAS No. 142.

As
of September 30, 2001, the Company has goodwill with a net book value of $6,234,653. The Company has decided to early adopt SFAS No. 142 as of October 1, 2001
and therefore, this goodwill will no longer be amortized. During the fiscal years ended September 30, 2001, 2000 and 1999, the Company recorded $638,864, $609,855 and $93,576, respectively, of
amortization expense related to this goodwill.

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

B.  MARKETABLE SECURITIES

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

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

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

The change in net unrealized gains during the fiscal year ended September 30, 2001 was $26,367 and is included in the balance sheet in a
separate component of stockholders' equity, net of tax effect. There were no realized gains or losses for the sale of securities classified as available for sale during the fiscal years ended
September 30, 2001, 2000 and 1999.

C.  UNBILLED CONTRACT COSTS AND FEES

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

48

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customer. These amounts included retained fee and unliquidated costs totaling $173,685 and $209,832 at September 30, 2001 and 2000, respectively.

D.  INVENTORY

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

September 30,2001

2000Raw material

$
6,146,102

$
3,081,265Work-in-process


3,297,713


2,932,965Finished goods


1,969,801


1,987,431$
11,413,616

$
8,001,661


E.  PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

September 30,2001

2000Machinery and equipment

$
9,506,275

$
8,059,916Furniture and fixtures


475,457


305,777Computer software


1,094,840


744,308Leasehold improvements


1,340,463


751,79312,417,035


9,861,794Less: accumulated depreciation and amortization


4,638,131


3,604,318$
7,778,904

$
6,257,476


Depreciation
and amortization expense relating to property and equipment for the fiscal years ended September 30, 2001, 2000 and 1999 was $1,233,273, $808,577 and $633,964,
respectively.

As
of September 30, 2001 and 2000, there was $1,810,503 and $19,903 of property under capital leases included in machinery and equipment, respectively. Of these capital leases,
$1,459,750 relates to asset purchases made during the fiscal year ended September 30, 2000 for which the Company entered into a sale leaseback transaction during the fiscal year ended
September 30, 2001. As of September 30, 2001 and 2000, there was $29,910 of property under capital leases that were included in computer software.

During
the fiscal year ended September 30, 2001, the Company consolidated its FMI manufacturing facilities, and as a result, has written-off the net book value of
the leasehold improvements of the vacated premise of $32,767, which has been included in cost of product revenue. During the fiscal year ended September 30, 1999, the Company determined that
certain of its machinery and equipment with a net book value totaling $105,544 was impaired based on a significant change in the manner in which the asset was used, and such assets were
written-off during the fiscal year ended September 30, 1999. These assets included $86,492 of tooling costs associated with the introduction of brushless motor products at the
Company's MagMotor Division that were impaired based on design changes in the product and $19,052 of optics equipment at the Company's Technology Center that were abandoned. These impairment losses
have been included in cost of product revenue and unfunded research and development expenses, respectively.

49

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F.  INVESTMENT IN BEACON POWER CORPORATION

During the fiscal years ended September 30, 1999 and 2000 and substantially all of the fiscal year ended September 30, 2001, the Company
accounted for its investment in Beacon Power under the equity method of accounting. During the fiscal years ended September 30, 2001, 2000 and 1999, the Company recorded $5,065,034, $899,493
and $4,340,567, respectively, of losses from Beacon Power, representing the Company's share of losses up to the extent of committed capital.

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

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

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

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

50

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holding gains or losses to be included in stockholders' equity as a component of accumulated other comprehensive income/(loss). As of September 30, 2001, the Beacon Power common stock had a
fair value of $7,152,983 and the Company recorded an unrealized gain of $4,364,035 in stockholders' equity as a component of accumulated other comprehensive income/(loss).

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

Beacon
Power accounted for $242,460, $470,996 and $72,644 of the Company's total revenue for the fiscal years ended September 30, 2001, 2000 and 1999, respectively. At
September 30, 2001 and 2000, the Company had $172,598 and $346,066, respectively, of accounts receivable and unbilled contract costs and fees from Beacon Power.

G.  LONG-TERM DEBT

Long-term debt consists of the following:

September 30,2001

1999Capital lease obligations

$
1,371,311

$
33,871Less: Current portion


(331,824
)

(17,494
)$
1,039,487

$
16,377


At
September 30, 2001, maturities of these obligations are as follows:

Fiscal Year2002

$
331,8242003


266,8082004


271,0902005


190,4122006


311,177$
1,371,311


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

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

51

---

has recorded these shares held in escrow at market value and as a reduction to stockholders' equity as of September 30, 1999.

On
April 26, 2000, the escrow agent, as authorized by the Company released the 42,860 shares of the Company's Common Stock that were held in escrow to Mr. Snider. The
Company recorded these securities at fair value until they were released from escrow at a market price of $16.00 per share or $685,760. The Company determined that the value of these securities
exceeded the net realizable value of the underlying services to be received by $235,760. The Company has charged this excess amount to selling, general and administrative expenses during the fiscal
year ended September 30, 2000. The Company is amortizing the realizable asset of $450,000 over the three-year period of service through September 30, 2002. At
September 30, 2001, the Company determined that the services provided under the consulting agreement will no longer be requested and has written off the unamortized asset of $150,000 to
selling, general and administrative expenses during the fiscal year ended September 30, 2001.

H.  COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facilities under various operating leases that expire through October 2005. The Company has also entered into leasing agreements
to lease various items of equipment.

Future
minimum annual rentals under lease agreements at September 30, 2001 are as follows:

Fiscal Year2002

$
2,590,6072003


2,188,0522004


739,5702005


501,1082006


262,367Thereafter


1,168,000Total (not reduced by minimum sublease rentals of $401,828)

$
7,449,704


Total
rental expense including operating expenses and real estate taxes for operating leases amounted to $2,727,286, $2,157,506 and $1,683,749 for the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.

Certain
of the facility leases contain escalation clauses, effective October 1, 1998 and rental expense has been recognized on a straight-line basis over the
remaining lease term. At September 30, 2001 and 2000, deferred rent expense amounted to $175,700 and $207,739, respectively.

Litigation

On
November 6, 1999, APACE, Inc. ("APACE") an action was commenced against the Company in the Supreme Court of the State of New York claiming that the Company had been awarded
a prime contract by the U.S. Department of Energy and that the Company had failed or refused to negotiate a subcontract with APACE, allegedly in breach of a contract between the Company and APACE.
APACE sought in excess of $1,000,000 in damages. The Company denied the allegations, moved to stay the action and filed for arbitration with the American Arbitration Association (the "AAA") in Boston,
Massachusetts. The AAA decided that the arbitration would go forward in Boston. In the meantime APACE requested that the court permit the action to go forward and for the arbitration to be stayed. On
March 21, 2000, the Supreme Court of the State of New York issued an order compelling arbitration and staying APACE's action pending arbitration to be conducted by the AAA in Boston.

52

---

On June 26, 2000, APACE served the Company with an amended answering statement and counterclaim, including additional allegations that the Company had engaged in unfair and
deceptive trade practices and that its actions were willful and knowing. Based on these allegations, APACE sought multiple damages, as well as attorneys' fees and expenses. On July 19, 2000,
the Company filed an answer to APACE's amended answering statement and counterclaim, denying the allegations and asserting various affirmative defenses.

An
arbitrator was selected and the arbitration was scheduled to go forward in Boston for nine days in February, March and April of 2001. The parties had exchanged some discovery and
expected to make a further exchange early in 2001.

On
February 7, 2001, the Company, APACE, Roger M. Slotkin and Jeffrey Waxweiler entered into a settlement agreement with respect to all claims concerning, in connection with or
arising from the APACE litigation and arbitration. The settlement agreement also contained mutual releases of the parties relating to all claims. Pursuant to the settlement agreement, the Company paid
and delivered to APACE $60,000 and issued 12,500 shares of the Company's Common Stock, valued at $13.00 per share or $162,500, to APACE. The Company was not obligated to register these shares under
the Securities Act of 1933, as amended. The AAA was notified that the arbitration proceeding would be dismissed without any recovery by any party, and APACE's counsel filed a voluntary Stipulation of
Dismissal With Prejudice in the Supreme Court for the State of New York on March 9, 2001.

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

I. EMPLOYEE BENEFIT PLAN

The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the Plan, any regular employee, as defined by the Plan, who has completed six months of
service and has attained the age of 21 years is eligible to participate. Under the terms of the Plan, an employee may defer up to 15% of his or her compensation through contributions to the
Plan. During 1999, the Company extended the Plan to its wholly-owned subsidiaries. The Company made matching contributions to the Plan of $398,281, $366,264 and $218,729 during the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.

53

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J.  INCOME TAXES

The provision for income taxes consists of the following:

For the Years Ended September 30,2001

2000

1999Current payable:Federal




$
(14,699
)

State








Foreign





14,699








Deferred tax expense/(benefit):Federal

$
(4,748,257
)
$
(2,962,183
)
$
(3,888,031
)Foreign


(250,953
)




State


(1,465,988
)

(890,122
)

(1,167,905
)Change in valuation allowance


6,465,198


3,852,305


5,055,936














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, 2001 and 2000, the components of the net deferred tax assets/(liabilities) are as follows:

2001

2000Federal net operating loss

$
15,695,932

$
13,385,851State net operating loss, net of federal benefit


2,865,093


1,912,496Credits


572,646


421,035Depreciation


(613,991
)

(227,657
)Loss from Beacon Power Corporation


410,235


4,932,397Net unrealized gains (losses) on securities available for sale


(1,837,412
)

Other


1,369,897


834,326Valuation allowance


(18,462,400
)

(21,258,448
)Net deferred income taxes








The
Company has placed a full valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that it will not be able to utilize its
deferred tax asset.

54

---

J.  INCOME TAXES

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

For the Years Ended
September 30,2001

2000

1999Tax at statutory rate

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

(4.3
)
(6.2
)
(6.2
)Other

9.3

1.6

(0.7
)Change in valuation allowance

29.0

38.6

40.9Effective tax rate


%

%

%


At
September 30, 2001, the Company had net operating loss carry-forwards of approximately $46,000,000 and $38,000,000 for federal and state income tax purposes, respectively.
The federal net operating losses expire beginning September 30, 2008 through 2021. The state net operating losses will expire beginning September 30, 2001 through 2006. The use of these
losses may be limited due to ownership change limitations under Section 382 of the Internal Revenue Code.

K.  STOCKHOLDERS' EQUITY

Investment from Mechanical Technology Incorporated

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

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

55

---

unrealized loss of $1,021,725, which is included in accumulated other comprehensive loss included in stockholders' equity.

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

Stock Options

Under the Company's 1992, 1994, 1996, 1998, 1999 and 2000 Stock Option Plans (collectively, the "Plans"), both qualified and non-qualified stock
options may be granted to certain officers, employees, directors and consultants to purchase up to 4,250,000 shares of the Company's Common Stock. At September 30, 2001, 3,716,752 of the
4,250,000 stock options available for grant under the Plans have been granted.

The
Plans are subject to the following provisions:

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

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

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

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

56

---

A summary of the status of the Company's stock options as of September 30, 2001, 2000 and 1999 and changes for the fiscal years then ended are presented below.

|                                 |           | 2001      |           | 2000 |       | 1999 
|-------------------------------- | --------- | --------- | --------- | ---- | ----- | -----
|
|Outstanding at beginning of year |           | 1,877,105 |           | $    | 11.89 |      
|                                 | Granted   |           | 1,172,600 |      |       | 10.93
|                                 | Exercised |           | (88,484   | )    |       | 7.65 
|                                 | Canceled  |           | (248,148  | )    |       | 12.15
|                                 |           |           |           |      |       |      
|Outstanding at end of year       |           | 2,713,073 |           | $    | 11.59 |      
|                                 |           |           |           |      |       |      
|Options exercisable at year-end  |           | 897,580   |           | $    | 11.13 |      
|                                 |           |           |           |      |       |      

The
following table summarizes information about stock options outstanding as of September 30, 2001.

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$5.00$6.38   |  | 248,391             |  | 7.12               
|$8.05$10.50  |  | 1,169,731           |  | 8.33               
|$10.56$13.38 |  | 686,851             |  | 8.32               
|$13.81$20.63 |  | 554,600             |  | 8.49               
|$27.06$31.25 |  | 53,500              |  | 8.83               
|              |  |                     |  |                    
|              |  | 2,713,073           |  | 8.26               
|              |  |                     |  |                    

At
September 30, 2001, an additional 533,248 shares were available under the Plans for future grants.

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

During
2000, the Company granted 216,000 non-qualified stock options to employees at an exercise price of $17.56 per share outside of the Board approved Plans, which are
included in the above table.

Warrants

On June 5, 1998, the Company issued to certain individuals, in settlement of a claim asserted against the Company, Common Stock Purchase Warrants to
purchase up to 68,795 shares of the Company's Common Stock, as amended, at an exercise price of $11.43 per share. The value of these

57

---

warrants was not material to the financial statements. These warrants expired on November 11, 1999, unexercised.

On
November 11, 1998, the Company issued common stock warrants to purchase up to 67,125 shares of the Company's Common Stock at an exercise price of $11.43 per share. The
Company has recorded the fair value of these warrants, as determined by the Black-Scholes option-pricing model, of $56,362, to selling, general and administrative expenses during the fiscal year ended
September 30, 1999. These warrants expired on November 11, 1999 unexercised.

On
August 25, 1999, in connection with the $8 million private placement of 8,000 shares of the Company's Series A Convertible Preferred Stock, $0.01 par value per
share, with Brown Simpson Strategic Growth Funds (see Note L), the Company issued common stock warrants to purchase up to
120,000 and 675,000 shares of the Company's Common Stock at an exercise price of $7.80 and $8.54, respectively. These warrants expire on August 25, 2003. The Company has valued these warrants
at $2,369,292, using the Black-Scholes option-pricing model. At September 30, 2000, 18,000 shares of the Company's Common Stock had been purchased at an exercise price of $7.80 per share. On
May 25, 2001, the Company issued 675,000 shares of its Common Stock in connection with the exercise of the warrant to purchase 675,000 shares of the Company's Common Stock at an exercise price
of $8.54 per share. The aggregate gross proceeds to the Company as a result of the warrant exercised was $5,764,500. H.C. Wainwright & Co., Inc. received a commission of $230,580 upon
the exercise of these warrants. In connection with the warrant exercise, the Company issued a new warrant to purchase 438,750 shares of the Company's Common Stock at an exercise price of $16.70 per
share. The new warrant has a term of three years. The Company has valued this new warrant at $4,942,508 using the Black-Scholes option-pricing model and has designated the warrant as an equity
instrument in accordance with EITF 00-19. At September 30, 2001, none of these warrants were exercised. On June 1, 2001, the Company issued 102,000 shares of its Common Stock
in connection with the exercise of a warrant to purchase the Company's Common Stock at an exercise price of $7.80 per share. The aggregate gross proceeds to the Company as a result of the warrants
exercised was $795,600. In connection with the warrant exercises, the Company issued new warrants to purchase 66,300 shares of the Company's Common Stock at an exercise price of $16.70 per share. The
new warrants have a term of three years. The Company has valued these new warrants at $707,036 using the Black-Scholes option-pricing model and has designated the warrant as an equity instrument in
accordance with EITF 00-19. At September 30, 2001, none of these warrants were exercised.

On
October 21, 1999, in connection with an investment by MTI, the Company issued a warrant to purchase up to 36,000 shares of the Company's Common Stock at an exercise price of
$8.80 per share. This warrant expires on October 21, 2003. On January 31, 2000, in connection with a second closing of this investment, the Company issued an additional warrant to
purchase up to 64,000 shares of the Company's Common Stock at an exercise price of $8.80 per share. This warrant expires on January 31, 2004. The Company valued the warrants issued to MTI on
October 12, 1999 and January 31, 2000 at $231,912 and $1,273,509, respectively, using the Black-Scholes option-pricing model. At September 30, 2001, none of these warrants had
been exercised. At September 30, 2001, the Company has valued these warrants at $234,699 and has designated the warrants as a liability in accordance with EITF 00-19, as a result of the
warrant holders having rights that rank higher than those of common stockholders. (See Note A)

On
November 16, 1999, in connection with the acquisition of certain intellectual property, equipment and other assets from Northrop Grumman Corporation, the Company issued a
warrant to purchase up to 100,000 shares of the Company's Common Stock at an exercise price of $9.725 per share. The Company has valued this warrant at $631,000 using the Black-Scholes option-pricing
model and has designated the warrant as an equity instrument in accordance with EITF 00-19. As of September 30, 2001, all of this warrant had been exercised.

58

---

On February 4, 2000, the Company issued to Northrop Grumman Corporation an additional warrant to purchase up to 100,000 shares of the Company's Common Stock at an exercise
price of $9.725 per
share. This warrant is exercisable upon the occurrence of certain defined events. As of September 30, 2000, this warrant is not yet exercisable. This warrant expires on December 31,
2006. As of September 30, 2000, the fair value of this warrant, using the Black-Scholes option-pricing model, was $936,485, which will be added to the purchase price of the assets acquired from
Northrop Grumman Corporation when it becomes exerciseable. These warrants are designated as an equity instrument in accordance with EITF 00-19.

Stock-based Compensation

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

Had
compensation cost for the Company's stock-based compensation been determined based on fair value at the grant dates as calculated in accordance with SFAS No. 123, the
Company's net loss and loss per share for the fiscal years ended September 30, 2000, 1999 and 1998 would have been increased to the pro forma amounts indicated below:

|            |  | 2001 |             | 2000 |   | 1999  |  
|----------- |  | ---- | ----------- | ---- | - | ----- | -
|
|As reported |  | $    | (24,264,423 | )    | $ | (1.65 | )
|Pro forma   |  | $    | (29,257,543 | )    | $ | (1.99 | )

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

The
fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: an expected
life of seven years, expected volatility ranging from 96.6% to 125.0%, no dividends, and risk-free interest rate ranging from 4.50% to 5.87% for the fiscal year ended September 30,
2001; an expected life of seven years, expected volatility ranging from 80.1% to 112.3%, no dividends, and risk-free interest rate of 6.17% for the fiscal year ended September 30,
2000; and an expected life of seven years, expected volatility of 80.0%, no dividends, and risk-free interest rate of 6.08% for the fiscal year ended September 30, 1999. The
weighted average price of the fair value of options granted for the fiscal years ended September 30, 2001, 2000 and 1999 are $9.64, $14.05 and $5.21, respectively.

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

59

---

Common Stock Offering

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

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

L.  PREFERRED STOCK

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

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

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

H.C.
Wainwright & Co., Inc. ("H.C. Wainwright") served as placement agent for the transaction and received a commission of $560,000 and warrants to purchase 120,000
shares of the Company's Common Stock at $7.80 per share. These warrants expire on August 25, 2003. H.C. Wainwright will also receive a future fee in the amount of 4% of any monies received by
the Company upon the exercise of the Brown Simpson Warrants. The Company has recorded the fair value of these warrants, as determined by the Black-Scholes option-pricing model, of $550,734 as a
discount to the Series A Preferred Stock.

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

On
March 7, 2000, the preferred stockholders elected to convert all 8,000 shares of the Series A Preferred Stock into 1,025,641 shares of the Company's Common Stock,
which resulted in the accretion

60

---

of an additional $3,105,888 of the discount on the redeemable preferred stock during the fiscal year ended September 30, 2000.

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

M. SIGNIFICANT CUSTOMERS

Significant customers, defined as those customers that account for 10% or more of total net revenue in a fiscal year or 10% or more of accounts receivable and
unbilled contract costs and fees at the end of a fiscal year, were as follows:

|                  |                            | Percentage of Total Revenue
Year Ended September 30, |   | Percentage of Accounts Receivable and Unbilled Contract Costs and Fees at September 30, |     
|----------------- | -------------------------- | ---------------------------------------------------- | - | --------------------------------------------------------------------------------------- | ----
|
|
|U.S. government:  |                            |                                                      |   |                                                                                         |     
|                  | U.S. Department of Defense |                                                      | * |                                                                                         | *   
|                  | U.S. Department of Energy  |                                                      | * |                                                                                         | 11.5
|Applied Materials |                            | *                                                    |   | 10.6                                                                                    | %   

---

N.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Non-Cash Investing and Financing Activities

|                                                                                    |  | Year Ended September 30,
|----------------------------------------------------------------------------------- |  | ------------------------
|
|Accretion of redeemable convertible preferred stock discount                        |  | $                       
|Acquisition of equipment under capital leases                                       |  | $                       
|Contingent obligation to Class D preferred stockholders of Beacon Power Corporation |  | $                       
|Conversion of redeemable convertible preferred stock to common stock                |  |                         
|Common stock held in escrow issued in connection with settlement agreement          |  |                         
|Valuation adjustment for common stock held in escrow                                |  |                         
|Warrants issued in connection with MTI investment                                   |  |                         
|MTI warrant received in connection with MTI investment                              |  |                         
|Valuation adjustment for warrants to purchase common stock                          |  | $                       
|Net gain on investment in Beacon Power Corporation                                  |  | $                       
|Contingent obligation to common stock warrant holders                               |  | $                       
|Retirement of treasury shares                                                       |  | $                       
|Distribution of Beacon Power Corporation common stock                               |  | $                       
|Change in unrealized gain on marketable securities                                  |  | $                       

61

---

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

|                                                        |  | Year Ended September 30, |           
|------------------------------------------------------- |  | ------------------------ | ----------
|
|Fair value of assets acquired                           |  | $                        | 3,126,638 
|Cost in excess of net assets of companies acquired, net |  |                          | 2,695,992 
|Liabilities assumed, including transaction costs        |  |                          | (1,805,030
|Fair value of common stock issued                       |  |                          | (3,917,600
|                                                        |  |                          |           
|Cash paid                                               |  | $                        | 100,000   
|Less: Cash acquired                                     |  |                          | (310,427  
|                                                        |  |                          |           
|Net cash (received) paid for the acquisitions           |  | $                        | (210,427  
|                                                        |  |                          |           

Interest and Income Taxes Paid

Cash paid for interest and income taxes was as follows:

For the Years Ended
September 30,2001

2000

1999Interest

$
104,994

$
3,176

$
115,692Income taxes











O.  ACQUISITIONS

Inductive Components, Inc. and Lighthouse Software, Inc.

On January 4, 1999, the Company's MagMotor subsidiary acquired substantially all of the assets and assumed certain liabilities of Inductive
Components, Inc. and Lighthouse Software, Inc., pursuant to the terms of an Asset Purchase Agreement, dated January 4, 1999, among MagMotor, the Company, Inductive
Components, Inc., Lighthouse Software, Inc. and Thomas Glynn, the sole stockholder of Inductive Components, Inc. and the majority stockholder of Lighthouse Software, Inc.
The aggregate consideration paid by the Company for the acquired assets of Inductive Components, Inc. and Lighthouse Software, Inc. was 100,000 shares of the Company's Common Stock,
valued at $5.6875 per share or $568,750. In addition, the Company assumed indebtedness of approximately $246,000. The Company has included in its consolidated results of operations the acquisition of
Inductive Components, Inc. and Lighthouse Software, Inc. under the purchase method of accounting. The purchase price has been allocated as follows:

Inventory

$
50,000Property and equipment


100,597Intangibles


275,000Goodwill


389,079$
814,676


The
pro forma financial information has not been presented, as the acquisitions of Inductive Components, Inc. and Lighthouse Software, Inc. are not material.

62

---

Hycomp, Inc.

On April 12, 1999, the Company executed an agreement to purchase substantially all of the assets and assume certain liabilities of HyComp, Inc.
("HyComp"). This agreement was dated March 31, 1999 and was by and between HyComp and HyComp Acquisition Corp., a wholly-owned subsidiary of the Company. The aggregate consideration paid by the
Company for the acquired assets of HyComp consisted of (i) $750,000 in cash; (ii) the assumption of certain liabilities and obligations of HyComp in the amount of approximately $422,000;
(iii) transaction costs of $95,000; and (iv) a 5% royalty to HyComp on certain sales through April 12, 2000. At September 30, 1999, the Company has recorded $50,000 of
accrued royalties. The Company has included in its consolidated results of operations the acquisition of HyComp under the purchase method of accounting. The purchase price has been allocated as
follows:

Accounts receivable

$
38,556Inventory


318,359Deposits


19,800Property and equipment


940,500$
1,317,215


The
pro forma financial information has not been presented as the acquisition of HyComp is not material.

Ling Electronics, Inc.

On October 21, 1999, the Company acquired Ling Electronics, Inc. and Ling Electronics, Ltd. (collectively, "Ling Electronics") from MTI.
In consideration for the acquisition of Ling Electronics, MTI received $70,000 and 770,000 shares of the Company's Common Stock valued at $9.8438 per share or $7,579,726. In addition, the Company
incurred approximately $177,000 of legal, accounting,
consultation and filing fees as a cost of this transaction. The purchase price of the acquisition has been allocated as follows:

Cash and cash equivalents

$
45,946Accounts receivable


1,937,023Inventory


3,127,991Prepaid expenses and other assets


260,239Property and equipment


250,000Goodwill


3,754,910Accounts payable


(641,687
)Accrued payroll and payroll related expenses


(334,129
)Deferred revenues


(13,500
)Other accrued expenses


(560,437
)$
7,826,356


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

63

---

occurred on the applicable dates indicated and are not intended to be indicative of future results of operations.

Year Ended September 30,2000

1999(unaudited)Revenue

$
31,194,618

$
23,849,881Operating loss

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

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

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

$
(1.06
)
$
(1.60
)


Northrop Grumman Corporation

On November 16, 1999, the Company purchased certain intellectual property, equipment and other assets from Northrop Grumman Corporation ("NGC"). These
assets were used by NGC in connection with its power electronics product business. The Company is amortizing the purchase price allocated to completed technology on a straight-line basis
over a 10-year period. The Company is depreciating the purchase price allocated to property and equipment on a straight-line basis over a 10-year period. The
Company also entered into (i) a sublease with NGC pursuant to which it agreed to a five-year sublease for approximately 14,863 square feet of rentable space in the Baltimore,
Maryland area and (ii) a three-year Transition Services Agreement providing the Company access to certain test facilities and personnel of NGC on a fee basis. In consideration for
these foregoing assets and agreements, NGC received 578,761 shares of the Company's Common Stock valued at $8.3438 per share or $4,829,066. In addition, the Company issued to NGC a warrant to purchase
an additional 100,000 shares of the Company's Common Stock at an exercise price of $9.725 per share. The Company has recorded the fair value of this warrant, as determined by the Black-Scholes option
pricing model, of approximately $631,000 and approximately $119,000 of legal, accounting, consultation and filing fees as a cost of this transaction. On February 4, 2000, the Company issued to
NGC an additional warrant to purchase 100,000 shares of the Company's Common Stock at an exercise price of $9.725 per share. This warrant is exercisable upon the occurrence of certain defined events,
none of which had occurred as of September 30, 2000. The purchase price of the asset purchase has been allocated as follows:

Inventory




$
1,206,000Property and equipment





1,091,643Intangibles:Completed technology

$
3,142,882Transition services agreement


101,542Favorable lease


36,999Total intangibles





3,281,423$
5,579,066


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

For
the fiscal year ended September 30, 2001 and 2000, the Company recognized $239,532 and $413,991, respectively, of revenue, primarily related to funded research and
development arrangements,

64

---

from NGC. At September 30, 2001 and 2000, the Company had $64,437 and $62,492, respectively, of accounts receivable and unbilled contract costs and fees from NGC.

Inverpower Controls Ltd.

On July 13, 2001, the Company acquired substantially all of the assets and assumed certain certain liabilities of Inverpower Controls Ltd., a
corporation based in Burlington, Ontario, Canada ("Inverpower"). Inverpower is a manufacturer of power electronics modules and advanced high-speed digital controls for use in industrial
power-supply, power conversion and power quality systems. The acquired assets, including plant, equipment and other physical property, were used by Inverpower in connection with its power electronics
and controls business.

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

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

Current assets

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


440,773Developed technology


260,000Goodwill


2,695,992Liabilities assumed


(1,471,470
)Total

$
4,351,160


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

65

---

|                                                                                                                    |                                                           | Year Ended September 30, 2001 (Unaudited) |            
|------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------------- | -----------
|
|Revenue:                                                                                                            |                                                           |                                           |            
|Product revenue                                                                                                     |                                                           | $                                         | 30,779,861 
|Funded research and development and other revenue                                                                   |                                                           |                                           | 10,904,375 
|                                                                                                                    |                                                           |                                           |            
|Total revenue                                                                                                       |                                                           |                                           | 41,684,236 
|                                                                                                                    |                                                           |                                           |            
|Operating costs and expenses:                                                                                       |                                                           |                                           |            
|Cost of product revenue                                                                                             |                                                           |                                           | 27,827,909 
|Research and development and other revenue expenses:                                                                |                                                           |                                           |            
|                                                                                                                    | Funded research and development revenue                   |                                           |            
|                                                                                                                    | Unfunded research and development expenses                |                                           |            
|                                                                                                                    |                                                           |                                           |            
|                                                                                                                    | Total research and development and other revenue expenses |                                           |            
|Selling, general and administrative expenses                                                                        |                                                           |                                           | 13,593,197 
|Write-off of public offering costs                                                                                  |                                                           |                                           | 1,420,627  
|Amortization of intangibles                                                                                         |                                                           |                                           | 1,362,365  
|                                                                                                                    |                                                           |                                           |            
|Total operating expenses                                                                                            |                                                           |                                           | 57,878,624 
|                                                                                                                    |                                                           |                                           |            
|Operating loss                                                                                                      |                                                           |                                           | (16,194,388
|Other income/(losses), net                                                                                          |                                                           |                                           | (1,480,190 
|Interest income                                                                                                     |                                                           |                                           | 688,593    
|Interest expense                                                                                                    |                                                           |                                           | (104,994   
|                                                                                                                    |                                                           |                                           |            
|Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                                                           |                                           | (17,090,979
|Equity loss from Beacon Power Corporation                                                                           |                                                           |                                           | (5,065,034 
|                                                                                                                    |                                                           |                                           |            
|Net loss before cumulative effect of changes in accounting principles                                               |                                                           |                                           | (22,156,013
|Cumulative effect of changes in accounting principles                                                               |                                                           |                                           | (167,612   
|                                                                                                                    |                                                           |                                           |            
|Net loss                                                                                                            |                                                           | $                                         | (22,323,625
|                                                                                                                    |                                                           |                                           |            
|Cumulative effect of change in accounting principle                                                                 |                                                           |                                           | (1,940,798 
|                                                                                                                    |                                                           |                                           |            
|Net loss attributable to common stockholders                                                                        |                                                           | $                                         | (24,264,423
|                                                                                                                    |                                                           |                                           |            
|Net loss before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                                           | $                                         | (1.51      
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted                 |                                                           |                                           | (0.14      
|                                                                                                                    |                                                           |                                           |            
|Net loss per weighted average share, basic and diluted                                                              |                                                           | $                                         | (1.65      
|                                                                                                                    |                                                           |                                           |            
|Weighted average number of common shares, basic and diluted                                                         |                                                           |                                           | 14,665,683 

66

---

|                                                             |                                                              | Year Ended September 30, 2000 (Unaudited) |            
|------------------------------------------------------------ | ------------------------------------------------------------ | ----------------------------------------- | -----------
|
|Revenue:                                                     |                                                              |                                           |            
|Product revenue                                              |                                                              | $                                         | 22,427,428 
|Funded research and development and other revenue            |                                                              |                                           | 8,627,601  
|                                                             |                                                              |                                           |            
|Total revenue                                                |                                                              |                                           | 31,055,029 
|                                                             |                                                              |                                           |            
|Operating costs and expenses:                                |                                                              |                                           |            
|Cost of product revenue                                      |                                                              |                                           | 19,069,192 
|Research and development and other revenue expenses:         |                                                              |                                           |            
|                                                             | Funded research and development expense                      |                                           |            
|                                                             | Unfunded research and development and other revenue expenses |                                           |            
|                                                             |                                                              |                                           |            
|                                                             | Total research and development and other revenue expenses    |                                           |            
|Selling, general and administrative expenses                 |                                                              |                                           | 9,969,580  
|Amortization of intangibles                                  |                                                              |                                           | 1,217,490  
|                                                             |                                                              |                                           |            
|Total operating costs and expenses                           |                                                              |                                           | 40,557,027 
|                                                             |                                                              |                                           |            
|Operating loss                                               |                                                              |                                           | (9,501,998 
|Other income, net                                            |                                                              |                                           | 9,891      
|Interest income                                              |                                                              |                                           | 453,631    
|Interest expense                                             |                                                              |                                           | (3,176     
|                                                             |                                                              |                                           |            
|Net loss before equity loss fron Beacon Power Corporation    |                                                              |                                           | (9,041,652 
|Equity loss from Beacon Power Corporation                    |                                                              |                                           | (899,493   
|                                                             |                                                              |                                           |            
|Net loss                                                     |                                                              |                                           | (9,941,145 
|Accretion of redeemable convertible preferred stock discount |                                                              |                                           | (3,105,888 
|                                                             |                                                              |                                           |            
|Net loss attributable to common stockholders                 |                                                              | $                                         | (13,047,033
|                                                             |                                                              |                                           |            
|Net loss per weighted average share, basic and diluted       |                                                              | $                                         | (1.03      
|                                                             |                                                              |                                           |            
|Weighted average number of common shares, basic and diluted  |                                                              |                                           | 12,629,822 

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

67

---

P.  LOSS PER SHARE

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

|                                                                                                          |                                                                                                                                                         | For the Years Ended
September 30, |            
|--------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | -----------
|
|Net loss attributable to common shareholders before cumulative effect of changes in accounting principles |                                                                                                                                                         | $                                 | (22,156,013
|Cumulative effect of changes in accounting principles                                                     |                                                                                                                                                         |                                   | (2,108,410 
|                                                                                                          |                                                                                                                                                         |                                   |            
|Net loss attributable to common shareholders                                                              |                                                                                                                                                         | $                                 | (24,264,423
|                                                                                                          |                                                                                                                                                         |                                   |            
|Basic and diluted:                                                                                        |                                                                                                                                                         |                                   |            
|                                                                                                          | Common shares outstanding, beginning of year                                                                                                            |                                   |            
|                                                                                                          | Weighted average common shares issued during the year                                                                                                   |                                   |            
|                                                                                                          | Weighted average shares repurchased during the year                                                                                                     |                                   |            
|                                                                                                          |                                                                                                                                                         |                                   |            
|                                                                                                          | Weighted average shares outstandingbasic and diluted                                                                                                   |                                   |            
|                                                                                                          |                                                                                                                                                         |                                   |            
|                                                                                                          | Net loss attributable to common shareholders before cumulative effect of changes in accounting principles per weighted average share, basic and diluted |                                   | $          
|Cumulative effect of changes in accounting principles per weighted average share, basic and diluted       |                                                                                                                                                         |                                   | (0.14      
|                                                                                                          |                                                                                                                                                         |                                   |            
|Net loss attributable to common shareholders per weighted average share, basic and diluted                |                                                                                                                                                         | $                                 | (1.65      
|                                                                                                          |                                                                                                                                                         |                                   |            

For
the fiscal years ended September 30, 2000 and 1999, 44,500 and 28,300 common shares, respectively, were excluded from common shares outstanding as they were held in
treasury. For the fiscal year ended September 30, 1999, 42,860 common shares were excluded from common shares outstanding as they were held in escrow.

At
September 30, 2001, 2000 and 1999, options and warrants to purchase 3,418,123, 2,854,105 and 2,782,147 shares of common stock, respectively, were excluded from the diluted
weighted average common shares outstanding as their effect would be antidilutive.

Q.  SEGMENT DISCLOSURES

The Company's organizational structure is based on strategic business units that perform services and offer various products to the principal markets in which
the Company's products are sold. These business units equate to three reportable segments: Applied Technology, Power Systems and Semiconductor Products.

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

The
accounting policies of each of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on revenue
and profit and loss from operations before income taxes, interest income, interest expense, other income and loss, loss from Beacon Power Corporation, unrealized loss on warrants to purchase common
stock and cumulative effect of change in accounting principle, excluding the effects of the write-off of the public

68

---

offering costs and amortization of intangible assets associated with acquisitions. Common costs not directly attributable to a particular segment are allocated among segments based on management's
estimates.

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

|                        |                                                                                                                     | Year Ended September 30, |  
|----------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------ | -
|
|Applied Technology:     |                                                                                                                     |                          |  
|                        | Product revenue                                                                                                     |                          |  
|                        | Funded research and development and other revenue                                                                   |                          | $
|                        |                                                                                                                     |                          |  
|                        | Total revenue                                                                                                       |                          | $
|                        |                                                                                                                     |                          |  
|                        | Loss from operations, net of amortization of intangibles                                                            |                          | $
|                        |                                                                                                                     |                          |  
|Power Systems:          |                                                                                                                     |                          |  
|                        | Product revenue                                                                                                     |                          | $
|                        |                                                                                                                     |                          |  
|                        | Loss from operations, net of amortization of intangibles                                                            |                          | $
|                        |                                                                                                                     |                          |  
|Semiconductor Products: |                                                                                                                     |                          |  
|                        | Product revenue                                                                                                     |                          | $
|                        |                                                                                                                     |                          |  
|                        | Loss from operations, net of amortization of intangibles                                                            |                          | $
|                        |                                                                                                                     |                          |  
|Consolidated:           |                                                                                                                     |                          |  
|                        | Product revenue                                                                                                     |                          | $
|                        | Funded research and development and other revenue                                                                   |                          |  
|                        |                                                                                                                     |                          |  
|                        | Total revenue                                                                                                       |                          | $
|                        |                                                                                                                     |                          |  
|                        | Loss from operations, net of amortization of intangibles                                                            |                          | $
|                        | Amortization of intangibles                                                                                         |                          |  
|                        |                                                                                                                     |                          |  
|                        | Operating loss                                                                                                      |                          | $
|                        | Other income (loss)                                                                                                 |                          |  
|                        | Interest income                                                                                                     |                          |  
|                        | Interest expense                                                                                                    |                          |  
|                        |                                                                                                                     |                          |  
|                        | Net loss before equity loss from Beacon Power Corporation and cumulative effect of changes in accounting principles |                          | $
|                        |                                                                                                                     |                          |  

69

---

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

September 30,2001

2000Applied Technology:Segment assets

$
29,223,705

$
18,464,754Power Systems:Segment assets


21,835,106


13,783,418Semiconductor Products:Segment assets


9,987,749


9,765,354Consolidated:Segment assets


61,046,560


42,013,526Investment in Beacon Power Corporation


7,152,984


Warrants to purchase common stock


576,915


2,473,713Total assets

$
68,776,459

$
44,487,239


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

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

70

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE

To
the Board of Directors of SatCon Technology Corporation:

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



Boston,
Massachusetts
December 4, 2001

71

---



FINANCIAL STATEMENT SCHEDULE

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                               |                                                | Balance at
beginning
of period |   | Additions
charged to
costs and
expenses |  | Additions
from
Acquisitions |           | Deductions
and Adjustments |   | Balance
at end
of period
|------------------------------ | ---------------------------------------------- | ------------------------------ | - | --------------------------------------- |  | --------------------------- | --------- | -------------------------- | - | ------------------------
|Year Ended September 30, 1999: |                                                |                                |   |                                         |  |                             |           |                            |   |                         
|                               | Allowance for uncollectible accounts           |                                | $ | 51,836                                  |  | $                           | 345,433   |                            |   |                        
|                               | Allowance for unbilled contract costs          |                                | $ | 57,611                                  |  | $                           | 688,510   |                            |   |                        
|                               | Deferred tax valuation allowance               |                                | $ | 6,801,567                               |  | $                           | 4,788,539 |                            |   |                        
|                               | Allowance for excess and obsolete inventory    |                                | $ | 208,776                                 |  | $                           | 870,021   |                            |   |                        
|                               | Reserve for product warranty expense           |                                |   |                                        |  | $                           | 36,000    |                            |   |                        
|                               | Accrued costs for consolidation of facilities. |                                | $ | 100,000                                 |  |                             |          |                            |   |                        
|Year Ended September 30, 2000: |                                                |                                |   |                                         |  |                             |           |                            |   |                         
|                               | Allowance for uncollectible accounts           |                                | $ | 386,686                                 |  | $                           | 265,742   |                            |   |                        
|                               | Allowance for unbilled contract costs          |                                | $ | 746,121                                 |  |                             |          |                            |   |                        
|                               | Deferred tax valuation allowance               |                                | $ | 11,590,106                              |  | $                           | 9,668,342 |                            |   |                        
|                               | Allowance for excess and obsolete inventory    |                                | $ | 1,078,797                               |  | $                           | 658,774   |                            |   |                        
|                               | Reserve for product warranty expense           |                                | $ | 36,000                                  |  | $                           | 264,096   |                            | $ | 195,384                 
|                               | Accrued costs for consolidation of facilities  |                                | $ | 100,000                                 |  |                             |          |                            |   |                        
|Year Ended September 30, 2001: |                                                |                                |   |                                         |  |                             |           |                            |   |                         
|                               | Allowance for uncollectible accounts           |                                | $ | 320,220                                 |  | $                           | 540,977   |                            |   |                        
|                               | Deferred tax valuation allowance               |                                | $ | 21,258,448                              |  |                             | 5,355,184 |                            |   |                        
|                               | Allowance for excess and obsolete inventory    |                                | $ | 1,193,950                               |  | $                           | 1,153,564 |                            |   |                        
|                               | Reserve for product warranty expense           |                                | $ | 465,115                                 |  | $                           | 38,436    |                            | $ | 722,483                 
|                               | Accrued costs for consolidation of facilities  |                                | $ | 100,000                                 |  | $                           | 175,000   |                            |   |                        

72

---



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

Not applicable.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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 our proxy statement for our 2002 Annual Meeting of Stockholders to be held on March 13, 2002. Information relating to certain filings on Forms 3, 4 and 5 is contained
in our 2002 proxy statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."

Item 11. EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by reference to the section entitled "Compensation of Executive Officers" in our 2002 proxy
statement.

The
sections entitled "Compensation Committee Report on Executive Compensation" and "Comparative Stock Performance Graph" in our 2002 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 herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in our 2002 proxy statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this item is incorporated herein by reference to the section entitled "Certain Relationships and Related Party Transactions" in
our 2002 proxy statement.

73

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PART IV

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







On
July 17, 2001, we filed a Current Report on Form 8-K, dated July 13, 2001, under Items 2 and 7 in connection with our acquisition of substantially
all of the assets of Inverpower Controls Ltd., a corporation based in Burlington, Ontario, Canada.

On
August 10, 2001, we filed Amendment No. 1 to Current Report on Form 8-K, dated July 13, 2001, under Item 7 with financial statements in
connection with our acquisition of substantially all of the assets of Inverpower Controls Ltd.

On
September 13, 2001, we filed a Current Report on Form 8-K, dated September 11, 2001, under Items 5 and 7 in connection with our then proposed
contingent, pro rata distribution to our stockholders of 5,000,000 shares of common stock of Beacon Power Corporation.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth of Massachusetts on December 20, 2001.

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

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

|Name                                          |  | Capacity                                                                                                |  | Date             
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -----------------
|                                              |  |                                                                                                         |  |                  
|/s/DAVID B. EISENHAUREDavid B. Eisenhaure     |  | Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) |  | December 20, 2001
|/s/SEAN F. MORANSean F. Moran                 |  | Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)                     |  | December 20, 2001
|/s/JOHN J. MCCABEJohn J. McCabe               |  | Controller and Chief Accounting Officer (Principal Accounting Officer)                                  |  | December 20, 2001
|/s/MICHAEL C. TURMELLEMichael C. Turmelle     |  | Director, Vice President and Chief Operating Officer                                                    |  | December 20, 2001
|/s/JAMES L. KIRTLEY, JR.James L. Kirtley, Jr. |  | Director, Vice President and Chief Scientist                                                            |  | December 20, 2001
|/s/MARSHALL J. ARMSTRONGMarshall J. Armstrong |  | Director                                                                                                |  | December 20, 2001
|/s/ALAN P. GOLDBERGAlan P. Goldberg           |  | Director                                                                                                |  | December 20, 2001
|/s/THOMAS A. HURKMANSThomas A. Hurkmans       |  | Director                                                                                                |  | December 20, 2001
|/s/GERALD L. WILSONGerald L. Wilson           |  | Director                                                                                                |  | December 20, 2001

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EXHIBIT INDEX

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Amended and Restated Asset Purchase Agreement among SatCon Film Microelectronics, Inc., Film Microelectronics Inc., and Albert R. Snider, dated as of April 3, 1997, is incorporated herein by reference to
Exhibits to the Registrant's Current Report on Form 8-K dated April 16, 1997.                                       
|2.2         |  | Stock Purchase Agreement, dated as of October 21, 1999, by and among the Registrant, Mechanical Technology Incorporated, Ling Electronics, Inc. and Ling Electronics, Ltd. is incorporated herein by reference to Exhibits to the Registrant's
Current Report on Form 8-K dated October 21, 1999.                               
|2.3         |  | Asset Purchase Agreement, dated as of November 16, 1999, by and between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 16,
1999.                                                                                 
|2.4         |  | Asset Purchase Agreement by and among Inverpower Controls Ltd., the Registrant and SatCon Power Systems Canada Ltd., dated June 25, 2001, is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated July 13, 2001.                                                                   
|3.1         |  | Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).                                                                                                                                                      
|3.2         |  | Bylaws of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).                                                                                                                                                                            
|3.3         |  | Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on May 12, 1997, is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1997.                               
|3.4         |  | Bylaws Amendment of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997.                                                                                                                                                       
|3.5         |  | Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 17, 1999, is incorporated herein by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated August 25, 1999.                                              
|3.6         |  | Certificate of Designation of Series and Statement of Variations of Relative Rights, Preferences and Limitations of Preferred Stock, dated as of August 25, 1999, relating to the Series A Preferred Stock is incorporated herein by reference
to Exhibits to the Registrant's Current Report on Form 8-K dated August 25, 1999.
|3.7         |  | Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 15, 2000 is incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2000.                                      
|3.8         |  | Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on May 4, 2001, is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 2001.                                

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|4.1   |     | Specimen Certificate of Common Stock, $.01 par value, is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).                                                                                                                                                                                                                                                                                                              
|----- | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1  | (*) | Employment Agreement, dated July 1, 1992, between the Registrant and David B. Eisenhaure is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).                                                                                                                                                                                                                                                                           
|10.2  | (*) | Employment Agreement, dated July 1, 1992, between the Registrant and Michael C. Turmelle is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).                                                                                                                                                                                                                                                                           
|10.3  |     | Change of Control Letter Agreement, dated March 22, 2000, between the Registrant and Sean F. Moran is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
2000.                                                                                                                                                                                                                                                      
|10.4  | (*) | 1992 Stock Option Plan is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).                                                                                                                                                                                                                                                                                                                                             
|10.5  | (*) | 1994 Stock Option Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994.                                                                                                                                                                                                                                                                                                                                   
|10.6  | (*) | 1996 Stock Option Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996.                                                                                                                                                                                                                                                                                                                                   
|10.7  | (*) | 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit B to the Registrant's Definitive Schedule 14A filed January 26, 1999.                                                                                                                                                                                                                                                                                                                                                 
|10.8  | (*) | 1999 Stock Incentive Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1999.                                                                                                                                                                                                                                                                                                                                
|10.9  | (*) | 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit C to the Registrant's Preliminary Schedule 14A filed March 19, 2001.                                                                                                                                                                                                                                                                                                                                                  
|10.10 |     | Lease, dated October 21, 1993, between the Registrant and Gunwyn/First Street Limited Partnership is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286) and First
Amendment to Lease, dated June 22, 1998, by and between the Registrant and Gunwyn/First Street Limited Partnership is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended
September 30, 1998.
|10.11 | () | Manufacturing Agreement between Applied Materials, Inc. and its wholly-owned subsidiaries and the Registrant, dated as of February 20, 1997, is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1997.                                                                                                                                                                                                            
|10.12 |     | Securities Purchase Agreement, dated as of May 28, 1997, by and among the Registrant, Beacon Power Corporation and DQE Enterprises, Inc. is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K
dated May 28, 1997.                                                                                                                                                                                                                                    
|10.13 |     | Securities Purchase Agreement, dated as of October 23, 1998, by and among Beacon Power Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant is incorporated herein
by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 23, 1998.                                                                                                                                                         
|10.14 |     | Amended and Restated License Agreement, dated as of October 23, 1998, by and between the Registrant and Beacon Power Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
October 23, 1998.                                                                                                                                                                                                                                        

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|10.15 |  | Registration Rights Statement, dated as of October 23, 1998, by and among Beacon Power Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro Generation Technology Fund, L.L.C., and the Registrant, setting forth
certain registration rights granted by the Registrant is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 23, 1998.         
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16 |  | Registration Rights Statement, dated as of October 23, 1998, by and among Beacon Power Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant, setting forth certain
registration rights granted by Beacon Power Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 23, 1998.
|10.17 |  | Lease, dated February 27, 1996, by and between the Registrant and Diamond Management, Inc. is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30,
1998.                                                                                                                                                                                     
|10.18 |  | Lease, dated March 5, 1998, by and between the Registrant and Harold W. Slovin is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1998.                                                                                                                                                                                                 
|10.19 |  | North America Distributor Agreement, dated June 4, 1998, by and between SatCon Film Microelectronics, Inc., a division of the Registrant, and Falcon Electronics, Inc. is incorporated herein by reference to Exhibits to the Registrant's
Annual Report on Form 10-K for the year ended September 30, 1998.                                                                                                         
|10.20 |  | Asset Purchase Agreement, dated as of January 4, 1999, among K&D MagMotor Corp., the Registrant, Inductive Components, Inc., Lighthouse Software, Inc. and Thomas Glynn is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated January 4, 1999.                                                                                                                        
|10.21 |  | Asset Purchase Agreement, dated as of March 31, 1999, by and between HyComp, Inc. and HyComp Acquisition Corp., a wholly-owned subsidiary of the Registrant, is incorporated herein by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1999.                                                                                                                   
|10.22 |  | Note Purchase Agreement, dated as of June 22, 1999, by and among Beacon Power Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant is incorporated herein by
reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999.                                                                         
|10.23 |  | Note and Warrant Purchase Agreement, dated as of August 2, 1999, by and among Beacon Power Corporation, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro Generation Technology Fund, L.L.C. and the Registrant is incorporated
herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1999.                                                            
|10.24 |  | License and Technical Assistance Agreement, dated as of June 7, 1999, by and between Delco Remy America, Inc. and the Registrant is incorporated herein by reference to Exhibits to the Registrant's Amendment No. 1 to the Quarterly
Report on Form 10-Q for the period ended March 31, 1999.                                                                                                                       
|10.25 |  | Securities Purchase Agreement, dated as of August 25, 1999, among the Registrant and the purchasers listed on Schedule I thereto is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
August 25, 1999.                                                                                                                                                               

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|10.26 |  | Registration Rights Agreement, dated as of August 25, 1999, among the Registrant and the investors named on the signature pages thereof is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
August 25, 1999.                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.27 |  | Form of Warrants issued on August 25, 1999 in connection with the sale of the Series A Preferred Stock is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated August 25,
1999.                                                                                                                                                                  
|10.28 |  | Securities Purchase Agreement, dated as of October 21, 1999, between the Registrant and Mechanical Technology Incorporated is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 21,
1999.                                                                                                                                             
|10.29 |  | SatCon Registration Rights Agreement, dated as of October 21, 1999, between the Registrant and Mechanical Technology Incorporated is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
October 21, 1999.                                                                                                                                      
|10.30 |  | MTI Registration Rights Agreement, dated as of October 21, 1999, between Mechanical Technology Incorporated and the Registrant is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
October 21, 1999.                                                                                                                                         
|10.31 |  | Form of Stock Purchase Warrant issued on October 21, 1999 by the Registrant to Mechanical Technology Incorporated is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 21,
1999.                                                                                                                                                      
|10.32 |  | Form of Stock Purchase Warrant issued on October 21, 1999 by Mechanical Technology Incorporated to the Registrant is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated October 21,
1999.                                                                                                                                                      
|10.33 |  | Sublease, dated November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 16, 1999.                                                                                                                                                                            
|10.34 |  | Transition Services Agreement, dated as of November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 16,
1999.                                                                                                                                                 
|10.35 |  | Memorandum of Understanding, entered into on November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 16,
1999.                                                                                                                                               
|10.36 |  | Registration Rights Agreement, dated as of November 16, 1999, between the Registrant and Northrop Grumman Corporation is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 16,
1999.                                                                                                                                                 
|10.37 |  | Stock Purchase Warrant issued on February 4, 2000 by the Registrant to Northrop Grumman Corporation is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended December 31,
1999.                                                                                                                                                             
|10.38 |  | Promissory Note, dated October 6, 1999, made in favor of the Registrant by Michael C. Turmelle in the amount of $10,000, together with Promissory Note, dated December 6, 1999, made in favor of the Registrant by Michael C. Turmelle in
the amount of $75,000, is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 1999.

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|10.39 |  | Demand Promissory Note, dated February 25, 2000, made in favor of the Registrant by Beacon Power Corporation in the amount of $300,000, together with First Amendment to Demand Promissory Note, dated March 16, 2000, is incorporated by
reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2000.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.40 |  | Consulting Agreement, dated July 19, 2000, between the Registrant and Marshall J. Armstrong is incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2000.                                                                                                                                 
|10.41 |  | Agreement between the Department of Energy and the Registrant is incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000.                                                                                                                                                          
|10.42 |  | Master Lease Agreement, dated as of August 31, 2000, by and between General Electric Corporation and the Registrant is incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended
December 31, 2000.                                                                                                
|10.43 |  | Cooperation Agreement by and between the Registrant and Beacon Power Corporation, dated April 25, 2001, is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31,
2001.                                                                                                        
|10.44 |  | Warrant, dated May 25, 2001, issued to Brown Simpson Partners I, Ltd. is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated May 25, 2001.                                                                                                                                                              
|10.45 |  | Amendment No. 1 to Registration Rights Agreement, dated as of May 25, 2001, among the Registrant and the parties whose names appear on Schedule I thereto is incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated May 25, 2001.                                                                                      
|21.1  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                       
|23.1  |  | Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                                       
|99    |  | Risk Factors.                                                                                                                                                                                                                                                                                                                                         

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