<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                             ---------------------

                                   FORM 10-K
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
                        COMMISSION FILE NUMBER 1-11512

                             ---------------------

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

                             ---------------------

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

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

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


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

                                TITLE OF CLASS
                                --------------
                         COMMON STOCK, $.01 PAR VALUE

                             ---------------------


  INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
                               YES   X          NO
                                  --------        --------


  INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE,  IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.      [_]  

  As of December 5, 1997, 8,918,844 shares of the registrant's Common Stock,
$.01 par value, were issued and outstanding. The aggregate market value of the
registrant's voting stock held by non-affiliates of the registrant as of
December 5, 1997, based upon the closing price of such stock on the Nasdaq Stock
Market on that date ($9.500) was $50,054,379.

 44 pages in this filing                        Index to exhibits is on page 42




       DOCUMENTS INCORPORATED BY REFERENCE:   Portions of the Registrant's Proxy
       Statement for its 1998 Annual Meeting of Stockholders are incorporated by
                                       reference into Part III of this Form 10-K

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<PAGE>
 
                                     PART I
ITEM 1.  BUSINESS

  GENERAL

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

  STRATEGY

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

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

  DEVELOPMENTS DURING 1997

  During 1997 the Company initiated several actions to advance its strategy of
  commercializing products established under externally funded research and
  development through the acquisition of manufacturing capabilities and the
  establishment of strategic partnerships.

  During 1996, the Company delivered five "beta-site" units of an integrated
  suspension and motor system ("ISAM") to Applied Materials Inc., a manufacturer
  of semiconductor wafer fabrication equipment, for evaluation. After successful
  testing and evaluation, the Company entered into a long-term manufacturing
  agreement on February 20, 1997 calling for the Company to manufacture and
  supply its ISAM product to

                                       2
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  Applied Material Inc.. The Company began making shipments under the terms of
  the agreement during the third quarter and had transitioned the manufacturing
  process from its Cambridge facility to its newly acquired motor manufacturing
  company, K&D MagMotor ("K&D"), by the fourth quarter.

  The Technology Division, located in Cambridge, continues to participate in
  several efforts with various commercial customers to develop new products and
  product improvements including an improved performance alternator for
  commercial vehicles; control electronics for power regulation for a turbine
  for alternative fuel vehicles; and flywheel integrated power and attitude
  control systems for commercial satellite applications.

  During the fourth quarter of 1997 the Company decided to consolidate the space
  flywheel energy storage systems segment into the Technology Division. The
  consolidation will allow the Company to capitalize on the synergies between
  the Tuscon and and Cambridge operations in technology, technical personnel,
  and equipment involved in the development of flywheel energy storage systems.
  The consolidation will further provide the Company's space customers direct
  access to related research and development projects currently being conducted
  by the Technology Division and Beacon Power Corporation. The development of
  electro-optic sensing systems will continue to be performed at the Tucson
  location.

  FUNDED RESEARCH AND DEVELOPMENT

  The Company continued its funded research and development with various U.S.
  Government agencies during Fiscal 1997.  Projects included a terrestrial based
  flywheel energy storage system for the Marine Corps; variable speed drives for
  auxiliary applications on U.S. Navy ships that can integrate high density
  drive electronics with innovative permanent magnet motors for hydraulic pump
  motors, circulating pumps and compressors; a light-weight, low volume
  alternator with high efficiency power electronics for the Army.  The Company
  is also working with the Air Force to investigate the use of new specialty
  shape memory alloys in air foil controls for greater fuel efficiency and with
  several other agencies on the development of high power density electronics
  modules called Power Electronic Building Blocks or PEBB's.

  COMMERCIALIZATION

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

  Flywheel Energy Storage Systems

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

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

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

  During 1997, the Company made internal research and development investments in
  this technology by continuing product development of its Inertial Battery
  20C1000 series flywheel energy storage system for uninterruptible power supply
  applications for the telecommunications market.  In addition, the Company made
  an investment in research and development related to the development of
  flywheel energy storage technology for satellite applications.

                                       3
<PAGE>
 
  On May 28, 1997, the Company entered into a strategic relationship with
  Duquesne Enterprises, a subsidiary of DOE, Inc., and formed Beacon Power
  Corporation to manufacture and distribute SatCon's flywheel energy storage
  systems. The capital required to continue product development and to startup
  the manufacturing process will be partially funded by a $5,000,000 investment
  in SatCon by Duquesne Enterprises. Beacon Power Corporation assumed the
  activities of SatCon's Energy Systems Division. The Energy Systems Division,
  located in SatCon's Cambridge offices, was formed in October 1995 to focus on
  the product development and marketing of flywheel "Inertial Battery" systems
  for such markets as utilities, cable television and telecommunications, where
  uninterruptible power supplies (UPS) are critical to maintaining service.

  Motors and High Speed Drives

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

  SatCon has teamed with United Technologies to develop a direct drive, high
  speed compressor for the development of a Roof Top Air Conditioning System.
  SatCon is developing a 47,000 rpm permanent magnet motor that produces 28
  horse power and is driven by a Digital Signal Processor (DSP) controlled IGBT
  based inverter.  Existing systems use low speed, low efficiency induction
  motors which due to size and weight, force compromises in the overall design
  of air conditioning systems.  This high speed motor technology shows great
  promise in the development of high efficiency, variable speed drive air
  conditioning systems.

  During 1997, the Company continued to make internal research and development
  investments in this product area by continuing product development of an
  advanced automotive alternator that can provide more power at lower speeds.
  One important key limitation with current automotive alternators is their
  inability to match power requirements at idle speeds effectively.  By
  addressing limitations of current alternators, SatCon is attempting to
  develop technology to revolutionize the automotive alternator market.

  On January 23, 1997, the Company completed the acquisition of K&D MagMotor
  Corporation ("K&D").  K&D, a privately held company, is a manufacturer of
  custom electronic motors targeting the factory automation, medical, semi
  conductor and packaging markets.  Pursuant to the Asset Purchase Agreement,
  dated as of January 2, 1997, by and among the Company, K&D and K&D's principal
  stockholder, the Company acquired substantially all of the assets of K&D,
  which became a wholly-owned subsidiary of SatCon.

  Power Electronics

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

  During 1997, the Company continued work on the development of an advanced,
  high power-density, starter/regulator unit capable of starting and controlling
  a turbine alternator being developed for a major automotive manufacturer.

  SatCon has also developed an automotive Turbine Starter Rectifier Regulator
  for Williams International which is designed to drive a turbine alternator
  during engine light-off and to electrically load the turbine alternator to
  charge the battery. This is performed by utilizing sensorless control
  strategies and a novel system topology achieving an efficiency of greater than
  98% measured at one-third the power. This program is a

                                       4
<PAGE>
 
  significant development for hybrid electric vehicles obtained through the
  efforts of SatCon, Williams International, and General Motors.

  On April 16, 1997, the Company completed the acquisition of Film
  Microelectronics, Inc. ("FMI").  FMI, a privately held company, is a
  manufacturer of production and custom integrated circuits for the
  communications, industrial, military and aerospace markets.  Pursuant to the
  Asset Purchase Agreement, dated April 3, 1997, by and among the Company, FMI
  and FMI's principal stockholder, the Company acquired substantially all of the
  assets of FMI, which became a wholly owned subsidiary of SatCon.

  Magnetic Bearings and Suspension Systems

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

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

  SatCon has been contracted by Pratt and Whitney to develop a combination air
  and magnetic bearing system for next generation military aircraft gas turbine
  engines.  Current engines utilize oil lubricated ball and roller bearings
  which are challenged by both the high rotational speed and temperatures
  required to achieve greater efficiencies.  Non-contacting magnetic and air
  bearings offer the promise of greater design freedom to produce smooth running
  highly reliable machines that are less complex, longer lasting and require
  lower maintenance.  Once the advantages have been clearly demonstrated, this
  technology is expected to flow down to commercial aircraft gas turbines and
  other types of high speed machinery, such as, pumps and electric generators.

  During 1997, the Company continued to make internal investments in this
  product area by completing beta site testing and continuing product and
  process development of its ISAM system.  The ISAM system is designed for
  semiconductor processing applications and can eliminate unwanted debris,
  provide higher throughput potential, and is more easily maintained than
  existing mechanical systems.

  Electro-Optics Sensor Systems

  SatCon is developing a commercial real time, non-contact Remote Inspection
  Biological Sensor ("RIBS") for pathogen detection of contaminants, such as E.
  Coli 0157:H7 and Salmonella in meat, poultry, vegetables, fruit, and fruit
  juices. The detection technique is based on laser spectroscopy, which has been
  used for agent identification in combustion diagnostics, emission monitoring,
  bioaerosol detection, and chemical analysis of oil types. SatCon believes that
  the benefits resulting from the development of a commercial sensor capable of
  remotely detecting pathogens in the world's food supply are enormous. In
  addition, SatCon believes the RIBS system has the potential to play a role in
  implementing the recently enacted USDA's Hazard Analysis Critical Control
  Point ("HACCP") regulations.

  MARKETS

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

                                       5
<PAGE>
 
  Flywheel Energy Storage Systems: Electromechanical storage in SatCon's
  flywheel energy storage systems may replace batteries in a variety of
  industries including uninterruptible power supplies for telecommunications
  providers and industrial systems, power quality for utilities, and integrated
  power and attitude control for satellites.

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

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

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

  Electro-Optic Sensor and Inspection Systems:  Advanced Electro-Optic Sensor
  and Detection systems have the potential to satisfy the needs of a wide range
  of applications in food safety inspection, environmental monitoring, earth
  mapping, mine detection, and commercial fishing for both government and
  commercial customers.

  COMPETITION

  The Company is aware of direct and indirect competitors that employ similar
  technology and have extensive research and development facilities in all of
  SatCon's market opportunity areas in both government and commercial markets.
  The Company is aware of large companies, as well as small companies, entering
  these markets, and expects competition to intensify either through direct
  competition or via alternative technologies.

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

  The industries served by the Company are highly competitive and a number of
  companies are involved in extensive research and development programs designed
  to address the technological challenges which the Company is seeking to
  address through its development programs. Many of these companies are larger
  and better financed than the Company. As a result, there can be no assurance
  that customers will not select technologies developed by or under development
  by other companies or that potential customers will select the Company's
  technologies to address both existing and potential markets. The majority of
  the Company's revenues to date from commercial contracts have been derived in
  connection with prototype development contracts. As a result, the Company will
  need to develop technologies that address customers' needs in a cost-effective
  and timely manner. There can be no assurance that the Company will be
  successful in these efforts, that technologies developed by other companies
  will not be selected, or that potential customers for the Company's
  technologies will utilize the Company's technologies in a timely manner, if at
  all.

  PATENTS AND PROPRIETARY INFORMATION

  The Company currently owns eleven United States patents that expire between
  2007 and 2014.  The Company has fifteen patent applications pending with the
  U.S. Patent and Trademark Office.

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

                                       6
<PAGE>
 
  In addition to its patent rights, the Company also relies upon treatment of
  its technology as trade secrets and upon confidentiality agreements, which all
  of its employees are required to execute, assigning to the Company all patent
  rights and technical or other information developed by the employees during
  their employment with the Company. The Company's employees have also agreed
  not to disclose any trade secret or confidential information without the prior
  written consent of the Company. Notwithstanding these confidentiality
  agreements, there can be no assurance that other companies will not acquire
  information that the Company considers to be proprietary.  Moreover, while the
  Company intends to defend vigorously its patents against infringement by third
  parties, there can be no assurance that the Company's patents will be
  enforceable or provide the Company with meaningful protection from competitors
  or that patent applications will be allowed. No assurance can be given as to
  the issuance of additional patents or, if  issued, as to their scope. Patents
  granted may not provide meaningful protection from competitors. Even if a
  competitor's products were to infringe patents owned by the Company, it would
  be very costly for the Company to pursue its rights in an enforcement action,
  which would also divert funds and resources which otherwise could be used in
  the Company's operations. Furthermore, there can be no assurance that the
  Company would be successful in enforcing intellectual property rights or that
  the Company may not be infringing patent or intellectual property rights of
  third parties, although the Company, to date, has not been required to defend
  its patents or proprietary information against claims by third parties.

  RESEARCH AND DEVELOPMENT

  Approximately $8,200,000 or 66% of the Company's revenues during fiscal year
  1997 are attributable to research and development activities funded by
  commercial customers and U.S. Government agency sponsors.  Under the
  agreements funded by the U.S. Government, the government retains a royalty-
  free license to use the technology developed for government purposes and the
  Company retains exclusive rights to the technology for commercial and
  industrial applications.  The rights to technology developed under contracts
  funded by commercial customers are negotiated on a case by case basis.  In
  addition to the research and development conducted under contract, the Company
  expended $2,489,207 on internally funded research and development during 1997.
  Beacon Power Corporation's Flywheel UPS product and the introduction of
  SatCon's ISAM product accounted for the majority of the 1997 internally funded
  costs.

  GOVERNMENT REGULATION

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

  As a party to a number of contracts with the U.S. Government and its agencies,
  the Company must comply with extensive regulations, including regulations with
  respect to bid proposals and billing practices. As research and development
  contracts are generally subject to cancellation at the U.S. Government's sole
  discretion, should the U.S. Government or its agencies conclude that the
  Company has not adhered to federal regulations, any contracts to which the
  Company is a party could be canceled and/or the Company could be prohibited
  from bidding on future contracts, which would have a material adverse effect
  on the Company. All payments to the Company for work performed on contracts
  with agencies of the U.S. government are subject to adjustment upon audit by
  the U.S. Government Defense Contract Audit Agency, the General Accounting
  Office, and other agencies. The Company could be required to disgorge any
  payments received from U.S. Government agencies if it is found to have
  violated federal regulations.

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

                                       7
<PAGE>
 
  MANUFACTURING AND SUPPLIERS

  Until 1997, the Company had manufactured all of its prototype products at its
  facility in Cambridge, Massachusetts. The Company anticipates investing in
  manufacturing equipment to further develop the manufacturing capabilities at
  this facility.   During 1997, the Company acquired K&D, a manufacturer of
  custom electric motors, and FMI, a manufacturer of custom integrated circuits.
  The Company intends to continue to transition the production of key components
  of its products to these newly acquired manufacturing companies.  In addition,
  the Company intends to continue to acquire manufacturing capabilities to
  support its product development efforts and product line expansion.  If the
  Company is successful in obtaining market penetration of its products, the
  Company will be required to deliver large volumes of quality products or
  components to its customers on a timely basis at reasonable costs to the
  Company. When necessary, the Company intends to seek to supplement its
  manufacturing capabilities by establishing relationships with manufacturing
  organizations to deliver large volumes of its products until such time as the
  Company can develop its own manufacturing expertise and capacity.  No
  assurance can be given that the Company will be able to successfully establish
  relationships with third party manufacturing organizations, or if such
  relationships are established, that they will be successful.

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

  BACKLOG

  The Company's backlog consists primarily of research and development contracts
  and orders for multi-chip modules and hybrid products.  At September 30, 1997,
  the backlog was approximately $10,500,000 for work to be performed and
  products to be shipped during the fiscal year ending September 30, 1998 and
  beyond.  Many of the Company's contracts may be canceled at any time with
  limited or no penalty.  Also, contract awards may be subject to funding
  approval from the U.S. Government and commercial entities, which involves
  political, budgetary, and other considerations over which the Company has no
  control. The Company's backlog at September 30, 1996 was approximately
  $7,400,000.

  SIGNIFICANT CUSTOMERS

  The U.S. Department of Defense accounted for approximately 45% of the
  Company's fiscal 1997 sales. 

  EMPLOYEES

  At September 30, 1997, the Company employed a total of 199 people; 188 on a
  regular full-time basis, 5 on a regular part-time basis, and 6 student
  interns.  Many of the Company's employees are affiliated with large
  universities located in the greater Boston area.  Approximately 83 persons are
  employed in engineering, 74 in manufacturing, 32 in administration and 10 in
  sales and marketing.  None of these employees are represented by a union.  The
  Company believes that its relations with its employees are satisfactory.

                                       8
<PAGE>
 
ITEM 2.   DESCRIPTION OF PROPERTIES

  The Company occupies 45,820 square feet of office and laboratory space at 161
  First Street, Cambridge, Massachusetts under a primary lease expiring on
  October 31, 1998 and an additional 8,343 square feet located at 6245 East
  Broadway Boulevard, Suite 350, Tucson, Arizona under a primary lease expiring
  on March 31, 2001.  The Company also occupies approximately 14,757 square feet
  of manufacturing space at 530 Turnpike Street, North Andover, Massachusetts
  under a primary lease expiring on July 31, 2002 and approximately 12,000
  square feet at 90 Prescott Street, Worcester, Massachusetts under a month-by-
  month lease arrangement.

  Effective November 5, 1997 the Company entered into an agreement to sub-lease
  8,930 square feet at 161 First Street to a third party.

  The Company believes its facilities are adequate for its current needs and
  that adequate facilities for expansion, if required, are available.

ITEM 3.   LEGAL PROCEEDINGS

  On December 12, 1997, SatCon Film Microelectronics Inc., a wholly-owned
  subsidiary of SatCon Technology Corporation, initiated a suit against Albert
  R. Snider for breach of certain representations made by Snider including
  overstatements of inventory balances. The representations were made in the
  Asset Purchase Agreement entered into between Snider and SatCon Film
  Microelectronics Inc. dated as of April 3, 1997 relating to the purchase by
  SatCon of the business of FMI. The suit was filed in the United States
  District Court in Boston, Massachusetts. SatCon believes it has sufficient
  reserves on the books of FMI for the overstatement in inventory balances.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

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

                                       9
<PAGE>
 
                                    PART II

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

  The Company's Common Stock is traded on the NASDAQ Stock Market ("NASDAQ")
  under the trading symbol "SATC."  As of December 5, 1997 there were
  approximately 180 shareholders of record.

  For the periods reported below, the following table sets forth the range of
  high and low bid quotations for the Common Stock as reported by NASDAQ.  Such
  quotations represent interdealer quotations without adjustment for retail
  markups, markdowns or commissions and may not represent actual transactions.
  As of December 5, 1997 the closing price for the Company's Common Stock, as
  quoted in the Wall Street Journal, was $9.500.
<TABLE>
<CAPTION>
 
                              FISCAL YEAR 1997   FISCAL YEAR 1996
                            -------------------  -----------------
                                     BID                BID
                            -------------------  -----------------
                                HIGH      LOW      HIGH      LOW
                            ---------- --------  -------- --------
     <S>                      <C>       <C>      <C>       <C>
     First Quarter.........    $ 8.625   $5.625   $11.375   $7.750
     Second Quarter........      9.125    5.750    12.750    6.250
     Third Quarter.........     10.500    5.750    12.750    8.625
     Fourth Quarter........    $13.375   $7.500   $ 9.250   $7.000
</TABLE>

  DIVIDEND POLICY

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

                                       10
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

  The selected financial data set forth below for the years ended September 30,
  1997, 1996, 1995, 1994, and 1993 has been derived from the financial
  statements of the Company which have been audited by Coopers & Lybrand L.L.P.,
  independent accountants.  This information should be read in conjunction with
  the financial statements and notes thereto set forth elsewhere in this Report.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
                                                                YEARS ENDED SEPTEMBER 30,
                                         -----------------------------------------------------------------------
                                              1997           1996           1995           1994         1993
                                         -------------   -------------   -----------   ------------  -----------
<S>                                       <C>            <C>            <C>            <C>           <C>
      Revenue...........................   $12,466,335    $ 9,384,588    $11,475,427    $18,016,987   $5,306,680
                                           -----------   -------------   -----------   ------------  -----------
      Cost of Sales.....................     7,730,666      3,940,674      6,522,768     11,281,239    2,652,533
      Selling, General and               
      Administrative                         
        Expenses........................     8,538,435      8,023,441      5,483,194      4,655,769    2,363,370 
                                         
      Research and Development..........     2,489,207        893,628      1,937,241        461,068      119,663
      Goodwill amortization.............       120,467
                                           -----------   -------------   -----------   ------------  -----------
                                         
      Total Operating Expenses..........    18,878,775     12,857,743     13,943,203     16,398,076    5,135,566
      Interest Income/(Expense), Net....       269,198        463,840        451,034        409,337      119,100
                                           -----------   -------------   -----------   ------------  -----------
      Income/(loss) Before Income 
       Taxes............................    (6,143,242)    (3,009,315)    (2,016,742)     2,028,248      290,214
      Provision/(benefit) for Income       
       Taxes............................                     (144,479)      (806,697)       803,356      101,288
                                           -----------   -------------   -----------   ------------  -----------
      Net Income/(loss).................   $(6,143,242)   $(2,864,836)   $(1,210,045)   $ 1,224,892   $  188,926
      Earnings/(loss)  per Common and                                                 
      Common Equivalent Share...........         $(.77)         $(.39)         $(.17)          $.17         $.03
                                           ============  =============   ===========   ============  ===========
      Weighted Average Shares            
      Outstanding.......................     7,959,309      7,285,756      7,079,855      7,347,098    5,628,641
</TABLE> 

<TABLE> 
<CAPTION> 
 
     BALANCE SHEET DATA:
                                                                     AT SEPTEMBER 30,
                                          ----------------------------------------------------------------------
                                              1997           1996           1995           1994         1993
                                          ------------   ------------   ------------   ------------   ----------
<S>                                       <C>            <C>            <C>            <C>           <C>
      Total Assets......................   $20,709,438    $17,277,517    $19,792,966    $22,274,534   $8,430,630
      Total Long Term Obligations.......   $   322,897    $         0    $         0    $         0   $   11,229
      Total Liabilities.................   $ 2,630,301    $ 1,178,349    $ 1,040,251    $ 2,768,493   $1,241,426
      Working Capital...................   $10,595,294    $11,011,170    $15,615,645    $18,067,939   $6,653,681
      Stockholders' Equity..............   $18,079,137    $16,099,168    $18,752,715    $19,506,041   $7,189,204
</TABLE>

                                       11
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

  INTRODUCTION

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

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

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

  RESULTS OF OPERATIONS

  During 1997 the Company initiated several actions to advance the development
  and market introduction of new products, to establish a product manufacturing
  base capable of supplying key components of SatCon's products, and to improve
  the future profitability of the Company.  These actions include the
  introduction of the ISAM and PowerSmart products, the formation of Beacon
  Power Corporation, the acquisition of K&D and FMI, the recognition of certain
  product development costs in the current year rather than amortizing them over
  future years sales, and the recognition of costs associated with the Company's
  plan to consolidate the Tucson Space Division into the Technology Division.
  The effects of these actions on the Company's financial performance during
  1997 are discussed below.

                                       12
<PAGE>
 
  The following table sets forth, for the periods indicated, the Percentage of
  Revenues for certain items in the Company's Statement of Operations for each
  period:
<TABLE>
<CAPTION>
                                                         YEAR ENDED SEPTEMBER 30,
                                                     --------------------------------
                                                        1997         1996       1995
                                                     ---------    ---------    ------
<S>                                                    <C>          <C>         <C>
          Revenues..................................    100.0%      100.0%      100.0%
          Cost of sales.............................     62.0        42.0        56.8
          Selling, general and administrative 
            expenses................................     68.5        85.5        47.8
          Research and development..................     20.0         9.5        16.9
           expenses.................................                       
          Goodwill amortization.....................      1.0                      
          Total operating expenses (excluding cost 
            of sales)...............................     89.5        95.0        64.7
          Operating income/(loss)...................    (51.5)      (37.0)      (21.5)
          Interest income/(expense) net.............      2.2         4.9         3.9
          Income /(loss) before income taxes........    (49.3)      (32.1)      (17.6)
          Provision/(benefit) for income taxes......                 (1.5)       (7.0)
          Net income/(loss).........................    (49.3)      (30.6)      (10.6)

</TABLE>

  YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996

  Revenues.  The Company's revenues increased $3,081,747 or 32.8% from 1996 to
  1997.  The increase is due to the introduction of revenue from the sale of
  manufactured products as well as an increase in effort on government
  development contracts.  During 1997 the Company acquired K&D and FMI as wholly
  owned subsidiaries which provided for incremental revenue of approximately
  $1,135,000 and $2,595,000, respectively.  Sales of the Company's new ISAM
  product contributed approximately $540,000 of the additional revenue.
  Approximately $1,295,000 of the increase in revenue related to an increase in
  effort on government development contracts.  These increases were partially
  offset by a decrease in revenue of approximately $3,410,000 from contracts
  with Chrysler Corporation for the development of drive train components as
  part of the Patriot Hybrid Vehicle Program.  During 1996, Chrysler Corporation
  announced the cancellation of the Patriot Hybrid Vehicle Program. Chrysler
  announced that it intends to transition technologies utilized in the Patriot
  Program to their Hybrid Electric Vehicle (HEV) program being sponsored by the
  U.S. Government's Super Car Initiative.

  Cost of Sales.  Cost of sales increased $3,789,992, or 96.2%, from 1996 to
  1997.  The increase is primarily due to the addition of cost of sales
  associated with K&D and FMI of approximately $797,000 and $1,886,000,
  respectively and increased effort on government development contracts
  accounting for an additional $696,000.  In addition, the Company established a
  reserve of approximately $910,000 in connection with the cost to complete a
  number of commercial development contracts.  These increases were partially
  offset by a decrease in effort on contracts with Chrysler Corporation.

  Selling, General and Administrative. Selling, general and administrative
  expenses increased $514,994 or 6.4% from 1996 to 1997. Approximately $250,000
  and $570,000 of the increase is due to selling, general and administrative
  expenses related to K&D and FMI, respectively. In addition, the Company
  established a reserve of $498,000 for expenses, primarily lease cancellation
  costs relating to consolidating the Tucson Space Division into the Technology
  Division. These increases are offset by a decrease of approximately $800,000
  primarily due to the management of travel and other selling and administrative
  costs.

  Research and Development.  Internally funded research and development expenses
  increased $1,595,579 from 1996 to 1997.  Approximately $2,593,000 of the
  increase is related to the Company's decision to recognize certain capitalized
  product development cost in the current year rather than amortizing the costs
  over future year's sales based on the uncertainty of future sales.  These
  product development cost related primarily to Beacon Power Corporation's
  Flywheel UPS product development efforts and the ISAM product.  These costs
  are partially offset by the reversal of a reserve for a fiscal year 1996
  dispute over

                                       13
<PAGE>
 
  contractual terms. Management believes that the reserve is no longer necessary
  and that the financial statements properly reflect the ultimate impact of this
  matter.

  Goodwill Amortization.  The Company recognized $120,467 of goodwill
  amortization in 1997 related to goodwill in connection with the acquisition of
  K&D and FMI.

  Net Loss.  As a result of an increase in revenues being offset by the
  Company's decision to recognize certain product development costs in the
  current year rather than amortizing the costs over future periods sales, and
  the establishment of contingency reserves associated with consolidating the
  Tucson Space Division into the Technology Division, the Company realized a net
  loss of $6,143,242 in 1997 compared to a net loss of $2,864,836 in 1996.

  YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1995

  Revenues.  The Company's revenues decreased $2,090,839, or 18.2%, from 1995 to
  1996. The decrease was primarily due to a decrease in revenue of approximately
  $3,945,253 from contracts with Chrysler Corporation for the development of
  drive train components as part of the Patriot Hybrid Vehicle Program.  During
  1996, Chrysler Corporation announced the cancellation of the Patriot Hybrid
  Vehicle Program. Chrysler announced that it intends to transition technologies
  utilized in the Patriot Program to their Hybrid Electric Vehicle (HEV) program
  being sponsored by the U.S. Government's Super Car Initiative.  To date the
  Company has not recorded any revenues associated with the Chrysler HEV
  Program. This decrease in revenue was partially offset by increased revenues
  of approximately $2,355,000 related to work on various government development
  contracts.

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

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

  Research and Development.  Research and development expenses decreased
  $1,043,613, or 53.9% from 1995 to 1996.  As a percentage of revenue, internal
  research and development decreased from 16.9% in 1995 to 9.5% in 1996.  The
  decrease in research and development spending was primarily the result of a
  reallocation of engineering resources from internally funded research and
  development to construction of a pre-production flywheel, and additional
  marketing efforts and development efforts on contracts from the U.S.
  Government and commercial customers.  Virtually all of 1996 revenues were for
  sponsored research and development.

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

                                       14
<PAGE>
 
  LIQUIDITY AND CAPITAL RESOURCES

  As of September 30, 1997, the Company's cash and cash equivalents were
  $4,256,504 an increase of $485,579 from September 30, 1996.  Cash used in
  operating activities during 1997 was $6,075,232 as compared to cash used in
  operating activities of $3,481,674 during 1996. The cash used in operations
  was primarily the result of a net loss of $3,072,434 during 1997.  The effect
  of the net loss was partially offset by an increase of $535,797 in accounts
  receivable and an increase in reserve balances.

  Cash used in investing activities, as of September 30, 1997, was $1,224,869.
  The cash provided relates primarily to the sale and maturity of approximately
  $2,079,000 of marketable securities to fund operations prior to collection of
  outstanding invoices. The cash provided was partially offset by purchases of
  marketable securities of approximately $600,000, capital expenditures of
  $2,496,726, and the acquisitions of K&D and FMI of $112,986. The capital
  expenditures primarily relate to the purchase of manufacturing and inspection
  equipment, furniture and fixtures, leasehold improvements, computer equipment,
  and sales and demonstration equipment.

  Cash provided by financing activities as of September 30, 1997, was
  $5,192,122.  The cash provided relates primarily to the proceeds from the
  Securities Purchase Agreement, dated May 28, 1997, by and among the Company,
  Beacon Power Corporation, and Duquesne Enterprises.  The aggregate
  consideration received by the Company was $4,817,232 net of financing
  expenses.

  The Company's $3,000,000 bank line of credit expired January 31, 1997.  No
  funds were advanced under the facility.  The Company intends to seek a
  replacement line of credit from its new primary bank during 1998.

  The Company anticipates that its existing cash resources, cash flow from
  operations, and availability of a replacement line of credit will be
  sufficient to fund its operations through September 30, 1998, provided it
  meets its operating plan.  The Company's ability to finance its operations may
  be dependent on its ability to negotiate a replacement bank line of credit.
  There can be no assurance that the Company will be successful in negotiating a
  replacement line of credit.  To the extent cash flow from operations is
  insufficient to fund the Company's activities, it may be necessary to raise
  additional funds through equity or debt financing.  The Company's ability to
  generate cash from operations depends upon, among other things, revenue
  growth, its credit and payment terms with vendors, and collections of accounts
  receivable.  If such sources of cash prove insufficient, the Company will be
  required to make changes in its operations or to seek additional debt or
  equity financing.  There can be no assurances that cash generated from
  operations will be sufficient to meet its operating requirements, or if
  required, that additional debt or equity financing will be available on terms
  acceptable to the Company.

  FACTORS AFFECTING FUTURE RESULTS

  The Company's future results remain difficult to predict and may be affected
  by a number of factors which could cause actual results to differ materially
  from the forward-looking statements contained in this Annual Report on Form
  10-K and presented elsewhere by management from time to time.  These factors
  include business conditions within the automotive, telecommunications,
  industrial machinery and semiconductor industries and the world economies as a
  whole, and competitive pressures that may impact research and development
  spending.  The Company's revenue growth is dependent on technology
  developments and contract research and development for both the government and
  commercial sectors and no assurance can be given that such investments will
  continue or that the Company can successfully obtain such funds.  In addition,
  the Company's future growth opportunities are dependent on the introduction of
  new products that must penetrate automotive, telecommunications, industrial,
  and computer market segments.  No assurance can be given that new products can
  be developed, or if developed, will be successful; that competitors will not
  force prices to an unacceptably low level or take market share from the
  Company; or that the Company can achieve or maintain profits in these markets.
  Because of these and other factors, past financial 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
  Company's stock price frequently experiences significant volatility.

                                       15
<PAGE>
 
  EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

  In February 1997 the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standard (SFAS) No. 128, "Earnings per share."  The
  statement is effective for financial statements issued for periods ending
  after December 15, 1997 and changes the method in which earnings per share
  will be determined.  Adoption of this statement by the Company is not expected
  to have a material impact on earnings per share.

  In June 1997 the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive
  Income."  The statement is effective for fiscal years beginning after December
  15, 1997 and requires that an enterprise disclose, by major components and as
  a single total, the change in its net assets during the period from "non-
  owner" sources.

  Also in June 1997, the Financial Accounting Standards Board issued Statement
  of Financial Accounting Standard (SFAS) No. 131, "Disclosure about Segments of
  an Enterprise and Related Information."  The statement is effective for
  periods beginning after December 15, 1997 and establishes annual and interim
  reporting standards for an enterprise's operating segments and related
  disclosures about its products and services, geographic areas and major
  customers.

  Adoption of SFAS No. 130 and No. 131 is not expected to have a material impact
  to the Company's consolidated financial position, results of operations or
  cash flows and any effect will be limited to the form and content of its
  disclosures.

  EFFECTS OF INFLATION

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

                                       16
<PAGE>
 
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                        <C>
          Report of Independent Accountants.............................      18

          Financial Statements:

            Balance Sheets as of September 30, 1997 and 1996............      19

            Statements of Operations for the Years  Ended September 30,
              1997, 1996, and 1995......................................      20

            Statements of Changes in Stockholders' Equity for the Years
              Ended September 30, 1997, 1996, and 1995..................      21

            Statements of Cash Flows for the Years Ended September 30, 
              1997, 1996, and 1995......................................      22

            Notes  to Financial Statements..............................   23-36

            Schedule II; Valuation and Qualifying Accounts for the Years
              Ended September 30, 1997, 1996, and 1995..................      37
</TABLE>

                                       17
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS


    We have audited the accompanying consolidated balance sheets and financial
  statement schedule of SatCon Technology Corporation and its subsidiaries as of
  September 30, 1997 and 1996, and the related consolidated statements of
  operations, changes in stockholders' equity, and cash flows for each of the
  three years in the period ended September 30, 1997. These financial statements
  and financial statement schedule are the responsibility of the Company's
  management.  Our responsibility is to express an opinion on these financial
  statements and financial statement schedule based on our audits.

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

    In our opinion, the financial statements referred to above present fairly,
  in all material respects, the financial position of SatCon Technology
  Corporation and its subsidiaries as of September 30, 1997 and 1996, and the
  results of its operations and its cash flows for each of the three years in
  the period ended September 30, 1997 in conformity with generally accepted
  accounting principles.  In addition, in our opinion, the financial statement
  schedule referred to above, when considered in relation to the basic financial
  statements taken as a whole, presents fairly, in all material respects, the
  information required to be included therein.

                                             Coopers & Lybrand L.L.P.


  Boston, Massachusetts
  December 9, 1997

                                       18
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 
                                                                                                  SEPTEMBER 30,     SEPTEMBER 30,
                                                                                                       1997              1996
                                                                                                 ---------------     -------------
<S>                                                                                              <C>               <C>
                                              ASSETS                               
Current assets:
     Cash and cash equivalents..........................................................             $ 4,256,504       $ 3,770,925
     Marketable securities (Note B).....................................................               1,976,400         3,435,743
     Accounts receivable, net of allowance of $159,243 in 1997 and                           
      $130,900 in 1996..................................................................               2,965,559         2,881,790
     Unbilled contract costs, net of allowance of $1,130,468 in 1997                         
      and $432,500 in 1996 (Note C).....................................................               1,709,826         1,658,316
     Inventory, net of allowance of $758,541 in 1997 and $0 in 1996 (Note D)............               1,577,483
     Prepaid expenses and other assets..................................................                 416,926           442,745
                                                                                                 ---------------     -------------
          Total current assets..........................................................              12,902,698        12,189,519
Property and equipment, net (Note E)....................................................               4,784,355         4,347,784
Intangibles, net (Notes A and 0)........................................................               2,992,659           485,983
Other assets............................................................................                  29,726           254,231
                                                                                                 ---------------     -------------
          Total assets..................................................................             $20,709,438       $17,277,517
                                                                                                 ===============     =============
                              LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:                                                             
      Accounts payable..................................................................             $   850,208       $   605,048
      Accrued payroll and payroll related expenses......................................                 392,235           183,747
      Deferred revenue..................................................................                 191,128            95,062
      Accrued costs for consolidation of facilities (Note G)............................                 498,000
      Other accrued expenses............................................................                 290,049           294,492
      Short term portion of long term debt..............................................                  85,784
                                                                                                 ---------------     -------------
           Total current liabilities....................................................               2,307,404         1,178,349
Long term liabilities:
      Note Payable (Note F).............................................................                   6,737                 -
      Long term debt (Note P)...........................................................                 316,160
                                                                                                 ---------------     -------------
           Total long term liabilities..................................................                 322,897                 - 
Commitments (Note G)
                                   STOCKHOLDERS' EQUITY
Preferred stock; $.01 par value, 1,000,000 shares authorized; none issued (Note K)                             -                 -
Common stock, $.01 par value, 15,000,000 shares authorized; 8,769,146 and 7,359,074
     shares at September 30, 1997 and 1996, respectively, issued and outstanding
     (Note J)...........................................................................                  87,691            73,591 
Additional paid-in capital..............................................................              26,576,600        18,487,209
Retained earnings/(loss)................................................................              (8,564,939)       (2,421,697)
Unrealized losses on marketable securities, net of tax effect (Note B)                                   (20,215)          (39,935)
                                                                                                 ---------------     -------------
           Total stockholders' equity...................................................              18,079,137        16,099,168
                                                                                                 ---------------     -------------
             Total liabilities and stockholders'........................................             $20,709,438       $17,277,517
                                                                                                 ===============     =============
</TABLE>

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

                                       19
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
 
                                                      YEARS ENDED SEPTEMBER 30,
                                               ---------------------------------------
                                                   1997          1996          1995
                                               -----------    ----------   -----------
<S>                                            <C>           <C>           <C>
Revenue.................................       $12,466,335   $ 9,384,588   $11,475,427
Cost of sales...........................         7,730,666     3,940,674     6,522,768
Selling, general and administrative              
 expenses...............................         8,538,435     8,023,441     5,483,194 
Research and development expenses.......         2,489,207       893,628     1,937,241
Goodwill amortization...................           120,467             -             -
                                               -----------    ----------   -----------
Total operating expenses................        18,878,775    12,857,743    13,943,203
Operating loss..........................        (6,412,440)   (3,473,155)   (2,467,776)
Interest income, net....................           269,198       463,840       451,034
                                               -----------    ----------   -----------
Net loss before income taxes............        (6,143,242)   (3,009,315)   (2,016,742)
Benefit for income taxes................                        (144,479)     (806,697)
                                               -----------    ----------   -----------
Net loss................................        (6,143,242)   (2,864,836)   (1,210,045)
                                               ===========    ==========   ===========
Net loss per common and common                                                          
equivalent share........................       $      (.77)  $      (.39)   $     (.17) 
                                               ===========    ==========   ===========
Weighted average shares outstanding.....         7,959,309     7,285,756     7,079,855
 
</TABLE>



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

                                       20
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

             FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
 
                                                                                               UNREALIZED
                                                               ADDITIONAL      RETAINED         LOSS ON              TOTAL
                                    COMMON        COMMON         PAID-IN       EARNINGS        MARKETABLE         STOCKHOLDERS'    
                                    SHARES         STOCK         CAPITAL        (LOSS)         SECURITIES(1)          EQUITY
                                   ---------     ---------     ------------  ------------    -----------        -------------
<S>                               <C>          <C>            <C>           <C>             <C>                <C> 
Balance, September 30, 1994......  7,013,726       $70,137      $17,918,587   $ 1,653,184      $(135,867)         $19,506,041
Net loss.........................                                              (1,210,045)                         (1,210,045)
Exercise of stock options........    152,875         1,529          365,899                                           367,428
Change in unrealized losses                                                                                
   on marketable securities(1)...                                                                 89,291               89,291
                                   ---------     ---------     ------------  ------------    -----------        -------------
Balance, September 30, 1995......  7,166,601       $71,666      $18,284,486   $   443,139      $ (46,576)         $18,752,715
Net Loss.........................                                              (2,864,836)                         (2,864,836)
Exercise of stock options........    192,473         1,925          202,723                                           204,648
Change in unrealized losses on                                                                                
 marketable securities(1)........                                                                  6,641                6,641
                                   ---------     ---------     ------------  ------------    -----------        -------------
Balance, September 30, 1996......  7,359,074       $73,591      $18,487,209   $(2,421,697)     $ (39,935)         $16,099,168
Net Loss.........................                                              (6,143,242)                         (6,143,242)
Exercise of stock options........    161,934         1,619          408,390                                           410,009
Change in unrealized losses                                                                                
   on marketable securities(1)...                                                                 19,720               19,720
                                                                                                              
Stock issued in acquisition......    450,000         4,500        2,871,750                                         2,876,250
Securities purchase agreement                                                                                 
(Note J).........................    798,138         7,981        4,809,251                                         4,817,232
                                   ---------     ---------     ------------  ------------    -----------        -------------
Balance, September 30, 1997......  8,769,146       $87,691      $26,576,600   $(8,564,939)     $ (20,215)         $18,079,137
                                   =========     =========     ============  ============    ===========        =============
</TABLE>

(1) Net of tax effect






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

                                       21
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
 
                                                                                  YEARS ENDED SEPTEMBER 30,
                                                                     ---------------------------------------------------
                                                                         1997                1996              1995
                                                                     -----------          -----------       -----------
<S>                                                              <C>                    <C>                 <C> 
Cash flows from operating activities:
            Net income/(loss)..................................      $(6,143,242)          $(2,864,836)      $(1,210,045)
      Adjustments to reconcile net income/(loss) to net cash
       provided by/(used in) operating activities:
          Depreciation and amortization........................          969,010               820,991           352,143
          Reserve for unbilled contract costs..................          697,968               366,000
          Allowance for doubtful accounts......................           28,324
          Write off of impaired assets.........................        2,593,558 
          Changes in operating assets and liabilities:
              Accounts receivable..............................          535,797              (905,787)        3,020,582
              Prepaid expenses and other assets................           62,174               222,821           (61,958)
              Unbilled contract costs..........................         (749,462)             (532,886)        5,290,655
              Inventory........................................         (403,302)                          
              Other assets.....................................          212,339              (221,772)           88,856
              Accounts payable.................................         (385,868)              (19,907)         (754,935)
              Reserve for consolidation of business............          498,000                           
              Accrued expenses and payroll.....................       (1,396,970)              236,225          (166,610)
              Deferred income taxes............................                               (173,283)         (806,697)
                                                                     -----------          ------------       -----------
            Total adjustments..................................        2,661,568              (207,598)        6,962,036
                                                                     -----------          ------------       -----------
Net cash provided by/(used in) operating activities............       (3,481,674)           (3,072,434)        5,751,991
                                                                     -----------          ------------       -----------

Cash flows from investing activities:
           Purchases of marketable securities..................         (600,000)           (1,450,000)       (9,465,938)
           Sales and maturities of marketable securities.......        2,079,064             8,407,185         6,148,814
           Patent and trademark expenditures...................         (150,534)             (156,843)         (245,140)
           Deferred financing fees.............................           56,313               (56,313)         (277,764)
           Capital Expenditures................................       (2,496,726)           (2,293,305)         (999,415)
           Acquisitions, net of cash acquired..................         (112,986)                          
                                                                     -----------          ------------       -----------
          Net cash provided by/(used in) investing activities..       (1,224,869)            4,450,724        (4,839,443)
                                                                     -----------          ------------       -----------
Cash flows from financing activities:                                                                                  
           Repayment of short-term borrowings..................          (35,119)                    -                 -
           Proceeds from exercise of stock options.............          410,009               204,648           367,428
           Proceeds from issuance of common stock..............        4,817,232                           
Net cash provided by financing activities......................        5,192,122               204,648           367,428
Net increase/(decrease) in cash................................          485,579             1,582,938         1,279,976
Cash at beginning of period....................................        3,770,925             2,187,987           908,011
                                                                     -----------          ------------       -----------
Cash and cash equivalents at end of period.....................      $ 4,256,504           $ 3,770,925       $ 2,187,987
                                                                     ===========          ============       ===========

</TABLE>

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

                                       22
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Organization

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


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

  Basis of consolidation

  The consolidated financial statements include the accounts of the Company and
  its wholly-owned subsidiaries.  See "Footnote O and J" of Notes to Financial
  Statements for consolidated entities.

  Revenue Recognition

  The Company performs research under cost type, fixed price, and time and
  material contracts and sells product prototypes.  Revenue is recognized on the
  percentage-of-completion method based on the proportion of costs incurred to
  total estimated costs for each contract.  Revenues recognized in excess of
  amounts billed are classified in current assets as unbilled contract costs.
  Certain contracts contain provisions for performance incentives.  Such
  incentives are included in revenues when realization is assured.  If a current
  contract estimate indicates a loss, a provision is made for the total
  anticipated loss.  All payments to the Company for work performed on contracts
  with agencies of the U.S. Government are subject to audit and adjustment by
  the Defense Contract Audit Agency.  Adjustments are recognized in the period
  made.

  The Company also designs and manufactures standard products such as multi-chip
  modules and hybrids, custom electric motors, and integrated suspension and
  motor systems.  Revenue from product sales is recognized upon shipment.

  Cash and Cash Equivalents

  Cash and cash equivalents include cash on hand, demand deposits and highly
  liquid investments with a maturity of three months or less when acquired.  At
  September 30, 1997, $67,632 of cash and cash equivalents is reserved as
  collateral for a letter of credit drawn for the deposit on a facility lease.

                                       23
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

  Marketable Securities

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

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

  Securities available for sale are carried at fair value, based on quoted
  market prices, with the unrealized gains and losses, net of tax, reported in a
  separate component of shareholders' equity except for unrealized losses
  determined to be permanent in nature.  Such unrealized losses are included in
  the determination of net income in the period in which management determines
  the decline to be permanent.  The Company is not actively involved in the
  purchase and sale of investments classified as trading.  At September 30,
  1997, the Company had no investments that qualified as trading or held to
  maturity.

  The amortized cost of debt securities classified as available for sale is
  adjusted for amortization of premiums and accretion of discounts to maturity
  or, in the case of mortgage-backed securities, over the estimated life of the
  security.  Such amortization and interest are included in interest income.
  Realized gains and losses are included in other income or expense.  The cost
  of securities sold is based on the specific identification method.

  At September 30, 1997, $600,000 of marketable securities is reserved as
  collateral for an operating lease.

  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.

  Property and Equipment

  Property and equipment are stated at cost.  Depreciation is computed using the
  straight-line method over the asset's estimated useful life.  The estimated
  useful lives of property and equipment are as follows:
<TABLE>
<CAPTION>
 
                                                                               ESTIMATED LIVES
                                                                         --------------------------------
<S>                                                                   <C> 
Computer equipment and software..................................                3 - 5 Years
Electronic laboratory and shop equipment.........................                  5 Years
Mechanical laboratory and shop equipment.........................                 10 Years
Sales and demonstration equipment................................               3 - 10 Years
Furniture and fixtures...........................................               7 - 10 Years
Leasehold improvements...........................................       Lesser of the life of the lease or
                                                                        the useful life of the improvement
</TABLE>

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.

                                       24
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

  Intangibles

  The Company periodically reviews the propriety of carrying amounts of its
  intangible assets as well as the amortization periods to determine whether
  current events and circumstances warrant adjustment to the carrying value or
  estimated useful lives.  At each balance sheet date, management evaluates
  whether there has been a permanent impairment in the value of intangibles by
  assessing the carrying value of intangibles against anticipated future cash
  flows from related operating activities.  Factors which management considers
  in performing this assessment include current operating results, trends and
  prospects and, in addition, demand, competition and other economic factors.

  Other intangibles, which consist primarily of patents and trademarks, goodwill
  and a non-compete agreement, are amortized on a straight-line basis over
  periods ranging from 5 to 15 years.

  Use of estimates

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

  Income Taxes

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

  Earnings/(loss) Per Common and Common Equivalent Share

  Earnings/(loss) per common and common equivalent share is based upon the
  weighted average number of common shares outstanding during each year,
  adjusted to include the dilutive effects of stock options and warrants.  For
  the current year ended September 30, 1997 common share equivalents have not
  been included because their effect would have been antidilutive.  For all
  periods presented, fully diluted earnings per share is not materially
  different from primary earnings per share.

  Concentration of Credit Risk

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

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

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

  Reclassifications

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

                                       25
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  B.  MARKETABLE SECURITIES

  At September 30, 1997, debt securities have been categorized as available for
  sale, and as a result, are stated at fair value.

  As of September 30, 1997 marketable securities consist of the following:
<TABLE>
<CAPTION>
                                                                                                                     
                                                                                       GROSS           GROSS    
                                                AMORTIZED           AGGREGATE        UNREALIZED     UNREALIZED  
           SECURITY CATEGORY                    COST BASIS         FAIR VALUE          GAINS         (LOSSES)   
           -----------------                    ----------         ----------          -----        ---------
<S>                                             <C>                <C>               <C>            <C>    
          Corporate debt securities.....        $  597,178          $  568,000             -          $(29,178)
          Debt securities issued by                                                              
           U.S. Government and its                                                                              
           agencies.....................         1,301,396           1,296,063                          (5,333) 
                                                                                                 
          Mortgage-backed securities....           111,518             112,337           819     
                                                ----------          ----------          ----          --------
                                                $2,010,092          $1,976,400          $819          $(34,511)
                                                ==========          ==========          ====          ========

</TABLE> 

The contractual maturities of debt securities available for sale at September
30, 1997 are as follows:
<TABLE> 
<CAPTION> 
 
                                                              AMORTIZED                 AGGREGATE
                                                             COST BASIS                FAIR VALUE
                                                           -------------             -------------
<S>                                                       <C>                       <C> 
 Due within one year.................................        $1,301,397                $1,296,063
 Due after one year through five years...............                 -                         -
 Due after five years through 10 years...............           250,352                   242,500
 Due after 10 years..................................           458,343                   437,837
                                                           ------------              ------------
                                                             $2,010,092                $1,976,400
                                                           ============              ============
</TABLE>

  The changes in net unrealized holding losses at September 30, 1997 and 1996
  were $33,692 and $66,558, respectively, and are included in the balance sheet
  as a separate component of stockholders' equity net of tax effect.

  Proceeds from sales and maturities of marketable securities during fiscal year
  1997 and 1996 were $2,079,065 and $8,407,185, respectively.

  Gross realized losses from the sale of securities classified as available for
  sale during fiscal year 1997, 1996 and 1995 were $0, $1,461, and $58,360,
  respectively.  For the purpose of determining gross realized gains and losses,
  the cost of securities sold is based upon specific identification.

  C.  UNBILLED CONTRACT COSTS

  Unbilled contract costs include retention arising from contractual provisions
  of $273,814 and $111,745 at September 30, 1997 and 1996, respectively.  It is
  anticipated that substantially all of these unbilled retention amounts will be
  collected during the fiscal year ending September 30, 1998.
  D. INVENTORY

  Inventory consists of the following:

<TABLE> 
<CAPTION> 

                                            SEPTEMBER 30,
                                         ------------------
                                           1997      1996
                                          ------    ------
<S>                                     <C>         <C>
          Raw material................  $  651,460     -
          Work-in-process.............     637,657
          Finished goods..............     288,366
                                        ----------  -------
                                        $1,577,483     -
                                        ==========  =======
</TABLE>

                                       26
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

E.    PROPERTY AND EQUIPMENT

  Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                    SEPTEMBER 30,
                                ----------------------
                                   1997        1996
                                ----------  ----------
<S>                             <C>         <C>
Machinery and equipment.......  $3,251,193  $3,118,538
Sales and demonstration units.   2,115,921   1,885,274
Furniture and fixtures........     261,478     219,204
Computer software.............     529,788     385,987
Leasehold improvements........     496,977     315,327
                                ----------  ----------
                                 6,655,357   5,924,330
Less accumulated depreciation               
 and amortization.............   1,871,002   1,576,546    
                                ----------  ----------
                                $4,784,355  $4,347,784
                                ==========  ==========
</TABLE>

  Depreciation expense for the fiscal years ended September 30, 1997, 1996, and
  1995 was $836,924, $817,539, and $343,775, respectively.

  For fiscal year ended September 30, 1997, $29,650 of the $3,251,193 machinery
  and equipment related to a capital lease for equipment.  There was no
  equipment under capital leases for fiscal year 1996.  The associated
  accumulated depreciation is $13,837 and $0 for fiscal years ended September
  30, 1997 and 1996, respectively.

  During 1997, the Company determined that certain of its machinery and
  equipment totaling $2,593,558 was impaired based on change in the needs of its
  customers and as a result such assets were written off.

  F.  NOTES PAYABLE

  In January 1995 the Company established a $3,000,000 line of credit with
  Citizen's Bank replacing the existing $1,500,000 line established on December
  8, 1993.  The bank line of credit expired January 31, 1997.  No funds were
  advanced under the line of credit.  The Company intends to seek a replacement
  line of credit from its new primary bank during fiscal year 1998.

  G.  COMMITMENTS AND CONTINGENCIES

  Operating Leases

  The Company occupies 45,820 square feet of office and laboratory space at 161
  First Street, Cambridge, Massachusetts under a primary lease expiring on
  October 31, 1998. The monthly payment is $42,002 plus its pro rata share of
  operating expenses and real estate taxes.  An additional 8,343 square feet of
  office and laboratory space is occupied at 6245 East Broadway Boulevard, Suite
  350, Tucson, Arizona under a primary lease expiring on March 31, 2001.  The
  monthly payment is $10,430 including its pro rata share of operating expenses.
  The Company also occupies approximately 14,757 square feet of manufacturing
  space at 530 Turnpike Street, North Andover, Massachusetts under a primary
  lease expiring on July 31, 2002.  The monthly payment is $8,458 plus its pro
  rata share of operating expenses and real estate taxes.

  In the fourth quarter of fiscal 1997, the Company decided to consolidate its
  operating facility in Tucson, AZ back to Cambridge, MA.  As a result the
  Company has accrued $498,000 primarily related to the buyout of the facility
  lease.

                                       27
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
G.    COMMITMENTS AND CONTINGENCIES - (CONTINUED)

  Future minimum annual rentals under all lease agreements at September 30, 1997
  are as follows:
<TABLE>
<CAPTION>
 
               FISCAL YEAR
               -----------
<S>                                                                <C> 
               1998..........................................         $1,456,170
               1999..........................................          1,463,424
               2000..........................................          1,470,116
               2001..........................................          1,404,142
               2002..........................................          1,281,424
                                                                      ----------
                                                                      $7,075,276
                                                                      ==========
</TABLE>

      Total rental expense including operating expenses and real estate taxes
  for operating leases amounted to $1,245,238, $1,000,802, and $725,750 for the
  years ended September 30, 1997, 1996 and 1995, respectively.

  Capital Leases

  As of September 30, 1997, the future minimum annual lease payments due under
  capital leases, net of $361 imputed interest, amounted to $6,737.

  H.  EMPLOYEE BENEFIT PLAN

  The Company offers a 401(k) Employee Benefit Plan (the "401(k) Plan").  Under
  the 401(k) Plan, any employee who has completed one year of service and has
  attained the age of 21 years is eligible to participate.  Under the terms of
  the 401(k) Plan, an employee may defer up to 15% of his or her compensation
  through contributions to the 401(k) Plan.  The Company made a matching
  contribution to the 401(k) plan in the amount of $133,018 during fiscal year
  1997 and $128,458 during fiscal year 1996.

I.    INCOME TAXES

  The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                   YEARS ENDED SEPTEMBER 30,
                                          ----------------------------------------
                                              1997          1996         1995
                                             ------        ------       ------
<S>                                       <C>           <C>           <C>
     Current Payable:
     Federal........................                -   $     9,775    $   4,000
     State..........................    
                                          -----------   -----------    ---------
                                                    -         9,775        4,000
     Deferred tax                       
      expenses/(benefit):               
     Federal........................      $ 1,823,584   $ 1,544,844    $(603,233)
     State..........................          680,530       (37,769)    (207,464)
     Change in valuation allowance..       (2,504,114)   (1,661,329)
                                          -----------   -----------    ---------
                                                    -      (154,254)    (810,697)
                                          ===========   ===========    =========
                                                    -   $  (144,479)   $(806,697)
                                          ===========   ===========    =========
</TABLE>                                

                                       28
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  I.  INCOME TAXES - (CONTINUED)

  Deferred income taxes reflect the net tax effects of temporary differences
  between the carrying amounts of assets and liabilities for financial reporting
  purposes and the amounts used for income tax purposes.  As of September 30,
  1997 the components of the net deferred tax assets (liabilities) are as
  follows:

<TABLE>
<CAPTION>
                                               1997          1996
                                              ------        ------
<S>                                         <C>          <C>
          Accrual to cash adjustment....    (1,175,626)  $(2,351,252)
          Federal Net Operating Loss....     3,176,307     3,180,017
          State Net Operating Loss, net                              
           of federal benefit...........       533,120       539,304 
          Unrealized losses on                                       
           marketable securities........        13,568        26,632 
          Credits.......................       183,728       268,143
          Depreciation..................       407,537      (203,168)
          Purchase accounting...........      (564,762)
          Other.........................       363,334       201,653
          Valuation Allowance...........    (2,937,206)   (1,661,329)
                                            ----------    ----------
          Net Deferred Income Taxes.....             -             -
                                            ----------    ----------
</TABLE>

  An increase in net deferred tax liabilities and a decrease in the valuation
  allowance in the amount of $1,225,723 each has been made to account for the
  acquisition of Film Microelectronics, Inc. during fiscal year ended September
  30, 1997.

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

<TABLE>
<CAPTION>
                                        YEARS ENDED SEPTEMBER 30,
                                        -------------------------
                                          1997    1996    1995
                                         ------  ------  ------
<S>                                       <C>     <C>     <C>
            Tax at statutory rate.......  (34.0)% (34.0)% (34.0)%
            State taxes - net of                                 
             federal benefit............   (7.3)   (0.8)   (6.8) 
             Other......................     .6     2.1      .8
            Change in valuation                         
             allowance..................   40.7    27.9 
                                          ------  -----   ----- 
            Effective tax rate..........      - %  (4.8)% (40.0)%
                                          ======  ======  ===== 
</TABLE>

  At September 30, 1997 the Company had Net Operating Loss Carryforwards of
  $9,342,000 and $8,503,000 for federal and state income tax purposes,
  respectively, of which $1,038,475 relates to deductions attributable to the
  exercise of non-qualified stock options and employees early disposition of
  stock acquired through incentive stock options. The federal net operating
  losses expire beginning September 30, 2008 through 2012. The state net
  operating losses expire beginning September 30, 1998 through 2002. The use of
  these losses may be limited due to ownership change limitations under Section
  382 of the Internal Revenue Code of 1986.

  Research and experimental credit carryforward at September 30, 1997 was
  $222,000 for federal income tax purposes which begin to expire September 30,
  2003 through 2012.

  J.  STOCK OPTIONS

  Under the Company's 1986 Stock Option Plan, both qualified and nonqualified
  stock options may be granted to certain officers and key employees. Options
  under the 1986 Plan become exercisable as vested over four years, and expire
  December 31, 1996.  At September 30, 1997 and 1996, all of the 553,196 stock
  options available for grant under the Company's 1986 Stock Option Plan have
  been granted.

  In June 1992, the Company adopted its 1992 Stock Option Plan which provides
  for the grant to employees, officers, directors and consultants of qualified
  and nonqualified stock options to purchase up to 450,000 shares of the
  Company's common stock.  At September 30, 1997 and 1996, 449,199 and 440,866,
  respectively, of the 450,000 stock options available for grant under the
  Company's 1992 Stock Option Plan have been granted.

                                       29
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  J.  STOCK OPTIONS -  (CONTINUED)

  In February 1994, the Company adopted its 1994 Stock Option Plan which was
  subsequently adopted by the Company's stockholders in June 1994.  The Plan
  provides for the grant to employees, officers, directors, and consultants of
  qualified and nonqualified stock options to purchase up to 300,000 shares of
  the Company's common stock.  At September 30, 1997 and 1996, 293,033 and
  277,092, respectively, of the 300,000 stock options available for grant under
  the Company's 1994 Stock Option Plan have been granted.

  During fiscal year 1996, the Company adopted its 1996 Stock Option Plan which
  provides for the grant to employees, officers, directors, and consultants of
  qualified and non qualified stock options to purchase up to 300,000 shares of
  the Company's common stock. At September 30, 1997 and 1996, 113,000 and
  "zero," respectively, of the 300,000 stock options available for grant under
  the Company's 1996 Stock Option Plan have been granted.

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

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

  Incentive stock options are issuable only to employees of the Company, while
  nonqualified options may be issued to nonemployee directors, consultants, and
  others, as well as to employees of the Company.  Options granted under the
  Stock Option Plans may not be granted with an exercise price less than 100% of
  fair value of the Company's common stock, as determined by the Board of
  Directors on the grant date.

  Options under the Plans must be granted within 10 years from the effective
  date of the Plan.  Incentive stock options granted under the Plans cannot be
  exercised more than 10 years from the date of grant except that incentive
  stock options issued to 10% or greater stockholders are limited to five year
  terms.  All options granted under the Plans provide for the payment of the
  Company's exercise price in cash, or by delivery to the Company of shares of
  common stock already owned by the optionee having fair market value equal to
  the exercise price of the options being exercised, or by a combination of such
  methods of payment.  Therefore, an optionee may be able to tender shares of
  common stock to purchase additional shares of common stock and may
  theoretically exercise all of his stock options with no additional investment
  other than his original shares.

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

  A summary of the status of the Company's stock option plans as of September
  30, 1997, 1996, and 1995, and changes during the years ending of those dates
  is presented below.

                                       30
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

J. STOCK OPTIONS - (CONTINUED)

<TABLE> 
<CAPTION> 
                                        1997                       1996                         1995
                            -------------------------  ----------------------------  -----------------------
                              NUMBER OF      AVERAGE     NUMBER OF      AVERAGE       NUMBER OF     AVERAGE
                                SHARES        PRICE        SHARES        PRICE          SHARES       PRICE
                              ---------      -------     ---------      -------       ---------     ------- 
<S>                          <C>             <C>         <C>            <C>           <C>          <C>           
Outstanding at beginning         
 of year...................      713,392     $ 7.08        904,503      $ 5.91          901,844      $ 4.53
Granted....................      144,000       8.97         20,000        7.00          156,200       10.43
Exercised..................     (144,466)      2.25       (185,773)        .91         (152,875)       2.38
Canceled...................      (12,499)     10.71        (25,338)      10.39             (666)      10.50
                               ---------                 ---------                     --------     
Outstanding at end of 
  year.....................      700,427     $ 8.44        713,392      $ 7.08          904,503      $ 5.91
                               =========                 =========                     ========
Options exercisable at 
 year-end..................      503,660     $ 8.14        579,776      $ 6.49          679,225      $ 4.55

</TABLE> 
      The following table summarizes information about stock options outstanding
       as of September 30, 1997.
<TABLE> 
<CAPTION> 
                                           OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE
                              ----------------------------------------------------     ------------------------------------
                                  NUMBER      WEIGHTED                                          NUMBER                       
         RANGE OF              OUTSTANDING     AVERAGE             WEIGHTED AVERAGE          EXERCISABLE   WEIGHTED AVERAGE  
      EXERCISE PRICES          AT 9/30/97    REMAINING LIFE         EXERCISE PRICE            AT 9/30/97    EXERCISE PRICE   
-------------------------     ------------   --------------        ----------------          -----------   ----------------
<S>                          <C>              <C>                 <C>                       <C>                 <C> 
       $5.00 - $7.00                258,694        5.5                   $ 5.73                  250,028             $ 5.69
      $8.75 - $10.50                350,068        8.1                     9.45                  171,968               9.68
      $11.00 - $13.38                91,665        7.2                    12.25                   81,664              12.39
-------------------------     ------------   --------------        ----------------          -----------   ----------------
      $5.00 - $13.38                700,427        7.0                   $ 8.44                  503,660             $ 8.14
                            ===============                                              ===============
</TABLE>
  An additional 194,768 and 329,269 shares were available for future grants at
  September 30, 1997 and 1996, respectively. All outstanding options vest at
  various rates over periods up to four years and expire at various dates from
  December 31, 1996 to August 3, 2007.

  In addition to options granted pursuant to the Plans, the Company in March
  1992 issued non-qualified options to purchase up to 33,500 shares of common
  stock to certain of its professional advisors.  These options are exercisable
  at a price of $5.25 per share and expire in March 1997.  At September 30,
  1997, all 33,500 options have been exercised.

  In connection with its initial public offering in November 1992, the Company
  also issued to the underwriter warrants to purchase up to (i) 150,000 shares
  of common stock at an exercise price of $8.25 per share and (ii) 150,000
  shares of common stock at an exercise price of $11.55 per share. At 
  September 30, 1997, 1,066 of these warrants have been exercised. In November
  1997 such warrants were exercised for a total of $1,237,458. The remainder of
  the options expired on November 11, 1997.

                                       31
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  J.  STOCK OPTIONS -  (CONTINUED)

  On May 28, 1997, SatCon Technology Corporation entered into a Securities
  Purchase Agreement (the "Agreement"), dated as of May 28, 1997, by and among
  the Company, Beacon Power Corporation, a new wholly-owned subsidiary of the
  Company ("Beacon"), and Duquesne Enterprises ("Duquesne").  Pursuant to the
  terms of the Agreement, Duquesne purchased from the Company and the Company
  issued, sold and delivered to Duquesne 798,138 shares (the "Shares") of the
  Company's Common Stock and received warrants (the "Beacon Warrant") to
  purchase 500,000 shares of Beacon's Common Stock, $.01 par value per share
  ("Beacon's Common Stock"), at a purchase price of $6.00 per share.  The
  Beacon warrant expires on the earlier of May 28, 1999 and 30 days prior to the
  filing of a registration statement with respect to Beacon's Common Stock. The
  aggregate consideration received by the Company was $5,000,000. In exchange
  for certain intangible assets and a capital contribution equal to its proceeds
  from Duquesne, the Company received all of the capital stock of Beacon,
  consisting of 3,000,000 shares of Beacons' Common Stock and 1,000,000 shares
  of Beacon's preferred stock, par value $.01 per share ("Beacon's Preferred
  Stock"). Duquesne also entered into agreements pursuant to which it will act
  as exclusive distributor of Beacon's products, subject to certain exceptions,
  in seven Mid-Atlantic States and the District of Columbia. Duquesne is also
  entitled to purchase sufficient securities in future Beacon equity financings
  to increase its ownership in Beacon to 20% of the voting securities of Beacon
  (assuming the Beacon Warrant is exercised). The foregoing purchase right
  expires (i) upon the expiration of the Beacon Warrant if the Beacon Warrant is
  not exercised in full; or (ii) if the Beacon Warrant is exercised in full,
  upon the closing of an initial public offering of Beacon's Common Stock.

  During a recapitilization of Beacon Power Corporation on December 24, 1997,
  the Company has converted a significant portion of its ownership of Beacon
  Power Corporation to preferred stock. The Company now holds less than 20% of
  the common stock of Beacon. The Company's investment in Beacon will be
  accounted for going forward on a cost basis.

  In October 1995, the Financial Accounting Standards Board  issued SFAS No.
  123, "Accounting for Stock-Based Compensation."  SFAS 123 is effective for
  periods beginning after December 15, 1995.  SFAS 123 requires that companies
  either recognize compensation expense for grants of stock, stock options, and
  other equity instruments based on fair value, or provide pro forma disclosure
  of net income and earnings per share in the notes to the financial statements.
  The Company adopted the disclosure provisions of SFAS 123 for year ended
  September 30, 1997 and has applied APB Opinion 25 and related interpretations
  in accounting for its plans.  There were no compensation costs recognized in
  fiscal year ended September 30, 1997 and 1996.

  Had compensation cost for the Company's stock-based compensation plans been
  determined based on fair value at the grant dates as calculated in accordance
  with SFAS 123, the Company's net income and earnings per share for fiscal
  years ended September 30, 1997 and 1996 would have been reduced to the pro
  forma amounts indicated below:
<TABLE>
<CAPTION>
                                   SEPTEMBER 30, 1997                 SEPTEMBER 30, 1996
                              ---------------------------      ---------------------------------
                                            EARNINGS PER                        EARNINGS PER
                              NET INCOME      SHARE             NET INCOME          SHARE
                             ------------  --------------      -------------   -----------------
<S>                          <C>           <C>                 <C>             <C> 
      As reported             $(6,143,242)   $       (.77)      $(2,864,836)    $        (.39)
      Pro forma               $(6,215,049)   $       (.78)      $(2,883,079)    $        (.40)

</TABLE>

  The effects of applying SFAS 123 in this pro forma disclosure are not
  indicative of future amounts.  SFAS 123 does not apply to awards prior to
  fiscal year 1996 and additional awards in future years are anticipated.

  The fair value of each stock option is estimated on the date of grant using
  the Black-Scholes option-pricing model with the following weighted-average
  assumptions: an expected life of 7.0 years, expected volatility of 57.9%, no
  dividends, and risk-free interest rate of 6.125% for September 30, 1997.  The
  weighted average price of the fair value of options granted for years ended
  September 30, 1997 and 1996 are $5.80 and $4.53, respectively.

                                       32
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  J.  STOCK OPTIONS -  (CONTINUED)

  Cash provided by financing activities as of September 30, 1997, was
  $5,192,122.  The cash provided relates primarily to the proceeds from the
  Securities Purchase Agreement, dated May 28, 1997, by and among the Company,
  Beacon Power Corporation, and Duquesne Enterprises.  The aggregate
  consideration received by the Company was $4,817,232 net of financing fees.

  K.  PREFERRED STOCK

  The Company is authorized to issue up to 1,000,000 shares of Preferred Stock,
  $.01 par value.  The Preferred Stock may be issued in one or more series, the
  terms of which may be determined at the time of issuance by the Board of
  Directors, without further action by stockholders, and may include voting
  rights (including the right to vote as a series on particular matters),
  preferences as to dividends and liquidation, conversion and redemption rights
  and sinking fund provisions.  No Preferred Stock is currently outstanding and
  the Company has no present plans for the issuance thereof.  However, the
  issuance of any such preferred Stock could affect the rights of the holders of
  Common Stock, and therefore, reduce the value of the Common Stock.  In
  particular, specific rights granted to future holders of Preferred Stock could
  be used to restrict the Company's ability to merge with or sell its assets to
  a third party, thereby preserving control of the Company by present owners.

  L.  RECENT PRONOUNCEMENTS

  In February 1997, the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standard (SFAS) No. 128, "Earnings per share."  The
  statement is effective for financial statements issued for periods ending
  after December 15, 1997 and revises the traditional computation presentation
  and disclosure requirements for earnings per share.  Adoption of this
  statement  will not have a material impact on the Company's reported earnings
  per share.

  In June 1997, the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive
  Income."  The statement is effective for fiscal years  beginning after
  December 15, 1997 and requires that an enterprise disclose, by major
  components and as a single total, the change in its net assets during the
  period from "non-owner" sources.

  Also in June 1997, the Financial Accounting Standards Board issued Statement
  of Financial Accounting Standard (SFAS) No. 131, "Disclosure about Segments of
  an Enterprise and Related Information." The statement is effective for periods
  beginning after December 15, 1997 and establishes annual and interim reporting
  standards for an enterprise's operating segments and related disclosures about
  its products and services, geographic areas and major customers.

  Adoption of SFAS No. 130 and No. 131 will not have a material impact to the
  Company's consolidated financial position, results of operations or cash flows
  and any effect will be limited to the form and content of its disclosures.

                                       33
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  M.  SIGNIFICANT CUSTOMERS

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

                                                           YEARS ENDED SEPTEMBER 30,
                                                    ------------------------------------------
                                                       1997             1996           1995
                                                    ------------   ------------   ------------
<S>                                                 <C>             <C>           <C> 
          U.S. Government:               
               N.A.S.A.....................              2.9%         18.2%           13.3%
               U.S. Department of Defense..             44.6          33.6             7.0 
                                                    ------------   ------------   ------------
                                                        47.5%         51.8%           20.3%
                                                    ------------   ------------   ------------
          Commercial:
               Automotice..................              9.7%         38.2%           72.9%
               Avonics.....................             20.8% 
                                                    ------------   ------------   ------------
                                                        30.5%         38.2%           72.9%
          Other:                                        22.0          10.0             6.8
                                                    ------------   ------------   ------------
                                                      100.0%         100.0%          100.0%
                                                    ============   ============   ============

</TABLE> 

  N.   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  
Interest and Income Taxes Paid

  Cash paid for interest and income taxes were as follows:

<TABLE> 
<CAPTION> 
                                                           YEARS ENDED SEPTEMBER 30,
                                                    ------------------------------------------
                                                       1997             1996           1995
                                                    ------------   ------------   ------------
<S>                                                 <C>             <C>           <C> 

 
          Interest......................             $    13,933    $   330          $1,277
                                                    ============    ========        =======
          Income taxes..................             $     5,800    $36,900          $8,620
                                                    ============    ========        =======

</TABLE> 
  Acquisition of subsidiaries Cash paid for the acquisition of Film
  Microelectronics, Inc. is as follows:

<TABLE> 
<CAPTION> 
                                                           YEARS ENDED SEPTEMBER 30,
                                                    ------------------------------------------
                                                       1997             1996           1995
                                                    ------------   ------------   ------------
<S>                                                 <C>             <C>           <C> 
 
          Fair value of assets.............         $ 4,723,408          -              -                     
          Cost in excess of net assets
            of companies acquired, net.....             987,678                                    
                                                                                                              
          Liabilities assumed..............          (2,624,836)                                              
          Stock issued.....................          (2,876,250)                                              
                                                                                                              
          Cash paid........................         $   210,000          -              -                     
          Less: Cash acquired..............             (97,014)                                              
          Net cash paid for acquisitions...         $   112,986          -              -                     

</TABLE> 
  Non-Cash Transaction

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

                                       34
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

  O.  ACQUISITIONS

  K&D MagMotor

  On January 23, 1997, the Company acquired substantially all of the assets and
  assumed certain of the liabilities of K&D MagMotor Corporation ("K&D")
  pursuant to the terms of an Asset Purchase Agreement, dated as of January 2,
  1997, by and among the Company, K&D and K&D's principal stockholder (the
  "Stockholder") (the "Asset Purchase Agreement").  The aggregate consideration
  paid by the Company for the acquired assets of K&D was approximately $210,000
  in cash and 30,000 shares of the Company's common stock, par value $.01 per
  share valued at $6.625 per share or $198,750.  K&D assets, machinery and
  equipment and inventory, were recorded at their estimated market value of
  $250,000 and $160,000, respectively.

  The terms of the Asset Purchase Agreement were determined on the basis of
  arms-length negotiations.  Prior to the execution of the Asset Purchase
  Agreement, the Company did not have any material relationship with K&D or the
  Stockholder.

  K&D, headquartered in Worcester, Massachusetts, is a manufacturer of custom
  electric motors targeting the factory automation, medical, semi conductor and
  packaging markets.  The Company currently intends to continue to use the
  assets in the same manner in which they were used by K&D immediately prior to
  the acquisition.

  The Company has included in its consolidated results of operations the 
  acquisition of K&D under the purchase method of accounting. 

  Film Microelectronics, Inc.

  On April 16, 1997, the Company completed the acquisition of Film
  Microelectronics, Inc. ("FMI").  FMI, a privately held company, is a
  manufacturer of production and custom integrated circuits for the
  communications, industrial, military and aerospace markets.  Pursuant to the
  Asset Purchase Agreement, dated as of April 3, 1997, by and among the Company,
  FMI and FMI's principal stockholder, the Company acquired substantially all of
  the assets of FMI, which became a wholly-owned subsidiary of SatCon.  The
  aggregate consideration paid by the Company for the acquired assets of FMI was
  420,000 shares of the Company's common stock, par value $.01 per share (the
  "Common Stock"). The 420,000 shares of Common Stock were valued at
  approximately $2,677,500 based on a closing price of $6.375 per share on
  April 16, 1997. In addition, the Company assumed trade payables aggregating
  approximately $900,000 and the assumption of indebtedness of approximately $1
  million. FMI's assets have been recorded at their estimated market values
  with the excess purchase price assigned to goodwill which will be amortized
  over 15 years.

  The Company has included in its consolidated results of operations the
  acquisition of FMI under the purchase method of accounting.  The following
  unaudited pro forma financial information combines SatCon and FMI's results of
  operations as if the acquisition had taken place on October 1, 1996 and 1995.
  The pro forma results are not necessarily indicative of what the results of
  operations actually would have been if the transaction had occurred on the
  applicable dates indicated and are not intended to be indicative of future
  results of operations.
<TABLE>
<CAPTION>
                        YEARS ENDED SEPTEMBER 30,
                       ---------------------------
                          1997           1996
                         ------         ------
<S>                   <C>            <C>
Net Sales...........   $14,974,765    $13,794,481
Net Income..........   $(6,517,857)   $(3,522,463)
Earnings per share..   $     (.82)    $     (.45)
</TABLE>

                                       35
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
P. LONG TERM DEBT

<TABLE> 
<CAPTION> 
                                         YEARS ENDED SEPTEMBER 30,
                                        ---------------------------
                                             1997        1996
                                            ------      ------
<S>                                       <C>          <C>
Note payable due in 52 weekly payments..   
 The total note of $443,804 commenced       
 on April 16, 1997 at an interest rate
 of 6.5%................................    $401,944   $   - 
                                           
Less: Current Portion...................      85,784
                                           ---------   --------- 
                                            $316,160   $   -
                                           =========   =========
</TABLE> 

Long-term debt maturities payable for the five years and thereafter subsequent
to September 30, 1997 are as follows:
 
<TABLE> 
<S>                                           <C> 
1998....................................          $ 85,784
1999....................................            91,534
2000....................................           224,626
2001....................................
2002....................................
                                                  --------
                                                  $401,944
                                                  ========
</TABLE>

                                       36
<PAGE>
 
                         SATCON TECHNOLOGY CORPORATION
                          FINANCIAL STATEMENT SCHEDULE

                 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                          BALANCE AT                                         BALANCE
                                           BEGINNING   ADDITIONS CHARGED TO                  AT END
                                           OF PERIOD    COSTS AND EXPENSES    DEDUCTIONS    OF PERIOD
                                         -----------  ---------------------   ----------    ---------
<S>                                       <C>          <C>                   <C>           <C>
Year Ended September 30, 1995:
  Allowance for Doubtful Accounts.......   $  130,900              -                   -    $  130,900
  Reserve for Unbilled Contract Costs...   $   66,500                                       $   66,500
Year Ended September 30, 1996:                                             
  Allowance for Doubtful Accounts.......   $  130,900                                       $  130,900
  Reserve for Unbilled Contract Costs...   $   66,500     $  390,500          $  (24,500)   $  432,500
      Deferred tax valuation allowance..                  $1,661,329                        $1,661,329
Year Ended September 30, 1997:                                             
      Allowance for Doubtful Accounts...   $  130,900     $   30,750          $   (2,407)   $  159,243
      Reserve for Unbilled Contract                                                                    
       Costs............................   $  432,500     $  909,100          $( 211,132)   $1,130,468 
      Deferred tax valuation allowance..   $1,661,329     $1,275,877                        $2,937,206
      Reserve for obsolete inventory....                  $  758,541                        $  758,541
      Reserve for product warranty                                                                     
       expense..........................                  $   16,511                        $   16,511 
      Reserve for consolidation of 
       business.........................                  $  498,000                        $  498,000 
</TABLE>

                                       37
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

  Not Applicable.

                                       38
<PAGE>
 
                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

  The information with respect to directors required under this item is
  incorporated herein by reference to the information set forth under the
  section entitled "Election of Directors" in the Company's Proxy Statement for
  the 1998 Annual Meeting of Stockholders to be held February 25, 1998, (the
  "1998 Proxy Statement"). Information relating to certain filings of Forms 3,
  4, and 5 of the Company is contained in the 1998 Proxy Statement under the
  caption "Compliance with Section 16 Reporting Requirements."

ITEM 11.  EXECUTIVE COMPENSATION

  The information required under this item is incorporated by reference to the
  section entitled "Compensation of Executive Officers" in the 1998 Proxy
  Statement.

  The sections entitled "Compensation Committee Report on Executive
  Compensation" and "Comparative Stock Performance Graph"  in the 1998 Proxy
  Statement are not incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required under this item is incorporated by reference to the
  section entitled "Security Ownership of Certain Beneficial Owners and
  Management" in the 1998 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required under this item is incorporated by reference to the
  section entitled "Certain Relationships and Related Transactions" in the 1998
  Proxy Statement.

                                       39
<PAGE>
 
                                    PART IV


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

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

  1. Financial Statements:

   Balance Sheets as of September 30, 1997 and 1996

   Statements of Operations for the Years Ended September 30, 1997, 1996, and
   1995

   Statements of Changes in Stockholders' Equity for the Years Ended September
   30, 1997, 1996, and 1995

   Statements of Cash Flows for the Years Ended September 30, 1997, 1996, and
   1995

   Notes to the Financial Statements

  2. Financial Statement Schedule:

   Schedule II; Valuation and Qualifying Accounts

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

  3. Exhibits:

  The Exhibits listed in the Exhibit Index immediately preceding such exhibits
  are filed as part of this Annual Report on Form 10-K.

 (b) Reports on Form 8-K

  1. The Company filed a current report on Form 8-K, dated January 23, 1997, in
  connection with the acquisition of K&D MagMotor Corporation.

  2. The Company filed a current report on Form 8-K and 8-K/A, dated April 16,
  1997, in connection with the acquisition of Film Microelectronics,
  Incorporated.

  3. The Company filed a current report on Form 8-K, dated May 28, 1997, in
  connection with the Securities Purchase Agreement, dated as of May 28, 1997,
  by and among the Company, Beacon Power Corporation, a wholly owned subsidiary
  of the Company, and Duquesne Enterprises.

  4. No reports on Form 8-k were filed during the last quarter of the period
  covered by this report.

                                       40
<PAGE>
 
                                   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   , 1997.
                                                       --       
 
                               SatCon Technology Corporation
                        
                        By:      /s/   DAVID B. EISENHAURE
                             --------------------------------
                               DAVID B. EISENHAURE, PRESIDENT

     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
           ----                          --------                    ----       
 
                               President, Chief Executive
  /s/ DAVID B. EISENHAURE      Officer, and Chairman of the    December 29, 1997
---------------------------    Board of Directors 
    DAVID B. EISENHAURE                           
 
 
                             Vice President, Chief Operation   December 29, 1997
/s/ WILLIAM E. STANTON       Officer and Director
---------------------------
WILLIAM E. STANTON
 
 
/s/ MICHAEL C.  TURMELLE     Vice President, Chief Financial   December 29, 1997
---------------------------  Officer, Treasurer and Director 
MICHAEL C. TURMELLE                                          
 
 
/s/ JAMES L. KIRTLEY,  JR.   Director                          December 29, 1997
---------------------------
JAMES L. KIRTLEY,  JR.
 
 
/s/ JOHN P. O'SULLIVAN       Director                          December 29, 1997
---------------------------
JOHN P. O'SULLIVAN
 
 
/s/ MARSHALL J. ARMSTRONG   Director                           December 29, 1997
---------------------------
MARSHALL J. ARMSTRONG
 
 
/s/ ANTHONY J. VILLIOTTI   Director                            December 29, 1997
---------------------------
ANTHONY J. VILLIOTTI
 

                                       41
<PAGE>
 
                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>
 
 EXHIBIT NO.               DESCRIPTION OF EXHIBIT
-------------     --------------------------------------
<S>                 <C>
      2.1 (1)  -    Asset Purchase Agreement by and among SatCon Technology
                    Corporation, K&D MagMotor Corporation, and Herbert S.
                    Peterson dated as of January 2, 1997.
      2.2 (2)  -    Amended and Restated Asset Purchase Agreement among SatCon
                    Film Microelectronics, Inc., Film Microelectronics Inc., and
                    Albert R. Snider, dated as of April 3, 1997.
      3.1 (3)  -    Certificate of Incorporation
      3.2 (3)  -    Bylaws
      3.3 (4)  -    Certificate of Amendment of Certificate of Incorporation of
                    SatCon Technology Corporation filed on May 12, 1997
      3.4 (4)  -    Amendment of Bylaws of SatCon Technology Corporation,
                    approved on January 2, 1997
      4.1 (3)  -    Specimen certificate for Common Stock $.01 par value
      4.2 (3)  -    Warrant Agreement between the Company and Continental Stock
                    Transfer and Trust Company (including specimen warrant
                    certificate)
     10.1 (3)  -    Employment Agreement dated July 1, 1992 between the Company
                    and Mr. Eisenhaure
     10.2 (3)  -    Employment Agreement dated July 1, 1992 between the Company
                    and Mr. Turmelle
     10.3 (3)  -    Employment Agreement dated July 1, 1992 between the Company
                    and Mr. Stanton
 10.4 (3) (*)  -    1986 Stock Option Plan
 10.5 (3) (*)  -    1992 Stock Option Plan
 10.6 (5) (*)  -    1994 Stock Option Plan
     10.7 (3)  -    Lease dated October 1993 between the Company and
                    Gunwyn/First Street Limited Partnership
     10.8 (6)  -    Line of Credit Agreement dated January 13, 1995 between the
                    Company and First NH Bank
     10.9 (3)  -    Subcontract No. 9770-A-0012 dated October 5, 1992 between
                    the Company and Itek Optical Systems, as amended
10.10 (7) (*)  -    1996 Stock Option Plan
    10.11 (7)  -    Amendment to Credit Agreement between the Company and First
                    NH Bank, dated March 13, 1996
    10.12 (4)  -    Manufacturing Agreement between Applied Materials, Inc. and
                    its wholly owned subsidiaries and SatCon Technology
                    Corporation and its wholly owned subsidiaries, dated as of
                    February 20, 1997
    10.13 (8)  -    Securities Purchase Agreement, dated as of May 28, 1997, by
                    and among SatCon Technology Corporation, Beacon Power
                    Corporation, and Dusquene Enterprises.
           11  -    Statement re Computation of Earnings Per Share
           21  -    Subsidiaries of the Registrant
           23  -    Consent of Coopers & Lybrand L.L.P.
           27  -    Financial Data Schedule
</TABLE> 
  (*) Management contract or compensatory plan or compensatory plan or
      arrangement filed in response to Items 14 (a) and 14 (c) of the
      instructions to Form 10-K.
  (1) Incorporated by reference to the Registrant's Current Report on Form 8-K
      dated January 23, 1997.
  (2) Incorporated by reference to the Registrant's Current Report on Form 8-K
      dated April 16, 1997.
  (3) Incorporated by reference to the Registrant's Registration Statement on
      Form S-1, File No. 33-49286.
  (4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
      Q for the period ended March 31, 1997.
  (5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the period ended September 30, 1994.
  (6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the period ended September 30, 1995.
  (7) Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the period ended September 30, 1996.
  (8) Incorporated by reference to the Registrant's Current Report on Form 8-K
      dated May 28, 1997.