10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended April 2, 2005

Commission File Number 1-11512

SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)	04-2857552 (IRS Employer Identification No.)
27 Drydock Avenue Boston, Massachusetts (Address of principal executive offices)	02210 (Zip Code)
(617) 897-2400
(Registrant’s telephone number, including area code)

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

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

                Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.01 Par Value,

33,360,276 shares outstanding as of May 10, 2005.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Financial Statements of SatCon Technology Corporation
Consolidated Balance Sheets as of April 2, 2005 (Unaudited) and September 30, 2004 (Audited)	3
Consolidated Statements of Operations (Unaudited)	4
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	5-6
Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Interim Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION	42
Item 1. Legal Proceedings	42
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3. Defaults Upon Senior Securities	42
Item 4. Submission of Matters to a Vote of Security Holders	42
Item 5. Other Information	42
Item 6. Exhibits	42
Signature	43
Exhibit Index	44

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

	April 2, 2005			September 30, 2004
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,120,499		$	1,171,152
Restricted cash and cash equivalents	84,000			1,011,900
Accounts receivable, net of allowance of $810,387 and $848,565 at April 2, 2005 and September 30, 2004, respectively	6,771,297			6,274,178
Unbilled contract costs and fees	124,529			447,405
Funded research and development expenses in excess of billings	—			292,111
Inventory	6,871,693			6,184,672
Prepaid expenses and other current assets	1,271,025			687,083
Total current assets	19,243,043			16,068,501
Warrants to purchase common stock	—			7,036
Property and equipment, net	5,417,738			5,913,211
Goodwill, net	704,362			704,362
Intangibles, net	2,129,183			2,391,193
Other long-term assets	529,987			501,634
Total assets	$	28,024,313		$	25,585,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	393,072		$	184,177
Accounts payable	3,611,871			3,823,249
Accrued payroll and payroll related expenses	1,478,774			1,449,349
Other accrued expenses	1,983,985			2,412,409
Accrued contract losses	84,779			514,489
Deferred revenue	1,904,662			2,048,442
Accrued restructuring costs	—			495,612
Total current liabilities	9,457,143			10,927,727
Redeemable convertible Series B preferred stock (425 shares issued and outstanding; face value: $5,000 per share; liquidation preference: 100%)	2,125,000			2,125,000
Long-term debt, net of current portion	—			311,178
Other long-term liabilities	513,940			563,372
Commitments and contingencies
Stockholders’ equity:
Common stock; $0.01 par value, 50,000,000 shares authorized; 33,281,527 and 28,226,010 shares issued and outstanding at April 2, 2005 and September 30, 2004, respectively	332,816			282,261
Additional paid-in capital	147,213,093			139,208,000
Accumulated deficit	(131,458,713		)	(127,659,993		)
Accumulated other comprehensive loss	(158,966		)	(171,608		)
Total stockholders’ equity	15,928,230			11,658,660
Total liabilities and stockholders’ equity	$	28,024,313		$	25,585,937

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

3

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
Revenue:
Product revenue	$	7,131,571		$	6,205,099		$	15,401,795		$	12,413,645
Funded research and development and other revenue	1,141,757			1,953,968			2,054,622			3,932,570
Total revenue	8,273,328			8,159,067			17,456,417			16,346,215
Operating costs and expenses:
Cost of product revenue	6,547,842			5,164,265			13,811,541			10,362,417
Research and development and other revenue expenses:
Funded research and development and other revenue expenses	946,293			1,416,360			1,693,693			2,795,142
Unfunded research and development expenses	8,188			316			8,504			1,301
Total research and development and other revenue expenses	954,481			1,416,676			1,702,197			2,796,443
Selling, general and administrative expenses	2,799,801			2,565,195			5,321,881			4,806,678
Restructuring costs	—			—			(255,612		)	—
Amortization of intangibles	111,671			111,671			223,342			223,343
Total operating costs and expenses	10,413,795			9,257,807			20,803,349			18,188,881
Operating loss	(2,140,467		)	(1,098,740		)	(3,346,932		)	(1,842,666		)
Net unrealized loss on warrants to purchase common stock	(28,975		)	(46,348		)	(7,036		)	(3,566		)
Net unrealized gain on Series B warrants	—			—			—			35,442
Other income/(expense)	(111,366		)	—			(129,422		)	—
Interest income	9,287			4,114			11,105			6,524
Interest expense	(94,759		)	(6,501,480		)	(326,435		)	(6,759,847		)
Net loss	$	(2,366,280	)	$	(7,642,454	)	$	(3,798,720	)	$	(8,564,113	)
Net loss per weighted average share, basic and diluted	$	(0.07	)	$	(0.29	)	$	(0.12	)	$	(0.34	)
Weighted average number of common shares, basic and diluted	33,249,055			26,783,766			31,181,906			25,529,189

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

4

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended March 27, 2004

(Unaudited)

	Common Shares	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Comprehensive Loss
Balance, September 30, 2003 (Audited)	21,023,200	$	210,232	$	122,792,791		$	(116,701,523	)	$	(139,354	)	$	6,162,146
Net loss	—	—		—			(8,564,113		)	—			(8,564,113		)	$	(8,564,113	)
Issuance of common stock to 401(k) Plan	107,070	1,071		256,976			—			—			258,047			—
Issuance of common stock in connection with exercise of Series A warrant to purchase common stock	28,000	280		—			—			—			280			—
Issuance of common stock in connection with exercise of warrants to purchase common stock	2,201,176	22,012		1,834,850			—			—			1,856,862			—
Issuance of common stock in connection with cashless exercise of warrants to purchase common stock	209,422	2,094		(2,094		)	—			—			—			—
Issuance of common stock in connection with the exercise of stock options to purchase common stock	67,750	677		42,153			—			—			42,830			—
Issuance of common stock in connection with the conversion of redeemable convertible Series A preferred stock	1,327,000	13,270		1,645,480			—			—			1,658,750			—
Issuance of common stock in connection with the conversion of convertible subordinated debentures	666,000	6,660		825,840			—			—			832,500			—
Issuance of common stock in lieu of first year interest on convertible subordinated debentures	8,298	83		23,981			—			—			24,064			—
Issuance of common stock in lieu of first six -months dividend on redeemable convertible Series B preferred stock	76,054	761		229,454			—			—			230,215			—
Issuance of common stock to Auerelius Consulting Group	90,000	900		193,950			—			—			194,850			—
Issuance of options and warrants to purchase common stock to non-employees	—	—		46,634			—			—			46,634			—
Issuance of warrants to convertible subordinated debentures holders	—	—		46,577			—			—			46,577			—
To record beneficial conversion feature of convertible subordinated debentures	—	—		138,977			—			—			138,977			—
Issuance of warrants to Series B preferred stockholders	—	—		1,242,441			—			—			1,242,441			—
To record beneficial conversion feature of the Series B preferred stock	—	—		3,655,607			—			—			3,655,607			—
Issuance of warrants to BHP in connection with the issuance of the Series B preferred stock	—	—		435,166			—			—			435,166			—
Issuance of common stock in connection with the conversion of redeemable convertible Series B preferred stock	2,080,000	20,800		5,179,200			—			—			5,200,000			—
Mark-to-market Series B warrants	—	—		(35,442		)	—			—			(35,442		)	—
Foreign currency translation adjustment	—	—		—			—			(40,796		)	(40,796		)	(40,796		)
Comprehensive loss																$	(8,604,909	)
Balance, March 27, 2004 (Unaudited)	27,883,970	$	278,840	$	138,552,541		$	(125,265,636	)	$	(180,150	)	$	13,385,595

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

5

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended April 2, 2005

(Unaudited)

	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Comprehensive Loss
Balance, September 30, 2004 (Audited)	28,226,010	$	282,261	$	139,208,000	$	(127,659,993	)	$	(171,608	)	$	11,658,660
Net loss						(3,798,720		)	—			(3,798,720		)	(3,798,720		)
Issuance of common stock to 401(k) Plan.	151,033	1,510		293,344		—			—			294,854			—
Issuance of common stock in connection with the exercise of stock options to purchase common stock	30,500	305		20,310		—			—			20,615			—
Issuance of common stock in lieu of six -months dividend on redeemable convertible Series B preferred stock	25,500	255		63,495		—			—			63,750			—
Issuance of warrants to Common stockholders, related to December Financing Transaction	—	—		1,602,954		—			—			1,602,954			—
Issuance of common stock in connection with the December Financing Transaction	4,848,484	48,485		5,835,521		—			—			5,884,006			—
Adjustment to conversion price related to re-pricing of Convertible Series B Preferred Stock	—	—		126,059		—			—			126,059			—
Adjustment in conversion price of Series B Warrants	—	—		42,920		—			—			42,920			—
Issuance of warrants to purchase common stock to Ardour Capital Investments				20,490		—			—			20,490			—
Foreign currency translation adjustment	—	—		—		—			12,642			12,642			12,642
Comprehensive loss	—	—		—		—			—			—			$	(3,786,078	)
Balance, April 2, 2005 (unaudited)	33,281,527	$	332,816	$	147,213,093	$	(131,458,713	)	$	(158,966	)	$	15,928,230

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

6

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	April 2, 2005			March 27, 2004
Cash flows from operating activities:
Net loss	$	(3,798,720	)	$	(8,564,113	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	937,763			991,881
Provision for uncollectible accounts	34,156			216,249
Provision for excess and obsolete inventory	—			140,785
Net unrealized (gain)/loss on warrants to purchase common stock	7,036			3,566
Net unrealized loss on Series B warrants	—			(35,442		)
Non-cash compensation and consulting expense	315,344			467,444
Non-cash interest expense	239,251			6,676,368
Changes in operating assets and liabilities:
Accounts receivable	(531,275		)	975,091
Unbilled contract costs and fees	322,876			(324,305		)
Prepaid expenses and other current assets	(31,174		)	(450,616		)
Inventory	(687,021		)	803,251
Other long-term assets	(28,353		)	18,576
Accounts payable	(211,378		)	(2,562,381		)
Accrued payroll and payroll related expenses, other expenses, accrued contract losses and restructuring costs	(1,584,978		)	(1,058,938		)
Deferred revenue	(143,780		)	(1,774,009		)
Other liabilities	(55,954		)	(135,376		)
Total adjustments	(1,417,487		)	3,952,144
Net cash used in operating activities	(5,216,207		)	(4,611,969		)
Cash flows from investing activities:
Purchases of property and equipment	(180,280		)	(44,228		)
Net cash used in investing activities	(180,280		)	(44,228		)
Cash flows from financing activities:
Net (repayments) borrowings under bank line of credit	—			(1,801,869		)
Repayment of long-term debt	(102,283		)	(141,338		)
Proceeds from issuance of convertible subordinated debentures	—			70,000
Net proceeds from issuance of common stock and warrants	7,486,960			—
Net proceeds from issuance of convertible preferred stock	—			6,925,000
Net proceeds from exercise of warrants and options to purchase common stock	20,615			1,899,972
Net cash provided by financing activities	7,405,292			6,951,765
Effect of foreign currency exchange rates on cash and cash equivalents	12,642			(40,796		)
Net increase in cash and cash equivalents	2,021,447			2,254,772
Cash and cash equivalents at beginning of period, including restricted cash and cash equivalents	2,183,052			1,235,191
Cash and cash equivalents at end of period, including restricted cash and cash equivalents	$	4,204,499		$	3,489,963
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-Cash Investing and Financing Activities:
Valuation adjustment for warrants to purchase common stock	$	—		$	42,782
Valuation adjustment for Series B Preferred stock and warrants	$	168,979		$	35,422
Issuance of Warrants to purchase common stock to consultant	$	20,490		—
Common Stock issued Related to 401(K) contributions	$	294,854		$	138,603
Common Stock issued in lieu of dividend on redeemable convertible Series B Preferred Stock	$	63,750		$	254,279
Interest and Income Taxes Paid:
Interest	$	87,184		$	83,446
Income Taxes	$	—		$	—

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

7

SATCON TECHNOLOGY CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

APRIL 2, 2005 AND MARCH 27, 2004

(Unaudited)

Note A. Basis of Presentation

                The accompanying unaudited consolidated financial statements include the accounts of SatCon Technology Corporation and its wholly-owned subsidiaries (collectively, the “Company”) as of April 2, 2005 and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All inter-company accounts and transactions have been eliminated. These unaudited consolidated financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2004. Operating results for the three and six months ended April 2, 2005 are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year.

Note B. Realization of Assets and Liquidity

                The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. In addition, the Company has used, rather than provided, cash in its operations.

                The Company has incurred significant costs to develop its technologies and products. These costs have exceeded total revenue. As a result, the Company has incurred losses in each of the past ten years. As of April 2, 2005, it had an accumulated deficit of $131,458,713 since inception. During the six months ended April 2, 2005, the Company incurred a loss from operations of $3,346,932, and used cash in operations of $5,216,207.  The Company’s restricted cash balances at April 2, 2005 and September 30, 2004 were $84,000 and $1,011,900, respectively.

                In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying unaudited consolidated balance sheet is dependent upon the continued operations of the Company. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

                On December 22, 2004, the Company completed an equity transaction for $7.4 million (net of transaction costs) involving the issuance of 4,848,484 shares of Common Stock and warrants to purchase up to 2,181,181 shares of Common Stock, to several unrelated institutional investors (the “December 2004 Financing Transaction”).  The warrants are exercisable for a five-year term and have an exercise price of $2.00 per share.  The Company valued these warrants at $1,602,954, using the Black-Scholes option pricing model, with the following assumptions: an expected life of five years, expected volatility of 73.4%, no dividends, and risk-free interest rate of 4.0%.

                As a result of the December 2004 Financing Transaction, in accordance with the anti-dilution provisions of the

8

Company’s Series B Convertible Preferred Stock, the Company was required to adjust the conversion price of the remaining 425 shares of Series B Preferred Stock outstanding at that time.  These shares of Series B Preferred Stock have a liquidation preference of $5,000 per share and are convertible into a number of shares of Common Stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which, as a result of the December 2004 Financing Transaction, has been adjusted from $2.50 per share to $2.36 per share. At the time of the December 2004 Financing Transaction, 425 shares of the Series B Preferred Stock remained un-converted into shares of Common Stock.  As of the December 2004 Financing Transaction, the liquidation preference of the remaining 425 shares of Series B Preferred Stock was $2,125,000, and these are convertible into 900,424 shares of Common Stock, after adjustment.  The Series B Preferred Stock accrues dividends of 6% per annum, increasing to 8% per annum on October 1, 2005. The result of the December 2004 Financing Transaction was an additional adjustment of $126,059, which was recorded as interest expense for the period ended January 1, 2005.

                In addition, in accordance with the anti-dilution provisions of the warrants issued in connection with the sale of the Series B Preferred Stock (the “Series B Warrants”), the Company was also required to adjust the exercise price of the Series B Warrants.   The Series B Warrants are exercisable for up to 1,228,000 shares of Common Stock, are exercisable for a five-year term and had an initial exercise price of $3.32 per share.  As a result of the December 2004 Financing Transaction, the exercise price on these warrants was adjusted to $3.06 per share. The Company re-valued these warrants using the Black-Scholes option pricing model with the following assumptions: an expected life of four years, expected volatility of 73.4%, no dividends, and risk-free interest rate of 4.0%, resulting in an additional adjustment of $42,920, which was recorded as interest expense for the period ended January 1, 2005.

                As a result of the December 2004 Financing Transaction the Company recorded the following non-cash charges as interest expense in its Statement of Operations during its first fiscal quarter of 2005 and is included in its results of operations for the six month period ended April 2, 2005:

Security	Conversion/Exercise Price		Adjusted Conversion/Exercise Price		Interest Expense
Redeemable convertible Series B Preferred Stock	$	2.50	$	2.36	$	126,059
Warrants to purchase Common Stock	$	3.32	$	3.06	$	42,920
Total					168,979

                Burnham Hill Partners, LLC, a division of Pali Capital, Inc. (“BHP”), acted as the Company’s financial advisor in connection with the December 2004 Financing Transaction. The Company agreed to pay BHP a fee equal to 6% of the gross proceeds received by the Company in connection with the financing. Based on the amount of the financing, this fee was approximately $480,000, which was paid from gross proceeds received by the Company.

                On December 12, 2003, the Company amended its agreement with Silicon Valley Bank (the “Bank”). Under the amended agreement, the Bank agreed to provide the Company with a line of credit of up to $6,250,000 (the “Amended Loan”). The Amended Loan was to mature on December 9, 2004. In connection with the Amended Loan, the Company issued to the Bank a warrant to purchase up to 16,164 shares of its Common Stock, at an exercise price of $2.32 per share. This warrant was immediately exercisable and expires on December 11, 2010.   The Company had valued this warrant at $32,087, using the Black-Scholes option-pricing model and has treated this as a deferred financing cost and has amortized this value on a straight line basis through December 9, 2004.  On December 3, 2004 the maturity of the Amended Loan was extended through December 31, 2004, and on December 21, 2004, the maturity of the Amended Loan was again extended to March 1, 2005.  On December 23, 2004, using the proceeds from the December 2004 Financing Transaction, the Company paid off all amounts outstanding on the Amended Loan.

                Effective January 31, 2005, the Company entered into a new loan agreement with the Bank (the “New Loan”), which replaced the Amended Loan.  Under the terms of the New Loan, the Bank will provide the Company with a credit line of up to $7.0 million.  The New Loan is secured by most of the assets of the Company and advances under the New Loan are limited to 80% of eligible receivables and up to $1.0 million based on the levels of eligible inventory.  Interest on outstanding borrowings accrues at the Bank’s prime rate of interest plus 2% per annum.  In addition, the Company will pay to the Bank a collateral handling fee of $1,000 per month and has agreed to the following additional fees: (i)

9

$25,000 commitment fee; (ii) an unused line fee in the amount of 0.5% per annum; and (iii) an early termination fee of 0.5% of the total credit line if the Company terminates the New Loan within the first six months.  The New Loan contains certain financial covenants relating to tangible net worth, as defined, which the Company must satisfy in order to continue to borrow from the Bank.  The New Loan will expire on January 30, 2006.  As of April 2, 2005, there were no amounts outstanding under the New Loan and at April 2, 2005 the Company was in compliance with all covenants under the New Loan.

                The Company anticipates that its current cash together with the ability to borrow under the New Loan will be sufficient to fund its operations at least through September 30, 2005. This assumes the Company achieves its business plan. Further, this assumes that the Company will be able to remain in compliance with all New Loan covenants. If, however, the Company is unable to realize its operating plan and is unable to remain in compliance with the New Loan agreement with the Bank, the Company may be forced to raise additional funds by selling stock or taking other actions to conserve its cash position.

Note C. Significant Accounting Policies and Basis of Presentation

Basis of Consolidation

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

Revenue Recognition

                The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, except for certain foreign shipments. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate the Company provides for a warranty reserve at the time the product revenue is recognized.

                The Company performs funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Product development revenue is included in product revenue. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fees depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. All payments to the Company for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as research and development expense as incurred. As of April 2, 2005, the Company has accrued $84,779 for anticipated contract losses on commercial contracts.

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

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

10

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

Cash and Cash Equivalents

                Cash and cash equivalents include demand deposits, overnight repurchase agreements with the Bank and highly liquid investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. At April 2, 2005 and September 30, 2004, the Company has restricted cash as indicated in the table below.  In addition, at April 2, 2005 and September 30, 2004, the Company had overnight repurchase agreements with the Bank of $4,413,480 and $880,895, respectively.

Restricted Cash	April 2, 2005		September 30, 2004
Security deposits	$	34,000	$	34,000
Certificates of Deposit	50,000		50,000
Performance bond	—		927,900
Total restricted Cash	$	84,000	$	1,011,900

Accounts Receivable

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

Inventory

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

Property and Equipment

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

	Estimated Lives
Machinery and equipment	3-10 years
Furniture and fixtures	7-10 years
Computer software	3 years
Leasehold improvements	Lesser of the remaining life of the lease or the useful life of the improvement

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

Goodwill and Intangible Assets

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

11

                Effective October 1, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects our treatment of goodwill and other intangible assets. The statement requires impairment tests be periodically repeated and on an interim basis, if certain conditions exist, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement’s criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives ceased.

                The Company determine the fair value of each of the reporting units based on a discounted cash flow income approach. The income approach indicates the fair value of a business enterprise based on the discounted value of the cash flows that the business can be expected to generate in the future. This analysis is largely based upon projections prepared by the Company and data from sources of publicly available information available at the time of preparation. These projections are based on management’s best estimate of future results. In making these projections, the Company considers the markets it addresses, the competitive environment and its advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. In addition, the Company performs a macro assessment of the overall likelihood that it would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Long-lived Assets

                As of October 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  The statement requires that long-lived assets be reviewed for possible impairment, if certain conditions exist, with impaired assets written down to fair value.

                The Company determines the fair value of certain of the long-lived assets based on a discounted cash flow income approach.  The income approach indicates the fair value of a long-lived assets based on the discounted value of the cash flows that the long-lived asset can be expected to generate in the future over the life of the long-lived asset.  This analysis is based upon projections prepared by us.  These projections represent management’s best estimate of future results.  In making these projections, the Company considers the market it is addressing, the competitive environment and its advantages.  There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material.  In addition, the Company performs a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Foreign Currency Translation

                The functional currency of the Company’s foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries are translated at the rates in effect at the balance sheet date, while stockholders’ equity (deficit) is translated at historical rates. Statements of operations and cash flow amounts are translated at the average rate for the period. Translation adjustments are included as a component of accumulated other comprehensive loss. Foreign currency gains and losses arising from transactions are reflected in the loss from operations and were not significant during the three and six months ended April 2, 2005 or for the fiscal year ended September 30, 2004.

Use of Estimates

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

Stock-based Compensation

                SFAS No. 123, Accounting for Stock-Based Compensation, requires the measurement of the fair value of stock options or warrants granted to employees to be included in the statement of operations or, alternatively, disclosed in the

12

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

                No stock based employee compensation costs are included in the determination of net loss for all periods presented.

                Had compensation cost for the Company’s stock-based compensation been determined based on fair value at the grant dates as calculated in accordance with SFAS No. 123, the Company’s net loss and loss per share for the three and six months ended April 2, 2005 and March 27, 2004 would have been increased to the pro forma amounts indicated below:

	Three Months Ended												Six Months Ended
	April 2, 2005						March 27, 2004						April 2, 2005						March 27, 2004
	Net Loss			Loss per Share			Net Loss			Loss per Share			Net Loss			Loss per Share			Net Loss			Loss per Share
As Reported	$	(2,366,280	)	$	(0.07	)	$	(7,642,454	)	$	(0.29	)	$	(3,798,720	)	$	(0.12	)	$	(8,564,113	)	$	(0.34	)
Stock based employee compensation expense	(1,843,522		)	(0.05		)	(749,433		)	(0.03		)	(2,011,978		)	(0.06		)	(1,551,691		)	(0.06		)
Pro Forma	$	(4,209,802	)	$	(0.12	)	$	(8,391,887	)	$	(0.31	)	$	(5,810,698	)	$	(0.18	)	$	(10,115,804	)	$	(0.40	)

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

                The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions indicated below:

	Three Months Ended		Six Months Ended
Assumptions:	April 2, 2005	March 27, 2004	April 2, 2005	March 27, 2004
Expected life	7 years	7 years	7 years	7 years
Expected volatility ranging from	58.2% to 64.5%	118.2% to 120.0%	58.2% to 80.4%	117.5% to 120.0%
Dividends	none	none	none	none
Risk-free interest rate	4%	4%	4%	4%

                On April 8, 2005, the Board of Directors of the Company voted to accelerate the vesting of all outstanding and unvested options held by directors, officers and employees under the Company’s stock option plans.  As a result of the acceleration, options to acquire 633,333 shares of the Company’s common stock, which otherwise would have vested from time to time over the next 48 months, became immediately exercisable.  Included in the options to acquire 633,333 shares of the Company’s common stock were (i) options to purchase 591,583 shares with exercise prices greater than the Company’s closing stock price on April 8, 2005 ($1.59) (the “underwater options”) and (ii) options to purchase 41,750 shares with exercise prices below the Company’s closing stock price on April 8, 2005 (the “in-the-money options”).  The underwater options have a weighted average exercise price of $2.23 per share.  The in-the-money options have a weighted average exercise price of $1.04 per share.  Under the accounting guidance of APB 25, the accelerated vesting relating to the in-the-money options will result in a charge for stock-based compensation of approximately $34,000, which will be recognized by the Company in the third fiscal quarter.

In taking this action, the Board of Directors considered whether it would be advantageous to the employee base to have their options become fully vested.  The Board of Directors concluded that, because the employees had not had significant raises over the past few years and had stayed with the Company during difficult times, and because the financial impact to the Company of the vesting was minimal, these options should be vested.

13

Net Loss per Basic and Diluted Common Share

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

Concentration of Credit Risk

                Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, trade accounts receivable and unbilled contract costs.

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

                The Company deposits its cash and invests in short-term investments primarily through a national commercial bank.

Research and Development Costs

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

Comprehensive Income (Loss)

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

Reclassifications

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

Recent Accounting Pronouncements

In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs — an amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the impact of this standard on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the Company to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the Black-Scholes model which the Company currently uses for its footnote disclosure. The FASB decided to remove its explicit preference for a lattice model and not require a single valuation methodology. On April 14, 2005 the Securities and Exchange

14

Commission extended the effective date for the adoption of SFAS No. 123R, requiring the Company to adopt the new accounting provisions beginning in its first quarter of fiscal 2006. The Company is evaluating the impact of this standard on our consolidated financial statements.

Note D. Loss per Share

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

	Three Months Ended						Six Months Ended
	April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
Net loss	$	(2,366,280	)	$	(7,642,454	)	$	(3,798,720	)	$	(8,564,113	)
Basic and diluted:
Common shares outstanding, beginning of period	29,114,757			25,142,052			28,226,010			21,023,200
Weighted average common shares issued during the period	4,134,298			1,641,714			2,955,896			4,505,989
Weighted average shares outstanding—basic and diluted	33,249,055			26,783,766			31,181,906			25,529,189
Net loss per weighted average share, basic and diluted	$	(0.07	)	$	(0.29	)	$	(0.12	)	$	(0.34	)

As of April 2, 2005 and March 27, 2004, shares of common stock issuable upon the exercise of options and warrants were excluded from the diluted average common shares outstanding, as their effect would have been antidilutive.  In addition, shares of common stock issuable upon the conversion of redeemable convertible preferred stock were excluded from the diluted weighted average common shares outstanding as their effect would also have been dilutive.   The table below summarizes the option and warrants and convertible preferred stock that were excluded from the calculation above due to their effect being antidilutive:

	April 2, 2005	March 27, 2004
Common Stock issuable upon the exercise of:
Options .	3,473,845	2,855,950
Warrants	3,551,980	1,870,503
Total Options and Warrants excluded	7,025,825	4,726,453
Common Stock issuable upon the conversion of redeemable convertible preferred stock.	900,424	990,000

Note E. Inventory

                Inventory at the end of each period were as follows:

	April 2, 2005	September 30, 2004
Raw material	1,933,050	$	1,369,096
Work-in-process	4,442,867	4,373,925
Finished goods	495,776	441,651
	6,871,693	$	6,184,672

15

Note F. Segment Disclosures

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

SatCon Applied Technology, Inc. performs research and development services in collaboration with third parties. SatCon Power Systems, Inc. specializes in the engineering and manufacturing of power systems. SatCon Electronics, Inc. designs and manufactures electronic products. The Company’s principal operations and markets are located in the United States.

The accounting policies of each of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on revenue and profit and loss from operations, including amortization of intangibles. Common costs not directly attributable to a particular segment are included in the Applied Technology segment. These costs include corporate costs such as executive officer compensation, facility costs, legal, audit and tax and other professional fees and totaled, $1,003,758 and 1,298,276, net of $255,612 in adjustments related to the 2002 accrued restructuring charge during the six months ended April 2, 2005, and $629,230, $1,222,127 for the three and six months ended April 2, 2005 and March 27, 2004, respectively.

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

	Three Months Ended								Six Months Ended
	April 2, 2005			March 27, 2004					April 2, 2005			March 27, 2004
Applied Technology:
Funded research and development and other revenue	$	1,141,757		$			1,953,968		$	2,054,622		$			3,932,570
Loss from operations, including amortization of intangibles $80,421 for the three months ended April 2, 2005 and March 27, 2004, and $160,842 for the six months ended April 2, 2005 and March 27, 2004	$	(1,344,357	)	$			(706,110	)	$	(2,112,276	)	$			(1,314,861		)
Power Systems:
Product revenue	$	4,597,483		$			3,981,089		$	10,628,063		$				8,149,058
Loss from operations, including amortization of intangibles of $0 for the three months ended April 2, 2005 and March 27, 2004, $0 for the six months ended April 2, 2005 and March 27	$	(975,341	)	$			(321,699	)	$	(1,271,389	)	$				(363,572	)
Electronics:
Product revenue	$	2,534,088		$			2,224,010		$	4,773,732		$				4,264,587
Income (loss) from operations, including amortization of intangibles of $31,250 for the three months ended April 2, 2005 and March 27, 2004 and $62,500 for the six months ended April 2, 2005 and March 27, 2004	$	179,231		$		(70,931		)	$	36,733		$		(164,233			)
Consolidated:
Product revenue	$	7,131,571		$	6,205,099				$	15,401,795		$		12,413,645
Funded research and development and other revenue	1,141,757			1,953,968					2,054,622			3,932,570
Total revenue	$	8,273,328		$	8,159,067				$	17,456,417		$	16,346,215
Operating loss	(2,140,467		)	$	(1,098,740			)	(3,346,932		)	$	(1,842,666				)
Net unrealized loss on warrants to purchase common stock	(28,975		)	(46,348				)	(7,036		)	(3,566					)
Net unrealized gain on Series B warrants	—			—					—			35,442
Other income	(111,366		)	—					(129,422		)	—
Interest income	9,287			4,114					11,105			6,524
Interest expense	(94,759		)	(6,501,480				)	(326,435		)	(6,759,847					)
Net loss	$	(2,366,280	)	$	(7,642,454			)	$	(3,798,720	)	$	(8,564,113				)

16

Common assets not directly attributable to a particular segment are included in the Applied Technology segment. These assets include cash and cash equivalents, prepaid and other corporate assets and amounted to $5,113,542 and $2,924,667 at April 2, 2005 and September 30, 2004, respectively. The following is a summary of the Company’s assets by operating segment:

	April 2, 2005		September 30, 2004
Applied Technology:
Segment assets	$	9,722,653	$	7,477,961
Power Systems:
Segment assets	11,969,219		11,284,272
Electronics:
Segment assets	6,332,441		6,816,668
Consolidated:
Segment assets	28,024,313		$	25,578,901
Warrants to purchase common stock	—		7,036
Total assets	$	28,024,313	$		25,585,937

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

	Three Months Ended				Six Months Ended
	April 2, 2005		March 27, 2004		April 2, 2005		March 27, 2004
Revenue by geographic region based on location of customer:
United States	$	7,911,380	$	7,428,840	$	14,969,428	$	14,051,747
Rest of world	361,948		730,227		2,486,989		2,294,468
Total revenue	$	8,273,328	$	8,159,067	$	17,456,417	$	16,346,215

	April 2,		September 30,
	2005		2004
Long-lived assets (including goodwill and intangible assets) by geographic region based on location of operations:
United States	$	8,186,830	$		8,941,166
Rest of world	64,453		67,600
Total long-lived assets (including goodwill and intangible assets)	$	8,251,283	$	9,008,766

Note G. Legal Matters

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

In October 2003, the Company was served with a Complaint by a former employee seeking, among other claims, severance and bonus compensation.  In July of 2004, the employee filed an amended complaint in which two additional former employees joined the action seeking similar damages.  The plaintiffs are seeking damages under multiple theories and claims in excess of $750,000.The Company has denied the allegations contained in the complaint and believes the claims are entirely without merit.  On February 19, 2005, the Company settled the Complaint with these former employees for approximately $124,000 and the forgiveness of a promissory note due from an employee of approximately $70,000, which had been previously provided for by the Company in fiscal 2003, the net results of which are included in the Company’s results of operations for the three and six months ended April 2, 2005.

On or about August 31, 2004, the Company was informed that Bristol Investment Group, Inc. had filed a Demand

17

for Arbitration with the American Arbitration Association claiming that it was owed money and warrants under a September 2002 agreement whereby Bristol was to have arranged for a private placement financing transaction.  The total amount at issue was approximately $240,000.  The Company settled this claim for $189,000 during the second quarter of fiscal 2005, which is included in the Company’s results of operations for the three and six months ended April 2, 2005.

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

Note H. Commitments and Contingencies

Letters of Credit

The Company utilizes a standby letter of credit to satisfy a security deposit requirement and in some instances to satisfy warranty commitments. Outstanding standby letters of credit as of April 2, 2005 and September 30, 2004 were $34,000 and $961,900, respectively, and are broken down as indicated below:

	Expiration Date	April 2, 2005		September 30, 2004
Security Deposits	expiring on July 15, 2005	$	34,000	$	34,000
Warranty Commitments	expiring on February 15, 2005	—		927,900
Total Letters of Credit at period end		$	34,000	$	961,900

                The Company is required to pledge cash as collateral on these outstanding letters of credit. As of April 2, 2005 and September 30, 2004, the cash pledged as collateral for these letters of credit was $34,000 and $961,900, respectively, and is included in restricted cash and cash equivalents on the balance sheet.

Purchase Commitments:

                In the ordinary course of business the Company enters into agreements with vendors for the purchase of goods and services through the issuance of purchase orders.  In general the majority of these purchases do not represent commitments of the Company until the goods or services are received.  In the third quarter of fiscal 2003 the Company provided for approximately $900,000 related to outstanding purchase commitments that were related to its Shaker and UPS product lines.  At April 2, 2005 and September 30, 2004, the balance outstanding on these purchase commitments was $357,334 and $390,330, respectively.  These amounts are included in other accrued expenses in the Company’s consolidated balance sheet.

Employment Agreements:

                The Company has employment agreements with certain employees that provide severance payments and accelerated vesting of options upon termination of employment under certain circumstances or a change of control, as defined. As of April 2, 2005, the Company’s potential obligation to these employees was approximately $500,000.  During the second fiscal quarter of 2005 the Company severed the employment of an employee that had an employment agreement that provided for severance.  The Company recorded a charge to operations of approximately $100,000 related to this severance agreement in its results of operations for the three and six months ended April 2, 2005.

Contract Losses:

In late fiscal 2002, the Company entered into a fixed price contract with EDO Corporation (“EDO”) for the design and development of a power converter for a new mine sweeping system for the U.S. Navy.  The fixed price contract, which initially totaled $1.1 million, involved milestones and progress payments and called for the delivery of four prototype power units.  These new power units required substantial engineering to meet the space, thermal and performance requirements of the customer.  At the end of fiscal 2003 the Company forecasted that the project would be completed during fiscal 2004 and the Company accrued $0.7 million for the then anticipated cost overrun to be incurred for the project.  Subsequently, the Company was successful in negotiating with the customer to increase the contract value by $0.4 million to a total of $1.5 million which was not recorded at that time due to technological uncertainties that existed at that time.

18

           In the third and fourth quarters of fiscal 2004 and through the first quarter of fiscal 2005, the Company encountered unanticipated problems related to performance requirements.  At the end of the third quarter of fiscal 2004 the Company had completed the technical design and was working on integration and testing.  During the latter half of fiscal 2004 the Company estimated that it would incur costs of approximately $3.0 million to complete the project.  Accordingly, the Company had recorded an additional charge in the third and fourth fiscal quarters of 2004 totaling $0.8 million.  During the first quarter of fiscal 2005 there were no changes to the Company’s estimate and no additional charges were recorded related to these contracts.  All contract elements were delivered to the customer and the contract was completed during the second quarter of fiscal 2005.  For the three and six months ended April 2, 2005, the Company did not record any revenue related to the EDO contract.  In addition, due to the loss related to this contract, the Company recorded approximately $0.1 million in costs for the three and six months ended April 2, 2005.  The Company has deferred the recognition of the revenue related to this contract of $1.5 million until final acceptance is received from the customer on all elements delivered.

Note I. Restructuring Costs

                As of September 30, 2004, the Company had $495,612 accrued related to a restructuring cost, which was established in April 2002.  On January 27, 2005, the Company reached a settlement with the landlord of the Anaheim facility in the amount of $240,000 as final settlement for all claims.  In addition, the Company has determined that all remaining restructuring liabilities accrued are no longer warranted and that all matters related to the restructuring charge have been settled, therefore the Company has adjusted all remaining balances related to severance costs, facilities cost and equipment costs remaining as of January 1, 2005, resulting in a reduction of accrued restructuring charges of $255,612 and reflected in the Company’s statement of operations for the six months ended April 2, 2005.  The Company paid the remaining balance of $240,000 during the quarter ended April 2, 2005.

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

	Balance September 30, 2004			Amounts Paid or Assets Disposed Of			Adjustments			Balance April 2, 2005
Severance costs	$		89,353	$	—		$	(89,353	)	$	—
Facility costs	306,320			(240,000		)	(66,320		)	—
Equipment costs	99,939			—			(99,939		)	—
Accrued restructuring costs	$	495,612		$	(240,000	)	$	(255,612	)	$	—

19

Note J. Product Warranties

                In its Power Systems Division, and on occasion in its Applied Technology Division, the Company provides a warranty to its customers for most of its products sold. In general the Company’s warranties are for one year after the sale of the product, and in some limited instances two years. The Company reviews its warranty liability quarterly. Factors taken into consideration when evaluating the Company’s warranty reserve are (i) historical claims for each product, (ii) the development stage of the product, and  (iii) other factors.

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

	April 2, 2005			September 30, 2004
Balance at beginning of period	$	642,119		$	765,336
Provision	30,000			35,127
Usage	(152,626		)	(158,344		)
Balance at end of period	$	519,493		$	642,119

Note K. Subsequent Events

                On April 8, 2005, the Board of Directors voted to accelerate the vesting of all outstanding and unvested options held by directors, officers and employees under the Company’s stock option plans.   The financial impact of this acceleration will be included in the results of operations for the Company’s third quarter, which ends on July 2, 2005.

On April 12, 2005, Alan P. Goldberg resigned as a director of the Company.

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statement

This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Act of 1934. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “intends,” “estimates,” and similar expressions, whether in the negative or in the affirmative. Although we believe that these forward-looking statements reasonably reflect our plans, intentions and expectations, our actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements below under the heading “Factors Affecting Future Results” that we believe could cause our actual results to differ materially from the forward-looking statements that we make. We do not intend to update information contained in any forward-looking statements we make.

Overview (Executive Summary)

                SatCon designs, develops and manufactures high-efficiency high power electronics and a variety of standard and custom high-performance machines for specific applications. SatCon’s power control products convert, store and manage electricity for businesses and consumers, the U.S Government and military that require high-quality, uninterruptible power. SatCon is utilizing its engineering and manufacturing expertise to develop products that it believes will be integral components of distributed power generation and power quality systems. SatCon’s specialty motors are typically designed and manufactured for unique customer requirements such as high power-to-size requirements or high efficiency.

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

•              K&D MagMotor Corp.—a manufacturer of custom electric motors, acquired in January 1997.

•              Film Microelectronics, Inc.—a manufacturer of hybrid microelectronics, acquired in April 1997.

•              Inductive Components, Inc.—a value-added supplier of customized electric motors, acquired in January 1999.

•              Lighthouse Software, Inc.—a supplier of control software for machine tools, acquired in January 1999.

•              HyComp, Inc.—a manufacturer of electronic multi-chip modules, acquired in April 1999.

•              Ling Electronics, Inc.—a manufacturer of test equipment, power converters, amplifiers and converters, acquired in October 1999.

•              Inverpower Controls Ltd.—a manufacturer of power electronics modules and advanced high-speed digital controls, acquired in July 2001.

                In addition, in November 1999, the Company acquired intellectual property, tooling and other assets from Northrop Grumman Corporation enabling the Company to manufacture and sell electric drivetrains and in September 2002, we acquired certain intellectual property, equipment and other assets from Sipex Corporation to expand our high-reliability data conversion product line.

Critical Accounting Policies and Significant Judgments and Estimates

                Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting periods. On

21

an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, receivable reserves, inventory reserves, goodwill and intangible assets and income taxes. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting estimates were discussed with our Audit Committee.

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

Revenue Recognition

                We recognize revenue from product sales in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and we have determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, except for certain foreign shipments. If the product requires installation to be performed by us, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless we can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate, we provide for a warranty reserve at the time the product revenue is recognized.

                We perform funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each type of contract, we receive periodic progress payments or payment upon reaching interim milestones and retain the rights to the intellectual property developed in government contracts. All payments to us for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. The Defense Contract Audit Agency has agreed-upon the final indirect cost rates for the fiscal year ended September 30, 2001. When the current estimates of total contract revenue and contract costs for product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses as incurred. As of April 2, 2005 and September 30, 2004, we have accrued approximately $0.1 and $0.9 million, respectively, for anticipated contract losses.

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

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

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

Accounts Receivable

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

22

allowances may be required.

Inventory

                We value our inventory at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, as well as based on historical usage. Due to the custom and specific nature of certain of our products, demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

                At the end of June 2003, we were actively engaged in selling our Shaker product line, and we were pursuing a strategy that we hoped would lead to a strategic alliance with a larger company for the development and exploitation of the advantages embodied in our Uninterruptible Power Supply (“UPS”) system. During the process of considering various options, we concluded that both our Shaker and UPS system inventories were overvalued based upon the June 2003 plans. We analyzed the situation, recorded an increase to our valuation reserve and were actively considering offers for this product line. This reserve was based on our assessment of the situation as of that time.  We had no orders associated with this reserved inventory and there was no sales force dedicated to the sales and marketing of these products.  During the first quarter of fiscal 2004, we decided to terminate discussions about the possible sale of the Shaker product line and focus on generating orders.  This decision to retain our Shaker product line was due in part to a significant improvement in our liquidity situation.   The restarting of this line of business took some time and in the first quarter of 2004 no shaker units were sold.  At the end of the first quarter of fiscal 2004, the gross inventory for our Shaker product line inventory totaled $2.1 million and our valuation reserve against that inventory was $2.0 million, or 95%.  In addition, we had originally accrued approximately $0.9 million for purchase commitments related to the UPS and Shaker product lines (See Note H. Commitments and Contingencies).  The table below details the resulting reduction of costs related to both the inventory reserves of our Shaker and UPS product lines, as well as reserves established related to the purchase commitments as follows:

Fiscal Year	Quarter ended	Value of Inventory Reserve Used		Value of Purchase Commitments Reserve Used		Period Reduction to Cost of Sales		Fiscal Year to Date Reduction to Cost of Sales
2004	December 27, 2003	$	—	$	—	$	—	$		—
	March 27, 2004	$	126,532	—		$	126,542	$		126,532
	June 26, 2004	$	174,161	$	100,000	$	274,161	$		400,693
	September 30, 2004	$	223,974	$	67,556	$	291,530	$		692,223
2005	January 1, 2005	$	81,040	$	—	$	81,040	$		81,040
	April 2, 2005	$	58,004	$	88,488	$	146,492	$	227,532

                Although it is unclear how much of the remaining inventory we will sell and during which periods it will occur, as we sell this inventory our cost of product revenue will be lower than normal as this inventory has been largely written-down.  As a result, to the extent this inventory is sold in the future, our margins will be favorably impacted compared with results that would otherwise be achieved.

23

Goodwill and Intangible Assets

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

                Effective October 1, 2001, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects our treatment of goodwill and other intangible assets. The statement requires impairment tests be periodically repeated and on an interim basis, if certain conditions exist, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement’s criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives ceased.

                We determine the fair value of each of the reporting units based on a discounted cash flow income approach. The income approach indicates the fair value of a business enterprise based on the discounted value of the cash flows that the business can be expected to generate in the future. This analysis is largely based upon projections prepared by us and data from sources of publicly available information available at the time of preparation. These projections are based on management’s best estimate of future results. In making these projections, we consider the markets we are addressing, the competitive environment and our advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. In addition, we perform a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Long-Lived Assets

                As of October 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The statement requires that long-lived assets be reviewed for possible impairment, if certain conditions exist, with impaired assets written down to fair value.

                We determine the fair value of certain of the long-lived assets based on a discounted cash flow income approach. The income approach indicates the fair value of a long-lived assets based on the discounted value of the cash flows that the long-lived asset can be expected to generate in the future over the life of the long-lived asset. This analysis is based upon projections prepared by us. These projections represent management’s best estimate of future results. In making these projections, we consider the markets we are addressing, the competitive environment and our advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. In addition, we perform a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Income Taxes

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

                Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We have recorded a full valuation allowance against our deferred tax assets of $38.3 million as of April 2, 2005, due to uncertainties related to our ability to

24

utilize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to adjust our valuation allowance which could materially impact our financial position and results of operations.

Results of Operations

Three Months Ended April 2, 2005 Compared to Three Months Ended March 27, 2004

                Product Revenue.  Product revenue increased by $0.9 million, or 15%, from $6.2 million in fiscal 2004 to $7.1 million in fiscal 2005.  Product revenue by segment for the three months ended April 2, 2005 and March 27, 2004 is as follows:

	Three Months Ended (in thousands)
Division	April 2, 2005		March 27, 2004		$ Increase		% Increase
Power Systems	$	4,598	$	3,981	$	617	15	%
Electronics	2,534		2,224		310		14	%
Total Product Revenue	$	7,132	$	6,205	$	927	15	%

                This increase of $0.6 million in revenue from Power Systems was largely due to increased sales in our Fuel Cell and Solar photovoltaic conversion products of $1.2 million over that of the same quarter in fiscal 2004, offset in part by a $0.5 million reduction in our MagLev and other product line revenue.

                Revenue from our Electronics division increased by $0.3 million from the same period in 2004, primarily due to increases in our military sub-contract business.

Funded research and development and other revenue.  Funded research and development and other revenue decreased  by $0.9 million, or 45%, from $2.0 million in fiscal 2004 to $1.1 million in fiscal 2005. This decrease was primarily attributable to the focusing of our efforts on the completion of the contract with EDO in our Applied Technology division.  We have completed the contract and delivered all items required to the customer as of April 2, 2005, however until such time as the customer accepts all deliverables under the contract the recognition of the revenue is being deferred.  As a result of our focused efforts on completing the EDO program, we were unable to devote significant time to other opportunities (See Note H. Commitments and Contingencies — Contract Losses).   In addition, we experienced delays in starting-up several existing contracts, a decrease in revenue of $0.4 million from a Naval program which existed in fiscal 2004, and a decrease in revenue of  $0.3 million from a contract with General Atomics to deliver power converter and control assemblies for the RV Triton, a British research vessel. These factors resulted in lower funded research and development and other revenue for the quarter ended April 2, 2005 as compared to the quarter ended March 27, 2004.

                Cost of product revenue.  Cost of product revenue increased by $1.3 million, or 25%, from $5.2 million in fiscal 2004 to $6.5 million in fiscal year 2005. Cost of product revenue by segment for the three months ended April 2, 2005 and March 27, 2004 is as follows:

	Three Months Ended (in thousands)
Division	April 2, 2005		March 27, 2004		$ Increase		% Increase
Power Systems	$	4,624	$	3,349	$	1,275	38	%
Electronics	1,924		1,843		81		4	%
Total cost of product revenue	$	6,548	$	5,192	$	1,356	26	%

The increase in the Power Systems division was primarily attributable to$ 0.5 million higher material costs associated with the increase in sales volume, $0.3 million due to higher material costs primarily due to mix and $0.6 million higher manufacturing labor and overhead costs.  In our Power Systems division these increases were offset, in part, by products sold which contained certain materials which had been substantially written down or reserved which resulted in reduced costs.  This reduced cost of product revenue by approximately $0.1 million during the quarter ended April 2, 2005.

25

                Gross Margin.Gross margins on product revenue decreased from 17% for the three months ended March 27, 2004 to 8% for the three months ended April 2, 2005.  Gross margin by division is broken out below.

	Three Months Ended
Division	April 2, 2005		March 27, 2004
Power Systems	(1)	%	16	%
Electronics	24	%	17	%
Total gross margin %	8	%	17	%

                In our Power Systems division, the decrease in gross margin by 17% is a direct result of the product mix for the quarter as compared to the same period in fiscal 2004, along with higher materials costs and manufacturing inefficiencies.

                In our Electronics division the increase in gross margins by 7% was attributable to higher revenue compared to the same period in fiscal 2004, along with the sales mix consisting of higher margin business and manufacturing efficiencies, offset by higher materials costs.

                Funded research and development and other revenue expenses.  Funded research and development and other revenue expenses decreased by $0.5 million, or 33%, from $1.4 million in fiscal 2004 to $0.9 million in fiscal 2005.   The gross margin on funded research and other revenue decreased from 27.5% in fiscal 2004 to 17.1% in fiscal 2005. This decrease is a partly attributable to the efforts being applied to the EDO contract which was completed during the second quarter of fiscal 2005.  We anticipate recognizing $1.5 million in revenues related to this contract once the customer accepts all items delivered along with $1.5 million in associated costs.  Approximately $0.1 million in costs associated with the EDO contract wrap-up during the second quarter of fiscal 2005,which were not recoverable, are included in our funded research and development and other revenue expenses for the quarter. (See Note H. Commitments and Contingencies — Contract Losses).

                Unfunded research and development expenses.  We did not expend any material funds on unfunded research and development expenses in the quarters ended April 2, 2005 and March 27, 2004.

                Selling, general and administrative expenses.  Selling, general and administrative expenses increased by approximately $0.2 million, or 9%, from $2.6 million in fiscal 2004 to $2.8 million in fiscal 2005.  The increase was primarily the result of approximately $0.3 million incurred as a result of increased head count and payroll related costs across all operating units, the settlement of a law suit during the quarter for approximately $0.2 million, and to a lesser extent the effects of foreign currency exchange rates related to our Canadian subsidiary as compared to the second quarter of fiscal 2004, offset by approximately $0.1 million in lower operating costs in our Applied Technology division as compared to the second quarter of 2004.

                Amortization of intangibles.  Amortization of intangibles remained flat at $0.1 million.

                Restructuring costs.  During April 2002, we commenced a restructuring plan designed to streamline our production base, improve efficiency and enhance our competitiveness and recorded a restructuring charge of $1.5 million.  As of September 30, 2004 the balance of the restructuring accrual was $495,612.  On January 27, 2005 we agreed to settle our outstanding lawsuit with the landlord of the Anaheim, California facility for $240,000, for which approximately $300,000 had been allocated.  As a result of this settlement and our evaluation of the remaining restructuring charges we recorded a benefit in our statement of operations for the period ended January 1, 2005 in the amount of $255,612.  (See Note I. Restructuring costs).

                Net unrealized loss on warrants to purchase common stock.  We had approximately $30,000 unrealized loss on warrants to purchase common stock in the second quarter of 2005 compared to an unrealized loss of approximately $50,000 in the second quarter of 2004. We account for our warrants to purchase Mechanical Technology Incorporated’s common stock and to purchase Beacon Power Corporation’s common stock in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and, therefore, we have recorded these warrants at their fair value at April 2,

26

2005 and March 27, 2004.   Our warrants to purchase Mechanical Technology Incorporated’s common stock expired unexercised on October 21, 2003 and January 31, 2004 and we no longer account for these Mechanical Technology Incorporated warrants in accordance with SFAS No. 133. The warrants to purchase Beacon Power Corporation’s common stock expired un-exercised on April 7, 2005.

                Other (expense).  Other expense was approximately $0.1 million for second quarter of fiscal year 2005.  This consisted primarily of state tax payments from prior years and the amortization of our line of credit renewal fee.

                Interest expense.  Interest expense was approximately $0.1 million for fiscal year 2005 compared with approximately $6.5 million for fiscal year 2004.   Interest expense for fiscal 2005 was primarily related to non-cash interest related to the valuation of warrants given to a vendor during the quarter.  Interest expense for fiscal year 2004 was virtually all comprised of non-cash items including $6.1 million amortization of discount on the convertible redeemable Series B preferred stock, $0.2 million amortization of the discount on the subordinated convertible debentures, $0.2 million associated with the redeemable convertible Series A preferred stock and subordinated debentures, $0.2 million associated with the line of credit with Silicon Valley Bank and $0.1 million associated with the Series B preferred stock, offset by a benefit from the negotiated reduction in fees associated with the February 2003 financing transaction.

Six Months Ended April 2, 2005 Compared to Six Months ended March 27, 2004

                Product Revenue.  Product revenue increased by $3.0 million, or 24%, from $12.4 million in fiscal year 2004 to $15.4 million in fiscal year 2005.  Product revenue by segment for the six months ended April 2, 2005 and March 27, 2004 is as follows:

	Six Months Ended (in thousands)
Division	April 2, 2005			March 27, 2004			$ Increase			% Increase
Power Systems	$		10,628	$	8,149		$	2,479		30	%
Electronics	4,774			4,265			509			12	%
Total Product Revenue	$	15,402		$		12,414	$		2,988	24	%

                Power Systems revenue for the six months ended March 27, 2005 included increases in the Fuel Cell Energy line of $1.3 million, Solar Converter line of $1.0 million and the Plasma Torch line of $1.3 million, partially offset by decreases of $1.0 million in the UPS line with one unit sold in the first half of 2004 and none in 2005, with other decreases amounting to $0.2 million

                The Electronics division increase of $ 0.5 million was due to an increase in the military product line of $0.9 million, partially offset by a decrease in the commercial product line of $ 0.4 million

Funded research and development and other revenue.  Funded research and development and other revenue decreased by $1.9 million, or 48%, from $3.9 million in fiscal year 2004 to $2.1 million in fiscal year 2005. This decrease was primarily attributable to less overall business in our Applied Technology division, delays in starting-up several existing contracts, a decrease in revenue of $1.0 million from a Naval program which existed in fiscal 2004, and a decrease in revenue of  $0.5 million from a contract with General Atomics to deliver power converter and control assemblies for the RV Triton, a British research vessel, combined with efforts focused on completing the EDO contract in the second quarter of fiscal 2005, which took away from our ability to work on other opportunities.  The EDO program was completed and delivered during the period ended April 2, 2005, however at the end of the period the customer has not accepted all items delivered under the contract.  We anticipate recognizing this revenue once the customer accepts all delivered elements.  (See Note H. Commitments and Contingencies — Contract Losses).  These factors resulted in lower funded research and development and other revenue during fiscal 2005 as compared to fiscal 2004.

27

                Cost of product revenue.  Cost of product revenue increased by $3.4 million, or 33%, from $10.4 million in fiscal year 2004 to $13.8 million in fiscal year 2005.  Cost of product revenue by segment for the six months ended April 2, 2005 and March 27, 2004 is as follows:

	Six Months Ended (in thousands)
Division	April 2, 2005			March 27, 2004			$ Increase		% Increase
Power Systems	$		9,976	$		6,807	$	3,169	47	%
Electronics	3,835			3,555			280		8	%
Total cost of product revenue	$	13,811		$	10,362		$	3,449	33	%

                The increase was primarily attributable to an increase in material costs due to higher sales volume across all divisions, higher material costs primarily due to mix, and higher manufacturing labor and overhead costs.  In our Power Systems division these increases were offset, in part, by products sold which contained certain materials which had been substantially written down or reserved which resulted in reduced costs.  This reduced cost of product revenue by approximately $0.2 million during fiscal 2005 and $0.1 million during fiscal 2004.

                Gross Margin. Gross margins on product revenue decreased from 17% for the six months ended March 27, 2004 to 10% for the six months ended April 2, 2005.  Gross margin by division is broken out below.

	Six Months Ended
Division	April 2, 2005		March 27, 2004
Power Systems	6	%	17	%
Electronics	20	%	17	%
Total gross margin %	10	%	17	%

In our Power Systems division, the decrease in gross margin by 11% is a direct result of the product mix for the quarter as compared to the same period in fiscal 2004, along with higher materials costs and manufacturing inefficiencies.

                In our Electronics division, the increase in gross margins by 3% was attributable to higher revenue compared to the same period in fiscal 2004, along with the sales mix consisting of higher margin business and manufacturing efficiencies, offset by higher materials costs.

                Funded research and development and other revenue expenses.  Funded research and development and other revenue expenses decreased by $1.1 million, or 39%, from $2.8 million in fiscal year 2004 to $1.7 million in fiscal year 2005.   A primary reason for the decrease was directly related to efforts focused on the completion of the EDO contract for which we did not recognize any costs or revenue during the period.    We anticipate recognizing this revenue of $1.5 million and corresponding costs of $1.5 million once the customer accepts all elements delivered under the contract (See Note H. Commitments and Contingencies — Contract Losses).   The gross margin on funded research and other revenue declined from 29% in fiscal year 2004 to 18% in fiscal year 2005, the primary reason for the decline is directly related to the EDO contract.

                Unfunded research and development expenses.  We did not expend any material funds on unfunded research and development in fiscal year 2005 or 2004.

                Selling, general and administrative expenses.  Selling, general and administrative expenses increased by $0.5 million, or 11%, from $4.8 million in fiscal year 2004 to $5.3 million in fiscal year 2005.  The increase was primarily the result of approximately $0.6 million incurred as a result of increased head count and payroll related costs across all operating units, $0.2 million related to the settlement of a law suit and to a lesser extent the effects of foreign currency exchange rates related to our Canadian subsidiary as compared to fiscal 2004, offset by approximately $250,000 related to the reversal of our restructuring accrual (see Note I. Restructuring Costs).

                Amortization of intangibles.  Amortization of intangibles remained flat at $0.2 million for the six months ended April 2, 2005 and March 27, 2004.

28

                Net unrealized loss on warrants to purchase common stock.  Net unrealized loss on warrants to purchase common stock in fiscal year 2005 was approximately $7,000 compared to a net unrealized loss of approximately $4,000 in 2004. We account for our warrants to purchase Mechanical Technology Incorporated’s common stock and to purchase Beacon Power Corporation’s common stock in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and, therefore, we have recorded these warrants at their fair value at March 27, 2004.   Our warrants to purchase Mechanical Technology Incorporated’s common stock expired unexercised on October 21, 2003 and January 31, 2004 and we no longer account for these warrants in accordance with SFAS No. 133.  Our warrants to purchase Beacon Power Corporation’s common stock expired un-exercised on April 7, 2005.

                Other (expense).  Other expense was approximately $0.1 million in fiscal 2005.  This consisted primarily of state tax payments from prior years and the amortization of our line of credit renewal fee.

                Interest expense.  Interest expense was approximately $0.3 million for fiscal year 2005 compared with approximately $6.8 million for fiscal year 2004, a decrease of approximately $6.5 million. Interest expense in fiscal 2005 includes non-cash interest of approximately $0.2 million associated with our December 2004 financing and the related anti-dilution effects on the Series B preferred stock and warrants issued with the Series B preferred stock and non-cash interest of approximately $75,000 related to the issuance of warrants to a vendor.  In addition, during the six months ended April 2, 2005 we had borrowing under credit facility with Silicon Valley Bank and interest expense related to our line of credit during this period was approximately $16,000.  There are no outstanding amounts under the line at April 2, 2005. Interest expense for fiscal year 2004 was virtually all comprised of non-cash items including $6.1 million amortization of discount on the convertible redeemable Series B preferred stock, $0.2 million amortization of the discount on the subordinated convertible debentures, $0.2 million associated with the redeemable convertible Series A preferred stock and subordinated debentures, $0.2 million associated with the line of credit with Silicon Valley Bank and $0.1 million associated with the Series B preferred stock, offset by a benefit from the negotiated reduction in fees associated with the February 2003 financing transaction.  Interest expense for fiscal year 2003 includes the amortization of the fair value, as determined using the Black-Scholes option pricing model, of the warrants we issued in connection with our existing line of credit of $0.1 million and $0.1 million of costs associated with the forbearance agreement entered into on December 19, 2002.

Liquidity and Capital Resources

                As of April 2, 2005, we had approximately $4.2 million of cash, of which approximately $0.1 million was restricted.  At this time no funds had been drawn against our $7.0 million line of credit with Silicon Valley Bank. The maximum amount we can borrow under this agreement is $7.0 million based upon 80% of eligible receivables and eligible inventory.  As of April 2, 2005, approximately $4.4 million could have been borrowed based on the level of eligible receivables.  Our trade payables, at April 2, 2005, totaled approximately $3.0 million, of which approximately $0.7 million were for invoices over 60 days old. In addition, we had approximately $0.6 million of accrued accounts payable at April 2, 2005 for goods and services received but not yet invoiced.

On December 22, 2004, we sold 4,848,484 shares of common stock under our universal shelf registration statement directly to several unrelated institutional investors for proceeds of $7,430,000, net of transaction costs.  As part of the December 22, 2004 financing we also issued warrants to purchase up to 2,181,818 shares of common stock.  These warrants have an exercise price of $2.00 per share.  These warrants are immediately exercisable and expire on December 21, 2009.  We have valued these warrants at $1,602,954, using the Black-Scholes option pricing model.   A portion of the proceeds from this financing was used to pay off amounts outstanding on our line of credit.

On December 29, 2004 we filed our Form 10-K with the Securities and Exchange Commission for our fiscal year ended September 30, 2004.  At the time of filing our “unaffiliated” market capitalization was below the $75 million required to maintain our universal shelf registration statement and, consequently, we can no longer use that universal shelf registration statement to issue registered securities.

29

We anticipate that our current cash together with the ability to borrow under the New Loan will be sufficient to fund our operations at least through September 30, 2005.  This assumes that we will achieve or exceed our business plan and remain in compliance with all New Loan covenants.  If, however, we are unable to realize our business plan and are unable to remain in compliance with the New Loan, we may be forced to raise additional funds by selling stock or taking other actions to conserve our cash position.

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

                Our financial statements for our fiscal year ended September 30, 2004, which are included in our Annual Report on Form 10-K, contain an audit report from Grant Thornton LLP. The audit report contains a going concern qualification, which raises substantial doubt with respect to our ability to continue as a going concern. However, our business plan, which envisions a significant improvement in results from the recent past, contemplates sufficient liquidity to fund operations at least through September 30, 2005.  The receipt of a going concern qualification may create a concern among our current and future customers and vendors as to whether we will be able to fulfill our contractual obligations.

                We have incurred significant costs to develop our technologies and products. These costs have exceeded total revenue. As a result, we have incurred losses in each of the past ten years. Since inception, we have financed our operations and met our capital expenditure requirements primarily through the sale of private equity securities, public security offerings, and borrowings on our line of credit and capital equipment leases.

                As of April 2, 2005, our cash and cash equivalents were approximately $4.2 million, including restricted cash and cash equivalents of approximately $0.1 million, an increase of approximately $2.0 million from September 30, 2004.  Cash used in operating activities for the six months ended April 2, 2005 was approximately $5.2 million as compared to approximately $4.6 million for the six months ended March 27, 2004.

Operating Activities

                Cash used in operating activities during the six months ended April 2, 2005 was primarily attributable to the net loss of approximately $3.8 million, offset by approximately $1.5 million of non-cash items such as $0.9 million related to depreciation and amortization, $0.2 million of non-cash interest expense related to our December 2004 financing transaction and the issuance of warrants to a vendor, $0.3 million of non-cash compensation expense related to our matching of employee 401 (k)contributions with shares of our common stock,  increases in allowances for uncollectible accounts, and an approximately $3.0 million decrease in working capital.

30

Investing Activities

                Cash used in investing activities during the six months ended April 2, 2005 was approximately $0.2 million as compared to cash used in investing activities of approximately $44,000 for the six months ended March 27, 2004.

Financing Activities

                Cash provided by financing activities for the six months ended April 2, 2005 was approximately $7.4 million as compared to approximately $7.0 million for the six months ended March 27, 2004. Net cash provided by financing activities during the six months ended April 2, 2005 includes approximately $8.0 million of proceeds from the sale of common stock of the Company in the December 2004 financing transaction, net of approximately $0.6 million in transaction related costs.  Net cash provided by financing activities during the six months ended March 27, 2004 included approximately $7.0 million in net proceeds from the issuance of convertible preferred stock, $1.9 million from the exercise of options and warrants to purchase common stock, offset by approximately $1.8 million used to pay down outstanding amount under the bank line of credit and approximately $70,000 used for the repayment of long term debt.

                We lease equipment and office space under non-cancelable capital and operating leases. Future minimum rental payments, as of April 2, 2005, under the capital and operating leases with non-cancelable terms are as follows:

Fiscal Years ended September 30,	Capital Leases		Operating Leases
2005	$	127,072	$	455,923
2006	316,762		852,188
2007	—		888,801
2008	—		900,814
2009	—		852,832
Thereafter	—		520,242
Total	$	443,834	$	4,470,800

31

Factors Affecting Future Results

Our future results remain difficult to predict and may be affected by a number of factors which could cause actual results to differ materially from forward-looking statements contained in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time. These factors include business conditions within the distributed power, power quality, aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive industries and the world economies as a whole. Our revenue growth is dependent, in part, on technology developments and contract research and development for both the government and commercial sectors and no assurance can be given that we will continue to obtain such funds. In addition, our growth opportunities are dependent on our new products penetrating the distributed power, power quality, aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive markets. No assurance can be given that new products can be developed, or if developed, will be commercially viable; that competitors will not force prices to unacceptably low levels or take market share from us; or that we can achieve and maintain profitability in these or any new markets. Because of these and other factors, including, without limitation, the factors set forth below, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the market price of our common stock experiences significant volatility.

                We have a history of operating losses, may not be able to achieve profitability and may require additional capital in order to sustain our businesses.

                For each of the past ten fiscal years, we have experienced losses from operating our businesses. As of April 2, 2005, we had an accumulated deficit of approximately $131.5 million. During the six months ended April 2, 2005 we had a loss from operations of approximately $3.3 million.  If we are unable to operate on a cash flow breakeven basis during 2005, we may need to raise additional capital in order to sustain our operations. There can be no assurance that we will be able to achieve such results or to raise such funds if they are required.

                We may not be able to continue as a going concern.

                Our financial statements for our fiscal year ended September 30, 2004, which are included in our Annual Report on Form 10-K, contain an audit report from Grant Thornton LLP. The audit report contains a going concern qualification, which raises substantial doubt with respect to our ability to continue as a going concern. The receipt of a going concern qualification may create a concern among our current and future customers and vendors as to whether we will be able to fulfill our contractual obligations.

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

                We have authorized 50,000,000 shares of our common stock, of which 33,360,276 shares were issued and outstanding as of May 10, 2005. Our board of directors has the authority, without action or vote of our stockholders in most cases, to issue all or a part of any authorized but unissued shares. Such stock issuances may be made at a price that reflects a discount from the then-current trading price of our common stock. In addition, in order to raise the capital that we may need at today’s stock prices, we will need to issue securities that are convertible into or exercisable for a significant amount of our common stock. These issuances would dilute your percentage ownership interest, which will have the effect of reducing your influence on matters on which our stockholders vote, and might dilute the book value of our common stock. You may incur additional dilution of net tangible book value if holders of stock options, whether currently outstanding or subsequently granted, exercise their options or if warrant holders exercise their warrants to purchase shares of our common stock.  In December 2004, we issued 4,848,484 shares of common stock to investors for $1.65 per share and warrants to purchase 2,181,818 shares of common stock to investors; the exercise price for these warrants is $2.00.  As of April 2, 2005, none of these warrants have been exercised.

32

The sale or issuance of a large number of shares of our common stock could depress our stock price.

                As of May 10, 2005, we have reserved 7,518,876 shares of common stock for issuance upon exercise of stock options and warrants, 600,811 shares for future issuances under our stock plans and 53,555 shares for future issuances as matching contributions under our 401(k) plan. We have also reserved 900,424 shares of common stock for issuance upon conversion of the outstanding Series B Preferred Stock, which can be converted at any time. As of May 10, 2005, holders of warrants and options to purchase an aggregate of 6,913,575 shares of our common stock may exercise those securities and transfer the underlying common stock at any time subject, in some cases, to Rule 144. In December 2004, we issued warrants to purchase an additional 2,181,818 shares of common stock.  These warrants are immediately exercisable and are included in the numbers above; the underlying common stock may be transferred at any time subject, in some cases, to Rule 144.

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

                Our stock is listed on the Nasdaq National Market, which affords us an opportunity for relatively broad exposure to a wide spectrum of prospective investors. As a requirement of continued inclusion in the Nasdaq National Market, SatCon must comply with Nasdaq’s Marketplace Rules. In 2003, SatCon received notice from Nasdaq that it was not in compliance with Marketplace Rules. Subsequently, in late 2003, Nasdaq advised SatCon that it had achieved compliance, and SatCon has continued to maintain compliance with the Nasdaq National Market Marketplace Rules for Continued Inclusion since that time. However, if we fail to maintain compliance with these rules and our common stock is delisted from the Nasdaq National Market, there could be a number of negative implications, including reduced liquidity in our common stock as a result of the loss of market efficiencies associated with the Nasdaq National Market, the loss of federal preemption of state securities laws, the potential loss of confidence by suppliers, customers and employees, as well as the loss of analyst coverage and institutional investor interest, fewer business development opportunities and greater difficulty in obtaining financing.

                We expect to generate a significant portion of our future revenues from sales of our power control products and cannot assure market acceptance or commercial viability of our power control products.

                We intend to continue to expand development of our power control products. We cannot assure you that potential customers will select SatCon’s products to incorporate into their systems or that our customers’ products will realize market acceptance, that they will meet the technical demands of their end users or that they will offer cost-effective advantages over existing products. Our marketing efforts have included development contracts with several customers and the targeting of specific market segments for power and energy management systems. We cannot know if our commercial marketing efforts will be successful in the future. Additionally, we may not be able to develop competitive products, our products may not receive market acceptance, and we may not be able to compete profitably in this market, even if market acceptance is achieved. If our products do not gain market acceptance or achieve commercial viability, we will not attain our anticipated levels of profitability and growth.

                If we are unable to maintain our technological expertise in design and manufacturing processes, we will not be able to successfully compete.

                We believe that our future success will depend upon our ability to develop and provide products that meet the changing needs of our customers. This requires that we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. As a result, we continually evaluate the advantages and feasibility of new product design and manufacturing processes. We cannot, however, assure you that our process improvement efforts will be successful. The introduction of new products embodying new technologies and the emergence of shifting customer demands or changing industry standards could render our existing products obsolete and unmarketable, which would have a significant impact on our ability to generate revenue. Our future success will depend upon our ability to continue to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers. We may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products or product enhancements may cause customers to

33

forego purchases of our products and purchase those of our competitors.

                We are heavily dependent on contracts with the U.S. government and its agencies or from subcontracts with the U.S. government’s prime contractors for revenue to develop our products, and the loss of one or more of our government contracts could preclude us from achieving our anticipated levels of growth and revenues.

                Our ability to develop and market our products is dependent upon maintaining our U.S. government contract revenue and research grants. Many of our U.S. government contracts are funded incrementally on a year-to-year basis. Approximately 50% of our revenue during fiscal year 2004 was derived from government contracts and subcontracts. Changes in government policies, priorities or programs that result in budget reductions could cause the government to cancel existing contracts or eliminate follow-on phases in the future which would severely inhibit our ability to successfully complete the development and commercialization of our products. In addition, there can be no assurance that, once a government contract is completed, it will lead to follow-on contracts for additional research and development, prototype build and test or production. Furthermore, there can be no assurance that our U.S. government contracts or subcontracts will not be terminated or suspended in the future. In the event that any of our government contracts are terminated for cause, it could significantly affect our ability to obtain future government contracts, which could seriously harm our ability to develop our technologies and products.

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

                The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any such contract. Additionally, substantial portions of the payments to us under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. Adjustments that result from inquiries or audits of our contracts could have a material adverse impact on our financial condition or results of operations.

                Since our inception, we have not experienced any material adjustments as a result of any inquiries or audits, but there can be no assurance that our contracts will not be subject to material adjustments in the future.

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

                Many of our patents are the result of inventions made under U.S. government-funded research and development programs. With respect to any invention made with government assistance, the government has a nonexclusive, nontransferable, irrevocable, paid-up license to use the technology or have the technology employed for or on behalf of the U.S. government throughout the world. Under certain conditions, the U.S. government also has “march-in rights,” which enable the U.S. government to require us to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to responsible applicants, upon terms that are reasonable under the circumstances.

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

                As of May 10, 2005, we held approximately 70 U.S. patents and had 2 patent applications pending with the U.S. Patent and Trademark Office. We have also obtained corresponding patents in the rest of North America, Europe, and Asia for many of these patents. The expiration dates of our patents range from 2009 to 2021, with the majority expiring after 2015. As a qualifying small business from our inception to date, we have retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants.

                Our patent and trade secret rights are of significant importance to us and to our future prospects. Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary technology and systems designs relating to our products. Although we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be successful in doing so. Further, our competitors may independently develop or patent technologies that are substantially equivalent or superior to ours. No assurance can be

34

given as to the issuance of additional patents or, if so issued, as to their scope. Patents granted may not provide meaningful protection from competitors. Even if a competitor’s products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action and there can be no assurance that we would be successful in enforcing our intellectual property rights. Because we intend to enforce our patents, trademarks and copyrights and protect our trade secrets, we may be involved from time to time in litigation to determine the enforceability, scope and validity of these rights. This litigation could result in substantial costs to us and divert resources from operational goals. In addition, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country where we operate or sell our products.

                We may not be able to maintain confidentiality of our proprietary knowledge.

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

                Others may assert that our technology infringes their intellectual property rights.

                We believe that we do not infringe the proprietary rights of others and, to date, no third parties have asserted an infringement claim against us, but we may be subject to infringement claims in the future. The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our operating results may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.

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

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

                We expect significant competition for our products and services.

                In the past, we have faced limited competition in providing research services, prototype development and custom and limited quantity manufacturing. We expect competition to intensify greatly as commercial applications increase for our products under development. Many of our competitors and potential competitors are well established and have substantially greater financial, research and development, technical, manufacturing and marketing resources than we do. Some of our competitors and potential competitors are much larger than we are. If these larger competitors decide to focus on the development of distributed power and power quality products, they have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of these products more quickly and effectively than we can. There can also be no assurance that current and future competitors will not develop new or enhanced technologies perceived to be superior to those sold or developed by us. There can be no assurance that we will be successful in this competitive environment.

35

                We are dependent on third-party suppliers for the supply of key components for our products.

                We use third-party suppliers for components in many of our systems. From time to time, shipments can be delayed because of industry-wide or other shortages of necessary materials and components from third-party suppliers. A supplier’s failure to supply components in a timely manner, or to supply components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to deliver our products in accordance with contractual obligations.

                On occasion, we agree to fixed price engineering contracts in our Applied Technology Division, which exposes us to losses.

Most of our engineering design contracts are structured on a cost-plus basis.  However, on occasion we have entered into fixed price contracts, which may expose us to loss.  A fixed priced contract, by its very nature, requires cost estimates during the bidding process and throughout the contract, as the program proceeds to completion.  Depending upon the complexity of the program, the estimated completion costs could change frequently and significantly during the course of the contract.  We regularly involve the appropriate people on the program and finance staffs to arrive at a reasonable estimate of the cost to complete.   However, due to unanticipated technical challenges and other factors, there is the potential for substantial cost overruns in order to complete the contract in accordance with the contract specifications.  Currently we have only two significant contracts of this type. During the fiscal year ended September 30, 2004, we had recorded losses on these contracts of approximately $0.8 million.   During the three and six month period ended April 2, 2005, we recorded an additional $0.1 million related to a fixed price contract which was completed during the quarter.  No other losses were recorded on these contracts during the six months ended April 2, 2005.

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

                If our power control products are successful in achieving rapid market penetration, we may be required to deliver large volumes of technically complex products or components to our customers on a timely basis at reasonable costs to us. We have limited experience in ramping up our manufacturing capabilities to meet large-scale production requirements and delivering large volumes of our power control products. If we were to commit to deliver large volumes of our power control products, we cannot assure you that we will be able to satisfy large-scale commercial production on a timely and cost-effective basis or that such growth will not strain our operational, financial and technical resources.

                Our business could be subject to product liability claims.

                Our business exposes us to potential product liability claims, which are inherent in the manufacturing, marketing and sale of our products, and we may face substantial liability for damages resulting from the faulty design or manufacture of products or improper use of products by end users. We currently maintain a moderate level of product liability insurance, and there can be no assurance that this insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain such coverage on acceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. In addition, negative publicity in connection with the faulty design or manufacture of our products would adversely affect our ability to market and sell our products.

                We are subject to a variety of environmental laws that expose us to potential financial liability.

                Our operations are regulated under a number of federal, state and foreign environmental and safety laws and regulations that govern, among other things, the discharge or release of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Because we use hazardous materials in certain of our manufacturing processes, we are required to comply with these environmental laws. In addition, because we generate hazardous wastes, we, along with any other person who arranges for the disposal of our wastes, may be subject to potential financial exposure for costs associated with an investigation and remediation of sites at which we have arranged for the

36

disposal of hazardous wastes if those sites become contaminated and even if we fully comply with applicable environmental laws.  If we were found to be a responsible party, we could be held jointly and severably liable for the costs of remedial actions. To date, we have not been cited for any improper discharge or release of hazardous materials.

                Businesses and consumers might not adopt alternative distributed power solutions as a means for obtaining their electricity and power needs.

                 On-site distributed power generation solutions, such as fuel cell, photovoltaic and wind turbine systems, which utilize our products, provide an alternative means for obtaining electricity and are relatively new methods of obtaining electrical power that businesses may not adopt at levels sufficient to grow this part of our business. Traditional electricity distribution is based on the regulated industry model whereby businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to succeed, businesses and consumers must adopt new purchasing practices and must be willing to rely upon less upon traditional means of purchasing electricity. We cannot assure you that businesses and consumers will choose to utilize on-site distributed power at levels sufficient to sustain our business in this area. The development of a mass market for our products may be impacted by many factors which are out of our control, including:

•              market acceptance of fuel cell, photovoltaic and wind turbine systems that incorporate our products;

•              the cost competitiveness of these systems;

•              regulatory requirements; and

•              the emergence of newer, more competitive technologies and products.

If a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop these products.

                Our quarterly operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our share price may decrease significantly.

                Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our control.  Because our operating expenses are based on anticipated revenue levels, our sales cycle for development work is relatively long and a high percentage of our expenses are fixed for the short term, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. If our earnings do not meet the expectations of securities analysts or investors, the price of our stock could decline.

                 Provisions in our charter documents and Delaware law may delay, deter or prevent the acquisition of SatCon, which could decrease the value of your shares.

                Some provisions of our certificate of incorporation and bylaws may delay, deter or prevent a change in control of SatCon or a change in our management that you, as a stockholder, may consider favorable. These provisions include:

•              authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and deter a takeover attempt;

•              a board of directors with staggered, three-year terms, which may lengthen the time required to gain control of our board of directors;

•              prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and

•              limitations on who may call special meetings of stockholders.

37

                In addition, Section 203 of the Delaware General Corporation Law and provisions in some of our stock incentive plans may delay, deter or prevent a change in control of SatCon. Those provisions serve to limit the circumstances in which a premium may be paid for our common stock in proposed transactions, or where a proxy contest for control of our board may be initiated. If a change of control or change in management is delayed, deterred or prevented, the market price of our common stock could suffer.

                We are subject to stringent export laws and risks inherent in international operations.

                We market and sell our products and services both inside and outside the United States. We are currently selling our products and services throughout North America and in certain countries in South America, Asia, Canada and Europe. Certain of our products are subject to the International Traffic in Arms Regulations (ITAR) 22 U.S.C 2778, which restricts the export of information and material that may be used for military or intelligence applications by a foreign person. Additionally, certain products of ours are subject to export regulations administered by the Department of Commerce, Bureau of Industry Security, which require that we obtain an export license before we can export certain products or technology. Failure to comply with these laws could result in enforcement responses by the government, including substantial monetary penalties, denial of export privileges, debarment from government contracts and possible criminal sanctions.

                Revenue from sales to our international customers for our fiscal years ended September 30, 2004 and 2003 were approximately $3.7 million and $3.3 million, respectively. For the six months ended April 2, 2005 revenue from sales to our international customers was approximately $2.5 million.  Our success depends, in part, on our ability to expand our market for our products and services to foreign customers and our ability to manufacture products that meet foreign regulatory and commercial requirements. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. We face numerous challenges in penetrating international markets, including unforeseen changes in regulatory requirements, export restrictions, fluctuations in currency exchange rates, longer accounts receivable cycles, difficulties in managing international operations, and the challenges of complying with a wide variety of foreign laws.

                We are exposed to credit risks with respect to some of our customers.

                To the extent our customers do not advance us sufficient funds to finance our costs during the execution phase of our contracts, we are exposed to the risk that they will be unable to accept delivery or that they will be unable to make payment at the time of delivery. Occasionally, we accept the risk of dealing with thinly financed entities. We attempt to mitigate this risk by seeking to negotiate more timely progress payments and utilizing other risk management procedures.

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

                Our loan agreement with Silicon Valley Bank subjects us to various restrictions on our ability to engage in certain activities without the prior written consent of the bank, including, among other things, our ability to:

•              dispose of or encumber assets, other than in the ordinary course of business

•              incur additional indebtedness

•              merge or consolidate with other entities, or acquire other businesses, and

•              make investments

                The agreement also subjects us to various financial and other covenants with which we must comply on an ongoing or periodic basis. The financial covenant requires us to maintain a minimum level of tangible net worth, as defined, which varies from month to month. If we violate this or any other covenant, any outstanding debt under this agreement could become immediately due and payable, the bank could proceed against any collateral securing indebtedness and our ability to borrow funds in the future may be restricted or eliminated.  These restrictions may also limit our ability to pursue

38

business opportunities or strategies that we would otherwise consider to be in the best interests of the company.

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

                As of May 10, 2005, 425 shares of our Series B Preferred Stock were outstanding. Pursuant to the terms of the certificate of designation creating the Series B Preferred Stock, upon a liquidation of our company, the holders of shares of the Series B Preferred Stock are entitled to receive a liquidation payment prior to the payment of any amount with respect to the shares of our common stock. The amount of this preferential liquidation payment is $5,000 per share of Series B Preferred Stock, plus the amount of any accrued but unpaid dividends on those shares. Dividends accrue on the shares of Series B Preferred Stock at a rate of 6% per annum increasing to a rate of 8% per annum on October 1, 2005.

If we are unable to effectively and efficiently eliminate the significant deficiencies that have been identified in our internal controls and procedures, there could be a material adverse effect on our operations or financial results.

      In December 2004, our management and Audit Committee were notified by our independent accountants, Grant Thornton LLP, of three significant deficiencies in our internal controls and procedures regarding, first, a significant deficiency related to a need to formalize policies and procedures, second,  a significant deficiency related to the need for improvement in segregation of duties and, third, a significant deficiency related to the need for monitoring controls to ensure that operational controls are operating as designed. Although we are committed to addressing these deficiencies, we cannot assure you that we will be able to successfully implement the revised controls and procedures or that our revised controls and procedures will be effective in remedying all of the identified significant deficiencies. Our inability to remedy these significant deficiencies potentially could have a material adverse effect on our business.

Effects of Inflation

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

Recent Accounting Pronouncements

In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs — an amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are evaluating the impact of this standard on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require Satcon to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the Black-Scholes model which Satcon currently uses for its footnote disclosure. The FASB decided to remove its explicit preference for a lattice model and not require a single valuation methodology. SFAS No. 123R requires Satcon to adopt the new accounting provisions beginning in our first quarter of 2006. We are evaluating the impact of this standard on our consolidated financial statements.

39

Item 3. Quantitative and Qualitative Disclosures About Market Risk

                The following discussion about our market risks disclosures involves forward-looking statements. Actual results could differ materially from those discussed in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate Risk

                We are exposed to market risk from changes in interest rates primarily through our financing activities. Interest on outstanding balances on the New Loan accrues at a rate equal to the Bank’s prime rate of interest plus 2.0% per annum. Our ability to carry out our business plan or our ability to finance future working capital requirements may be impacted if the cost of carrying debt fluctuates to the point where it becomes a burden on our resources.

Foreign Currency Risk

                Nearly all of our sales outside the United States are priced in US dollars. If the US Dollar strengthens versus local currencies, it may result in our products becoming more expensive in foreign markets. In addition, approximately 15-20% of our costs are incurred in foreign currencies, especially the Canadian dollar. If the US Dollar weakens versus these local currencies, it may result in an increase in our cost structure.

40

Item 4. Controls and Procedures

(a)           Evaluation of Disclosure Controls and Procedures.

                As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (the principal executive officer) and Vice President of Finance (the principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures. While the Company has identified internal control deficiencies, which are discussed below, the Company’s evaluation indicated that these deficiencies did not impair the effectiveness of the Company’s overall disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Vice President of Finance concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

                Our management and Audit Committee were notified by Grant Thornton LLP (“Grant Thornton”), of three significant deficiencies they observed during the audit of the September 30, 2004 financial statements.

                The first significant deficiency relates to a need to formalize policies and procedures (including code of conduct, process to evaluate complaints about accounting and financial reporting and anonymous submission process, documenting that control activities have occurred, and a comprehensive accounting and financial reporting policies and procedures manual).  The Company either had begun to formalize policies in these areas or had plans to do so prior to receiving Grant Thornton’s observations.  The Company will continue with these plans.

                The second significant deficiency relates to the need for improvement in segregation of duties (particularly for certain cash receipts, periodic rotation of duties and maintaining segregation of duties while employees are on vacation).  The Company expects to develop and implement improvements in this area during the fiscal year 2005.

                The third significant deficiency relates to the need for monitoring controls to ensure that operational controls are operating as designed (including periodic observation and re-performance of operational controls).  The Company expects to develop and implement these monitoring controls during the fiscal year 2005.

(b)           Changes in Internal Control Over Financial Reporting.

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

41

PART II. OTHER INFORMATION

Item 1. Legal Proceedings:

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

In October 2003, the Company was served with a Complaint by a former employee seeking, among other claims, severance and bonus compensation.  In July of 2004, the employee filed an amended complaint in which two additional former employees joined the action seeking similar damages.  The plaintiffs are seeking damages under multiple theories and claims in excess of $750,000.The Company has denied the allegations contained in the complaint and believes the claims are entirely without merit.  On February 19, 2005, the Company settled the Complaint with these former employees, agreeing to pay approximately $124,000 and the forgiveness of a promissory note due from an employee of approximately $70,000, which had been previously provided for by the Company in fiscal 2003.

                 On or about August 31, 2004, the Company was informed that Bristol Investment Group, Inc. had filed a Demand for Arbitration with the American Arbitration Association claiming that it was owed money and warrants under a September 2002 agreement whereby Bristol was to have arranged for a private placement financing transaction.  The total amount at issue was approximately $240,000.  The Company settled this claim for $189,000 during the second quarter of fiscal 2005.

                We are not aware of any other current or pending litigation to which we are or may be a party that we believe could materially adversely affect our results of operations or financial condition or net cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:

Not applicable.

Item 3. Defaults Upon Senior Securities:

                Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders:

                Not applicable.

Item 5. Other Information:

                Not applicable.

Item 6. Exhibits:

                The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q.

42

SIGNATURE

                Pursuant to the requirements 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.

	SATCON TECHNOLOGY CORPORATION
Date: May 17, 2005	By:	/s/ DAVID E. O’NEIL
		David E. O’Neil
		Vice President, Finance and Treasurer

43

EXHIBIT INDEX

Exhibit Number	Exhibit
10.1	Loan and Security Agreement Dated January 28, 2005, by and among the Registrant, SatCon Power Systems, Inc., SatCon Electronics, Inc., SatCon Applied Technology, Inc., SatCon Power Systems Canada LTD. And Silicon Valley Bank.
31.1	Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

44

EX-10.1

EXHIBIT 10.1

Silicon Valley Bank

Loan and Security Agreement

Borrower:	SATCON TECHNOLOGY CORPORATION
	SATCON POWER SYSTEMS, INC.
	SATCON ELECTRONICS, INC.
	SATCON APPLIED TECHNOLOGY, INC.
	SATCON POWER SYSTEMS CANADA LTD.
Address:	27 Drydock Avenue
	Boston, Massachusetts 02210
Date:	January 28, 2005

This LOAN AND SECURITY AGREEMENT is entered into on the above date between SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California  95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 (“Silicon”) and the borrowers named above (jointly and severally the “Borrower”), with offices located at the above address (“Borrower’s Address”).  The Schedule and Exhibits to this Agreement (the “Schedule” and the “Exhibits,” respectively) shall for all purposes be deemed to be part of this Agreement, and the same are integral parts of this Agreement.  (Definitions of certain terms used in this Agreement are set forth in Section 8 below.)

RECITALS

Each of the entities comprising the Borrower wishes to obtain credit from time to time from Silicon, and Silicon desires to extend credit to each and/or any one of the entities comprising the Borrower.  This Agreement sets forth the terms on which Silicon will advance credit to Borrower, and Borrower, jointly and several, will repay the amounts owing to Silicon.

1.             LOANS.

1.1          Loans.  Silicon will make loans to Borrower (the “Loans”) ­up to the amounts (the “Credit Limit”) shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of any Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time, upon notice to Borrower.  Amounts borrowed may be repaid and reborrowed during the term of this Agreement.

1.2          Interest.  All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement.  Interest shall be payable monthly, on the last day of the month.  Interest may, in Silicon’s discre­tion, be charged to Borrower’s loan account, and the same shall thereafter bear interest at the same rate as the other Loans.  Silicon may, in its discretion, charge interest to Borrower’s Deposit Accounts maintained with Silicon.

1

1.3          Overadvances.  If at any time or for any reason the total of all outstanding Loans and all other Obligations ex­ceeds the Credit Limit (an “Overadvance”), Borrower shall immediately pay the amount of the excess to Silicon, with­out notice or demand.  Without limiting Borrower’s obliga­tion to repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at a rate equal to the interest rate which would otherwise be applicable to the Overadvance, plus an additional two percent (2%) per annum.

1.4          Fees.  Borrower shall pay Silicon the fees shown on the Schedule, which are in addition to all interest and other sums payable to Silicon and are not refundable.

1.5          Loan Requests.  To obtain a Loan, Borrower shall make a request to Silicon by facsimile or telephone.  Loan requests received after 12:00 Noon will not be considered by Silicon until the next Business Day.  Silicon may rely on any telephone request for a Loan given by a person whom Silicon believes is an authorized representative of Borrower, and Borrower will indemnify Silicon for any loss Silicon suffers as a result of that reliance.  In the event Borrower has elected to be on “non-borrowing reporting status” (see Section 6 of the Schedule), Borrower shall furnish Silicon with a Loan request at least thirty (30) days prior to the requested funding date.

1.6          Letters of Credit.  At the request of Borrower, Silicon may, in its commercially reasonable discretion, issue or arrange for the issuance of letters of credit for the account of Borrower, in each case in form and substance satisfactory to Silicon in its commercially reasonable discretion (collectively, “Letters of Credit”).  The aggregate face amount of all outstanding Letters of Credit from time to time shall not exceed the amount shown on the Schedule (the “Letter of Credit Sublimit”), and shall be reserved against Loans which would otherwise be available hereunder.  Borrower shall pay all bank charges (including charges of Silicon) for the issuance of Letters of Credit, together with such commercially reasonable additional fee as Silicon’s letter of credit department shall charge in connection with the issuance of the Letters of Credit.  Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made.  Each Letter of Credit shall have an expiry date no later than thirty days prior to the Maturity Date.  Borrower hereby agrees to indemnify, save, and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys’ fees incurred by Silicon arising out of or in connection with any Letters of Credit, excluding gross negligence or willful misconduct by Silicon.  Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Silicon and opened for Borrower’s account or by Silicon’s interpretations of any Letter of Credit issued by Silicon for Borrower’s account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.  Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank.  Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon’s indemnification of any such issuing bank.  The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Silicon relating to Letters of Credit are cumulative.

1.7          Foreign Exchange Sublimit. Borrower may use up to the amount set forth on the Schedule for foreign exchange forward contracts with Silicon under which Borrower commits to purchase from or sell to Silicon a set amount of foreign currency more than one business day after the contract date (the “FX Forward Contract”).  Silicon shall subtract 10% of each outstanding FX Forward Contract from the foreign exchange sublimit.   Silicon may terminate the FX Forward Contracts if an Event of Default occurs.

1.8          Cash Management Services Sublimit.  Borrower may use up to the amount set forth on the Schedule for Cash Management Services.  Such aggregate amounts utilized under the Cash Management Services Sublimit shall at all times reduce the amount otherwise available for Loans hereunder.  Any amounts Silicon pays on behalf

2

of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Loans hereunder and will accrue interest at the interest rate applicable to Loans.

1.9          Designation of Agent.  Each Borrower hereby designates SatCon Technology Corporation (the”Agent”) as the agent of that Borrower to discharge the duties and responsibilities of the Agent as provided herein.

1.10        Operation of Agreement. (a) Except as otherwise permitted by Silicon, loans hereunder shall be re­quested solely by the Agent as agent for each Borrower.

(b)           Any Loan which may be made by Silicon under this Agreement and which is directed to the Agent is received by the Agent in trust for that Borrower who is intended to receive such Loan. The Agent shall distribute the proceeds of any such Loan solely to that Borrower.  Each Borrower shall be directly indebted to Silicon for each Loan distributed to any Borrower by the Agent, together with all accrued interest thereon, as if that amount had been advanced directly by Silicon to a Borrower (whether or not the subject Loan was based upon the accounts and/or inventory or other assets of the Borrower which actually received such distribution), in addition to which each Borrow­er shall be liable to Silicon for all Obligations under this Agreement, whether or not the proceeds of the Loan are distributed to any particular Borrower.

(c)           Silicon shall have no responsibility to inquire as to the distribution of Loans made by Silicon through the Agent as described herein.

1.11Loans Directly to Borrower.  (a) If, for any reason, and at any time during the term of this Agreement,

(i)            any Borrower, including the Agent, as agent for each Borrower, shall be unable to, or prohib­ited from carrying out the terms and conditions of this Agreement (as deter­mined by Silicon in Silicon’s sole and absolute discretion); or

(ii)           Silicon deems it inexpedient (in Silicon’s sole and absolute discretion) to continue making Loans to or for the account of any particular Borrower, or to channel such loans and Loans through the Agent, then Silicon may make Loans directly to such Borrower as Silicon determines to be expedient, which Loans may be made without regard to the procedures otherwise included in this Article 1.

(b)           In the event that Silicon determines to forgo the procedures included herein pursuant to which Loans are to be channeled through the Agent, then Silicon may designate one or more Borrower to fulfill the financial and other reporting requirements otherwise imposed herein upon the Agent.

(c)           Each Borrower shall remain liable to Silicon for the payment and performance of all Obligations (which payment and perfor­mance shall continue to be secured by all Collateral) notwithstanding any determination by Silicon to cease making Loans to or for the benefit of any Borrow­er.

1.12Continuation of Authority of Agent.  The authority of the Agent to request Loans on behalf of, and to bind, each Borrower, shall continue unless and until Silicon acts as provided in Section 1.8, above, or Silicon actually receives:

(a)           written notice of: (i) the termina­tion of such authority, and (ii) the subsequent appointment of a successor Agent, which notice is executed by the respective Presidents of each Borrower (other than the President of the Agent being replaced) then eligible for borrowing under this Agreement; and

3

(b)           written notice from the successor Agent (i) accept­ing such appointment; (ii) acknowledging that the removal and appoint­ment has been effected by the respective Presidents of each Borrower eligible for borrowing under the within Agreement; and (iii) acknowledging that from and after the date of appointment, the newly appointed Agent shall be bound by the terms hereof, and that as used herein, the term “Agent” shall mean and include the newly appointed Agent.

1.13        Indemnification.  The Agent and each Borrower respectively shall indem­nify, defend, and save and hold Silicon harmless from and against any liabilities, claims, demands, expenses, or losses made against or suffered by Silicon on account of, or arising out of, this Agreement, Silicon’s reliance upon Loan requests made by the Agent, or any other action taken by Silicon hereunder or under any of Silicon’s various agreements with the Agent and/or any Borrower and/or any other person arising under this Agreement.

2.  SECURITY INTEREST.

2.1          Security Interest.  To secure the payment and performance of all of the Obligations when due, and the performance of each of the Borrower’s duties under this Agreement and all documents executed in connection herewith, Borrower hereby grants to Silicon a continuing security interest in all of Borrower’s interest in the following, whether now owned or hereafter acquired, and wherever located:  All Inventory, Equipment, Payment Intangibles, Letter-of-Credit Rights, Supporting Obligations, Receivables, and General Intangibles, including, without limitation, all of Borrower’s Intellectual Property, Deposit Accounts, and all money, and all property now or at any time in the future in Silicon’s possession (including claims and credit balances), and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Silicon may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the “Collateral”).  The security interest granted herein shall be a first priority security interest in the Collateral.  After the occurrence of a Default, Silicon may place a “hold” on any Deposit Account pledged as collateral.  Borrower is not a party to, nor is bound by, any license or other agreement with respect to which the Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property.  Without prior consent from Silicon, Borrower shall not enter into, or become bound by, any such license or agreement which is reasonably likely to have a material impact on Borrower’s business or financial condition.  Borrower shall take such steps as Silicon requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for all such licenses or contract rights to be deemed “Collateral” and for Silicon to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future.

3.  REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

In order to induce Silicon to enter into this Agreement and to make Loans, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the fol­lowing representations will continue to be true, and that Borrower will at all times comply with all of the following covenants:

3.1          Corporate Existence and Authority.  Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation.  Borrower is and will con­tinue to be qualified and licensed to do business in all ju­risdictions in which any failure to do so would have a ma­terial adverse effect on Borrower.  The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as en­forcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors’ rights generally), (iii) do not violate Borrower’s articles or certificate of incorporation, Borrower’s by-laws, or any law or any  material agreement or instru­ment which is binding upon Borrower or its property, and (iv) do not constitute

4

grounds for acceleration of any material indebtedness or obligation under any material agreement or instru­ment which is binding upon Borrower or its property.

3.2          Name; Trade Names and Styles.  The name of Borrower set forth in the heading to this Agreement is its correct name.  Listed on the Schedule are all prior names of Borrower and all of Borrower’s present and prior trade names during the past five (5) years.  Borrower shall give Silicon 30 days’ prior written notice before changing its name or doing business under any other name.  The Borrower will be deemed to be in compliance with this provision by furnishing Silicon with notice of acquiring any new trade name within fifteen (15) days after such acquisition provided that prior notice, as otherwise required hereunder, was prohibited by a confidentiality agreement to which the Borrower is a party. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name.

3.3          Place of Business; Location of Collateral.  The ad­dress set forth in the heading to this Agreement is Borrower’s chief executive office.  In addition, Borrower’s places of business and Collateral are located only at the locations set forth on the Schedule.  Borrower will give Silicon at least 30 days prior written notice before opening any additional place of business, changing its chief execu­tive office, changing its state of formation or moving any of the Collateral to a location other than Borrower’s Address or one of the locations set forth on the Schedule, except for the movement of goods in the ordinary course of business.  The Borrower will be deemed to be in compliance with this provision by furnishing Silicon with notice of a new location where Collateral may be located within fifteen (15) days after establishing such location provided that prior notice, as otherwise required hereunder, was prohibited by a confidentiality agreement to which the Borrower is a party.

3.4          Title to Collateral; Permitted Liens.  Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower.  The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens.  Silicon now has, and will continue to have, a first-priority perfected and enforceable security in­terest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others.  None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture.  Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or im­pair Borrower’s right to remove any Collateral from the leased premises.  Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Silicon, use its best efforts to cause such third party to exe­cute and deliver to Silicon, in form acceptable to Silicon, such waivers and subordinations as Silicon shall specify, so as to ensure that Silicon’s rights in the Collateral are, and will continue to be, superior to the rights of any such third party.  Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located.

3.5          Maintenance of Collateral.  Borrower will maintain the Collateral in good working condition, and Borrower will not use the Collateral for any unlawful purpose.  Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral.

3.6          Books and Records.  Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records, comprising an accounting system in ac­cordance with generally accepted accounting principles.

3.7          Financial Condition, Statements and Reports.  All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the fi­nancial condition of Borrower, at the times and for the pe­riods therein stated.  Between the last date covered by any such statement provided to Silicon and the date hereof,

5

there has been no material adverse change in the financial condition or business of Borrower.  Borrower is now and will continue to be solvent.

3.8          Tax Returns and Payments; Pension Contributions.  Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, as­sessments, deposits and contributions now or in the future owed by Borrower.  Borrower may, however, defer pay­ment of any contested taxes, provided that Borrower (i) in good faith contests Borrower’s obligation to pay the taxes by appropriate proceedings promptly and diligently insti­tuted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) takes all reasonable steps required to keep the contested taxes from becoming a lien upon any of the Collateral.  Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional taxes becoming due and payable by Borrower.  Borrower has paid, and shall continue to pay all amounts necessary to fund all pre­sent and future pension, profit sharing and deferred com­pensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, in­cluding any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.  Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic de­posit of all payroll taxes payable by Borrower.

3.9          Compliance with Law.  Except as disclosed in the Schedule, Borrower has complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower’s ownership of real or personal prop­erty, the conduct and licensing of Borrower’s business, and all environmental matters.

3.10        Litigation.  Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investiga­tion pending or (to best of Borrower’s knowledge) threat­ened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in any material adverse change in the fi­nancial condition or business of Borrower, or in any mate­rial impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now be­ing conducted.  Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $100,000 or more, or involving $200,000  or more in the aggregate.

3.11        Use of Proceeds.  All proceeds of all Loans shall be used solely for working capital purposes.  Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.”

3.12        Withholding for SatCon Power Systems Canada Ltd. In the event any payments are received by Silicon from SatCon Power Systems Canada Ltd. (the “Cdn Borrower”) hereunder such payments will be made subject to applicable withholding for any taxes, levies, fees, deductions, withholding, restrictions or conditions of any nature whatsoever.  Specifically, if at any time any governmental authority, applicable law, regulation or international agreement requires the Cdn Borrower to make any such withholding or deduction from any such  payment or other sum payment hereunder to Silicon, the Cdn Borrower hereby covenants and agrees that the amount due from the Cdn Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that, after the making of such required withholding or deduction, Silicon receives a net sum equal to the sum which it would have received had no withholding or deduction been required and the Cdn Borrower shall pay the full amount withheld or deducted to the relevant governmental authority.  The Cdn Borrower will, upon request, furnish Silicon with proof satisfactory to Silicon indicating that the Cdn Borrower has made such withholding payment provided, however, that the Cdn Borrower need not make any withholding payment if the amount or validity of such withholding payment is contested in good faith by appropriate and timely proceedings

6

and as to which payment in full is bonded or reserved against by the Cdn Borrower.  The agreements and obligations of the Cdn Borrower contained in this Section shall survive the Maturity Date.

4.  RECEIVABLES.

4.1          Representations Relating to Receivables. Borrower represents and warrants to Silicon as follows:  Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing un­conditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services in the ordinary course of Borrower’s business, and (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below.

4.2          Representations Relating to Documents and Legal Compliance.  Borrower represents and warrants to Silicon as follows:  All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and cor­rect and all such invoices, instruments and other docu­ments and all of Borrower’s books and records are and shall be genuine and in all respects what they purport to be, and all signatories and endorsers have the capacity to contract.  All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations.  All signatures and endorsements on all documents, instru­ments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accor­dance with their terms.

4.3          Schedules and Documents relating to Receivables. Borrower shall deliver to Silicon transaction reports and loan requests (including, without limitation, a statement setting forth the intended use of each requested Loan), schedules and assignments of all Receivables, and schedules of collections, all on Silicon’s standard forms; provided, however, that Borrower’s failure to execute and deliver the same shall not affect or limit Silicon’s security interest and other rights in all of Borrower’s Receivables, nor shall Silicon’s failure to ad­vance or lend against a specific Receivable affect or limit Silicon’s security interest and other rights therein.  In the event Borrower has elected to be on “non-borrowing reporting status” (see Section 6 of the Schedule), Borrower shall furnish Silicon with a Loan request at least thirty (30) days prior to the requested funding date.  Otherwise, Loan requests received after 12:00 Noon will not be considered by Silicon until the next Business Day.  Together with each such schedule and assignment, or later if requested by Silicon, Borrower shall, at Silicon’s request, furnish Silicon with copies or originals of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the fore­going.  Borrower shall also furnish to Silicon an aged ac­counts receivable trial balance in such form and at such intervals as Silicon shall request.  In addition, Borrower shall deliver to Silicon the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary endorsements, all of which shall be with recourse.  Borrower shall also pro­vide Silicon with copies of all credit memos within two days after the date issued.

4.4          Collection of Receivables. Borrower shall cause the Account Debtors to remit all Receivables to Silicon and Silicon shall hold all payments on, and proceeds of, Receivables in a lockbox account, or such other “blocked account” as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may reasonably specify.  All such payments on, and proceeds of, Receivables shall be applied to the Obligations in such order as Silicon shall determine.  ­Silicon or its designee may, at any time, notify Account Debtors that the Receivables have been assigned to Silicon.

4.5.         Remittance of Proceeds. All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which re­ceived by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; pro­vided that, if no Default or Event of Default has occurred, Borrower shall not be obligated to remit to

7

Silicon the pro­ceeds of the sale of worn out or obsolete equipment dis­posed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $50,000 or less (for all such transactions in any fiscal year).  Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon.  Nothing in this  Section 4.5 limits the restrictions on disposi­tion of Collateral set forth elsewhere in this Agreement.

4.6          Disputes.  Borrower shall notify Silicon promptly of all disputes or claims relating to Receivables.  Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm’s length transactions, which are re­ported to Silicon on the regular reports provided to Silicon; (ii) no Default or Event of Default has occurred and is con­tinuing; and (iii) taking into account all such discounts set­tlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit.  Silicon may, at any time after the occurrence of an Event of Default, settle or adjust dis­putes or claims directly with Account Debtors for amounts and upon terms which Silicon considers advisable in its reasonable credit judgment and, in all cases, Silicon shall credit Borrower’s Loan account with only the net amounts received by Silicon in payment of any Receivables.

4.7          Returns.  Provided no Event of Default has oc­curred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (sending a copy to Silicon).  In the event any attempted return oc­curs after the occurrence of any Event of Default, Borrower shall (i) hold the returned Inventory in trust for Silicon, (ii) segregate all returned Inventory from all of Borrower’s other property, (iii) conspicuously label the returned Inventory as Silicon’s property, and (iv) immediately notify Silicon of the return of any Inventory, specifying the reason for such return, the loca­tion and condition of the returned Inventory, and on Silicon’s request deliver such returned Inventory to Silicon.

4.8          Verification.  Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose.

4.9          No Liability. Silicon shall not under any circum­stances be responsible or liable for any shortage or dis­crepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of Borrower’s obligations under any contract or agreement giving rise to a Receivable.  Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct.

5.  ADDITIONAL DUTIES OF THE BORROWER.

5.1          Financial and Other Covenants.  Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

5.2          Insurance.  Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require, and Borrower shall provide evidence of such insurance to Silicon, so that Silicon is satisfied that such insurance is, at all times, in full force and effect.  All such insurance policies shall name Silicon as an additional loss payee, and shall contain a lenders loss payee en­dorsement in form reasonably acceptable to Silicon.  Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its sole discretion, except that, provided no Default or Event of Default has

8

occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the in­surance proceeds were paid.  Silicon may require reasonable assurance that the insurance proceeds so released will be so used.  If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower’s expense.  Borrower shall promptly deliver to Silicon copies of all reports made to insurance companies.

5.3          Reports.  Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time reasonably specify.

5.4          Access to Collateral, Books and Records.  At rea­sonable times, and on one Business Day’s notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower’s books and records.  Silicon shall take reasonable steps to keep confi­dential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attor­neys, and pursuant to any subpoena or other legal process.  Silicon acknowledges that Borrower is a publicly traded company and that federal and state law restricts the disclosure and use of certain material, non-public information regarding the Borrower’s finances.  The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $750 per person per day (or such higher amount as shall repre­sent Silicon’s then current standard charge for the same), plus reasonable out of pocket expenses.  Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower’s books or records at any location other than Borrower’s Address, without first obtaining Silicon’s written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give Silicon the same rights with respect to access to books and records and related rights as Silicon has under this Loan Agreement.  Borrower waives the benefit of any accountant-client privi­lege or other evidentiary privilege precluding or limiting the disclosure, divulgence or delivery of any of its books and records (except that Borrower does not waive any at­torney-client privilege).

5.5          Negative Covenants.  Except as may be permitted in the Schedule, Borrower shall not, without Silicon’s prior written consent, do any of the following:  (i) merge or con­solidate with another corporation or entity; (ii) acquire any assets, except in the ordinary course of business; (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower’s business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (v) except as shown on the Schedule, store any Inventory or other Collateral with any ware­houseman or other third party;  (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other con­tingent basis; (vii) make any loans of any money or other assets; (viii) incur any debts outside the ordinary course of business; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity; (x) pay or declare any dividends on Borrower’s stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower’s stock; (xii) make any change in Borrower’s capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve or elect to dissolve.  Transactions permitted by the foregoing provisions of this Section 5.5 are only permitted if no Default or Event of Default would occur as a result of such transac­tion.

5.6          Litigation Cooperation.  Should any third-party suit or proceeding be instituted by or against Silicon with re­spect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to Silicon, make available Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding, provided, however, that such cooperation by Borrower shall not be construed as a waiver of its attorney-client privilege.

9

5.7          Further Assurances.  Borrower agrees, at its ex­pense, on request by Silicon, to execute all documents and take all actions, as Silicon may deem reasonably neces­sary or useful in order to perfect and maintain Silicon’s perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement.

6.   TERM.

6.1          Maturity Date.  This Agreement shall continue in effect until the maturity date set forth on the Schedule (the “Maturity Date”), subject to Section 6.2 below.

6.2          Payment of Obligations.  On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable.  Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit is­sued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to 105% the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection there­with, to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon’s then standard form cash pledge agreement.  Notwithstanding any termination of this Agreement, all of Silicon’s security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; pro­vided that Silicon may, in its sole discre­tion, refuse to make any further Loans after termination.  No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination re­lieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full.  Upon payment and performance in full of all the Obligations and written termination of this Agreement by Silicon, Silicon shall promptly de­liver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Silicon’s security interests.

7.  EVENTS OF DEFAULT AND REMEDIES.

7.1          Events of Default.  The occurrence of any of the following events shall constitute an “Event of Default” un­der this Agreement, and Borrower shall give Silicon im­mediate written notice thereof: (a) Any warranty, represen­tation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower’s officers, em­ployees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to per­form any other non-monetary Obligation, which failure is not cured within 5 Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encum­brance (other than a Permitted Lien) is made on all or any part of the Collateral ­, including, without limitation, the service of process upon Silicon seeking to attach by trustee, mesne, or other process, Borrower’s funds on deposit with, or assets of the Borrower in the possession of, Silicon in an amount in excess of $200,000; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has or may reasonably be ex­pected to have a material adverse effect on Borrower’s business or financial condition; or (i) Dissolution, termina­tion of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custo­dian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement,

10

readjustment of debt, dissolution or liquidation law or statute of any juris­diction, now or in the future in effect; or (j) the com­mencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganiza­tion, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any juris­diction, now or in the future in effect, which is not cured by the dismissal thereof within 30 days after the date commenced; or (k) revocation or termination of, or limita­tion or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordina­tion agreement; or (n) there shall be a change in the record or beneficial ownership of an aggregate of more than 35% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstand­ing shares of stock of Borrower in effect on the date hereof, without the prior written consent of Silicon; or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its prop­erty which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) ­there shall be (i) a material impairment in the perfection or priority of Silicon’s security interest in the Collateral or in the value of such Collateral; (ii) a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower; (iii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iv) Silicon determines, based upon information available to it and in its reasonable judgment, that there is significant likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 5.1 during the next succeeding financial reporting period; or (q) Silicon, acting in good faith and in a commercially reasonable manner, deems itself inse­cure because of the occurrence of a materially adverse event prior to the ef­fective date hereof of which Silicon had no knowledge on the effective date or because of the occurrence of an event on or subsequent to the effective date; or (r) Borrower shall breach any term of the IP Security Agreement.  Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred.

7.2          Remedies.  Upon the occurrence of any Event of Default which has not been timely cured, and at any time thereafter, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or other­wise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and de­clare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any de­ferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take posses­sion of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower’s premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custo­dian to remain on the premises in exclusive control thereof, without charge for so long as Silicon deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take posses­sion of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of, and not dis­pose of, any such Collateral until after trial or final judg­ment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places desig­nated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower’s premises, vehicles, hoists, lifts, cranes, equip­ment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condi­tion at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, ex­change or other property, or on credit, and to adjourn any such sale from

11

time to time without notice other than oral announcement at the time scheduled for sale.  Silicon shall have the right to conduct such disposition on Borrower’s premises without charge, for such time or times as Silicon deems reasonable, or on Silicon’s premises, or elsewhere and the Collateral need not be located at the place of dis­position.  Silicon may directly or through any affiliated company purchase or lease any Collateral at any such pub­lic disposition, and if permissible under applicable law, at any private disposition.  Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connec­tion therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower’s name on all collections, re­ceipts, instruments and other documents, to take posses­sion of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon’s sole dis­cretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; (h) Offset against any sums in any of Borrower’s general, special or other Deposit Accounts with Silicon; and (i) Demand and receive possession of any of Borrower’s federal and state income tax returns and the books and records utilized in the preparation thereof or re­ferring thereto.  All reasonable attorneys’ fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.  Without limiting any of Silicon’s rights and remedies, from and after the occur­rence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent (4%) per annum.

7.3          Standards for Determining Commercial Reasonableness.  Borrower and Silicon agree that a sale or other disposition (collectively, “sale”) of any Collateral which complies with the following standards will conclu­sively be deemed to be commercially reasonable:  (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m;  (v) Payment of the purchase price in cash or by cashier’s check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same.  Silicon shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable.

7.4          Power of Attorney.  Upon the occurrence of any Event of Default, without limiting Silicon’s other rights and remedies, Borrower grants to Silicon an irrevocable limited power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower’s expense, to do any or all of the following, in Borrower’s name or otherwise, but Silicon agrees to exer­cise the following powers in a commercially reasonable manner:  (a) Execute on behalf of Borrower any docu­ments that Silicon may, in its sole discretion, deem advis­able in order to perfect and maintain Silicon’s security in­terest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on be­half of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Silicon’s Collateral or in which Silicon has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or assignment or satisfaction of mechanic’s, materialman’s or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; en­dorse the name of Borrower upon any instruments, or doc­uments, evidence of payment or Collateral that may come into Silicon’s possession; (e) Endorse all checks and other forms of remittances received by Silicon; (f) Pay, contest or settle (upon commercially reasonable terms) any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay,

12

compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower’s taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or con­trol of any books or records belonging to, or relating to, Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (k) Take any action or pay any sum re­quired of Borrower pursuant to this Agreement and any other present or future agreements.  Any and all reasonable sums paid and any and all reasonable costs, expenses, lia­bilities, obligations and attorneys’ fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.  In no event shall Silicon’s rights under the foregoing power of attorney or any of Silicon’s other rights under this Agreement be deemed to indicate that Silicon is in control of the busi­ness, management or properties of Borrower.  The irrevocable limited power of attorney shall cease if and when the Event of Default is cured by Borrower and Silicon is reimbursed all reasonable costs occasioned by the Event of Default.

7.5          Application of Proceeds.  All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion.  Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency.  If, Silicon, in its sole discretion, directly or indirectly en­ters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its sole discre­tion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor.

7.6          Remedies Cumulative.  In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party un­der the Massachusetts Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive.  Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from sub­sequent exercise or partial exercise of any other rights or remedies.  The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and ef­fect until all of the Obligations have been fully paid and performed.

8.             DEFINITIONS.

As used in this Agreement, the fol­lowing terms have the following meanings:

“Account Debtor” means the obligor on a Receivable.

“Affiliate” means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person.

“Business Day” means a day on which Silicon is open for business.

“Cash Management Services” means Silicon’s cash management services, direct deposit of payroll, business credit card, and check cashing services as may be further identified in the various cash management services agreements related to such Cash Management Services.

13

“Code” means the Uniform Commercial Code as adopted and in effect in the Commonwealth of Massachusetts from time to time.

“Collateral” has the meaning set forth in Section 2.1 above.

“Default” means any event which with notice or passage of time or both, would constitute an Event of Default.

“Deposit Account” has the meaning set forth in Section 9-102 of the Code.

“Eligible Inventory” means Borrower’s  raw materials, finished goods and work in process arising in the ordinary course of Borrower’s business, which Silicon, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate; provided, however, Eligible Inventory does not include, in any event, (i) used, returned, obsolete, consigned, demonstrative or custom Inventory or supplies, or (ii) any raw materials, finished goods or work in process not subject to a first perfected security interest in favor of Silicon, or (iii) any of Borrower’s raw materials, finished goods or work in process not in Borrower’s possession.

“Eligible Receivables” means Receivables arising in the ordinary course of Borrower’s business from the sale of goods or rendition of services, which Silicon, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate.  Without limiting the fact that the determina­tion of which Receivables are eligible for borrowing is a matter of Silicon’s discretion, the following (the “Minimum Eligibility Requirements”) are the minimum requirements for a Receivable to be an Eligible Receivable:  (i) the Receivable must not be outstanding for more than 90 days from its invoice date, (ii) the Receivable must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, (iii)  the Receivable must not be subject to any contingencies (including Receivables arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be condi­tional, except as may otherwise be acceptable to Silicon in its discretion), (iv) the Receivable must not be owing from an Account Debtor with whom the Borrower has any dispute (whether or not relating to the particular Receivable), (v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to Silicon, or which, fails or goes out of a mate­rial portion of its business, (vii) the Receivable must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon’s satisfaction, with the United States Assignment of Claims Act), (viii) the Receivable must not be owing from an Account Debtor located outside the United States or Canada  (unless pre-approved by Silicon in its discretion in writing, or backed by a letter of credit sat­isfactory to Silicon, or FCIA insured satisfactory to Silicon), and (ix) the Receivable must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise. Receivables owing from one Account Debtor will not be deemed Eligible Receivables to the extent they exceed 25% of the total Receivables outstanding.  In addi­tion, if more than 50% of the Receivables owing from an Account Debtor are outstanding more than 90days from their invoice date (without regard to unapplied credits) or are otherwise not eligible Receivables, then all Receivables owing from that Account Debtor will be deemed ineligible for borrowing.  Silicon may, from time to time, in its discretion, revise the Minimum Eligibility Requirements, upon written notice to the Borrower.

“Equipment” means all of Borrower’s present and here­after acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower’s operations or owned by Borrower and any interest in any of the forego­ing, and all attachments, accessories, accessions, replace­ments, substitutions, additions or improvements to any of the foregoing, wherever located.

“Event of Default” means any of the events set forth in Section 7.1 of this Agreement.

14

“General Intangibles” means all general intangibles of Borrower, whether now owned or hereafter created or ac­quired by Borrower, including, without limitation, all choses in action, rights to payment for credit extended, amounts due to Borrower, credit memoranda in favor of Borrower, warranty claims, causes of action, corporate or other busi­ness records, deposits, Deposit Accounts, inventions, designs, draw­ings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security  and other deposits, rights in all litigation presently or here­after pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter aris­ing therefrom, all claims of Borrower against Silicon, rights to purchase or sell real or personal property, rights as a li­censor or licensee of any kind, royalties, telephone numbers, proprietary informa­tion, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnifica­tion and all other intangible property of every kind and nature (other than Receivables).

“Intellectual Property” is the Intellectual Property Collateral, as defined in the IP Security Agreement.

“IP Security Agreement” means that certain Intellectual Property Security Agreement dated as of the date hereof by and between Silicon and Borrower.

“Inventory” means all of Borrower’s now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any con­tract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are owned by Borrower and are intended for use or are used or consumed in Borrower’s business or used in con­nection with the manufacture, packing, shipping, advertis­ing, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, docu­ments of title and other documents representing any of the foregoing.

“Letter-of-Credit Rights” means all letter-of-credit rights including, without limitation, “letter-of-credit rights” as defined in the Code and also any right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance.

“Obligations” means all present and future Loans, ad­vances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, including, without limitation, the  Borrower’s obligations pursuant to the IP Security Agreement, whether aris­ing from an extension of credit, opening of a letter of credit, banker’s acceptance, FX Forward Contracts, loan, Cash Management Services, guaranty, indemnifica­tion or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower’s debts owing to oth­ers), absolute or contingent, due or to become due, includ­ing, without limitation, all interest, charges, expenses, fees, attorney’s fees, expert witness fees, audit fees, letter of credit fees, Collateral Handling Fees, closing fees, facility fees, Cancellation Fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agree­ment between Borrower and Silicon.

“Payment” means all checks, wire transfers and other items of payment received by Silicon (including proceeds of Accounts and payment of the Obligations in full) for credit to Borrower’s outstanding Loans or, if the balance of the Loans have been reduced to zero, for credit to its Deposit Accounts.

15

“Payment Intangibles” means all payment intangibles including, without limitation, “payment intangibles” as defined in the Code and also any general intangible under which the Account Debtor’s primary obligation is a monetary obligation.

“Permitted Liens” means the following:  (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon, which consent shall not be unreasonably withheld; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, ware­housemen, carriers, or other similar liens arising in the or­dinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or re­placement lien is limited to the property encumbered by the existing lien and the principal amount of the indebted­ness being extended, renewed or refinanced does not in­crease; and (viii)liens in favor of customs and revenue author­ities which secure payment of customs duties in connec­tion with the importation of goods.  Silicon will have the right to require, as a condition to its consent under sub­section (iv) above, that the holder of the additional se­curity interest or lien sign an intercreditor agreement on Silicon’s then standard form, acknowledge that the secu­rity interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any un­cured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement.

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organiza­tion, association, corporation, government, or any agency or political division thereof, or any other entity.

“Receivables” means all of Borrower’s now owned and hereafter acquired accounts (whether or not earned by performance), accounts receivable, health-care insurance receivables, rights to payment, letters of credit, contract rights, chattel paper, in­struments, securities, securities accounts, investment property, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party.

“Reserves” means, as of any date of determination, such amounts as Silicon may from time to time establish and revise in good faith reducing the amount of Loans, Letters of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule:  (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in good faith, do or may affect in any material respect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Receivables), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon’s good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

“Supporting Obligations” means all supporting obligations including, without limitation, “supporting obligations” as defined in the Code and also any letter-of-credit right or secondary obligations which supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument, or investment property.

Other Terms.  All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied.  All

16

other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

9.  GENERAL PROVISIONS.

9.1          Interest Computation; Float Charge.  In computing interest on the Obligations, all Payments received after 12:00 Noon on any day shall be deemed received on the next Business Day.  In addition, at any time that Loans are outstanding Silicon shall be entitled to charge Borrower a “float” charge in an amount equal to three Business Days interest, at the interest rate applicable to the Loans, on all Payments received by Silicon.  Said float charge is not included in interest for purposes of computing Minimum Monthly Interest (if any) under this Agreement.  The float charge for each month shall be payable on the last day of the month.  Silicon shall not, however, be required to credit Borrower’s account for the amount of any item of payment which is unsatisfactory to Silicon in its good faith business judgment, and Silicon may charge Borrower’s loan account for the amount of any item of payment which is returned to Silicon unpaid.

9.2          Application of Payments.  All payments with re­spect to the Obligations may be applied, and in Silicon’s sole discretion reversed and re-applied, to the Obligations, in such order and manner as Silicon shall determine in its sole discretion.

9.3          Charges to Accounts.  Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower’s Loan account, in which event they will bear interest at the same rate appli­cable to the Loans.  Silicon may also, in its discretion, charge any monetary Obligations to Borrower’s Deposit Accounts maintained with Silicon.

9.4          Monthly Accountings.  Silicon shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement.  Such account shall be deemed correct, accurate and bind­ing on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of er­rors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within thirty days after each account is rendered, describing the nature of any al­leged errors or omissions.

9.5          Notices.  All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt re­quested, addressed to Silicon or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party.  Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager.  All no­tices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expira­tion of one Business Day following delivery to the private delivery service, or two Business Days following the de­posit thereof in the United States mail, with postage pre­paid.

9.6          Severability.  Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

9.7          Integration.  This Agreement and such other written agreements, documents and instruments as may be exe­cuted in connection herewith are the final, entire and com­plete agreement between Borrower and Silicon and super­sede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement.  There are no oral under­standings, representations or agreements between the par­ties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

17

                9.8          Waivers; Indemnity.  The failure of Silicon at any time or times to require Borrower to strictly comply with any of the pro­visions of this Agreement or any other present or future agreement between Borrower and Silicon shall not waive or diminish any right of Silicon later to demand and re­ceive strict compliance therewith.  Any waiver of any de­fault shall not waive or affect any other default, whether prior or subsequent, and whether or not similar.  None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Silicon shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower.  Borrower waives demand, protest, notice of protest and notice of de­fault or dishonor, notice of payment and nonpayment, re­lease, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement.  Borrower hereby agrees to indemnify Silicon and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including reasonable attorneys’ fees), of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between Silicon and Borrower, or any other matter, relating to Borrower or the Obligations; provided, that this indemnity shall not extend to damages proximately caused by the indemnitee’s own gross negligence or willful misconduct.  Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect for a period up to the statute of limitations for any actions that arise or could arise under the indemnity.

9.9          No Liability for Ordinary Negligence.  Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, de­mands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon from liability for its own gross negligence or willful misconduct.

9.10        Amendment.  The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized offi­cer of Silicon.

9.11        Time of Essence.  Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

9.12        Attorneys Fees and Costs.  Borrower shall reim­burse Silicon for all reasonable attorneys’ fees and all fil­ing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys’ fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; en­force, or seek to enforce, any of its rights; prosecute ac­tions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceed­ing; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; exam­ine, audit, copy, and inspect any of the Collateral or any of Borrower’s books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon’s secu­rity interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower.  In satisfying Borrower’s obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue checks directly to Silicon’s attorneys, Riemer & Braunstein, LLP, but Borrower acknowledges and agrees that Riemer & Braunstein, LLP is representing only Silicon and not Borrower in connection with this Agreement.  If either Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, Silicon shall be entitled to recover its reason­able costs and attorneys’ fees, including (but not limited to) reasonable attorneys’ fees and costs incurred in the en­forcement of, execution upon or defense of any order, de­cree, award or judgment.  All attorneys’ fees and costs to which

18

Silicon may be entitled pursuant to this Section 9.12 shall immediately become part of Borrower’s Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

9.13        Benefit of Agreement.  The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void.  No consent by Silicon to any assignment shall re­lease Borrower from its liability for the Obligations.

9.14        Right of Set-Off.  Borrower and any guarantor hereby grant to Silicon, a lien, security interest and right of setoff as security for all Obligations to Silicon, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Silicon or any entity under the control of Silicon Valley Bank or in transit to any of them.  At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Silicon may set off the same or any part thereof and apply the same to any liability or obligation of Borrower and any guarantor even though unmatured and regardless of the adequacy of any other collateral securing the loan.  ANY AND ALL RIGHTS TO REQUIRE SILICON TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

9.15.       Joint and Several Liability.  If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the re­lease of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

9.16        Limitation of Actions.Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after Borrower’s knowledge of the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter.  Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action.  The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion.  This provision shall survive any termination of this Loan Agreement or any other present or future agreement.

9.17        Section Headings; Construction.  Section headings are only used in this Agreement for convenience.  Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applica­ble section, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement.  The term “including”, when­ever used in this Agreement, shall mean “including (but not limited to)”.  This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise.

9.18        Governing Law; Jurisdiction; Venue.  This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the Commonwealth of Massachusetts.  As a ma­terial part of the consideration to Silicon to enter into this Agreement, Borrower (i) agrees

19

that all actions and pro­ceedings relating directly or indirectly to this Agreement shall, at Silicon’s option, be litigated in state or federal courts located within Massachusetts; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal de­livery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding, provided, however, that if for any reason Silicon cannot avail itself of such courts in the Commonwealth of Massachusetts, Borrower accepts jurisdiction of the courts and venue in Santa Clara, California.

9.19        Ratification of IP Security Agreement.  Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of the IP Security Agreement and acknowledges, confirms and agrees that the IP Security Agreement contains an accurate and complete listing of all Intellectual Property Collateral as defined therein.

9.20        Mutual Waiver of Jury Trial.  BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FU­TURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

9.21        Confidentiality.In handling any confidential information, Silicon shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made:  (i) to Silicon’s subsidiaries or affiliates in connection with their present or prospective business relations with Borrower; (ii) to prospective transferees or purchasers of any interest in the Loans; (iii) as required by law, regulation, subpoena, or other order; (iv) as required in connection with Silicon’s examination or audit; and (v) as Silicon considers appropriate in exercising remedies under this Agreement.  Confidential information does not include information that either:  (a) is in the public domain or in Silicon’s possession when disclosed to Silicon, or becomes part of the public domain after disclosure to Silicon (through no act or omission of Silicon); or (b) is disclosed to Silicon by a third party, which third party is not under any non-disclosure obligation.

20

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first above written.

Borrower:

SATCON TECHNOLOGY CORPORATION

By

Name:

Title

SATCON POWER SYSTEMS, INC.

By

Name:

Title

SATCON APPLIED TECHNOLOGY, INC.

By

Name:

Title

SATCON ELECTRONICS, INC.

By

Name:

Title

SATCON POWER SYSTEMS CANADA LTD.

By

Name:

Title

21

Silicon:

SILICON VALLEY BANK d/b/a
SILICON VALLEY EAST
By	/s/ John Atanasoff
Name:	John Atanasoff
Title	Senior Relationship Manager

22

Silicon Valley Bank

Schedule to

Loan and Security Agreement

Borrower:	SATCON TECHNOLOGY CORPORATION
	SATCON POWER SYSTEMS, INC.
	SATCON ELECTRONICS, INC.
	SATCON APPLIED TECHNOLOGY, INC.
	SATCON POWER SYSTEMS CANADA LTD.
Address:	27 Drydock Avenue
	Boston, Massachusetts 0210
Date:	January 28, 2005

This Schedule forms an integral part of the Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date.

1.  CREDIT LIMIT

                (Section 1.1):         An amount not to exceed the lesser of (A) or (B), below:

(A)          (i)            $7,000,000 (the “Maximum Credit Limit”); minus

(ii)           the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.

(B)(i)            80.0% of the amount of the Borrower’s Eligible Receivables;

                                plus

                (ii)           the lesser of

(a)  (x) 40% of Borrower’s Eligible Inventory comprised of raw materials and finished goods (valued at the lower of actual cost or fair market value), plus (y) the lesser of (A) 10% of Borrower’s Eligible Inventory comprised of work in process (valued at the lower of actual cost or fair market value) or (B) $300,000; or

(b) 85% of the orderly liquidation value of Borrower’s Eligible Inventory; or

23

(c) the lesser of (x) 25% of the amount set forth in Section (B) (i) above (regarding availability based on Borrower’s Eligible Receivables) or (y) $1,000,000.00;

minus

(iii)the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.

Silicon may, from time to time, modify the advance rate(s) set forth herein in its good faith business judgment upon notice to Borrower based on changes in collection experience with respect to the Receivables or other issues or factors relating to the Receivables or the Collateral.

Borrower acknowledges that (i) Silicon will make no advances under this Agreement unless and until it has received an audit of the Collateral in form and substance satisfactory to Silicon, and (ii) Silicon will make no advances under this Agreement based upon Borrower’s Eligible Inventory unless and until it has received an appraisal of Borrower’s Inventory in form and substance satisfactory to Silicon performed by an independent auditor that is acceptable to Silicon in its sole discretion.

                Letter of Credit/Foreign Exchange Contract/Cash Management Services Sublimit

                (Section 1.6, 1.7, and 1.8):   $3,000,000

2.  INTEREST.

Interest Rate(Section 1.2):

                A rate equal to the greater of (i) 6.75% per annum or (ii) the “Prime Rate” in effect from time to time, plus 2.00% per annum.  Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed.  “Prime Rate” means the rate announced from time to time by Silicon as its “prime rate;” it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon.  The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate.

                Minimum Monthly Interest (Section 1.2, 9.1) None.

3.  FEES (Section 1.4):

Loan Fee:               $25,000.00.

Collateral Handling Fee:      $1,000.00 per month, payable in arrears.

Unused Line Fee: In the event, in any calendar month (or portion thereof at the beginning and end of the term hereof), the average daily principal balance of the Loans outstanding during the month is less than the amount of the Maximum Credit Limit, Borrower shall pay Silicon an unused line fee in an amount equal to 0.50% per annum on the difference between the amount of the Maximum Credit Limit and the average daily principal balance

24

of the Loans outstanding during the month, which unused line fee shall be computed and paid monthly, in arrears, on the first day of the following month.

Cancellation Fee:If the Obligations are voluntarily or involuntarily (in the event of bankruptcy) prepaid or if this Agreement is otherwise terminated prior to its maturity (a “Cancellation Event”), the Borrower shall pay to Silicon a termination fee (the “Cancellation Fee”) in the amount equal to 0.50% of the Maximum Credit Limit if a Cancellation Event occurs on or before six (6) months from the date hereof, provided that no such Cancellation Fee shall be charged if the credit facility hereunder is replaced or transferred to another division of Silicon.  The Cancellation Fee shall be due and payable upon prepayment by the Borrower in the case of voluntary prepayments or upon demand by Silicon in the event of  involuntary prepayment, and if not paid immediately shall bear interest at a rate equal to the highest rate applicable to any of the Obligations.

4.  MATURITY DATE

(Section 6.1):         364 days from the date of this Agreement.

5.  FINANCIAL COVENANTS

                (Section 5.1):         Borrower shall comply with each of the following covenant(s).  Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:

                a. Minimum Tangible Net Worth:

                Borrower shall maintain an Tangible Net Worth of not less than the sum of (i) plus (ii) below:

(i)(a) from October 1, 2004  through and including October 31, 2004 - $9,000,000;

(b) from November 1, 2004 through November 30, 2004 - $8,250,000.00;

(c) from December 1, 2004 through December 31, 2004 - $12,500,000;

(d) from January 1, 2005 through January 31, 2005 - $11,750,000;

(e) from February 1, 2005 through February 28, 2005 - $11,000,000;

(f) from March  1, 2005 through March 31, 2005 - $12,500,000;

(e) from April 1, 2005 through April 30, 2005 -  $11,750,000;

(f) from May 1, 2005 through May 31, 2005 - $11,000,000;

(g) from June 1, 2005 through June 30, 2005 - $12,500,000;

(h) from July 1, 2005 through July 31, 2005 - $11,750,000;

(i) from August 1, 2005 through August 31, 2005 - $11,000,000;

(j) from September 1, 2005 through September 30, 2005 - $12,500,000

(k) from October 1, 2005 through October 31, 2005 - $11,750,000;

(l) from November 1, 2005 through November 30, 2005 - $11,000,000; and

(m) from December 1, 2005 through December 31, 2005 - $12,500,000

(ii) 80% of all consideration received in addition to those amount to be received pursuant to the Capitalization Event (as defined in Section 8 (4) of this Schedule to Loan and Security Agreement) from proceeds from the issuance of any equity securities of the Borrower and/or subordinated debt incurred by the Borrower.

25

                b. Minimum Cash or Excess Availability:

The Borrower shall at all times maintain $400,000.00 in (i) cash deposits maintained at Silicon, and/or (ii) excess “availability” under this Agreement (net of Loans, Letters of Credit or other indebtedness under this Agreement), as determined by Silicon based upon the Credit Limit restrictions set forth in Section 1 above).

                Definitions.           For purposes of the foregoing financial covenants, the following term shall have the following meaning:

                                “Liabilities” shall have the meaning ascribed thereto by generally accepted accounting principles.

                                “Tangible Net Worth” shall mean the excess of total assets over total Liabilities, determined in accordance with generally accepted accounting principles, with the following adjustments:

                                (A) there shall be excluded from assets:  (i) notes, accounts receivable and other obligations owing to the Borrower from its officers or other Affiliates, and (ii) all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises

                                (B) there shall be excluded from Liabilities:  all indebtedness which is subordinated to the Obligations under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon in its discretion.

6.  REPORTING.

Borrower shall provide Silicon with the following:

i.              Weekly (monthly, if no amounts are outstanding under this Agreement and Borrower has advised Silicon in writing that it has elected to be on “non-borrowing reporting status”), and upon each loan request, borrowing base certificates and transaction reports.

ii.             Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen days after the end of each month.

iii.            Monthly accounts receivable agings, aged by invoice date, and receivable reconciliations, within fifteen days after the end of each month.

iv.            Monthly unaudited financial statements, as soon as available, and in any event within thirty days after the end of each month; provided, however, for the months ending March, June, September and December, Borrower shall forward only a draft of such financial statements, with a final statement due within forty-five days after the end of such month.

v.             Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks.

26

vi.            Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty days prior to the end of each fiscal year of Borrower.

vii.           Draft annual financial statements, as soon as available, and in any event within 45 days following the end of Borrower’s fiscal year, prepared under GAAP, consistently applied.

viii.          Annual auditedfinancial statements, as soon as available, and in any event within 90 days following the end of Borrower’s fiscal year, prepared under GAAP, consistently applied, together with an unqualified opinionon the financial statements from an independent certified public accounting firm reasonably acceptable to Silicon.

ix.            Such additional reports and information as Silicon may from time to time specify.

                Borrower may elect to be on “non-borrowing reporting status” if Borrower notifies Silicon in writing that it so elects and  there are no Loans or other Obligations outstanding hereunder (including, without limitation, any issued Letters of Credit).  After Borrower has notified Silicon of its intention to be on “non-borrower reporting status”, as further set forth in Section 4.3 of this Agreement, Borrower must provide Silicon at least 30 days prior written notice of its intention to borrow.

7.  BORROWER INFORMATION:

Prior Names of

Borrower

(Section 3.2):         See Perfection Certificate of even date herewith.

Prior Trade

Names of Borrower

(Section 3.2):         See Perfection Certificate of even date herewith.

Existing Trade

Names of Borrower

(Section 3.2):         See Perfection Certificate of even date herewith.

Other Locations and

Addresses (Section 3.3):     See Perfection Certificate of even date herewith.

27

Material Adverse

Litigation (Section 3.10):    None

8.  OTHER COVENANTS

(Section 5.1):         Borrower shall at all times comply with all of the following additional covenants:

(1)           Banking Relationship.  In order for Silicon to properly monitor its loan arrangement with the Borrower, Borrower shall at all times maintain all of its depository, operating (other than payroll and operating accounts maintained in Canada) and securities accounts with Silicon (or an affiliate of Silicon with respect to securities accounts).

(2)           Subordination of Inside Debt.  All present and future indebtedness (excluding reasonable salary, bonus and expense reimbursement) of the Borrower to its officers, directors and shareholders,(“Inside Debt”) shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon’s standard form.  Borrower represents and warrants that there is no Inside Debt presently outstanding.  Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon’s standard form.

(3)           Subordination Agreements. Borrower represents and warrants that Borrower is not presently indebted to any third party for borrowed money.  Prior to incurring any such indebtedness (which incurrence may only occur upon Silicon’s prior written consent), Borrower shall cause each creditor to execute and deliver to Silicon a subordination agreement on Silicon’s standard form subordinating to the Obligations the indebtedness of Borrower to any such creditor and shall cause such subordination agreements to continue in full force and effect at all times during the term of this Agreement.

(4)           Capitalization Event.  As a condition precedent to the effectiveness of this Agreement, receive from investors acceptable to Silicon cash proceeds from the issuance of equity securities of the Borrower and/or subordinated debt incurred by the Borrower in the aggregate amount of at least $4,000,000.00 (the “Capitalization Event”).

28

Borrower:

SATCON TECHNOLOGY CORPORATION

By

Name:

Title

SATCON POWER SYSTEMS, INC.

By

Name:

Title

SATCON APPLIED TECHNOLOGY, INC.

By

Name:

Title

SATCON ELECTRONICS, INC.

By

Name:

Title

SATCON POWER SYSTEMS CANADA LTD.

By

Name:

Title

29

Silicon:
SILICON VALLEY BANK d/b/a
SILICON VALLEY EAST
By	/s/ John Atanasoff
Name:	John Atanasoff
Title	Senior Relationship Manager

30

EX-31.1

EXHIBIT 31.1

Certification Pursuant to

Section 302 of the

Sarbanes-Oxley Act of 2002

I, David B. Eisenhaure, certify that:

1.I have reviewed this quarterly report on Form 10-Q of SatCon Technology Corporation;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)             designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)            evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)             disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)             all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 17, 2005	/s/ DAVID B. EISENHAURE
	David B. Eisenhaure
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification Pursuant to

Section 302 of the

Sarbanes-Oxley Act of 2002

I, David E. O’Neil, certify that:

1.I have reviewed this quarterly report on Form 10-Q of SatCon Technology Corporation;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)             designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)            evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)             disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)             all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 17, 2005	/s/ DAVID E. O’NEIL
	David E. O’Neil
	Vice President, Finance and Treasurer

EX-32.1

EXHIBIT 32.1

Certification Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

                In connection with the Quarterly Report on Form 10-Q of SatCon Technology Corporation (the “Company”) for the fiscal quarter ended April 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

                This certification is being furnished as an exhibit to the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section.  This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing, except to the extent that the Company specifically incorporates this certification by reference.

Date: May 17, 2005	/s/ DAVID B. EISENHAURE
	David B. Eisenhaure
	President and Chief Executive Officer
Date: May 17, 2005	/s/ DAVID E. O’NEIL
	David E. O’Neil
	Vice President, Finance and Treasurer

                A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.