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 July 2, 2005

Commission File Number 1-11512

SATCON TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	04-2857552
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
27 Drydock Avenue  Boston, Massachusetts	02210
(Address of principal executive offices)	(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,
33,516,717 shares outstanding as of August 10, 2005.

TABLE OF CONTENTS

Financial Statements of SatCon Technology Corporation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

Signature

Exhibit Index

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

	July 2, 2005			September 30, 2004
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,513,834		$	1,171,152
Restricted cash and cash equivalents	84,000			1,011,900
Accounts receivable, net of allowance of $671,867 and $848,565 at July 2, 2005 and September 30, 2004, respectively	6,470,410			6,274,178
Unbilled contract costs and fees	144,024			447,405
Funded research and development expenses in excess of billings	—			292,111
Inventory	7,591,308			6,184,672
Prepaid expenses and other current assets	1,077,962			687,083
Total current assets	17,881,538			16,068,501
Warrants to purchase common stock	—			7,036
Property and equipment, net	5,156,361			5,913,211
Goodwill, net	704,362			704,362
Intangibles, net	1,998,090			2,391,193
Other long-term assets	523,509			501,634
Total assets	$	26,263,860		$	25,585,937
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	344,387		$	184,177
Accounts payable	3,509,485			3,823,249
Accrued payroll and payroll related expenses	1,490,690			1,449,349
Other accrued expenses	1,849,498			2,412,409
Accrued contract losses	84,779			514,489
Deferred revenue	2,341,004			2,048,442
Accrued restructuring costs	—			495,612
Total current liabilities	9,619,843			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	512,048			563,372
Commitments and contingencies
Stockholders’ equity:
Common stock; $0.01 par value, 50,000,000 shares authorized; 33,407,662 and 28,226,010 shares issued and outstanding at July 2, 2005 and September 30, 2004, respectively	334,078			282,261
Additional paid-in capital	147,588,254			139,208,000
Accumulated deficit	(133,732,614		)	(127,659,993		)
Accumulated other comprehensive loss	(182,749		)	(171,608		)
Total stockholders’ equity	14,006,969			11,658,660
Total liabilities and stockholders’ equity	$	26,263,860		$	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						Nine Months Ended
	July 2, 2005			June 26, 2004			July 2, 2005			June 26, 2004
Revenue:
Product revenue	$	6,971,627		$	6,840,972		$	22,373,422		$	19,254,617
Funded research and development and other revenue	1,186,141			1,771,056			3,240,763			5,703,626
Total revenue	$	8,157,768		8,612,028			25,614,185			24,958,243
Operating costs and expenses:
Cost of product revenue	6,325,023			5,483,030			20,136,564			15,845,447
Research and development and other revenue expenses:
Funded research and development and other revenue expenses	1,205,756			1,415,758			2,899,449			4,210,900
Unfunded research and development expenses	2,397			4,188			10,901			5,489
Total research and development and other revenue expenses	1,208,153			1,419,946			2,910,350			4,216,389
Selling, general and administrative expenses	2,723,064			2,248,449			8,044,945			7,055,127
Restructuring costs	—			—			(255,612		)	—
Amortization of intangibles	111,671			111,671			335,013			335,014
Total operating costs and expenses	10,367,911			9,263,096			31,171,260			27,451,977
Operating loss	(2,210,143		)	(651,068		)	(5,557,075		)	(2,493,734		)
Net unrealized loss on warrants to purchase common stock	—			(77,200		)	(7,036		)	(80,766		)
Net unrealized gain on Series B warrants	—			—			—			35,442
Other income/(expense)	(22,867		)	2,479			(152,289		)	2,479
Interest income	16,392			2,545			27,497			9,069
Interest expense	(57,283		)	(71,865		)	(383,718		)	(6,831,712		)
Net loss	$	(2,273,901	)	$	(795,109	)	$	(6,072,621	)	$	(9,359,222	)
Net loss per weighted average share, basic and diluted	$	(0.07	)	$	(0.03	)	$	(0.19	)	$	(0.35	)
Weighted average number of common shares, basic and diluted	33,364,094			28,078,113			31,909,163			26,378,830

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 nine months ended June 26, 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	—	—		—			(9,359,222		)	—			(9,359,222		)	$	(9,359,222	)
Issuance of common stock to 401(k) Plan	161,786	1,618		399,235			—			—			400,853			—
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	2,246,467	22,465		1,834,850			—			—			1,857,315			—
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	88,050	880		56,239			—			—			57,119			—
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	2,220,000	22,200		5,527,800			—			—			5,550,000			—
Mark-to-market Series B warrants	—	—		(35,442		)	—			—			(35,442		)	—
Foreign currency translation adjustment	—	—		—			—			(74,505		)	(74,505		)	(74,505		)
Comprehensive loss																$	(9,433,727	)
Balance, June 26, 2004 (Unaudited)	28,144,277	$	281,443	$	139,057,486		$	(126,060,745	)	$	(213,859	)	$	13,064,325

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 nine months ended July 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						(6,072,621		)	—			(6,072,621		)	(6,072,621		)
Issuance of common stock to 401(k) Plan	229,282	2,293		424,801		—			—			427,094			—
Issuance of common stock in connection with the exercise of stock options to purchase common stock	51,250	513		46,778		—			—			47,291			—
Issuance of common stock in lieu of six -months dividend on redeemable convertible Series B preferred stock	52,636	526		126,974		—			—			127,500			—
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			—
Issuance of warrants to purchase common stock to Silicon Valley Bank	—	—		119,427		—			—			119,427			—
Compensation charge associated with the acceleration of unvested incentive stock options	—	—		34,330		—			—			34,330			—
Foreign currency translation adjustment	—	—		—		—			(11,141		)	(11,141		)	(11,141		)
Comprehensive loss	—	—		—		—			—			—			$	(6,083,762	)
Balance, July 2, 2005 (unaudited)	33,407,662	$	334,078	$	147,588,254	$	(133,732,614	)	$	(182,749	)	$	14,006,969

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

6

SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended
	July 2, 2005			June 26, 2004
Cash flows from operating activities:
Net loss	$	(6,072,621	)	$	(9,359,222	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,395,162			1,458,884
Provision for uncollectible accounts	105,902			82,471
Provision for excess and obsolete inventory	—			209,757
Net unrealized (gain)/loss on warrants to purchase common stock	7,036			80,766
Net unrealized loss on Series B warrants	—			(35,442		)
Non-cash compensation and consulting expense	601,341			610,250
Non-cash interest expense	274,387			6,731,579
Changes in operating assets and liabilities:
Accounts receivable	(302,134		)	(93,300		)
Unbilled contract costs and fees	303,381			(24,102		)
Prepaid expenses and other current assets	161,889			(593,188		)
Inventory	(1,406,636		)	508,111
Other long-term assets	(21,875		)	18,576
Accounts payable	(313,764		)	(2,056,577		)
Accrued payroll and payroll related expenses, other expenses, accrued contract losses and restructuring costs	(1,675,674		)	(890,460		)
Deferred revenue	292,562			(2,076,550		)
Other liabilities	(61,107		)	(137,206		)
Total adjustments	(639,530		)	3,793,569
Net cash used in operating activities	(6,712,151		)	(5,565,653		)
Cash flows from investing activities:
Purchases of property and equipment	(245,209		)	(72,610		)
Net cash used in investing activities	(245,209		)	(72,610		)
Cash flows from financing activities:
Net (repayments) borrowings under bank line of credit	—			(1,801,869		)
Repayment of long-term debt	(150,968		)	(211,235		)
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	47,291			1,914,714
Net cash provided by financing activities	7,383,283			6,896,610
Effect of foreign currency exchange rates on cash and cash equivalents	(11,141		)	(74,505		)
Net increase in cash and cash equivalents	414,782			1,183,842
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	$	2,597,834		$	2,419,033
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-Cash Investing and Financing Activities:
Valuation adjustment for warrants to purchase common stock	$	—		$	(3,566	)
Valuation adjustment for Series B Preferred stock and warrants	$	168,979		$	35,422
Issuance of Warrants to purchase common stock to consultant	$	20,490		—
Issuance of Warrants to purchase common stock to Silicon Valley Bank	$	119,427		—
Common Stock issued Related to 401(K) contributions	$	427,094		—
Common Stock issued in lieu of dividend on redeemable convertible Series B Preferred Stock	$	127,500		—
Compensation charge associated with the acceleration of unvested employee stock options	$	34,330		—
Interest and Income Taxes Paid:
Interest	$	109,332		$	100,135
Income Taxes	$	—		$	—

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

7

SATCON TECHNOLOGY CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

JULY 2, 2005 AND JUNE 26, 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 July 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 nine months ended July 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 July 2, 2005, it had an accumulated deficit of $133,732,614 since inception. During the nine months ended July 2, 2005, the Company incurred a loss from operations of 5,557,075 and used cash in operations of $6,712,151.  The Company’s restricted cash balances at July 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 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

8

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 nine month period ended July 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) $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 July 2, 2005, there were no amounts outstanding under the New Loan and at July 2, 2005 the Company was in compliance with all covenants under the New Loan.

On June 29, 2005, the New Loan was modified pursuant to a Loan Modification Agreement (the

9

“Modification Agreement”) between the Company and the Bank.  The Modification Agreement has an effective date of May 31, 2005.  Under the Modification Agreement, certain financial covenants relating to tangible net worth and minimum cash, which covenants the Company must satisfy in order to continue to borrow from the Bank, were modified.  In addition, certain conditions precedent to the making of advances were also modified.  The Modification Agreement will expire on January 30, 2006.  As consideration for the modifications, the Company (i) paid the Bank a modification fee of $20,000 and (ii) issued to the Bank a 10-year warrant to purchase 151,515 shares of the Company’s common stock at an exercise price of $1.386 per share.  The Company valued these warrants at $119,427 using the Black-Scholes option pricing model with the following assumptions: an expected life of seven years, expected volatility of 52.3%, no dividends, and risk-free interest rate of 4.0%.  The value of these warrants will be amortized ratably over the remaining term of the Loan.

On August 15, 2005, the Company sold 4,676,151 shares of Common Stock to accredited investors for proceeds of approximately $5.3 million, net of transaction costs.  As part of this financing the Company also issued warrants to purchase up to 1,169,038 shares of Common Stock.  These warrants have an exercise price of $1.99 per share, are immediately exercisable and expire on August 2, 2010.  As condition to this transaction, the Company has agreed to file a registration statement on Form S-3 to register these shares within 90 days of the closing with the Securities and Exchange Commission.  The warrants will be valued using the Black-Scholes option pricing model.

The Company anticipates that its current cash together with the ability to borrow under the New Loan, as modified, 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

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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 July 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.

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 July 2, 2005 and September 30, 2004, the Company has restricted cash as indicated in the table below.  In addition, at July 2, 2005 and September 30, 2004, the Company had overnight repurchase agreements with the Bank of $2,317,118 and $880,895, respectively.

Restricted Cash	July 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 customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. (See Concentration of Credit Risk)

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:

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	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.

Effective October 1, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects its 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 determines 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 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 the Company 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 the Company. These projections represent management’s best estimate of future results. In making these projections, the Company considers the markets 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.

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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 nine months ended July 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 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.

During the three and nine months ended July 2, 2005, $34.330 of stock based employee compensation was included in the determination of net loss.

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 nine months ended July 2, 2005 and June 26, 2004 would have been increased to the pro forma amounts indicated below:

	Three Months Ended												Nine Months Ended
	July 2, 2005						June 26, 2004						July 2, 2005						June 26, 2004
				Loss per						Loss per						Loss per						Loss per
	Net Loss			Share			Net Loss			Share			Net Loss			Share			Net Loss			Share
As Reported	$	(2,273,901	)	$	(0.07	)	$	(795,109	)	$	(0.03	)	$	(6,072,621	)	$	(0.19	)	$	(9,359,222	)	$	(0.35	)
Stock based employee compensation expense	(1,355,051		)	(0.04		)	(153,895		)	(0.01		)	(3,367,029		)	(0.11		)	(1,705,586		)	(0.06		)
Pro Forma	$	(3,628,952	)	$	(0.11	)	$	(949,004	)	$	(0.03	)	$	(9,439,650	)	$	(0.30	)	$	(11,064,808	)	$	(0.42	)

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.

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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		Nine Months Ended
Assumptions:	July 2, 2005	June 26, 2004	July 2, 2005	June 26, 2004
Expected life	7 years	7 years	7 years	7 years
Expected volatility ranging from	52.2% - 58.4%	114.2% to 119.8%	52.2% to 80.4%	114.2% 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 resulted in a charge for stock-based compensation of approximately $34,330, which was recognized by the Company in the third fiscal quarter.  The Company had calculated this charge using the Black-Scholes option pricing model, taking into account the remaining unvested shares, each unvested share’s exercise price as compared to the price on the day the vesting of the options was accelerated.

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.

As a direct result of the acceleration of the employee stock options, the amounts shown in the three and nine months ended July 2, 2005, above, include approximately $860,000 of stock based employee compensation expense that would have been accounted for in subsequent periods had the unvested options not been accelerated.  The table below details the Stock Based Employee Compensation Expense for the three month period presented above:

Description	$ ‘s
Related to options granted during the period which were not accelerated	$	495,481
Result of option acceleration	$	859,570
Total	$	1,355,051

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.

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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.  At July 2, 2005, the Company had one customer that accounted for approximately 19% of gross accounts receivable.  Of the amounts due from this customer approximately $432,000 related to sales greater than sixty days past due, or approximately 32% of the balance due from the customer.  In addition, approximately $930,000 of the balance due from the customer are from sales made to the customer during the quarter ended July 2, 2005, which represents less than 10% of total revenue for the period.  Historically the Company has not experienced any credit losses as a result of doing business with this customer.

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 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.

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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						Nine Months Ended
	July 2, 2005			June 26, 2004			July 2, 2005			June 26, 2004
Net loss	$	(2,273,901	)	$	(795,109	)	$	(6,072,621	)	$	(9,359,222	)
Basic and diluted:
Common shares outstanding, beginning of period	33,281,527			27,883,970			28,226,010			21,023,200
Weighted average common shares issued during the period	82,567			194,143			3,683,292			5,355,630
Weighted average shares outstanding—basic and diluted	33,364,094			28,078,113			31,909,302			26,378,830
Net loss per weighted average share, basic and diluted	$	(0.07	)	$	(0.03	)	$	(0.19	)	$	(0.35	)

As of July 2, 2005 and June 26, 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:

	July 2, 2005	June 26, 2004
Common Stock issuable upon the exercise of:
Options	3,768,095	2,007,501
Warrants	3,703,495	1,320,162
Total Options and Warrants excluded	7,471,590	3,327,663
Common Stock issuable upon the conversion of redeemable convertible preferred stock	900,424	850,000

On April 19, 2004, the Company completed the first phase of its stock option exchange offer. A total of 781,158 options with an average exercise price of approximately $12.30 were tendered by employees and directors and then cancelled by the Company in exchange for the future issuance of options. New options were to be issued in the final phase of the exchange offer on or after October 20, 2004 at the then current market price to employees and directors who were employed by the Company or served as directors of the Company from the acceptance date through the date that the new options were granted. As of June 26, 2004, the Company was obligated to issue 684,008 options associated with the exchange, subject to certain conditions.  Executive officers of the Company elected not to participate in the program. Ultimately, in October 2004, the Company issued 658,508 options with an exercise price of $2.08.

Note E. Inventory

Inventory at the end of each period were as follows:

	July 2, 2005			September 30, 2004
Raw material	$		2,446,562	$	1,369,096
Work-in-process	3,660,944			4,373,925
Finished goods	1,483,802			441,651
	$	7,591,308		$		6,184,672

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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, $761,161 and 565,081, and $2,351,049, $1,787,208 for the three and nine months ended July 2, 2005 and June 26, 2004, respectively.

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

	Three Months Ended						Nine Months Ended
	July 2, 2005			June 26, 2004			July 2, 2005			June 26, 2004
Applied Technology:
Funded research and development and other revenue	$	1,186,141		$	1,771,056		$	3,240,763		$	5,703,626
Loss from operations, including amortization of intangibles $80,421 for the three months ended July 2, 2005 and June 26, 2004, and $241,264 for the nine months ended July 2, 2005 and June 26, 2004	$	(1,423,658	)	$	(809,059	)	$	(3,535,934	)	$	(2,123,920	)
Power Systems:
Product revenue	$	4,562,468		$	4,506,350		$	15,190,531		$	12,655,408
Income (loss) from operations	$	(673,025	)	$	64,866		$	(1,944,414	)	$	(298,706	)
Electronics:
Product revenue	$	2,409,159		$	2,334,622		$	7,182,891		$	6,599,209
Income (loss) from operations, including amortization of intangibles of $31,250 for the three months ended July 2, 2005 and June 26, 2004 and $93,750 for the nine months ended July 2, 2005 and June 26, 2004	$	(113,460	)	$	93,125		$	(76,727	)	$	(71,108	)
Consolidated:
Product revenue	$	6,971,627		$	6,840,972		$	22,373,422		$	19,254,617
Funded research and development and other revenue	1,186,141			1,771,056			3,240,763			5,703,626
Total revenue	$	8,157,768		$	8,612,028		$	25,614,185		$	24,958,243
Operating loss	(2,210,143		)	$	(651,068	)	(5,557,075		)	$	(2,493,734	)
Net unrealized loss on warrants to purchase common stock	—			(77,200		)	(7,036		)	(80,766		)
Net unrealized gain on Series B warrants	—			—			—			35,442
Other income	(22,867		)	2,479			(152,289		)	2,479
Interest income	16,392			2,545			27,497			9,069
Interest expense	(57,283		)	(71,865		)	(383,718		)	(6,831,712		)
Net loss	$	(2,273,901	)	$	(795,109	)	$	(6,072,621	)	$	(9,359,222	)

Common assets not directly attributable to a particular segment are included in the Applied Technology segment.

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These assets include cash and cash equivalents, prepaid and other corporate assets and amounted to $3,019,908 and $2,924,667 at July 2, 2005 and September 30, 2004, respectively. The following is a summary of the Company’s assets by operating segment:

	July 2, 2005		September 30, 2004
Applied Technology:
Segment assets	$	6,989,644	$	7,477,961
Power Systems:
Segment assets	13,211,365		11,284,272
Electronics:
Segment assets	6,062,851		6,816,668
Consolidated:
Segment assets	$	26,263,860	$	25,578,901
Warrants to purchase common stock	—		7,036
Total assets	$	26,263,860	$	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				Nine Months Ended
	July 2, 2005		June 26, 2004		July 2, 2005		June 26, 2004
Revenue by geographic region based on location of customer:
United States	$	7,850,022	$	7,932,379	$	22,819,451	$	21,984,127
Rest of world	307,746		679,649		2,794,734		2,974,116
Total revenue	$	8,157,768	$	8,612,028	$	25,614,185	$	24,958,243

	July 2, 2005		September 30, 2004
Long-lived assets (including goodwill and intangible assets) by geographic region based on location of operations:
United States	$	7 791,569	$	8,941,166
Rest of world	67,244		67,600
Total long-lived assets (including goodwill and intangible assets)	$	7,858,813	$	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.  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 nine months ended July 2, 2005.

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 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 nine months ended July 2, 2005.

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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 July 2, 2005 and September 30, 2004 were $34,000 and $961,900, respectively, and are broken down as indicated below:

	Expiration Date	July 2, 2005		September 30, 2004
Security Deposits	expiring on July 15, 2006	$	34,000	$	34,000
Warranty Commitments	expired 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 July 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 July 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 July 2, 2005, the Company’s potential obligation to these employees was approximately $500,000.  During the nine months ended July 2, 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 nine months ended July 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.

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

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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 nine months ended July 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 nine months ended July 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.  The Company has billed the customer for the entire amount related to the contracts, of which approximately $100,000 remains unpaid and outstanding as of July 2, 2005.

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 nine months ended July 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 July 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	)	$	—

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:

	July 2, 2005			September 30, 2004
Balance at beginning of period	$	642,119		$	765,336
Provision	149,047			35,127
Usage	(245,036		)	(158,344		)
Balance at end of period	$	546,130		$	642,119

Note K. Related Party Transactions

On occasion the Company engages certain of its directors to perform financial and advisory services.  During the period ended July 2, 2005 the Company paid approximately $23,000 to two of its non-employee directors for financial and advisory services.  These services are provided at the request of the Company’s management on an ad-hoc basis. The Company is under no obligation to engage these directors for such services.

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Note L. Subsequent Events

On August 15, 2005, the Company sold 4,676,151 shares of Common Stock to accredited investors for proceeds of approximately $5.0 million, net of transaction costs.  As part of this financing, the Company also issued warrants to purchase up to 1,169,038 shares of Common Stock.  These warrants have an exercise price of $1.99 per share, are immediately exercisable and expire on August 2, 2010.  As condition to the this financing transaction, the Company has agreed to file a registration statement on Form S-3 to register these shares within 90 days of the closing with the Securities and Exchange Commission.  The warrants will be valued using the Black-Scholes option pricing model.  As a result of this financing transaction, in accordance with the anti-dilution provisions of the Company’s Series B Convertible Preferred Stock, the Company will be required to adjust the conversion price of the remaining 425 Series B Convertible Preferred Shares outstanding at that time, along with adjusting the exercise price of the outstanding Series B Warrants, which will be recorded in the results of operations for the Company’s fiscal fourth quarter.

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.

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•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 drive trains 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 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 July 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

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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 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 approximate 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	Fiscal 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	$	127,000	$	—	$	127,000	$	127,000
	June 26, 2004	$	174,000	$	100,000	$	274,000	$	401,000
	September 30, 2004	$	224,000	$	68,000	$	292,000	$	693,000
2005	January 1, 2005	$	81,000	$	—	$	81,000	$	81,000
	April 2, 2005	$	58,000	$	88,000	$	146,000	$	227,000
	July 2, 2005	$	83,000	$	—	$	83,000	$	310,000

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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.

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.

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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 $39.2 million as of July 2, 2005, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to adjust our valuation allowance which could materially impact our financial position and results of operations.

Results of Operations

Three Months Ended July 2, 2005 Compared to Three Months Ended June 26, 2004

Product Revenue.  Product revenue increased by $0.1 million, or 2%, from $6.8 million in fiscal 2004 to $7.0 million in fiscal 2005.  Product revenue by segment for the three months ended July 2, 2005 and June 26, 2004 is as follows:

	Three months ended
	(in thousands)
Division	July 2, 2005		June 26, 2004		$ Increase		% Increase
Power Systems	$	4,562	$	4,506	$	56	1.2	%
Electronics	2,409		2,335		75		3.2	%
Total product revenue	$	6,972	$	6,841	$	131	1.9	%

This increase of $0.1 million in revenue from Power Systems was due to increased sales in our and Solar photovoltaic conversion products of $0.4 million and an increase of approximately $0.5 million in our Test and Measurement product line revenue, over that of the same period in fiscal 2004, offset in part by a $0.4 million decrease in our MagLev revenue and approximately $0.5 million in other product line revenue.  During the quarter we shipped a Rotary UPS to a customer and have deferred approximately $1.3 million in revenue until all elements of revenue recognition are achieved.

Revenue from our Electronics division increased by approximately $0.1 million from the same period in fiscal 2004, primarily due to increases in our military sub-contract business by approximately $0.3 million.

Funded research and development and other revenue.  Funded research and development and other revenue decreased by $0.6 million, or 33%, from $1.8 million in fiscal 2004 to $1.2 million in fiscal 2005.   The decrease was primarily due to a decrease in revenue of $0.5 million from a naval program which existed in 2004, offset slightly by new programs in 2005.  Also, due to efforts focused on the completion of our contract with the EDO Corporation in prior quarters we have experienced some delays in starting-up several existing contracts, which resulted in a decrease in revenues for the quarter.  These factors resulted in lower funded research and development and other revenue for the quarter ended July 2, 2005 as compared to the quarter ended June 26, 2004.

Cost of product revenue.  Cost of product revenue increased by $0.8 million, or 15%, from $5.5 million in fiscal 2004 to $6.3 million in fiscal year 2005. Cost of product revenue by segment for the three months ended July 2, 2005 and June 26, 2004 is as follows:

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	Three months ended
	(in thousands)
Division	July 2, 2005		June 26, 2004		$ Increase		% Increase
Power Systems	$	4,284	$	3,733	$	551	14.8	%
Electronics	2,041		1,750		$	291	16.6	%
Total cost of product revenue	$	6,325	$	5,483	$	842	15.4	%

The increase in the Power Systems division was primarily attributable to the increase in sales volume compared to the same period in fiscal 2004.  In addition, increased materials costs, such as steel and copper, which are major components in our products, and the use of outside contractors contributed to the increase.

The increase of $0.3 million the Electronics division was due in part by increased sales volume in addition to increased materials and labor costs for compared to the same period in fiscal 2004.

Gross Margin. Gross margins on product revenue decreased from 20% for the three months ended June 26, 2004 to 9% for the three months ended July 2, 2005.  Gross margin by division is broken out below.

	Three months ended
Division	July 2, 2005		June 26, 2004
Power Systems	6	%	17	%
Electronics	15	%	25	%
Total gross margin %	9	%	20	%

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 decrease in gross margins by 10% was attributable to higher materials costs compared to the same period in fiscal 2004, along with a change in the sales mix, increased military sub-contract revenue, which in general is slightly lower margin business.

Funded research and development and other revenue expenses.  Funded research and development and other revenue expenses decreased by $0.2 million, or 15%, from $1.4 million in the three months ended June 26, 2004 to $1.2 million in the three months ended July 2, 2005.   The gross margin on funded research and other revenue decreased from 20% in the three months ended June 26, 2004 to (2%) in the three months ended July 2, 2005. The primary reason for this decline was the utilization of staff as a result of delays in starting up new programs.

Unfunded research and development expenses.  We did not expend any material funds on unfunded research and development expenses in the quarters ended July 2, 2005 and June 26, 2004.

Selling, general and administrative expenses.  Selling, general and administrative expenses increased by approximately $0.5 million, or 21%, from $2.2 million in fiscal 2004 to $2.7 million in fiscal 2005.  The increase was primarily the result of approximately $0.4 million incurred as a result of increased head count in finance and sales support and payroll related costs across all operating units, as compared to the third quarter of fiscal 2004.

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

Net unrealized loss on warrants to purchase common stock.  We incurred a $0.1 million unrealized loss on warrants to purchase common stock in fiscal year 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 July 2, 2005 and June 26, 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 and we no longer account for these Beacon Corporation

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warrants in accordance with SFAS No. 133.

Other (expense).  Other expense was approximately $23,000 for third quarter of fiscal year 2005.  This consisted primarily of the amortization of our line of credit renewal fee.

Interest expense.  Interest expense remained flat at less than $0.1 million.

Nine Months Ended July 2, 2005 Compared to Nine Months ended June 26, 2004

Product Revenue.  Product revenue increased by $3.1 million, or 16%, from $19.3 million in fiscal year 2004 to $22.4 million in fiscal year 2005.  Product revenue by segment for the nine months ended July 2, 2005 and June 26, 2004 is as follows:

	Nine Months Ended
	(in thousands)
Division	July 2, 2005		June 26, 2004		$ Increase		% Increase
Power Systems	$	15,191	$	12,655	$	2,535	20.0	%
Electronics	7,183		6,599		$	584	8.8	%
Total product revenue	$	22,373	$	19,255	$	3,119	16.2	%

This increase of approximately $2.5 million in revenue from our Power Systems division for the nine months ended July 2, 2005 was largely due to increases in the Fuel Cell Energy line of approximately $1.2 million, Solar Converter line of approximately $1.5 million, the Plasma Torch line of approximately $1.0 million and other increases amounting to approximately $0.5 million, partially offset by decreases in our Test and Measurement product line of approximately $0.5 million and our Rotary UPS line of approximately $0.9 million.  During the nine months ended July 2, 2005 we shipped a Rotary UPS to a customer and have deferred approximately $1.3 million in revenue until all elements of revenue recognition are achieved.

The Electronics division increase of approximately $0.6 million was due to an increase in the military product line of approximately $1.2 million, partially offset by a decrease in the commercial product line of approximately $0.6 million

Funded research and development and other revenue.  Funded research and development and other revenue decreased by $2.5 million, or 43%, from $5.7 million in fiscal year 2004 to $3.2 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 $1.5 million from a Naval program which existed in fiscal 2004, and a decrease in revenue of  $0.6 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 first and second quarters 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 that period and through the end of the third quarter 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 same period in fiscal 2004.

Cost of product revenue.  Cost of product revenue increased by $4.3 million, or 27.1%, from $15.8 million in fiscal year 2004 to $20.1 million in fiscal year 2005.  Cost of product revenue by segment for the nine months ended July 2, 2005 and June 26, 2004 is as follows:

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	Nine Months Ended
	(in thousands)
Division	July 2, 2005		June 26, 2004		$ Increase		% Increase
Power Systems	14,260		10,540		$	3,720	35.3	%
Electronics	5,876		5,306		571		10.8	%
Total cost of product revenue	$	20,137	$	15,845	$	4,291	27.1	%

The increase was primarily attributable to an increase in material costs due to higher sales volume across all divisions, higher material costs, such as steel and copper which are material components to our products,  the mix of products sold, and higher manufacturing labor and overhead costs as compared to the same period in fiscal 2004.

Gross Margin. Gross margins on product revenue decreased from 18% for the nine months ended June 26, 2004 to 10% for the nine months ended July 2, 2005.  Gross margin by division is broken out below.

	Nine Months Ended
Division	July 2, 2005		June 26, 2004
Power Systems	6	%	17	%
Electronics	18	%	20	%
Total gross margin %	10	%	18	%

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 decrease in gross margins by 2% was attributable to higher revenue compared to the same period in fiscal 2004, along with the sales mix consisting of lower margin business related to military sub-contract revenues, in conjunction with manufacturing efficiencies and higher materials costs.

Funded research and development and other revenue expenses.  Funded research and development and other revenue expenses decreased by $1.3 million, or 31%, from $4.2 million in fiscal year 2004 to $2.9 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 upon customer accepts of 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 26% in fiscal year 2004 to 11% in fiscal year 2005, the primary reason for the decline is directly related to our efforts in completing the EDO contract which led to lower efficiency levels of our staff due to the slower start-up of new programs.

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 approximately $1.0 million, or 14%, from $7.1 million in fiscal year 2004 to $8.0 million in fiscal year 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, approximately $0.2 million related to the settlement of a law suit, approximately $0.1 million in costs related to our efforts to comply with Sarbanes-Oxley, and approximately $0.4 million in increased legal, accounting and other corporate costs as compared to fiscal 2004.

Amortization of intangibles.  Amortization of intangibles remained flat at $0.3 million for the nine months ended July 2, 2005 and June 26, 2004.

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 $0.1 million in 2004. We account for our warrants to purchase Mechanical Technology Incorporated’s common stock and to purchase Beacon Power

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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 June 26, 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 and we no longer account for these warrants in accordance with SFAS No. 133.

Other (expense).  Other expense was approximately $0.2 million in fiscal 2005.  This consisted primarily of state tax payments from prior years and the amortization of our line of credit renewal and Modification fees.

Interest expense.  Interest expense was approximately $0.4 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 nine months ended July 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 July 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.

Liquidity and Capital Resources

As of July 2, 2005, we had approximately $2.6 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 July 2, 2005, approximately $3.4 million could have been borrowed based on the level of eligible receivables.  Our trade payables, at July 2, 2005, totaled approximately $3.1 million, of which approximately $0.9 million were for invoices over 60 days old. In addition, we had approximately $0.4 million of accrued accounts payable at July 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.

On June 29, 2005, our Loan and Security agreement (the “New Loan”) with Silicon Valley Bank (the “Bank”) was modified pursuant to a Loan Modification Agreement (the “Modification Agreement”) with Silicon Valley Bank (the “Bank”).  The Modification Agreement has an effective date of May 31, 2005. Under the Modification Agreement, certain financial covenants relating to tangible net worth and minimum cash, which covenants we must satisfy in order to continue to borrow from the Bank, were modified.  In addition, certain conditions precedent to the making of advances were also modified.  The Modification Agreement will expire on January 30, 2006.  As consideration for the modifications, we (i) paid the Bank a modification fee of $20,000 and (ii) issued to the Bank a 10-year warrant to purchase 151,515 shares of our common stock at an exercise price of $1.386 per share.  We valued

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these warrants at $119,427 using the Black-Scholes option pricing model with the following assumptions: an expected life of seven years, expected volatility of 52.3%, no dividends, and risk-free interest rate of 4.0%.  The value of these warrants will be amortized ratably over the remaining term of the New Loan.

On August 15, 2005, the Company sold 4,676,151 shares of Common Stock to accredited investors for proceeds of approximately $5.3 million, net of transaction costs.  As part of this financing the Company also issued warrants to purchase up to 1,169,038 shares of Common Stock.  These warrants have an exercise price of $1.99 per share, are immediately exercisable and expire on August 2, 2010.

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 July 2, 2005, our cash and cash equivalents were approximately $2.6 million, including restricted cash and cash equivalents of approximately $0.1 million, an increase of approximately $0.4 million from September 30, 2004.  Cash used in operating activities for the nine months ended July 2, 2005 was approximately $6.7 million as compared to approximately $5.6 million for the nine months ended June 26, 2004.

Operating Activities

Cash used in operating activities during the nine months ended July 2, 2005 was primarily attributable to the net loss of approximately $6.1 million, offset by approximately $2.4 million of non-cash items such as $1.4 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, $0.6 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 $2.9 million decrease in working capital.

Investing Activities

Cash used in investing activities during the nine months ended July 2, 2005 was approximately $0.2 million as compared to cash used in investing activities of approximately $0.1 million for the nine months ended June 26, 2004.

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Financing Activities

Cash provided by financing activities for the nine months ended July 2, 2005 was approximately $7.4 million as compared to approximately $6.9 million for the nine months ended June 26, 2004. Net cash provided by financing activities during the nine months ended July 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 nine months ended June 26, 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.

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We lease equipment and office space under non-cancelable capital and operating leases. Future minimum rental payments, as of July 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	$	67,958	$	327,599
2006	316,762		1,225,148
2007	—		1,270,161
2008	—		1,290,574
2009	—		1,250,992
Thereafter	—		723,522
Total	$	384,720	$	6,087,996

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 July 2, 2005, we had an accumulated deficit of approximately $133.7 million. During the nine months ended July 2, 2005 we had a loss from operations of approximately $6.1 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 33,516,717 shares were issued and

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outstanding as of August 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 July 2, 2005, none of these warrants have been exercised.

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

As of August 10, 2005, we have reserved 7,446,931 shares of common stock for issuance upon exercise of stock options and warrants, 2,200,811 shares for future issuances under our stock plans and 946,909 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 August 10, 2005, holders of warrants and options to purchase an aggregate of 7,442,431 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.

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.

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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 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.

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

As of August 1, 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 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

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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.

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 do not have any 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 nine month period ended July 2, 2005, we recorded an additional $0.1 million related to a fixed price contract which was completed during the period.  No other losses were recorded on these contracts during the nine months ended July 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.

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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 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;

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•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.

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 nine months ended July 2, 2005 revenue from sales to our international customers was approximately $2.8 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. At July 2, 2005, we had one customer that accounted for approximately 19% of gross accounts receivable. Of the amounts due from this customer approximately $432,000 related to sales greater than sixty days past due, or approximately 32% of the balance due from the customer. In addition, approximately $930,000 of the balance due from the customer are from sales made to the customer during the quarter ended July 2, 2005, which represents less than 10% of total revenue for the period.  Historically we have not experienced any credit losses as a result of doing business with this customer.

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

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•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 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 August 1, 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

39

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.

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.

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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.

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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.

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

Item 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:

The annual meeting of stockholders of our Company was held on May 18, 2005. The following sets forth a brief description of each matter voted upon at the annual meeting and the number of votes cast for, against, withheld, as well as the number of abstensions and broker non-votes, as to each such matter.

		FOR	AGAINST/ WITHHELD	ABSTAIN	BROKER NON-VOTES
PROPOSAL
(1)	To elect the following Class II Directors:
	Andrew R. Muir	27,627,965	1,323,763	—	—
	Joseph E. Levangie	27,679,558	1,272,179	—	—
	To elect the following Class III Director:
	Michael C. Turmelle	27,847,064	1,104,664	—	—

The other directors of the Company, whose terms of office as directors continued after the annual meeting, are:
Marshall J. Armstrong, David B. Eisenhaure, Anthony J. Villiotti, James L. Kirtley, Jr., and John M. Carroll.

(2)	To ratify the selection of Grant Thornton LLP as independent auditors for the fiscal year ending September 30, 2005	28,691,554	135,808	124,366	—
(3)	To approve the Company’s 2005 Stock Incentive Compensation Plan	4,242,042	2,018,757	171,693	22,519,236

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.

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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: August 15, 2005	By:	/s/ David E. O’Neil
		David E. O’Neil Vice President, Finance and Treasurer

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EXHIBIT INDEX

Exhibit Number	Exhibit
10.1	Cooperative Agreement between Satcon Technology Corporation and U.S. Army Research Laboratory, concerning Power Conversion Systems for Future Army Applications, agreement number: W911NF-05-2-0020.
10.2	Loan Modification Agreement dated June 29, 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.
10.3	Form of Satcon Technology Corporation 2005 Incentive Compensation Plan, Incentive Stock Option agreement for Directors and Officer’s of the Corporation.
10.4	Form of Satcon Technology Corporation 2005 Incentive Compensation Plan, Non-Qualified Stock Option agreement for Directors and Officer’s of the Corporation.
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

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EX-10.1

EXHIBIT 10.1

COOPERATIVE AGREEMENT

BETWEEN

SatCon Tecnology Corporation

(The Recipient)

AND

US Army Research Laboratory

CONCERNING

Power Conversion Systems for Future Army Applications

Agreement No.: W911NF-05-2-0020

Total Estimated Amount of the Agreement: $2,865,417.00

Total Estimated Government Funding of the Agreement: $2,865,417.00

CLIN 0001 is hereby established in the amount of $275,000.00 and CLIN 0002 is hereby established in the amount of $599,784.00.  CLIN 0001 and CLIN 0002 are funded as set forth below. Additional CLINs may be established, subject to the availability of funds, up to the Total Estimated Amount of the Agreement set forth above.

Government Funds Obligated: $874,784.00

Authority:  10 U.S.C. 2358

Accounting and Appropriation Data:

ACRN AA:

(1)  Appropriation No.:	21 5 2040 0000 0 6N 6N7C 622120H1600 255Y
	ANDP00 W71B7J5038M102 5NX1XX S18129
(2) Requisition No.:	W71B7J-5038-M102
(3) Amount:	$275,000.00
(4) Applicable CLIN:	000101
ACRN AB:
(1)  Appropriation No.:	21 5 2040 0000 0 6N 6N7E 622601H9111 255Y
	4RHE00 MIPR5EARL2B101 52B101 S20113
(2) Requisition No.:	W71B7J-5038-M101
(3) MIPR No.:	MIPR5EARL2B101
(4) Amount:	$599,784.00
(5) Applicable CLIN:	000201

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This Agreement is entered into between the United States of America, hereinafter called the Government, represented by the U.S. Army Research Laboratory (ARL), and SatCon Technology Corp., pursuant to and under U.S. Federal Law

2

Table of Contents

ARTICLES
Article 1	Scope of the Agreement
Article 2	General Definitions
Article 3	Program Management
Article 4	Staff Rotation
Article 5	Fiscal Management
Article 6	Agreement Administration
Article 7	Term of the Agreement
Article 8	Administrative Responsibility
Article 9	Public Release or Dissemination of Information
Article 10	Patent Rights
Article 11	Entire Agreement
Article 12	Governing Law/Order of Precedence
Article 13	Waiver of Rights
Article 14	Use of Technical Facilities
Article 15	Metric System of Measurement
Article 16	Liability
Article 17	Non-Assignment
Article 18	Severability
Article 19	Force Majeure
Article 20	Notices
Article 21	Performance by Foreign Nationals
ATTACHMENTS
Attachment 1	Standard Terms and Conditions for For-Profit Entities
Attachment 2	National Policy Requirements
Attachment 3	Other Certifications
Attachment 4	Annual Program Plan & Budget
Attachment 5	Reporting Requirements

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ARTICLE 1    Scope of the Agreement

1.1 Introduction

This Agreement is a “Cooperative Agreement” (31 USC 6305) and is awarded pursuant to 10 USC 2358 Research Projects.  The Parties agree that the principal purpose of this Agreement is for SatCon Technology Corp., hereinafter referred to as the “Recipient,” to provide its best research efforts in the support and stimulation of applied research and not the acquisition of property for the direct benefit or use of the Government.  FAR and DFARS apply only as specifically referenced herein.  This Agreement is not intended to be, nor shall it be construed as, by implication or otherwise, a partnership, a corporation, or other business organization.

1.2 Background and Vision Statement

The U.S. Army Research Laboratory (ARL)Sensors and Electron Devices Directorate (SEDD) works in many areas crucial to the success of the future Army, providing fundamental research to give commanders real-time situational awareness; rapid and precise discrimination and targeting; highly compact, lightweight energy sources; as well as mitigating techniques for use against hostile enemy threats.

SatCon will perform its best research to systematically investigate the design, optimization, performance limits, and technology barriers of high-power power conversion systems for future Army applications. This effort will target (but is not limited to) power conversion systems in the 500 kW output power class with nominal input voltages of 600 VDC. Topic areas covered by this effort include, but are not limited to: optimization of circuit topology, optimization of control strategies, identification of component technologies, evaluation and design of thermal management systems, evaluation and design of advanced packaging concepts, failure analysis and repair, and power conversion system development.

1.3 Goals/Objectives

The recipient shall participate in a program of coordinated research, development, and education with ARL in accordance with the Annual Program Plan, which sets forth the specific goals and objectives for the program for each program period.  The Annual Program Plans will be provided as attachments to this Agreement.  The recipient shall also comply with the reporting requirements set forth in Attachment 5.

The Government will have continuous involvement with the recipient.  The Government will also obtain access to the research results and certain rights in data, computer codes developed, and patents pursuant to Article 10 and Attachment 1 to this agreement.  The Government and the Recipient are bound to each other by a duty of good faith and best research effort in achieving the goals of the Program.

As a condition of this Agreement, it is herein understood and agreed that Federal funds are to be used only for costs that: (1) a reasonable and prudent person would incur, in carrying out the advanced research project herein; and (2) are consistent with the purposes stated in governing Congressional authorizations and appropriations.

ARTICLE 2    General Definitions

In addition to the Definitions set forth at 32 CFR 34.2, the following definitions apply to this Agreement:

2.1 Recipient  — An organization or other entity receiving a grant or cooperative agreement from a DoD Component.  For purposes of this Agreement, the Recipient is SatCon Technology Corp.

2.2 Party  — For purposes of this Agreement, the parties are ARL and the Recipient.

2.3 Cooperative Agreement Manager (CAM) — Is the Government’s technical representative from ARL charged with the overall responsibility of management and guidance of the cooperative agreement.

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2.4 Grants Officer — Is the Government’s principal point of contact for all administrative, financial or other non-technical issues arising under the Agreement.

2.5 Agreements Administrator – The Agreements Administrator has authority to administer Cooperative Agreements and, in coordination with the Grants Officer, make determination and findings related to delegated administration functions.

2.6 Recipient Program Manager (RPM) — The RPM is the Recipient’s technical representative charged with the Recipient’s overall responsibility of management and guidance of the cooperative agreement.

2.7 Annual Program Plan (APP) and Budget — Is the annual baseline document which details the scope, schedule, principal investigator(s), collaboration, staff rotation, and educational opportunities for the research activities.  It also includes the financial expression of the project, which serves as the resource allocation/commitment for the research activities.  The Budget shall include the sum of both Federal and non-Federal shares, as appropriate.

ARTICLE 3    Program Management

3.1 ARL Cooperative Agreement Manager (CAM).   The ARL Cooperative Agreement Manager (CAM) is:

Dr. Wes Tipton

U.S. Army Research Laboratory

ATTN:  AMSRD-ARL-SE-DP

2800 Powder Mill Road

Adelphi, MD 20783-1197

Phone: (301) 394-5209

Fax No.: (301) 394-0310

Email Address: wtipton@arl.army.mil

3.2 Recipient Program Manager (RPM).   The Recipient Program Manager (RPM) is:

Mr. Laban (Ted) Lesster

SatCon Technology Corporation

27 Drydock Avenue

Boston, MA 02210-2377

Phone: (410) 694-0447

Fax: (410) 859-1702

Email: ted.lesster@satcon.com

3.3 Cooperative Agreement Manager (CAMC). – The ARL CAM is responsible for the overall management and guidance of the cooperative agreement.  The CAM, together with the RPM will form the Cooperative Agreement Management Committee (CAMC).  Other advisory members may be added by either the CAM, or the RPM, by mutual agreement, when their presence will prove beneficial to the research. The CAMC will prepare and approve the Annual Program Plan.

3.4 Management and Program Structure – The CAMC shall be responsible for the management and integration of the party’s collaborative efforts under this agreement including programmatic, technical and reporting.

3.5 Annual Program Planning Process – The APP shall serve as the annual baseline document, which details the scope, schedule, principal investigator(s), staff rotation, educational opportunities, and resource allocation/commitment of the research activities. Along with the APP, the Recipient shall include a list of foreign nationals proposed to perform during the period in accordance with the notification required by Article 21.  This list shall be updated as necessary during the course of the year. The Annual Program Plan for year 1 will be incorporated under the Agreement as Attachment 4 at time of award.

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Beginning 6 months after initial award, the RPM and ARL CAM will collaborate and prepare the Annual Program Plan (APP) for year 2. Within 10 days of submission, the Grants Officer, in conjunction with the RPM and ARL CAM, will approve the APP and associated budget for year 2. This process shall continue for the length of the Agreement. As part of this process, one or more site visits may be required. In addition, the ARL CAM or his representatives will have the right to make visits as needed during the year to assess or coordinate performance.

During the course of performance, if it appears that research milestones will not be met, the RPM will provide a proposed adjustment to the APP for approval by the ARL CAM.  In addition, the ARL CAM may from time to time request that additional research be added to the APP.

ARTICLE 4 Staff Rotation and On-Site Collaboration

4.1  Salary and Travel Costs.  All salary and travel costs associated with the rotation of government personnel will be borne by the Government.  All salary and travel costs associated with staff rotation or on-site collaboration of recipient personnel will be paid for with funding provided under this agreement.

4.2  Host Facility Regulations.  All personnel in rotational assignments or on-site collaboration are required to comply with the safety, environmental, security, and operational regulations or requirements of the host facility.

4.3  Administrative Support.  The host facility will provide adequate office space, communications connections, administrative support, and office supplies, if available, for researchers in long-term rotational assignments.  Should it become necessary to procure equipment to facilitate a rotational assignment, the Annual Program Plan should reflect the need for said equipment, and the costs will be borne under the cooperative agreement.

ARTICLE 5    Fiscal Management

5.1  Allocation of Recipient Funds

5.1.1  Restrictions on the Use of Government Funds.  Government funds provided under this Agreement must be allocated by the Recipient exclusively for the execution and operation of the APP or Agreement Scope.  Government funds shall not be utilized to support the Recipient’s operations or administration unrelated to this Agreement.

5.1.2 Obligation.  In no case shall the Government’s financial obligation exceed the amount obligated on this Agreement or by amendment to the Agreement.  The total Government funding amount estimated for performance of this Agreement is $2,865,417.00, subject to the availability of funds.  The amount of Government funds allotted and available for payment is $874,784.00.  It is estimated that such funds shall be sufficient to cover performance through twelve (12) months from date of agreement award.  The Government is not obligated to reimburse the Recipient for expenditures in excess of the amount of obligated funds allotted by the Government.

5.1.3 Incremental Funding.  The Government may obligate funds to this Agreement incrementally.  In the event that this Agreement is funded incrementally, the Government anticipates that from time to time additional amounts will be allotted to this agreement by unilateral modification, until the total amount for performance of this Agreement has been funded.  To minimize interruption of effort due to lack of funds, the Recipient shall notify the Grants Officer in writing whenever the amount of funds obligated under this agreement when added to anticipated costs in the next 60 days will exceed 75% of the amount allotted.

5.1.4 Payments

The Recipient shall submit an original and two (2) copies of all vouchers (SF 270 “Request for Advance or Reimbursement”) to the Agreement Administrator for payment approval. The Recipient shall submit separate vouchers for each CLIN and clearly designate the appropriate CLIN on the voucher.  After written verification of progress towards or achievement of the research milestones by the CAM, and approval by the Agreement

6

Administrator, the vouchers will be forwarded to the payment office within ten (10) calendar days of receipt of the voucher.  The Payment Office will make payments via EFT within 20 calendar days of receipt of transmittal.

Payments will be made no more frequently than monthly and will be based on reimbursement of actual expenditures as monitored against the Budget Plan contained in the APP.  Once the CAM has verified that the Recipient has expended best efforts towards the successful achievement of the research goals, payment will be authorized.

ARTICLE 6    Agreement Administration

6.1  Modifications to this Agreement.  Any Party who wishes to modify this Agreement shall, upon reasonable notice of the proposed modification to the other Party, confer in good faith with the other Party to determine the desirability of the proposed modification.  Modifications shall not be effective until a written modification is signed by the Agreement signatories or their successors.  Administrative modifications may be unilaterally executed by the Grants Officer or by the Agreements Administrator.

6.2  Requirements for Approval for Changes to the Program Budget and Annual Program Plan.  This provision highlights Agency decisions on the terms and conditions of 32 CFR 32.25 and 32 CFR 34.15 as applicable.  During the course of performance, the Grants Officer, in coordination with the CAM, will have approval authority for certain specific changes to the APP including but not limited to:

a. Changes in the scope or the objective of the program, APP, or research milestones;

b. Change in the key personnel specified in the proposal or award document;

c. The absence for more than three months, or a 25% reduction in time devoted to the project, by the approved project director or principal investigator;

d. The need for additional Federal funding;

e. The inclusion of pre-award costs.  All such costs are incurred at the Recipient’s risk;

f. Any sub-award, transfer, or contracting out of substantive program performance under an award, unless described in the application and funded in the approved awards.

6.3  No-Cost Period of Performance Extension.  In accordance with the DoD Grant and Agreement Regulations (DoD 3210.6-R), the Recipient may initiate a request for a one-time, no-cost extension to the period of performance.  The request may not include additional Federal funds, nor change the approved objectives or scope of the program.

ARTICLE 7    Terms of the Agreement, Suspension, and Termination

7.1Term of the Agreement.  The basic term of this Agreement shall commence upon the effective date and continue through thirty-six (36) months, subject to the availability of funds.

ARTICLE 8    Administrative Responsibility

8.1 The Agreements Office

U.S. Army RDECOM Acquisition Center

Research Triangle Park Division

ATTN: AMSRD-ACC-R

For FedEx etc. use:

4300 S. Miami Blvd

7

Durham, NC 27703

For USPS use:

P.O. Box 12211

Research Triangle Park, NC 27709

Grants Officer: Patricia J. Fox

Phone: (919) 549-4272

Fax: (919) 549-4373

Email: patricia.fox@us.army.mil

Agreement Specialist: Richard Burkes

Phone: (919) 549-4295

Fax: (919) 549-4373

Email: richard.burkes@us.army.mil

8.2 Agreement Administrator

DCMA Boston

495 Summer Street

Boston, MA 02210-2138

8.3 The Recipient Address and Point of Contact

Danny Wong

SatCon Technology Corporation

27 Drydock Avenue

Boston, MA 02210-2377

Phone: (617) 897-2459

Fax: (617) 897-2427

Email: danny.wong@satcon.com

8.4 The Payment Office

DFAS COLUMBUS CENTER – HQ0337

DFAS-CO/NORTH ENTITLEMENT OPERATIONS

P.O. Box 182266

Columbus, OH 43218-2266

8.5 Address of Payee

SatCon Technology Corporation

27 Drydock Avenue

Boston, MA 02210-2377

ARTICLE 9    Public Release or Dissemination of Information

9.1 Open Publication Policy.  Notwithstanding the reporting requirements of this Agreement, parties to this Agreement favor an open-publication policy to promote the commercial acceptance of the technology developed under this Agreement, but simultaneously recognize the necessity to protect proprietary information.

9.2  Prior Review of Public Releases.  The Parties agree to confer and consult with each other prior to publication or other disclosure of the results of work under this Agreement to ensure that no classified or proprietary information is released.  Prior to submitting a manuscript for publication or before any other public disclosure, each

8

Party will offer the other Party ample opportunity (not to exceed 60 days) to review such proposed publication or disclosure, to submit objections, and to file application letters for patents in a timely manner.

9.3  Publication Legend.  It is herein agreed that except for the disclosure of basic information regarding this Agreement such as membership, purpose and a general description of the technical work, the Recipient will submit all proposed public releases to the ARL cooperative Agreement Manager for comment prior to release.  Public releases include press releases, specific publicity or advertisement, and articles for proposed publication or presentation.  In addition, articles for publication or presentation will contain an acknowledgement of support and a disclaimer.  This should be included to read as follows.  These statements may be placed either at the bottom of the first page or at the end of the paper.  “Research was sponsored by the Army Research Laboratory and was accomplished under Cooperative Agreement Number W911NF-05-2-0020.  The views and conclusions contained in this document are those of the authors and should not be interpreted as representing the official policies, either expressed or implied, of the Army Research Laboratory or the U.S. Government.  The U.S. Government is authorized to reproduce and distribute reprints for Government purposes notwithstanding any copyright notation heron.”

ARTICLE 10Intellectual Property

In addition to the Intellectual Property Rights contained in 32 CFR 34.25, incorporated by reference into this Agreement, the participants recognize that this program may result in intellectual property that is generated by the Recipient or Sub-Recipient personnel and Government personnel.  Should this occur, the parties agree to use their best efforts to mutually agree to an equitable distribution of property rights and distribution of filing fees or other administrative costs.  Should the parties reach an impasse in determining the distribution of property rights, the parties shall resort to the Disputes, Claims, and Appeals Process as set forth at 32 CFR 22.815.

ARTICLE 11    Entire Agreement

This Agreement along with all Attachments constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes any prior understandings or written or oral agreement relative to said matter.  In the event of a conflict between the terms of the Agreement and its attachments, the terms of the Agreement shall govern.

ARTICLE 12    Governing Law/Order of Precedence

The Agreement shall be enforced in accordance with applicable federal law and regulations, directives, circulars or other guidance as specified in this Agreement.  When signed, this Agreement shall become binding on the Recipient and the Government to be administered in accordance with the DoD Grant and Agreement Regulations as they apply to the particular recipient or sub-recipient concerned.  In the event a conflict exists between the provisions of this Agreement and the applicable law, regulations, directives, circulars or other guidance, the Agreement provisions are subordinate.

ARTICLE 13    Waiver of Rights

 Any waiver of any requirement contained in this Agreement shall be by mutual agreement of the parties hereto.  Any waiver shall be reduced to writing and a copy of the waiver shall be provided to each Party.  Failure to insist upon strict performance of any of the terms and conditions hereof, or failure or delay to exercise any rights provided herein or by law, shall not be deemed a waiver of any rights of any Party hereto.

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ARTICLE 14    Use of Technical Facilities

To the maximum extent practical, the Recipient agrees to use the technical reference facilities of the Defense Technical Information Center, 8725 John J. Kingman Road, Suite 0944, Ft. Belvoir, VA  22060-6218 (Internet address: http://www.dtic.mil) and all other sources, whether United States Government or private, for purpose of surveying existing knowledge and avoiding needless duplication of scientific and engineering effort.

ARTICLE 15    Metric System of Measurement

The Metric Conversion Act of 1975 as amended by the Omnibus Trade and Competitiveness Act of 1988 and implemented by Executive Order 12770 gives preference to the metric system.  The Recipient shall ensure that the metric system is used to the maximum extent practicable in performance of this Agreement.

ARTICLE 16    Liability

No Party to this Agreement shall be liable to any other Party for any property of that other Party consumed, damaged, or destroyed in the performance of this Agreement, unless it is due to the negligence or misconduct of the Party or an employee or agent of the Party.

ARTICLE 17   Non-Assignment

This Agreement may not be assigned by any Party except by operation of law resulting from the merger of a party into or with another corporate entity.

ARTICLE 18   Severability

If any clause, provision or section of this Agreement shall be held illegal or invalid by any court, the invalidity of such clause, provision or section shall not affect any of the remaining clauses, provisions or sections herein and this Agreement shall be construed and enforced as if such illegal or invalid clause, provision or section had not been contained herein.

ARTICLE 19   Force Majeure

Neither Party shall be in breach of this Agreement for any failure of performance caused by any event beyond its reasonable control and not caused by the fault or negligence of that Party.  In the event such a force majeure event occurs, the Party unable to perform shall promptly notify the other Party and shall in good faith maintain such partial performance as is reasonably possible and shall resume full performance as soon as is reasonably possible.

ARTICLE 20   Notices

All notices and prior approvals required hereunder shall be in writing and shall be addressed to the parties identified on the Agreement cover page and Article 8.  Notices shall be effective upon signature of the Grants Officer.

ARTICLE 21  FOREIGN NATIONALS PERFORMING UNDER AGREEMENT

In accordance with 8 U.S.C. 1324a, it is unlawful to hire for employment in the U.S. an individual without verifying that individual’s employment authorization.  8 CFR 274a.2 VERIFICATION OF EMPLOYMENT ELIGIBILITY identifies the official documents that establish employment eligibility.

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Prior to performance of work by a foreign national as a result of this agreement, the employer shall provide the Grants Officer the name of the foreign national and identify the type of form(s) produced for verification of employment status.  Should the foreign national’s performance require access to DoD facilities, the employer shall coordinate with the sponsor providing access, in order to submit the following:

1. Individual’s Name

2. Citizenship

3. Date and Location of the Visit

4. Purpose of the Visit

5. Passport Number

6. Employer’s Verification of Work Authorization

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ATTACHMENT 1    Standard Terms and Conditions Applicable to For-Profit Entities

Department of Defense Grant and Agreement Regulations  (DoDGARS)

DoD 3210.6-R and 32 CFR Parts 21-37

Award, administration, and performance under this agreement is subject to the requirements of the DoD Grant and Agreement Regulations (32 CFR Parts 21 – 37).  The following references indicate the awarding agency’s decision on specific issues.

32 CFR 34.1(b)(2)(ii) Sub-Awards

For-profit organizations that receive prime awards covered by this part shall apply to each sub-award the administrative requirements that are applicable to the particular type of sub-recipient (see 32 CFR parts 32 and 34)

32 CFR 34.11 Standards for Financial Management Systems

The Agency does not guarantee or insure the repayment of money borrowed by the Recipient (see section 11(b)).  Fidelity bond coverage is not required (see section 11(c)).

32 CFR 34.12 Payment

This Agreement will employ the reimbursement method of payment (see 32 CFR 34.12(a)(1)).  This Agreement does not provide for advance payments (see section 12(a)(2)).  (See Article 5, subparagraphs 5.1.2 through 5.1.4).  See Article 5 – Fiscal Management for specifics concerning the payment process.

32 CFR 34.13 Cost Share or Match

This provision is applicable only if cost share or match is proposed.  Should cost share or match be included, the parties to this agreement will mutually agree to its allowability, valuation, and necessary documentation.

32 CFR 34.14 Program Income

Should this agreement result in the generation of program income, the recipient shall account for said funds, add them to the funds committed to the project, and they shall be used to further the program objectives.  The recipient shall have no obligation to the Government for program income earned after the expiration of the program.  Costs incident to the generation of program income may be deducted from gross income to determine program income, provided these costs have not been charged to the award document.  The Patent and Trademark Amendments (35 U.S.C. Chapter 18) apply to inventions made under this award.

32 CFR 34.15 Revision of Budget/Program Plans

See Article 6 of this agreement.

32 CFR 34.16  Audit

For profit Recipient(s) of this award are required to submit audit reports to the following address:

Grants Officer: Patricia J. Fox	Agreement Administrator:
Phone: (919) 549-4272	DCMA Boston
Fax: (919) 549-4373	495 Summer Street
Email: patricia.fox@us.army.mil	Boston, MA 02210-2138
DCAA Boston Branch Office	Other:
101 Merrimac St., Suite 82	Audit reports may be requested from the DoD
Boston, MA 02114-4719	Inspector General, or any of the Department of Army
	Policy directorates.

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32 CFR 34.17 Allowable Costs

The For-Profit costs principles in 48 CFR parts 31 and 231 (Federal Acquisition Regulation and Defense Acquisition Regulations Supplement) as well as the supplemental information on allowability of audit costs in the 32 CFR 34.16(f) are applicable.

32 CFR 34.18 Fee/Profit

This Agreement does not provide for the payment of fee/profit to the recipient or subrecipients.

32 CFR 34.20 through 34.25 Property Standards

For-Profit Recipients may only purchase real property and equipment under this Agreement with the prior approval of the Grants Officer.  Government approved Program Plans that include a budget indicating real property or equipment purchases will provide sufficient evidence of the required Grants Officer approval.

The Recipient receives conditional title to all real property and equipment purchased under this Agreement.  ARL reserves the right to transfer title to any and all equipment or real property purchased under this Agreement to the Federal Government or to eligible third parties upon conclusion of this Agreement.

For-Profit organizations other than small business concerns shall comply with 35 U.S.C. 210(c ) and Executive Order 12591 (3 CFR, 1987 Comp., p.220) which codifies a Presidential Memorandum on Government Patent Policy dated February 18, 1983.

ARL reserves the right to obtain, reproduce, publish, or otherwise use for Federal Government purpose the data first produced under this award, and authorize others to receive, reproduce, publish, or otherwise use such data for Federal purposes.

32 CFR 34.30 through 34.31 Procurement Standards

ARL reserves the right to review prior to award procurement documents such as request for proposals, or invitations for bids, independent cost estimates etc., during performance under this award. (see 32 CFR 34.31(b))

32 CFR 34.41  Reports

See Attachment 5 of this Agreement.

32 CFR 34.42  Records

32 CFR 34.50 through 34.52 Termination and Enforcement

In addition to the termination processes set forth at 32 CFR 34.51, this Agreement may also be terminated by the Grants Officer should available funds be insufficient to accomplish the goals or intent of the Agreement, or other convenience of the Government.

32 CFR 22.815 Claims, Disputes and Appeal

The Agency and Recipient will employ Alternative Dispute Resolution to resolve issues which arise during the performance of agreement.  The Agency and Recipient recognize that disputes arising under this agreement are best resolved at the local working level by the parties directly involved.  All Parties are encouraged to be imaginative in designing mechanisms and procedures to resolve disputes at this level.  Any dispute arising under the agreement, which is not disposed of by agreement of the parties at the working level shall be submitted jointly to a senior manager of Agency and Recipient or their designee(s) for resolution (see section 815(c)(2)).  The Grant Appeal Authority is the Director of Agency (see section 815(e)(2)).  Pending the resolution of any dispute or claim pursuant to this Article, the Parties agree that performance of all obligations shall be pursued diligently in accordance with the Agreement.

32 CFR 34.61 through 34.63  After-the-Award Requirements

Appendix A to Part 34 – Contract Provisions

All contracts awarded by the Recipient, including those for amounts less than the simplified acquisition threshold, shall contain the following provisions as applicable:

 • Equal Employment Opportunity (E.O. 11246, as amended by E.O. 11375, and supplemented by 41 CFR Chapter 60)

 • Copeland “Anti-Kickback” Act (18 U.S.C. 874 and 40 U.S.C. 276c)

 • Contract Work Hours and Safety Standards Act (40 U.S.C. 327-333)

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 • Rights to Inventions Made Under a Contract, Grant, or Cooperative Agreement (37 CFR Part 401)

 • Clean Air Act (42 U.S.C. 7401 et seq.) and the Federal Water Pollution Control Act (33 U.S.C. 1251 et. seq.)

 • Byrd Anti-Lobbying Amendment (31 U.S.C. 1352)

 • Debarment and Suspension (E.O.s 12549 and 12689)

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ATTACHMENT 2    National Policy Requirements

National Policy Requirements

By signing this Agreement or accepting funds under this Agreement, the recipient assures that it will comply with applicable provisions of the national policies on the following topics:

1. Nondiscrimination

a.  On the basis of race, color, or national origin, in Title VI of the Civil Rights Act of 1964 (42 U.S.C. 2000d, et seq.), as implemented by DoD regulations at 32 CFR part 195.

b.  On the basis of sex or blindness, in Title IX of the Education Amendments of 1972 (20 U.S.C. 1681, et seq.). (Applicable to Educational Institutions only)

c.  On the basis of age, in the Age Discrimination Act of 1975 (42 U.S.C. 6101, et seq.), as implemented by Department of Health and Human Services regulations at 45 CFR part 90.

d.  On the basis of handicap, in Section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794), as implemented by Department of Justice regulations at 28 CFR part 41 and DoD regulations at 32 CFR part 56.

2.  Live Organisms.  For human subjects, the Common Federal Policy for the Protection of Human Subjects, codified by the Department of Health and Human Services at 45 CFR part 46 and implemented by the Department of Defense at 32 CFR part 219.

3. Environmental Standards.

a.  Comply with the applicable provisions of the Clean Air Act (42 U.S.C. 7401, et. Seq.) and Clean Water Act (33 U.S.C. 1251, et. seq.), as implemented by Executive Order 11783 [3 CFR, 1971-1075 Comp., p. 799] and Environmental Protection Agency (EPA) rules at 40 CFR part 15.  In accordance with the EPA rules, the Recipient further agrees that it will:

• Not use any facility on the EPA’s List of Violating Facilities in performing any award that is nonexempt under 40 CFR 15.5, as long as the facility remains on the list.

• Notify the awarding agency if it intends to use a facility in performing this award that is on the List of Violating Facilities or that the Recipient knows has been recommended to be placed on the List of Violating Facilities.

b.  Identify to the awarding agency any impact this award may have on the quality of the human environment, and provide help the agency may need to comply with the National Environmental

Policy Act (NEPA, at 42 U.S.C. 4231, et. seq.) and to prepare Environmental Impact Statements or other required environmental documentation.  In such cases, the recipient agrees to take no action that will have an adverse environmental impact (e.g., physical disturbance of a site such as breaking of ground) until the agency provides written notification of compliance with the environmental impact analysis process.

4.  Officials Not to Benefit.  No member of or delegate to Congress, or resident commissioner, shall be admitted to any share or part of this Agreement or to any benefit arising from it, in accordance with 41 U.S.C. 22.

5.  Preference for U.S. Flag Carriers.  Travel supported by U.S. Government funds under this Agreement shall use U.S. -flag air carriers (air carriers holding certificates under 49 USC 41102) for international air transportation of people and property to the extent that such service is available, in accordance with the International Air Transportation Fair Competitive Practices Act of 1974 (49 USC 40118) and the interpretative guidelines issued by the Comptroller General of the United States in the March 31, 1981, amendment to the Comptroller General Decision B138942.

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6.  Cargo Preference.  The recipient agrees that it will comply with the Cargo Preference Act of 1954 (46 U.S.C. 1241), as implemented by Department of Transportation regulations at 46 CFR 381.7, which require that at least 50 percent of equipment, materials or commodities procured or otherwise obtained with U.S. Government funds under this agreement, and which may be transported by ocean vessel, shall be transported on privately owned U.S.-flag commercial vessels, if available.

7.  Military Recruiters.  As a condition for receipt of funds available to the Department of Defense (DoD) under this award, the recipient agrees that it is not an institution of higher education (as defined in 32 CFR part 216) that has a policy of denying, and that it is not an institution of higher education that effectively prevents, the Secretary of Defense from obtaining for military recruiting purposes:  (A) entry to campuses or access to students on campuses; or (B) access to directory information pertaining to students.  If the recipient is determined, using the procedures in 32 CFR part 216, to be such an institution of higher education during the period of performance of this agreement, and therefore to be in breach of this clause, the Government will cease all payments of DoD funds under this agreement and all other DoD grants and cooperative agreements to the recipient, and it may suspend or terminate such grants and agreements unilaterally for material failure to comply with the terms and conditions of award.

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ATTACHMENT 3    Other Certifications

The following Certifications, which have been executed by the Recipient prior to award of this Agreement are on file with the issuing office, and are hereby incorporated herein by reference:

a. Certification at Appendix A to 32 CFR Part 28 Regarding Lobbying

b. Certification at Appendix A to 32 CFR Part 25 Regarding Debarment, Suspension, and Other Responsibility Matters

c.  Certification at Appendix C to 32 CFR Part 25 Regarding Drug-Free Workplace Requirements

17

ATTACHMENT 4 Annual Program Plan and Budget

ANNUAL PROGRAM PLAN

For

COOPERATIVE AGREEMENT

W911NF-05-2-0020

Between

SatCon Technology Corporation

RPM: Mr. Laban (Ted) Lesster

And

U.S. Army Research Laboratory

CAM: Dr. Wes Tipton

Concerning

Power Conversion Systems for Future Army Applications

Period of Performance:  12 Months commencing upon effective date of Award

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The Recipient shall participate in a program of coordinated research, development and education with ARL as set forth below.

(CLIN 0001)

Task 1.1 — High-voltage converter product improvement

The Recipient shall, based on Government recommendation and requirements, improve the performance and operability of the existing high-voltage, DC-DC converter developed by SatCon Technologies, Inc. Improvements may include, but are not limited to, soft-start circuit for expanded input voltage ranges, output rectifier protection circuits, and dual-power operation.

Task 1.2 — Power converter failure analysis and repair

The Recipient shall perform evaluations of damaged high-voltage DC-DC converters developed by SatCon Technologies, Inc., determine the cause of failure, repair and analyze of the failure, and make recommendations on how to prevent similar damage in the future.

Task 1.3 — Power conversion technology consultation and development

The Recipient shall provide to the Government: design support, engineering consultation, and analyses related to the field of power electronics. The Recipient shall, at the request of the Government and subject to available funds, develop and deliver to the Government prototype power conversion systems of common interest to the Recipient and the Government. These systems may be evaluated by the Government for use in future Army systems.

(CLIN 0002)

Task 2.1 — System configuration study

The Recipient shall, based on Government recommendations and requirements, perform a series of first-order designs to assess the relative performance, volume, and cost of potential power generation systems.

Task 2.2 — Permanent Magnet generator design and fabrication

Based on the results of Task 2.1, the Recipient shall build/buy a permanent magnet generator that conforms to the overall system requirements. The generator shall be use 80°C coolant fluid and shall be able to deliver approximately 400 kW of electrical power at a nominal voltage 610 VDC through the power conversion electronics. Maximum power generation shall occur at input shaft speeds in the range of 3000 to 3600 rpm. Power delivery of approximately 50 kW (at 610 VDC) shall be provided at input shafts speeds of approximately 1000 rpm.

Task 2.3 — Power conversion system design and fabrication

The Recipient shall design and fabricate the power conversion electronics required to provide approximately 400 kW at a nominal output voltage of 610 VDC using the generator developed in Task 2.2. These electronics shall provide for variable speed power regulation and shall use digital control schemes where applicable. The Recipient shall provide to the Government all mechanical, thermal, electrical, and electronic design details of the power generation system and its components. The Recipient shall provide to the Government all simulation models and control code used in the development and operation of the power generation system.

Task 2.4 — Initial system evaluation

The Recipient and ARL shall perform (jointly) preliminary evaluations of the generator and power conversion systems to verify operation.

The parties to this Agreement will periodically review the progress or accomplishment of the above goals. Based upon this review, the parties may mutually agree to adjust the goals. Should this adjustment impact the budget or significantly alter the program goals the Grants Officer shall issue a modification to this Agreement evidencing same in accordance with Article 6.2.

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Budget CLIN 0001

Direct Labor	$	80,475.00
Fringe	27,361.00
Overhead	64,380.00
Materials	29,864.00
G&A	69,776.00
Other Direct Costs	3,144.00
Total Cost	$	275,000.00

Budget CLIN 0002

Direct Labor	$	175,518.00
Fringe	59,676.00
Overhead	140,414.00
Materials	65,136.00
G&A	152,184.00
Other Direct Costs	6,856.00
Total Cost	$	599,784.00

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ATTACHMENT 5  Reporting Requirements

A.  MONTHLY HBCU/MI REPORT

The Recipient shall provide a monthly accounting evidencing the distribution of funds provided under this agreement to educational institutions that qualify as HBCU or MI organizations.

B.  QUARTERLY REPORT

Throughout the term of the Agreement, the Recipient shall submit or otherwise provide a quarterly report (government fiscal quarter).  Two (2) copies shall be submitted or otherwise provided to the CAM, and one (1) copy shall be submitted or otherwise provided to the Agreements Administration Office.  A copy of the letter of transmittal shall be submitted or otherwise provided to the Agreements Office.  The report shall contain two (2) major sections:

Technical Status Report.  The technical status report will detail technical progress to date on research milestones, all problems, technical issues or major developments during the reporting period.  The technical status report will include a report on the status of the collaborative activities during the reporting period.  The technical status report will include the utilization of subject inventions by the Recipient.

Business Status Report.  The business status report will provide summarized details of the resource status of this Agreement, including the status of contributions by the Recipient.  This report should compare the resource status with any payment and expenditure schedules or plans provided in the original agreement.  Any major deviations shall be explained along with discussion of adjustment actions proposed.

C.  JOINT PAPERS AND PRESENTATIONS:

When determined necessary by the CAM periodic joint papers and presentations will be given.

D.  JOURNAL ARTICLES

Journal articles in general and joint ARL/Recipient journal articles are strongly encouraged as a major reporting mechanism of this research effort.

E.  ANNUAL AND FINAL REPORTS

1.  The Recipient shall submit an Annual Report making full disclosure of all major technical developments and progress for the preceding 12 months of effort within sixty (60) calendar days of completion of the effort and for each additional 12 months of effort, through the life of this agreement. The report will also provide an accounting of all Federal funds expended during the term of the Agreement.  With the approval of the Cooperative Agreement Manager, reprints of published articles may be attached to the Final Report.

The Recipient shall make distribution of the Final report as follows:

Cooperative Agreement Manager - 1 original plus 1 copy;

Agreement Administration Office - 1 copy, and the

Grants Officer - 1 copy of the letter of transmittal only.

One (1) copy of the Final Report shall be provided to:

Defense Technical Information Center (DTIC)

8725 John J. Kingman Road, Suite 0944

Ft. Belvoir, VA  22060-6218.

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EX-10.2

EXHIBIT 10.2

LOAN MODIFICATION AGREEMENT

This Loan Modification Agreement  (this “Loan Modification Agreement”) is entered into as of June29, 2005, with an effective date of May 31, 2005, by and 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, doing business under the name “Silicon Valley East” (“Bank”) and SATCON TECHNOLOGY CORPORATION, a Delaware corporation with offices located at 27 Drydock Avenue, Boston, Massachusetts 02210 (FAX 617-897-2401); SATCON POWER SYSTEMS, INC., Delaware corporation with offices located at 27 Drydock Avenue, Boston, Massachusetts 02210; SATCON APPLIED TECHNOLOGY, INC., a Delaware corporation with offices located at 27 Drydock Avenue, Boston, Massachusetts 02210; SATCON ELECTRONICS, INC., a Delaware corporation with offices located at 27 Drydock Avenue, Boston, Massachusetts 02210; and SATCON POWER SYSTEMS CANADA LTD., a corporation organized under the laws of the Province of Ontario, Canada with offices located at 35 Harrington Court, Burlington, Ontario L7N 3P3 (jointly and severally, individually and collectively, “Borrower”).

1.DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of January 31, 2005, evidenced by, among other documents,  a certain Loan and Security Agreement dated as of January 31, 2005 between Borrower and Bank, as amended (the “Loan Agreement”).  Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

2.DESCRIPTION OF COLLATERAL.  Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and a certain Intellectual Property Security Agreement dated January 31, 2005 (the “IP Agreement”)  (together with any other collateral security granted to Bank, the “Security Documents”).

Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the “Existing Loan Documents”.

3.DESCRIPTION OF CHANGE IN TERMS.

Modification to Loan Agreement.

A.Section 1 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein in its entirety:

“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.”

and substituting the following text therefor:

“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 (a) 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, and (b) prior to each request for an advance under this Agreement based upon Borrower’s Eligible Inventory, Borrower furnishes Silicon with evidence satisfactory to Silicon, in

Silicon’s sole discretion, that Borrower has achieved earnings before interest, taxes, depreciation and amortization of at least $1.00 for the immediately preceding three month period.”

B.Section 5 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein:

“(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)	(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;
	(g)	from April 1, 2005 through April 30, 2005 - $11,750,000;
	(h)	from May 1, 2005 through May 31, 2005 - $11,000,000;
	(i)	from June 1, 2005 through June 30, 2005 - $12,500,000;
	(j)	from July 1, 2005 through July 31, 2005 - $11,750,000;
	(k)	from August 1, 2005 through August 31, 2005 - $11,000,000;
	(l)	from September 1, 2005 through September 30, 2005 - $12,500,000
	(m)	from October 1, 2005 through October 31, 2005 - $11,750,000;
	(n)	from November 1, 2005 through November 30, 2005 - $11,000,000; and
	(o)	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.

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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).”

and substituting the following text therefor:

“(Section 5.1):Borrower shall comply with each of the following covenants.  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 a Tangible Net Worth of not less than the sum of (i) plus (ii) below:

(i)	(a)	at June 4, 2005 - $13,000,000;
	(b)	From June 5, 2005 through July 2, 2005 - $12,750,000;
	(c)	From July 3, 2005 through August 6, 2005 - $12,600,000;
	(d)	From August 7, 2005 through September 3, 2005 - $12,300,000;
	(e)	From September 4, 2005 through September 30, 2005 - $12,300,000;
	(f)	From October  1, 2005 through November 5, 2005 - $11,750,000;
	(g)	From November 6, 2005 through December 3, 2005 - $11,500,000;
	(h)	From December 4, 2005 through December 31, 2005 - $14,500,000; and
	(i)	From January 1, 2006 and thereafter - $14,500,000
(ii)	(a)	from the date of this Agreement through December 3, 2005, 75% of all consideration
	received from proceeds from the issuance of any equity securities of the Borrower and/or subordinated debt incurred by the Borrower from June 1, 2005 through December 3, 2005, and (b) from December 4, 2005 and thereafter, 75% of all consideration received from proceeds from the issuance of any equity securities of the Borrower and/or subordinated debt incurred by the Borrower in excess of $4,000,00.00 from December 4, 2005 and thereafter.

b. Minimum Cash or Excess Availability:

The Borrower shall at all times maintain $2,000,000.00 (which amount shall be reduced to $800,000.00 upon Silicon’s receipt of the Borrower’s August 6, 2005 month-end financial statements provided that there is no then existing Default and the Borrower is otherwise in compliance with all terms and conditions of this Agreement)  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).”

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4.WAIVER.  The Bank hereby waives Borrower’s anticipated default arising from Borrower’s failure to comply with the Tangible Net Worth requirement set forth in Section 5a. of the Schedule to the Loan Agreement as of May 31, 2005.   The Bank’s waiver of Borrower’s compliance with said foregoing affirmative covenant shall apply only to the foregoing specific period and shall not constitute a continuing waiver.

5.FEES.  Borrower shall pay to Bank a modification fee equal to Twenty Thousand Dollars ($20,000.00), which fee shall be due on the date hereof and shall be deemed fully earned as of the date hereof.  Borrower shall also reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents.

6.RATIFICATION OF INTELLECTUAL PROPERTY SECURITY AGREEMENT. Borrower hereby ratifies, confirms, and reaffirms, all and singular, the terms and conditions of the IP Agreement and acknowledges, confirms and agrees that the IP Agreement contains an accurate and complete listing of all Intellectual Property.

7.RATIFICATION OF PERFECTION CERTIFICATES.  Borrower hereby ratifies, confirms, and reaffirms, all and singular, the terms and disclosures contained in certain Perfection Certificates delivered to the Bank on or about January 31, 2005, and acknowledges, confirms and agrees the disclosures and information provided therein have not changed, as of the date hereof.

8.CONSISTENT CHANGES.  The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

9.RATIFICATION OF LOAN DOCUMENTS.  Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

10.NO DEFENSES OF BORROWER.  Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against the Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against the Bank, whether known or unknown, at law or in equity, all of tem are hereby expressly WAIVED and Borrower hereby RELEASES the Bank from any liability thereunder.

11.CONTINUING VALIDITY.  Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents.  Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect.  Bank’s agreement to modifications to the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations.  Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations.  It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing.  No maker will be released by virtue of this Loan Modification Agreement.

12.COUNTERSIGNATURE.  This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

[Remainder of page intentionally left blank]

4

This Loan Modification Agreement is executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first written above.

BORROWER:
SATCON TECHNOLOGY CORPORATION
By			/S/ David B. Eisenhaure
Name:				/David B. Eisenhaure
Title  CEO
SATCON POWER SYSTEMS, INC.
By	/S/ David B. Eisenhaure
Name:					/ David B. Eisenhaure
Title  CEO
SATCON APPLIED TECHNOLOGY, INC.
By	/S/ David B. Eisenhaure
Name:					/ David B. Eisenhaure
Title  CEO
SATCON ELECTRONICS, INC.
By		/S/ David B. Eisenhaure
Name:				/ David B. Eisenhaure
Title  CEO
SATCON POWER SYSTEMS CANADA LTD.
By		/S/ David B. Eisenhaure
Name:					/ David B. Eisenhaure
Title  CEO

5

BANK:
SILICON VALLEY BANK, d/b/a
SILICON VALLEY EAST
By:	/s/ Michael Tramack
Name:			Michael Tramack
Title:		Relationship Manager

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EX-10.3

EXHIBIT 10.3

SATCON TECHNOLOGY CORPORATION

INCENTIVE STOCK OPTION AGREEMENT

(2005 Incentive Compensation Plan)

Agreement

1.             Grant of Option.  The attached Notice of Grant of Stock Options (the “Notice”) and this Incentive Stock Option Agreement evidence the grant by SatCon Technology Corporation (the “Company”), as of [                     , 20   ], to the person named in the Notice(the “Optionee”) an option (the “Option”) to purchase up to that number of shares of the Company’s Common Stock, par value $0.01 per share, set forth in the Notice (the “Shares”) at an exercise price per share set forth in the Notice (the “Exercise Price”).  The Option shall be subject to the terms and conditions set forth herein.  The Option was issued pursuant to the Company’s 2005 Incentive Compensation Plan (the “Plan”), which is incorporated herein for all purposes.  The Option is an Incentive Stock Option, and not a Non-Qualified Stock Option.  The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all of the terms and conditions hereof and thereof and all applicable laws and regulations.

2.             Definitions.  Unless otherwise provided herein, terms used herein that are defined in the Plan and not defined herein shall have the meanings attributed thereto in the Plan.

3.             Exercise Schedule.  Except as otherwise provided in Sections 6 or 9of this Agreement, or in the Plan, the Option will become exercisable (“vest”) in accordance with the schedule set forth in the Notice, provided that the Continuous Service of the Optionee continues through and on the applicable vesting date (each, a “Vesting Date”). To the extent that the Option has become exercisable with respect to a percentage of Shares, the Option may thereafter be exercised by the Optionee, in whole or in part, at any time or from time to time prior to the expiration of the Option as provided herein. Except as otherwise specifically provided herein, there shall be no proportionate or partial vesting in the periods prior to each Vesting Date, and all vesting shall occur only on the appropriate Vesting Date. Upon the termination of the Optionee’s Continuous Service with the Company and its Related Entities, any unvested portion of the Option shall terminate and be null and void.

4.             Method of Exercise.  The vested portion of this Option shall be exercisable in whole or in part in accordance with the exercise schedule set forth in Section 3 hereof by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder’s investment intent with respect to such Shares as may be required by the Company pursuant to the provisions of the Plan.  Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company.  The written notice shall be accompanied by payment of the Exercise Price.  This Option shall be deemed to be exercised after both (a) receipt by the Company of such written notice accompanied by the Exercise Price and (b) arrangements that are satisfactory to the Committee in its sole discretion have been made for Optionee’s payment to the Company of the amount, if any, that is necessary to be withheld in accordance with applicable Federal or state withholding requirements.  No

Shares will be issued pursuant to the Option unless and until such issuance and such exercise shall comply with all relevant provisions of applicable law, including the requirements of any stock exchange upon which the Shares then may be traded.

5.             Method of Payment.    Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:  (a) cash; (b) check; (c) with Shares that have been held by the Optionee for at least 6 months (or such other Shares as the Company determines will not cause the Company to recognize for financial accounting purposes a charge for compensation expense), (d) pursuant to a “cashless exercise” procedure, by delivery of a properly executed exercise notice together with such other documentation, and subject to such guidelines, as the Committee shall require to effect an exercise of the Option and delivery to the Company by a licensed broker acceptable to the Company of proceeds from the sale of Shares (or, to the extent permitted by the Committee, a margin loan) sufficient to pay the Exercise Price and any applicable income or employment taxes, or (e) such other consideration or in such other manner as may be determined by the Committee in its absolute discretion.

6.1           Termination of Options (excluding Outside Non-Employee Directors).  Any unexercised portion of the Option shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following:

(a)           unless the Committee otherwise determines in writing in its sole discretion, three (3) months after the date on which the Optionee’s Continuous Service with the Company and its Related Entities is terminated for any reason other than by reason of (i) termination of the Optionee’s Continuous Service by the Company or a Related Entity for Cause, (ii) a Disability of the Optionee, or (iii) the Optionee’s death;

(b)           immediately upon the termination of the Optionee’s Continuous Service with the Company and its Related Entities for Cause;

(c)           twelve (12) months after the date on which the Optionee’s Continuous Service with the Company and its Related Entities is terminated by reason of a Disability;

(d)           twelve (12) months after the date of termination of the Optionee’s Continuous Service with the Company and its Related Entities by reason of the death of the Optionee (or, if later, three (3) months after the date on which the Optionee shall die if such death shall occur during the one year period specified in paragraph (c) of this Section 6); or

(e)the tenth (10^th) anniversary of the date as of which the Option is granted.

6.2           Termination of Options (for Outside Non-Employee Directors).  Directors of the Corporation shall have two years from the date of such cessation in which to exercise any fully vested options.  Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon such violation.

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7.             Transferability.  The Option granted hereby is not transferable otherwise than by will or under the applicable laws of descent and distribution, and during the lifetime of the Optionee the Option shall be exercisable only by the Optionee, or the Optionee’s guardian or legal representative. In addition, the Option shall not be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and the Option shall not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate the Option, or in the event of any levy upon the Option by reason of any execution, attachment or similar process contrary to the provisions hereof, the Option shall immediately become null and void.  The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

8.             No Rights of Stockholders.  Neither the Optionee nor any personal representative (or beneficiary) shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option.

9.             Acceleration of Exercisability of Option.

(a)                       This Option shall become immediately fully exercisable in the event that, prior to the termination of the Option pursuant to Section 6 hereof, and during the Optionee’s Continuous Service, there is a “Change in Control,” as defined in Section 9(b) of the Plan.

(b)           Notwithstanding the foregoing, if in the event of a Change in Control the successor company assumes or substitutes for the Option, the vesting of the Option shall not be accelerated as described in Section 9(a).  For the purposes of this paragraph, the Option shall be considered assumed or substituted for it following the Change in Control the Option or substituted option confers the right to purchase, for each Share subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) received in the transaction constituting a Change in Control by holders of Shares for each Share held on the effective date of such transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the transaction constituting a Change in Control is not solely common stock of the successor company or its parent or subsidiary, the Committee may, with the consent of the successor company, or its parent or subsidiary, provide that the consideration to be received upon the exercise or vesting of the Option will be solely common stock of the successor company or its parent or subsidiary substantially equal in fair market value to the per share consideration received by holders of Shares in the transaction constituting a Change in Control.  The determination of such substantial equality of value of consideration shall be made by the Committee in its sole discretion and its determination shall be conclusive and binding.  Notwithstanding the foregoing, in the event of a termination of the Optionee’s employment in such successor company (other than for Cause) within 24 months following such Change in Control, the option held by the Optionee at the time of the Change in Control shall be accelerated as described in paragraph (a) of this Section 9.

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10.           No Right to Continued Employment or Service.  Neither the Option nor this Agreement shall confer upon the Optionee any right to continued employment or service with the Company or any Related Entity.

11.           Law Governing.  This Agreement shall be governed in accordance with and governed by the internal laws of the State of Delaware.

12.           Interpretation / Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan adopted by the Committee as may be in effect from time to time. If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. The Optionee accepts the Option subject to all of the terms and provisions of the Plan and this Agreement.  The undersigned Optionee hereby accepts as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan and this Agreement.

13.           Notices.  Any notice under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or when deposited in the United States mail, registered, postage prepaid, and addressed, in the case of the Company, to the Company’s Secretary at 27 Drydock Avenue, Boston, MA 02110, or if the Company should move its principal office, to such principal office, and, in the case of the Optionee, to the Optionee’s last permanent address as shown on the Company’s records, subject to the right of either party to designate some other address at any time hereafter in a notice satisfying the requirements of this Section.

14.           Incentive Stock Option Treatment.  The terms of this Option shall be interpreted in a manner consistent with the intent of the Company and the Optionee that the Option qualify as an Incentive Stock Option under Section 422 of the Code.  If any provision of the Plan or this Agreement shall be impermissible in order for the Option to qualify as an Incentive Stock Option, then the Option shall be construed and enforced as if such provision had never been included in the Plan or the Option.  If and to the extent that the number of Options granted pursuant to this Agreement exceeds the limitations contained in Section 4(b) of the Plan on the value of Shares with respect to which this Option may qualify as an Incentive Stock Option, the excess portion of the Option shall be deemed a Non-Qualified Stock Option.

15.           Counterparts.        This Agreement may be executed in two or more separate counterparts, each of which shall be an original, and all of which together shall constitute one and the same agreement.

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OPTIONEE’S ACKNOWLEDGEMENT

The Optionee acknowledges receipt of a copy of the Plan and represents that he or she has reviewed the provisions of the Plan and this Option Agreement in their entirety, is familiar with and understands their terms and provisions, and hereby accepts this Option subject to all of the terms and provisions of the Plan and the Option Agreement.  The Optionee further represents that he or she has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement.

Dated:	OPTIONEE:
	By:
		Name:

5

EX-10.4

EXHIBIT 10.4

SATCON TECHNOLOGY CORPORATION

NON-QUALIFIED STOCK OPTION AGREEMENT

(2005 Incentive Compensation Plan)

Agreement

1.Grant of Option.  The attached Notice of Grant of Stock Options (the “Notice”) and this Non-Qualified Stock Option Agreement evidence the grant by SatCon Technology Corporation (the “Company”), as of [                       , 20   ], to the person names in the Notice(the “Optionee”) an option (the “Option”) to purchase up to that number of shares of the Company’s Common Stock, par value $0.01 per share, set forth in the Notice (the “Shares”) at an exercise price per share set forth in the Notice (the “Exercise Price”).  The Option shall be subject to the terms and conditions set forth herein.  The Option was issued pursuant to the Company’s 2005 Incentive Compensation Plan (the “Plan”), which is incorporated herein for all purposes.  The Option is a Non-Qualified Stock Option, and not an Incentive Stock Option.  The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all of the terms and conditions hereof and thereof and all applicable laws and regulations.

2.Definitions.  Unless otherwise provided herein, terms used herein that are defined in the Plan and not defined herein shall have the meanings attributed thereto in the Plan.

3.Exercise Schedule.  Except as otherwise provided in Sections 6 or 9of this Agreement, or in the Plan, the Option will become exercisable (“vest”) in accordance with the schedule set forth in the Notice, provided that the Continuous Service of the Optionee continues through and on the applicable vesting date (each, a “Vesting Date”). To the extent that the Option has become exercisable with respect to a percentage of Shares, the Option may thereafter be exercised by the Optionee, in whole or in part, at any time or from time to time prior to the expiration of the Option as provided herein. Except as otherwise specifically provided herein, there shall be no proportionate or partial vesting in the periods prior to each Vesting Date, and all vesting shall occur only on the appropriate Vesting Date. Upon the termination of the Optionee’s Continuous Service with the Company and its Related Entities, any unvested portion of the Option shall terminate and be null and void.

4.Method of Exercise.  The vested portion of this Option shall be exercisable in whole or in part in accordance with the exercise schedule set forth in Section 3 hereof by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder’s investment intent with respect to such Shares as may be required by the Company pursuant to the provisions of the Plan.  Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company.  The written notice shall be accompanied by payment of the Exercise Price.  This Option shall be deemed to be exercised after both (a) receipt by the Company of such written notice accompanied by the Exercise Price and (b) arrangements that are satisfactory to the Committee in its sole discretion have been made for Optionee’s payment to the Company of the amount, if any, that is necessary to be withheld in accordance with applicable Federal or state withholding requirements.  No

Shares will be issued pursuant to the Option unless and until such issuance and such exercise shall comply with all relevant provisions of applicable law, including the requirements of any stock exchange upon which the Shares then may be traded.

5.Method of Payment.  Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:  (a) cash; (b) check; (c) with Shares that have been held by the Optionee for at least 6 months (or such other Shares as the Company determines will not cause the Company to recognize for financial accounting purposes a charge for compensation expense), (d) pursuant to a “cashless exercise” procedure, by delivery of a properly executed exercise notice together with such other documentation, and subject to such guidelines, as the Committee shall require to effect an exercise of the Option and delivery to the Company by a licensed broker acceptable to the Company of proceeds from the sale of Shares (or, to the extent permitted by the Committee, a margin loan) sufficient to pay the Exercise Price and any applicable income or employment taxes, or (e) such other consideration or in such other manner as may be determined by the Committee in its absolute discretion.

6.1Termination of Options (excluding Outside, Non-Employee Directors).  Any unexercised portion of the Option shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following:

(a)unless the Committee otherwise determines in writing in its sole discretion, three (3) months after the date on which the Optionee’s Continuous Service with the Company and its Related Entities is terminated for any reason other than by reason of (i) termination of the Optionee’s Continuous Service by the Company or a Related Entity for Cause, (ii) a Disability of the Optionee, or (iii) the Optionee’s death;

(b)immediately upon the termination of the Optionee’s Continuous Service with the Company and its Related Entities for Cause;

(c)twelve (12) months after the date on which the Optionee’s Continuous Service with the Company and its Related Entities is terminated by reason of a Disability;

(d)twelve (12) months after the date of termination of the Optionee’s Continuous Service with the Company and its Related Entities by reason of the death of the Optionee (or, if later, three (3) months after the date on which the Optionee shall die if such death shall occur during the one year period specified in paragraph (c) of this Section 6); or

(e)the tenth (10^th) anniversary of the date as of which the Option is granted.

6.2Termination of Options (for Outside, Non-employee Directors).  Directors of the Corporation shall have two years from the date of such cessation in which to exercise any fully vested options.  Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon such violation.

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7.Transferability.  Unless otherwise determined by the Committee, the Option granted hereby is not transferable otherwise than by will or under the applicable laws of descent and distribution, and during the lifetime of the Optionee the Option shall be exercisable only by the Optionee, or the Optionee’s guardian or legal representative. In addition, the Option shall not be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and the Option shall not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate the Option, or in the event of any levy upon the Option by reason of any execution, attachment or similar process contrary to the provisions hereof, the Option shall immediately become null and void.  The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

8.No Rights of Stockholders.  Neither the Optionee nor any personal representative (or beneficiary) shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option.

9.Acceleration of Exercisability of Option.

(a)This Option shall become immediately fully exercisable in the event that, prior to the termination of the Option pursuant to Section 6 hereof, and during the Optionee’s Continuous Service, there is a “Change in Control,” as defined in Section 9(b) of the Plan.

(b)Notwithstanding the foregoing, if in the event of a Change in Control the successor company assumes or substitutes for the Option, the vesting of the Option shall not be accelerated as described in Section 9(a).  For the purposes of this paragraph, the Option shall be considered assumed or substituted for it following the Change in Control the Option or substituted option confers the right to purchase, for each Share subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) received in the transaction constituting a Change in Control by holders of Shares for each Share held on the effective date of such transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the transaction constituting a Change in Control is not solely common stock of the successor company or its parent or subsidiary, the Committee may, with the consent of the successor company, or its parent or subsidiary, provide that the consideration to be received upon the exercise or vesting of the Option will be solely common stock of the successor company or its parent or subsidiary substantially equal in fair market value to the per share consideration received by holders of Shares in the transaction constituting a Change in Control.  The determination of such substantial equality of value of consideration shall be made by the Committee in its sole discretion and its determination shall be conclusive and binding.  Notwithstanding the foregoing, in the event of a termination of the Optionee’s employment in such successor company (other than for Cause) within 24 months following such Change in Control, the option held by the Optionee at the time of the Change in Control shall be accelerated as described in paragraph (a) of this Section 9.

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10.No Right to Continued Employment or Service.  Neither the Option nor this Agreement shall confer upon the Optionee any right to continued employment or service with the Company or any Related Entity.

11.Law Governing.  This Agreement shall be governed in accordance with and governed by the internal laws of the State of Delaware.

12.Interpretation / Provisions of Plan Control.  This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan adopted by the Committee as may be in effect from time to time. If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. The Optionee accepts the Option subject to all of the terms and provisions of the Plan and this Agreement.  The undersigned Optionee hereby accepts as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan and this Agreement.

13.Notices.  Any notice under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or when deposited in the United States mail, registered, postage prepaid, and addressed, in the case of the Company, to the Company’s Secretary at 27 Drydock Avenue, Boston, MA 02110, or if the Company should move its principal office, to such principal office, and, in the case of the Optionee, to the Optionee’s last permanent address as shown on the Company’s records, subject to the right of either party to designate some other address at any time hereafter in a notice satisfying the requirements of this Section.

14.Counterparts.  This Agreement may be executed in two or more separate counterparts, each of which shall be an original, and all of which together shall constitute one and the same agreement.

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OPTIONEE’S ACKNOWLEDGEMENT

The Optionee acknowledges receipt of a copy of the Plan and represents that he or she has reviewed the provisions of the Plan and this Option Agreement in their entirety, is familiar with and understands their terms and provisions, and hereby accepts this Option subject to all of the terms and provisions of the Plan and the Option Agreement.  The Optionee further represents that he or she has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement.

Dated:	OPTIONEE:
	By:
		Name:

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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.

	/s/ DAVID B. EISENHAURE
	David B. Eisenhaure
Dated: August 15, 2005	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.

	/s/ DAVID E. O’NEIL
	David E. O’Neil
Dated: August 15, 2005	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 July 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: August 15, 2005	/s/ DAVID B. EISENHAURE
	David B. Eisenhaure
	President and Chief Executive Officer
Date: August 15, 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.