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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2011oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from            to


Commission file number 001-15957

CAPSTONE TURBINE CORPORATION(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

95-4180883(I.R.S. Employer
Identification No.)21211 Nordhoff Street,Chatsworth, California(Address of principal executive offices)

91311(Zip Code)


(818)734-5300(Registrant's telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:

Title of each class

Name of exchange on which registeredCommon Stock, par value $.001 per share

NASDAQ Global MarketSeries A Preferred Stock Purchase Rights


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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the shares of Common Stock of the registrant held by non-affiliates on September 30, 2010 was approximately
$189.1 million.

As
of June 7, 2011, 259,316,216 shares of the registrant's Common Stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the definitive proxy statement relating to the registrant's 2011 annual meeting of stockholders are incorporated by reference into Part III of this report to the
extent described therein.



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Table of Contents

CAPSTONE TURBINE CORPORATION        FORM 10-K

TABLE OF CONTENTS



PagePART IItem 1.

Business


2Item 1A.

Risk Factors


16Item 1B.

Unresolved Staff Comments


29Item 2.

Properties


30Item 3.

Legal Proceedings


30PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


32Item 6.

Selected Financial Data


33Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


34Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


50Item 8.

Financial Statements and Supplementary Data


50Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


50Item 9A.

Controls and Procedures


50Item 9B.

Other Information


53PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


53Item 11.

Executive Compensation


54Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


54Item 13.

Certain Relationships and Related Transactions, and Director Independence


54Item 14.

Principal Accountant Fees and Services


54PART IVItem 15.

Exhibits and Financial Statement Schedules


55Signatures


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Table of Contents

PART I

Item 1.    Business.

Overview

Capstone Turbine Corporation ("Capstone" or the "Company") develops, manufactures, markets and services microturbine technology
solutions for use in stationary distributed power generation applications, including cogeneration (combined heat and power ("CHP"), integrated combined heat and power ("ICHP"), and combined cooling,
heat and power ("CCHP")), resource recovery and secure power. In addition, our microturbines can be used as battery charging generators for hybrid electric vehicle applications. Microturbines allow
customers to produce power on-site in parallel with the electric grid or stand alone when no utility grid is available. There are several technologies that are used to provide
"on-site power generation" (also called "distributed generation") such as reciprocating engines, solar power, wind powered systems and fuel cells. For customers who do not have access to
the electric utility grid, microturbines provide clean, on-site power with lower scheduled maintenance intervals and greater fuel flexibility than competing technologies. For customers
with access to the electric grid, microturbines provide an additional source of continuous duty power, thereby providing additional reliability and potential cost savings. With our stand-alone
feature, customers can produce their own energy in the event of a power outage and can use microturbines as their primary source of power for extended periods. Because our microturbines also produce
clean, usable heat energy, they provide economic advantages to customers who can benefit from the use of hot water, chilled water, air conditioning and heating. Our microturbines are sold primarily
through our distributors. Our distributors install the microturbines. Service is provided directly by us through our Factory Protection Plan ("FPP") or by our distributors. Successful implementation
of microturbines relies on the quality of the microturbine, marketability for appropriate applications, and the quality of the installation and support.

We
believe we were the first company to offer a commercially available power source using microturbine technology. Capstone offers microturbines designed for commercial, industrial, and
utility users from 30 kilowatts ("kW") up to one megawatt in electric power output. Our 30 kW ("C30") microturbine can produce enough electricity to power a small convenience store. The 65 kW ("C65")
microturbine can produce enough heat to provide hot water to a 100-room hotel while also providing about one-third of its electrical requirements. Our 200 kW ("C200")
microturbine is well suited for larger hotels, office buildings, and wastewater treatment plants, among others. By packaging the C200 microturbine power modules into an International
Organization for Standardization ("ISO") sized container, Capstone has created a family of microturbine offerings from 600 kW up to one megawatt in a compact footprint. Our 1000 kW ("C1000 Series")
microturbines are well suited for utility substations, larger commercial and industrial facilities and remote oil and gas applications. Our microturbines combine patented air-bearing
technology, advanced combustion technology and sophisticated power electronics to form efficient and ultra low emission electricity and cooling and heat production systems. Because of our
air-bearing technology, our microturbines do not require liquid lubricants. This means they do not require routine maintenance to change and dispose of oil or other liquid lubricants, as
do the most common competing products. Capstone microturbines can be fueled by various sources, including natural gas, propane, sour gas, renewable fuels such as landfill or digester gas, kerosene,
diesel and biodiesel. The C65 and C200 microturbines are available with integrated heat exchangers, making them easy to engineer and install in applications where hot water is used. Our products
produce exceptionally clean power. Our C65 was certified by the California Air Resources Board ("CARB") as meeting its stringent 2007 emissions requirementsthe same emissions standard
used to certify fuel cells and the same emissions levels as a state-of-the-art central power plant. Our C65 Landfill and Digester Gas systems were certified in
January 2008 by CARB as meeting 2008 waste gas emissions requirements for landfill and digester gas applications. Our C200 Landfill and Digester

2

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Gas
systems were certified in November 2010 by CARB as meeting 2008 waste gas emissions requirements for landfill and digester gas applications.

On
February 1, 2010, we acquired the 100 kW ("TA100") microturbine product line from Calnetix Power Solutions, Inc. ("CPS") and entered into a manufacturing
sub-contract agreement and an original equipment manufacturer agreement with selected exclusive rights to package a combined microturbine and waste heat recovery generator product. The
TA100 microturbine is most similar to the Capstone product design compared to other microturbine products in the industry and the 100 kW rating fits well between our C65 and C200 microturbines. The
125 kW waste heat recovery generator can be directly fired by the exhaust of six C65 or two C200 microturbines to provide a total of over 500 kW of clean and efficient green power in
applications where the microturbine exhaust is not otherwise utilized, such as CHP or CCHP.

We
sell complete microturbine units, subassemblies, components and various accessories. We also remanufacture microturbine engines and provide after-market parts and services. Our
microturbines are sold primarily through distributors and Original Equipment Manufacturers ("OEMs"). Distributors purchase our products for sale to end users and also provide application engineering
and installation support. Distributors are also required to provide a variety of additional services, including engineering the applications in which the microturbines will be used, installation
support of the products at the end
users' sites, commissioning the installed applications and providing post-commissioning service. Our distributors perform as value-added resellers. OEMs integrate Capstone's
products into their own product solutions. Capstone has also established outside sales representatives who qualify and close customer orders for direct sales by Capstone.

To
assure proper installation of Capstone microturbine systems, we have instituted a Factory Trained Installer ("FTI") training and certification program. Personnel from our distributors
and OEMs, as well as design engineering firms, contractors and end users attend this FTI training. We offer a Conceptual Approval ("CA") process to assist all customers by reviewing their installation
designs to confirm that the technical requirements for proper operation have been met, such as electrical interconnections, load requirements, fuel type and pressure, cooling air flow, and turbine
exhaust routing. As part of the microturbine commissioning process, we also receive a checklist to confirm that the final installation adheres to Capstone technical requirements before we accept any
warranty obligations. This is aimed at providing the end user with a proper installation that will operate as expected for the life of the equipment.

Capstone
has a factory direct service offering for commissioning and post-commissioning service. We offer a comprehensive FPP where Capstone charges a fixed annual fee to
perform regularly scheduled maintenance, as well as other maintenance as needed. Capstone then performs the required maintenance directly with its own personnel or contracts with one of its local
distributors to do so. In January 2011, we expanded the FPP to include total microturbine plant operations if required by the end use customer. Capstone provides factory and on-site
training to certify all personnel that are allowed to perform service on our microturbines. Individuals who are certified are called Authorized Service Providers ("ASPs") and must be employed by a
distributor in order to perform work pursuant to a Capstone FPP. The majority of our distributors provide these services.

Our Products

We began commercial sales of our C30 products in 1998, targeting the emerging distributed generation industry that was being driven by
fundamental changes in power requirements. In September 2000, we shipped the first commercial unit of our 60 kW microturbine ("C60"), which was replaced by the C65 models during the quarter ended
March 31, 2006. We began shipping the C60 Integrated CHP solution in 2003. The first commercial C200 microturbine was shipped on August 28, 2008. Our C1000 Series product was
developed based on Capstone's C200 microturbine

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engine.
The C1000 Series product can be configured into 1,000 kW, 800 kW and 600 kW solutions in a single ISO-sized container. Our C1000 Series product beta testing was successfully
implemented during Fiscal 2009 and the first commercial shipment was on December 29, 2008. We began shipping TA100 microturbines in March 2010.

During
Fiscal 2011, we booked total orders of $86.5 million for 554 units, or 91.9 megawatts, compared to $73.5 million for 620 units, or 77.2 megawatts, during Fiscal
2010. We shipped 611 units with an aggregate of 69.7 megawatts, generating revenue of $66.4 million compared to 499 units with an aggregate of 52.8 megawatts, generating revenue of
$48.7 million during Fiscal 2010. Total backlog as of March 31, 2011 increased $20.1 million, or 23%, to $106.4 million from $86.3 million at March 31, 2010.
As of March 31, 2011, we had 669 units, or 118.6 megawatts, in total backlog compared to 726 units, or 96.4 megawatts, for the same period last year. As of March 31, 2011 and 2010, all
of the backlog was current and expected to be shipped within the next twelve months. The timing of shipments is subject to change based on several variables (including customer payments and changes in
customer delivery schedules), many of which are not in our control and can affect our revenue and backlog. During Fiscal 2011, we booked our first order for 14 waste heat recovery generators, 12 of
which are in the ending backlog as of March 31, 2011.

The
following table summarizes our backlog:

Years Ended March 31,2011

2010Megawatts

Units

Megawatts

UnitsCurrent (Expected delivery within the next twelve months)C30


3.2


106


5.9


196C65


27.0


416


23.4


361TA100


2.3


23


4.7


47C200


5.2


26


14.2


71C600


5.4


9


2.4


4C800


12.0


15


4.8


6C1000


62.0


62


41.0


41Waste heat recovery generator


1.5


12





Total Backlog


118.6


669


96.4


726


Capstone
microturbines are compact, lightweight and environmentally friendly generators of electricity and heat, compared to competing technologies. They operate on the same principle as
a jet engine with the added capability of using a variety of commercially available fuels. For example, our microturbines can operate on low British Thermal Unit ("BTU") gas, which is gas with lower
energy content, and can also operate on gas with a high amount of sulfur, known in the industry as sour gas. Examples of these fuel sources include methane from facilities such as wastewater treatment
plants, landfills or agrodigesters.

Our
microturbines incorporate four major design features:



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Our
advanced combustion technology allows Capstone microturbines to achieve low emissions capability with a design that is simple to manufacture. These low emission levels not only
provide an environmentally friendly product, but also eliminate permitting requirements in several municipalities for continuously operated onsite power generation. The air-bearing system
allows the microturbine's single moving assembly to produce power without the need for typical petroleum-based lubrication. Air-bearings use a high-pressure field of air rather
than petroleum lubricants. This improves reliability and reduces maintenance such as oil changes. The electronic controls manage critical functions and monitor operations of the microturbine. For
instance, our electronics control the microturbine's speed, temperature and fuel flow and communicate with external networks and building management systems. The power electronics coordinate with the
grid when the units are operated in a grid-connect mode and with the on-board battery when equipped for stand-alone mode. All control functions are performed digitally. Performance is
optimized, resulting in lower emissions, higher reliability and high efficiency over a variable power range.

The
electrical output of our units can be paralleled in multiple unit configurations through our Advanced Power Server product and a digital communications cable to serve larger
installations requiring electrical loads up to ten megawatts.

Our
products can operate:



We
also offer C65 and C200 ICHP systems. These systems combine the standard C65 and C200 microturbine unit with a Heat Recovery Module that provides electricity and heats water.

Our
family of products is offered in the following configurations:

C30

C65

TA100

C200

C1000 SeriesFuel Types

Grid
Connect

Dual
Mode

Grid
Connect

Dual
Mode

Grid
Connect

Dual
Mode

Grid
Connect

Dual
Mode

Grid
Connect

Dual
ModeLow pressure natural gas

X

X

X

X

X

X

X

X

X

XHigh pressure natural gas

X

X

X

X

X

X

X

X

X

XCompressed natural gas

X

X

X

X

X

X

X

X

X

XLandfill gas

X



X







X



XDigester gas

X



X







X



XGaseous propane

X

X

X

X





X

X

X

XDiesel

X

X

X

XBio-diesel

X

X

X

XKerosene

X

X

X

X


We
offer various accessories for our products including rotary gas compressors with digital controls, heat recovery modules for CHP applications, dual mode controllers that allow
automatic transition between grid connect and stand-alone modes, batteries with digital controls for stand-alone or dual-mode operations, power servers for large multipacked installations,
protocol converters for Internet access, packaging options and miscellaneous parts such as frames, exhaust ducting and installation hardware. We also sell microturbine components and subassemblies to
OEMs.

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Our
electronic controls manage microturbines using Capstone's proprietary software and advanced algorithms. The controls:



In
addition, our proprietary Capstone Remote Monitoring Software ("CRMS") allows end users to remotely operate and manage the microturbine. Unlike the technology of other power sources
that require manual monitoring and maintenance, the CRMS allows end users to remotely and efficiently monitor performance, power generation and time of operation using our CRMS interface software with
standard personal computers. This remote capability can provide end users with power generation flexibility and cost savings. Our Internet-based communication system, the Capstone Service Network
("CSN"), provides continuous remote monitoring and diagnostics to customers who purchase the service. If the CSN detects an out-of-limit condition or alarm, it automatically
notifies the responsible distributor for immediate follow-up action.

The
C30 microturbines were initially designed to operate connected to an electric utility grid and to use a high pressure natural gas fuel source. We have expanded our microturbines'
functionality to operate with different fuels. The combustor system remains the same for all fuels except for the fuel injectors, which currently vary between liquid and gaseous fuels. The Capstone
microturbines' multi-fuel capability provides significant competitive advantages with respect to some of our selected vertical markets.

Our
C65 grid-connect and stand-alone microturbine power systems are listed by Underwriters Laboratories ("UL") as meeting the UL 2200 stationary engine
generator standards and the UL 1741 utility interconnection requirements. Our products are manufactured by processes that are ISO 9001:2000 and ISO 14001:2004 certified.

In
2002, the California Energy Commission certified our 30 kW and 60 kW microturbine power systems as the first products to comply with the requirements of its "Rule 21" grid
interconnection standard. This standard streamlines the process for connecting distributed generation systems to the grid in California. The benefits of achieving this standard include avoiding both
costly external equipment procurement requirements and extensive site-by-site and utility-by-utility analysis. Our protective relay functionality has
also been recognized by the State of New York, which has pre-cleared our microturbines for connection to New York's electric utility grid.

Our
60 kW microturbine power system was the first combustion power generation product to be certified by the CARB as meeting its stringent distributed generation emissions standards that
went into effect in 2003. Our C65 microturbine now meets the even more stringent CARB 2007 standard for natural gas, as well as the 2008 CARB standard for landfill and digester gas fuels.

The
TA100 microturbine power system offers a digital communications interface which can be connected to an external controller (not sold by Capstone) to provide multiple unit and dual
mode dispatching functionality. An external synchronization board is provided to parallel the electrical output in multiple unit configurations for stand-alone operation.

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We
are the first microturbine manufacturer to achieve UL Class I, Division 2 certification for operation in hazardous-area oil and gas applications. These specially
packed systems are applied in oil and gas production areas with potentially explosive environments.

In
September 2009, we received UL certification for our C200 grid-connect and stand-alone microturbine power systems as meeting the UL 2200 stationary engine generator
standards and the UL 1741 utility interconnection requirements.

In
June 2010, we received UL certification for our C1000 Series grid-connect and stand-alone microturbine power systems as meeting the UL 2200 stationary engine generator
standards and the UL 1741 utility interconnection requirements.

Applications

Worldwide, stationary power generation applications vary from huge central stationary generating facilities up to 1,000 MW, to
back-up generators as small as two kW. Historically, power generation in most developed countries such as the United States, has been part of a regulated utility system. A number of
developments related primarily to the deregulation of the utility industry as well as significant technology advances have broadened the range of power supply choices available to all types of
customers.

Capstone
products serve multiple vertical markets worldwide from applications as small as 30 kW up to 5 MW. Our broad family of microturbine based low emission solutions are used in a
variety of applications generally requiring a minimum of 30 kW and a maximum of 5 MW. Within the distributed generation markets served, we focus on vertical markets that we have identified as having
the greatest near-term potential. In the markets we are focusing on (energy efficiency, renewable energy, natural resources, critical power supply and mobile products), we have identified
specific targeted vertical market segments.

Energy EfficiencyCHP/CCHP

Energy efficiency maximizes the use of energy produced by the microturbines, reduces emissions compared with traditional power
generation and enhances the economic advantage to customers. Energy efficiency uses both the heat and electric energy produced in the power generation process. Using the heat and electricity created
from a single combustion process increases the efficiency of the system from approximately 30% to 75% or more. The increased operating efficiency reduces overall green house gas emissions compared
with traditional independent sources such as power generation and local thermal generation and, through displacement of other separate systems, can reduce variable production costs. Our microturbines'
emissions of commonly found air pollutants ("criteria pollutants") such as Nitrogen oxides ("NOx") and volatile organic compounds ("VOCs") are lower than those from the on-site boilers
that our CHP system displacesmeaning that local emissions of these pollutants are actually reduced when a Capstone energy efficiency CHP system is installed. This high CHP efficiency also
means more efficient use of expensive fuels and can reduce net utility costs for end users. The most prominent uses of heat energy include space heating and air conditioning, heating and cooling
water, as well as drying and other applications. For example, we have used the heat generated by the microturbines to supply hot water solutions for hotels, schools, big box retail, commercial and
industrial customers. When our microturbine exhaust drives an absorption chiller, the chiller produces chilled water for air conditioning and other uses.

There
are energy efficiency markets for CHP and CCHP applications worldwide. A study conducted for the US Department of Energy ("DOE") calculated the total potential energy efficiency
CHP market in the United States to be over 35.5 gigawatts through 2020. Many governments have encouraged more efficient use of the power generation process to reduce pollution, lower dependence on
fossil fuels and control the cost of locally produced goods. To access these markets, we have entered

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into
agreements with distributors which have engineered energy efficiency CHP packages that utilize the hot exhaust air of the microturbine for heating water and also use the hot exhaust to run an
absorption chiller for air conditioning. Further, we have our own integrated energy efficiency CHP product for the C65 and C200 products.

Renewable Energy

Our microturbine products can use renewable methane gases from landfills, wastewater treatment facilities and other biogas applications
like cow, pig and chicken
manure. Capstone's product can burn these renewable waste gases with minimal emissions, thereby, in some cases, avoiding the imposition of penalties incurred for pollution, while simultaneously
producing electricity from this "free" renewable fuel for use at the site or in the surrounding community. Our microturbine products have demonstrated effectiveness in these applications and
outperform conventional combustion engines in a number of situations, including when the gas contains a high amount of sulfur.

In
February 2010, we entered into an agreement with CPS to purchase 125 kW waste heat recovery generators in exchange for certain minimum purchase requirements during a
three-year period ending February 1, 2013. Pursuant to this agreement, we have exclusive rights to sell the zero-emission waste heat recovery generator for all
microturbine applications and for applications 500 kW or lower where the source of heat is the exhaust of a reciprocating engine used in a landfill application.

Natural ResourcesOil, Natural Gas, Shale Gas & Mining

On a worldwide basis, there are thousands of locations where the drilling, production, compression and transportation of natural
resources and other extraction and production processes creates fuel byproducts, which traditionally have been released or burned into the atmosphere. Our microturbine products are installed in the
natural resource market to be used at oil and gas exploration, production, compression and transmission sites both onshore and offshore as a highly reliable critical source of power generation.
Typically these oil and gas or mining operations have no electric utility grid and rely solely on Capstone's microturbine product for reliable low emission power supply.

Many
major oil and gas companies are exploring large shale reservesor playsin the United States. In mid 2010 Capstone sold its first turbines into the U.S.
shale gas market in the Eagle Ford and Marcellus shale plays. The market for Capstone turbines and microturbines in this industry is vast. The shale gas market is expected to grow substantially,
especially since the U.S. Environmental Protection Agency's (EPA) Clean Air Act has strict requirements for emissions levels at natural gas sites.

Critical Power Supply

Because of the potentially catastrophic consequences of even momentary system failure, certain power users such as high technology and
information systems companies require particularly high levels of reliability in their power service. Capstone's secure power offerings are the world's only microturbine powered Uninterruptible Power
Source ("UPS") solutions that can offer clean, IT-grade power produced from microturbines, the utility or a combination of both. We offer two microturbine-powered UPS solutions that
support prime and dispatched power options. The Capstone UPSource microturbine-powered UPS solution provides prime or emergency power solutions. Capstone's Hybrid UPS microturbine powered solution
provides power when dispatched in high efficiency, standard UPS and emergency power solutions. Both secure power products offer eight 9's of reliability (99.999999%) in common N + 1
configurations. Dual mode units operating in a prime power configuration can support a 150% overload for 10 seconds during transient conditions. Dual mode units operating in grid parallel mode can
provide customers a back-up power system with an economic return. These systems offer high onsite energy efficiency when combined with a heat exchanger (CHP) to create hot water or

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with
a chiller (CCHP) for air conditioning at these facilities. This configuration, when combined with the Capstone Dual Mode Controller, can transition from the grid parallel mode to prime power mode
in less than 10 seconds. This provides end users with a backup system with a short return on investment.

Mobile ProductsHybrid Electric Vehicles

Our technology is also used in hybrid electric vehicle applications. Our customers have applied our products in hybrid electric
vehicles such as transit buses, trucks and boats. In these applications the microturbine acts as an onboard battery charger to recharge the electric vehicle battery system as needed. The benefits of
this microturbine hybrid include extended range, fuel economy gains, quieter operation, reduced emissions and higher reliability compared with traditional internal combustion engines. Internal
combustion diesel engine manufacturers have been challenged for the last several years to develop technology improvements, before after treatment that reduce emissions to levels specified by the EPA
and CARB 2007 and 2010 standards. Many manufacturers are incorporating exhaust after-treatment that increases upfront equipment costs, vehicle weight and life cycle costs and may reduce overall engine
efficiency.

Sales, Marketing and Distribution

We sell our microturbines worldwide. With the introduction of the C200 and C1000 Series products, management anticipates that our
microturbines will be used in applications requiring up to five megawatts.

We
primarily sell our microturbine products through distributors, and in some cases, we sell our microturbine products directly to end users. Our parts are sold to distributors and end
users. Our typical terms of sale include shipment of the products with title, care, custody and control transferring at our dock, payment due anywhere from in advance of shipment to 90 days
from shipment, and warranty periods of approximately 15 to 18 months from shipment. We typically do not have customer acceptance provisions in our agreements.

North America

We have distribution agreements with a number of companies throughout North America for the resale of our products. Many of these
distributors serve multiple markets in their select geographic regions. The primary markets served in this region have been energy efficiency, renewable energy, natural resources and mobile products.

In
developing our sales opportunities we have identified the need to address various requirements present in our target localities. These requirements include electric grid
interconnection standards, gas utility connection requirements, building and fire safety codes and various inspections and approvals. The costs and scheduling ramifications of these various approvals
can be significant to the completion of an installation. Our goal is to work with the applicable regulating entities to establish compliant standards for the installation of our microturbines so that
the costs and installation timelines are minimized for our customers. We have received pre-approval by the New York State Public Services Commission for installation and interconnection to
the electric utilities in New York, and we meet the California interconnection requirements. Management believes that we can create market advantages for our products through enhancing the ease of
deploying our distributed generation solutions.

In
February 2009, we introduced our factory rental program primarily to target the oil & gas and telecommunication sectors that frequently deploy temporary power solutions while
they build out permanent infrastructure.

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Asia and Australia

Our sales and marketing strategy in Asia and Australia has been to develop and strengthen distributor relationships throughout these
continents.

Our
market focus in Asia and Australia is energy efficiency and natural resources. Our historical sales in Southeast Asia and Australia have primarily been in the oil & gas
market. Other areas in Asia and the Pacific Rim offer attractive opportunities as well. South Korea and China are areas where resource recovery applications and CHP and CCHP solutions are expected to
experience market growth.

Europe and Russia

To address the European market, including Russia, we are strengthening our relationships with existing and new distributors and have
increased Capstone local sales and service support. We have an office in Europe for the purpose of working with our distributors there on a daily basis to realize growth opportunities. We have
established a spare parts distribution center in Europe to make parts readily available to our distributors. Renewable energy applications have been growing in Europe based on attractive incentives
established in several countries. Further, Europe has a history of extensive use of distributed generation technologies.

South America

Our sales and marketing strategy in South America has been to develop and strengthen distributor relationships throughout South
America.

Our
market focus in South America is energy efficiency and natural resources. Our historical sales in South America have primarily been in the natural resources market.

Revenue

For geographic and segment revenue information, please see Note 2Summary of Significant Accounting
PoliciesSegment Reporting in the "Notes to Consolidated Financial Statements."

Customers

Sales to Banking Production Centre ("BPC"), one of the Company's Russian distributors, and Pumps and Service Company ("Pumps and
Service"), one of the Company's domestic distributors, accounted for 23% and 18%, respectively, of revenue for the year ended March 31, 2011. Sales to BPC accounted for 23%, 14% and 13% of our
revenue for the years ended March 31, 2011, 2010 and 2009, respectively. Sales to Pumps and Service accounted for 18%, 4% and 6% of our revenue for the years ended March 31, 2011, 2010
and 2009, respectively. Sales to Aquatec-Maxcon Pty Ltd. ("Aquatec"), our Australian distributor, accounted for 4%, 14% and 5% of our revenue for the years ended March 31, 2011, 2010 and
2009, respectively. Additionally, BPC and Verdesis S.A. ("Verdesis"), the Company's Belgian distributor, accounted for 26% and 10%, respectively, of net accounts receivable as of
March 31, 2011. BPC and Greenvironment plc, the Company's Finnish distributor, accounted for 20% and 16%, respectively, of net accounts receivable as of March 31, 2010.

Competition

The market for our products is highly competitive. Our microturbines compete with existing technologies such as reciprocating engines
and may also compete with emerging distributed generation technologies, including solar power, wind-powered systems, fuel cells and other microturbines. Many potential customers rely on
the utility grid for their electrical power. As many of our distributed generation competitors are large, well-established companies, they derive advantages from production

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economies
of scale, worldwide presence and greater resources, which they can devote to product development or promotion.

Generally,
power purchased from the electric utility grid is less costly than power produced by distributed generation technologies, such as fuel cells or microturbines. Utilities may
also charge fees to interconnect to their power grids. However, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (CHP and CCHP), where
fuel costs are low (resource recovery/renewable fuels), where the costs of connecting to the grid may be high or impractical (such as remote power applications), where reliability and power quality
are of critical importance, or in situations where peak shaving could be economically advantageous because of highly variable electricity prices. Because Capstone microturbines can provide a reliable
source of power and can operate on multiple fuel sources, management believes they offer a level of flexibility not currently offered by other technologies such as reciprocating engines.

Our
reciprocating engine competitors have products and markets that are well developed and technologies that have been proven for some time. A reciprocating engine is also known as an
internal combustion engine similar to those used in automotive applications. Reciprocating engines are popular for primary and back-up power applications despite higher levels of
emissions, noise and maintenance. These technologies, which typically have a lower up-front cost than microturbines, are currently produced by, among others, Caterpillar Inc.,
Cummins Inc., Dresser Waukesha, a business unit of Dresser, Inc., GE Energy Jenbacher gas engines, Deutz Corporation and Kohler Power Systems, a division of Kohler Co.

Our
microturbines may also compete with other distributed generation technologies, including solar power, wind-powered systems and fuel cells. Solar-powered and
wind-powered systems produce no emissions. The main drawbacks to solar-powered and wind-powered systems are their dependence on weather conditions, the utility grid and high
capital costs that can often make these systems uneconomical without government subsidies depending upon geographic locale and application of the technology. Although the market for fuel cells is
still developing, a number of companies are focused on markets similar to ours; including FuelCell Energy Inc., UTC Power Corporation ("UTCP"), Plug Power Inc. and Ballard Power
Systems Inc. Fuel
cells have lower levels of NOx and other criteria pollutant emissions than our microturbines. Fuel cells, like wind-powered systems and solar power systems, have received higher levels of
incentives for the same type of applications as microturbines. Management believes that, absent these high government-supported incentives, microturbines provide a better value to end users in most
applications. However, over the medium-to-long term, fuel cell technologies that compete more directly with our products may be introduced.

We
also compete with other companies who have microturbine products, including Flex Energy and Turbec S.p.A.

Overall,
we compete with end users' other options for electrical power and heat generation on the basis of our microturbines' ability to:



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Governmental and Regulatory Impact

Our markets can be positively or negatively impacted by the effects of governmental and regulatory matters. We are affected not only by
energy policy, laws, regulations and incentives of governments in the markets into which we sell, but also by rules, regulations and costs imposed by utilities. Utility companies or governmental
entities could place barriers on the installation of our product or the interconnection of the product with the electric grid. Further, utility companies may charge additional fees to customers who
install on-site power generation, thereby reducing the electricity they take from the utility, or for having the capacity to use power from the grid for back-up or standby
purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our product or increase the cost to our potential customers for using our systems. This
could make our systems less desirable, thereby adversely affecting our revenue and profitability potential. In addition, utility rate reductions can make our products less competitive which would have
a material adverse effect on our operations. These costs, incentives and rules are not always the same as those faced by technologies with which we compete. However, rules, regulations, laws and
incentives could also provide an advantage to our distributed generation solutions as compared with competing technologies if we are able to achieve required compliance in a lower cost, more efficient
manner. Additionally, reduced emissions and higher fuel efficiency could help our customers combat the effects of global warming. Accordingly, we may benefit from increased government regulations that
impose tighter emission and fuel efficiency standards.

In
February 2009, the President of the United States signed into law the American Recovery and Reinvestment Act of 2009 ("ARRA"). ARRA has dedicated billions of dollars towards clean
energy research and deployment. Some of Capstone's distributors' projects in Fiscal 2010 were partly funded through ARRA with payments made directly to federal agencies. Members of Congress introduced
legislation in calendar 2009 and 2010 that may benefit Capstone in Fiscal 2012. In addition, certain proposed changes to the Internal Revenue Code of 1986 may result in positive tax benefits for our
end users. This proposed legislation targets CHP, hybrid electric and natural gas-powered vehicles. Additionally, Capstone continues to engage with Federal and State policymakers to
develop government programs to promote the deployment of Capstone's low emission and energy efficient products. We cannot provide assurance that any such legislation will be enacted, however, or that
it will benefit us if enacted.

In
California, the Self Generation Incentive Program was modified to allow natural gas and energy efficiency CHP applications to receive rebates. However, at this time, management
believes that our end users would not realize any significant benefits to their capital equipment purchase plans until the second half of calendar 2011.

Government
funding can impact the rate of development of new technologies. While we continue to receive development funding, committed amounts remaining are relatively low. Competing new
technologies generally receive larger incentives and development funding than do microturbines.

Sourcing and Manufacturing

Our microturbines are designed to achieve high-volume, low-cost production objectives. Our manufacturing designs include the use of
conventional technology, which has been proven in high volume automotive and turbocharger production for many years. The microturbines are designed for simple assembly and testing and to facilitate
automated production techniques using less-skilled labor.

Our
strategy of outsourcing the manufacturing and assembly of our nonproprietary product components allows for more attractive pricing, quick ramp-up and the use of
just-in-time inventory management techniques. While the current variability in our demand volumes and resulting imprecise demand forecasting affect our ability to leverage
these capabilities, management believes that we can realize economies of scale related to our product manufacturing costs as unit volume increases. We

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assemble
and test units as well as manufacture air-bearings and certain combustion system components at our facility in Chatsworth, California. Additionally, we manufacture recuperator
cores at our facility in Van Nuys, California. We have primary and secondary sources for other critical components and have evaluated our core competencies and identified additional outsourcing
opportunities which we are now actively pursuing. We monitor parts subject to a single or a limited source supply to minimize factory down time due to unavailability of such parts, which could impact
our ability to meet manufacturing schedules.

Management
believes our manufacturing facilities located in Chatsworth and Van Nuys, California have a combined production capacity of approximately 2,000 units per year, depending on
product mix. Excluding working capital requirements, management believes we can expand our combined production capacity to approximately 4,000 units per year, depending on product mix, with
approximately $10 to $15 million of capital expenditures. We have not committed to this expansion nor identified a source for its funding, if available.

Solar
Turbines Incorporated ("Solar"), a wholly owned subsidiary of Caterpillar Inc., had been our sole supplier of recuperator cores prior to 2001. In 2000, we exercised an
option to license Solar's technology, which allows us to manufacture recuperator cores ourselves. In June 2001, we started to manufacture recuperator cores. Recuperator cores using the Solar
technology, which we make and sell, are subject to a per-unit royalty fee. As of March 31, 2011, cumulative royalties of $0.3 million have been paid under the terms of the
licensing agreement with Solar.

On
April 28, 2011, we purchased $2.3 million of the remaining TA100 microturbine inventory from CPS that was not consumed as part of the TA100 manufacturing process and
acquired the manufacturing equipment. On February 1, 2010, the Company and CPS entered into an agreement pursuant to which we agreed to purchase 125 kW waste heat recovery generator systems
from CPS. In exchange for certain minimum purchase requirements during a three-year period, we have exclusive rights to sell the zero-emission waste heat recovery generator for
all microturbine applications and for applications 500 kW or lower where the source of heat is the exhaust of a reciprocating engine used in a landfill application. We must meet specified annual sales
targets in order to maintain the exclusive rights to sell the waste heat recovery generators.

Research and Development ("R&D")

For the fiscal years ended March 31, 2011, 2010 and 2009, R&D expense was $7.0 million, $7.0 million and
$8.1 million and was 9%, 11% and 19% of total revenue, respectively. R&D expenses are reported net of benefits from cost-sharing programs, such as the DOE grant and the Development
and License Agreement ("Development Agreement") with Carrier Corporation ("Carrier"), successor in interest to UTC Power Corporation. Benefits from cost-sharing programs were
$0.9 million, $1.7 million and $8.1 million for the years ended March 31, 2011, 2010 and 2009, respectively. Our R&D activities enabled us to become one of the first
companies to develop a commercially available microturbine that operates in parallel with the grid. We were the first company to successfully demonstrate a commercially available microturbine that
operates on a stand-alone basis.

The
CARB has established extremely high industry standards for distributed generation technologies by requiring them to meet emissions levels comparable to the Best Available Control
Technology for large state-of-the-art central utility power plants. Capstone's microturbines have become even "greener" with the ultra low emissions product
designed to meet this CARB 2007 standard which reduced previous requirements for NOx by 86%, carbon monoxide (CO) by 98%, and VOCs by 98%. In addition to the emission reductions, test results showed
that the microturbine removed concentrations of unburned hydrocarbons (HC) in the ambient air. The ultra low emissions performance was attained without sacrificing Capstone's signature low maintenance
costs by combining ultra low emission lean premix combustion technology with a catalyst that requires no scheduled

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maintenance
for the life of the system. This is in contrast to exhaust cleanup systems used by traditional reciprocating engine driven generation equipment that use chemicals such as ammonia or urea
and need frequent adjustments to maintain proper function and air quality. Certification to this standard allows generators to be installed in most of the major air quality management districts in
California without regular on-site emissions testing. To date, only microturbines and fuel cells have been certified to this new standard. Installing six 65 kW microturbines operating
24 hours a day reduces NOx emissions by approximately five tons per year which equates to the environmental impact of taking 258 cars off the road, based on EPA emissions and efficiency data
for the average U.S. power plant and average passenger vehicle. Capstone enhanced its C65 microturbine to meet the CARB 2007 standard with co-funding from the DOE.

Capstone
microturbines were the first power generation technology to receive CARB 2008 Waste Gas Emissions certification for operation on landfill and digester gas. Capstone
microturbines are capable of burning waste gases with methane contents as low as 30% which can be challenging for competing combustion technologies. We achieve CARB waste gas emissions requirements
with our low premix combustion technology inherent to the microturbine which requires no exhaust after treatment. Certification to the new waste fuel emissions standard makes approved technologies
such as the Capstone landfill and digester microturbines much easier to locate in California. Producing energy using gas from these applications avoids the need to use non-renewable
resources such as coal, oil, or natural gas to produce the same amount of energy.

Capstone
released for sale its C65 Liquid Fuel configuration microturbine system. The high reliability benefits of the Capstone microturbine product make it well suited for remote power
and secure power applications which often use liquid fuel. Capstone liquid fuel microturbines are able to burn a variety of fuels including kerosene, high and low sulfur diesel, and biodiesel blends.

Capstone
released versions of its C30 and C65 microturbine products for operation in high humidity applications. The new package provides resistance to corrosive environmental conditions
typical of coastal, jungle and other high humidity installations. Previously released products for offshore manned and unmanned platforms have been well received by our oil and gas customers. The high
humidity package is a further offering to many of these same customers for use at land-based oil and gas facilities.

Our
more recent significant R&D activity has been the C200 microturbinea 200 kW, higher electrical efficiency product. Capstone worked with the DOE on its "Advanced
MicroTurbine System" program and received funding for some of the early C200 development efforts. C200 beta testing demonstrated performance to design objectives making the C200 the highest electrical
efficiency turbine less than 4.5 megawatts. The C200 includes the same low emissions, certification options, and flexible configuration features incorporated on our existing C30 and C65 products.
Capstone signed an agreement with Carrier to provide cash and in-kind services to complete development and commercially launch the C200 product in September 2007. Our C200 beta testing was
successfully implemented during Fiscal 2005 and the first commercial shipment was on August 28, 2008.

Our
C1000 Series product was developed based on Capstone's C200 microturbine product line. This product family can be configured into 1,000 kW, 800 kW and 600 kW solutions in a single
ISO container. Benefits of the C1000 Series product include low greenhouse-gas emissions, patented air-bearing microturbine technology, ease of installation and commissioning
with a single fuel and electrical connection, minimal scheduled maintenance and downtime, low noise and vibration and one of the industry's smallest modular footprints. Additional features include
Capstone's remote monitoring and diagnostic capabilities and integrated utility synchronization and protection. Our C1000 product beta testing was successfully implemented during Fiscal 2009 and the
first commercial shipment was on December 29, 2008.

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In September 2009, we received UL certification for our C200 Series grid-connect and stand-alone microturbine power systems as meeting the UL 2200
stationary engine generator standards and the UL 1741 utility interconnection requirements. In June 2010, we received UL certification for our C1000 Series grid-connect and
stand-alone microturbine power systems as meeting the UL 2200 stationary engine generator standards and the UL 1741 utility interconnection requirements.

The
world's first boat powered with an ultra low emission Capstone C30 microturbine launched in the Netherlands on June 7, 2010. This innovative onboard energy system features a
Capstone C30 diesel fueled microturbine.

In
March 2009, we successfully demonstrated that our intercooled and recuperated ("ICR") microturbine produces emission levels that comply with the EPA and CARB 2010 requirements for
heavy duty diesel engines and hybrid electric buses. Sales of heavy duty trucks and buses represent a major market opportunity, and, therefore, these applications have the potential to become a
focused area for development if we can achieve the required performance and price levels. In December 2010, we released configurations of the C30 compressed natural gas ("CNG") microturbine that meet
or exceed emissions standards, including the EPA and CARB 2010 requirements for heavy duty diesel engines for urban bus. The C30 CNG microturbine is Capstone's second CARB certified engine for
automotive applications; the C30 liquid fuel microturbine was certified in June 2010.

In
July 2010, we successfully demonstrated a commercial concentrated solar power product converting sunlight to electricity with a solar receiver driving a C65 microturbine. This
renewable solution focuses enough sunlight energy to provide heat to drive the microturbine and offers higher solar conversion efficiencies over a traditional solar photovoltaic system.

We
are currently focusing efforts on a more efficient microturbine CHP system. The DOE awarded us a grant of $5.0 million in support of this development program. The first phase
of the development program is expected to improve our existing C200 engine to increase power output and electrical efficiency, resulting in a system with a targeted power output of 250 kW and
projected electrical efficiency of 35%. The second phase of the program is expected to incorporate further engine efficiency improvements, resulting in a product with a projected electrical efficiency
of 42% and targeted power output of 370 kW.

The
technology developed with the 370kW engine is directly applicable to the ICR microturbine targeted at the needs of the Class 8 truck market (trucks or tractor-trailers with a
manufacturer's listed gross vehicle weight of 33,000 pounds or more).

In
addition, we are developing and testing a fuel flexible microturbine system capable of operating on synthetic gas fuel mixtures containing varying amounts of hydrogen. The DOE awarded
us a grant of $2.5 million in support of this development program.

Protecting our Intellectual Property Rights and Patents

We rely on a combination of patent, trade secret, copyright and trademark law and nondisclosure agreements to establish and protect our
intellectual property rights in our products. In this regard, we have obtained 110 U.S. and 36 international patents (in certain cases covering the same technology in multiple jurisdictions). The
patents we have obtained will expire between 2014 and 2027. These numbers include 24 U.S. patents and 3 international patents that were acquired from CPS.

Management
believes that a policy of protecting intellectual property is an important component of our strategy of being the leader in microturbine system technology and will provide us
with a long-term competitive advantage. In addition, we implement security procedures at our plants and facilities and have confidentiality agreements with our suppliers, distributors,
employees and certain visitors to our facilities.

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Organization and Employees

We were organized in 1988. On June 22, 2000, we reincorporated as a Delaware corporation.

As
of March 31, 2011, we had 195 employees. No employees are covered by collective bargaining arrangements. We consider relations with our employees to be good.

Available Information

This annual report on Form 10-K ("Annual Report"), as well as our quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are made available free of charge on the
Company's Internet website (http://www.capstoneturbine.com) as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission
("SEC").

Item 1A.    Risk Factors.

This document contains certain forward-looking statements (as such term is defined in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") pertaining to, among other
things,



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These statements are based largely on our current expectations, estimates and forecasts and are subject to a number of risks and uncertainties. Actual results
could differ materially from those anticipated by these forward-looking statements. Factors that can cause actual results to differ materially include, but are not limited to, those discussed below.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The following factors should be considered in addition to the other
information contained herein in evaluating Capstone and its business. We assume no obligation to update any of the forward-looking statements after the filing of this Annual Report to conform such
statements to actual results or to changes in our expectations, except as may be required by law.

The following are risk factors that could affect our business, financial condition, results of operations, and cash flows. These risk factors should be considered
in connection with evaluating the forward-looking statements contained in this Annual Report because these factors could cause actual results and conditions to differ materially from those projected
in forward looking statements. Before you invest in our publicly traded securities, you should know that making such an investment involves some risks, including the risks described below. Additional
risks of which we may not be aware or that we currently believe are immaterial may also impair our business operations or our stock price. If any of the risks actually occur, our business, financial
condition, results of operations or cash flow could be negatively affected. In that case, the trading

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price of our common stock could decline, and you may lose all or part of your investment. In assessing these risks, investors should also refer to the other information contained or incorporated by
reference in this Annual Report, our quarterly reports on Form 10-Q and other documents filed by us from time to time.

Our operating history is characterized by net losses. We anticipate further losses and we may never become profitable.

Since inception, we have incurred annual operating losses. We expect this trend to continue until such time that we can sell a
sufficient number of units and achieve a cost structure to become profitable. Our business is such that we have relatively few customers and limited repeat business. As a result, we may not maintain
or increase revenue. We may not have adequate cash resources to reach the point of profitability, and we may never become profitable. Even if we do achieve profitability, we may be unable to increase
our sales and sustain or increase our profitability in the future.

We may be unable to fund our future operating requirements, which could force us to curtail our operations.

To the extent that the funds we now have on hand are insufficient to fund our future operating requirements, we would need to raise
additional funds, through further public or private equity or debt financings depending upon prevailing market conditions. These financings may not be available, or if available, may be on terms that
are not favorable to us and could result in dilution to our stockholders and reduction of the trading price of our stock. The state of worldwide capital markets could also impede our ability to raise
additional capital on favorable terms or at all. If adequate capital were not available to us, we likely would be required to significantly curtail our operations or possibly even cease our
operations.

We
maintain two Credit and Security Agreements (the "Agreements") with Wells Fargo Bank, National Association, or Wells Fargo, that provide us with a credit facility up to
$10 million in the aggregate. At March 31, 2011, we had $7.1 million outstanding under this line of credit. Under this credit facility, we are required to satisfy specified
financial and restrictive covenants. Failure to comply with these covenants could cause an event of default which, if not cured or waived, could require us to repay substantial indebtedness
immediately or allow Wells Fargo to terminate the credit facility. In addition, we have pledged our accounts receivables, inventories, equipment, patents and other assets as collateral under the
Agreements which would be subject to seizure by Wells Fargo if we were in default and unable to repay the indebtedness.

At
several times during Fiscal 2010, we were in noncompliance with certain covenants under the credit facility. In connection with each event of noncompliance, Wells Fargo waived the
event of default and, on several occasions, we amended the Agreements in response to the default and waiver. As a condition of the amended Agreements, $5.0 million of cash was restricted in
June 2010 as additional security for the credit facility. On November 9, 2010, we entered into an amendment to the Agreements that provides for the release by Wells Fargo of the
$5.0 million in cash upon the Company's satisfaction of certain conditions. During Fiscal 2011, Wells Fargo released $3.7 million of the restricted cash. The remaining
$1.3 million of cash was released in connection with the amendment to the Agreements on June 9, 2011 described below. On March 25, 2011, we entered into a an amendment to the
Agreements
that allows the Company to form one wholly-owned subsidiary in each of Singapore and the United Kingdom provided that the amount of cash and cash equivalents that may be held by, or invested in each
such subsidiary is within certain agreed upon limits. This amendment also provides that, if requested by Wells Fargo, the Company will grant Wells Fargo a security interest in 65% of the equity
interests of each subsidiary to secure indebtedness under the Agreements.

As
of March 31, 2011, we determined that we were not in compliance with one of the financial covenants in the Agreements regarding our net income. On June 9, 2011, we
entered into an amendment to the Agreements which provided a waiver of our noncompliance with the financial

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covenant
as of March 31, 2011 and removed the net worth financial covenant for future periods. Additionally, this amendment also established the financial covenants for Fiscal 2012 and
authorized the release of the remaining $1.3 million of restricted cash. If we had not obtained these waivers, or if we are ever again in noncompliance, we would not be able to draw additional
funds under the credit facility.

Our
obligations under the credit facility could have important consequences, including the following:



For
more information, see the section below entitled "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources."

If we are unable to either substantially improve our operating results or obtain additional financing, we may be unable to continue as a going concern.

Should we be unable to execute our plans to build sales and margins while controlling costs and obtain additional financing, we may be
unable to continue as a going concern. In particular, we must generate positive cash flow from operations and net income and otherwise improve our results of operations substantially. Our available
cash and proceeds from future financings, if any, that we may be able to obtain, may not be sufficient to fund our operating expenses, capital expenditures and other cash requirements. As a result,
this would affect our ability to continue as a going concern. These events and circumstances could have a material adverse effect on our ability to raise additional capital and on the market value of
our common stock. Moreover, should we experience a cash shortage that requires us to curtail or cease our operations, or should we be unable to continue as a going concern, you could lose all or part
of your investments in our securities.

Impairment charges on our long-lived assets, including intangible assets with finite lives would adversely affect our financial position and results of
operations.

We evaluate the carrying value of long-lived assets, including intangible assets with finite lives, for impairment whenever
events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine whether impairment has occurred, we compare the undiscounted cash flows of the
long-lived asset with its carrying value. The estimation of future cash flows requires significant estimates of factors that include future sales growth, gross margin performance,
including our estimates of reductions in our direct material costs, and reductions in operating expenses. If our sales growth, gross margin performance or other estimated operating results are not
achieved at or above our forecasted level, or inflation exceeds our forecast, the carrying value of our asset groups may prove to be unrecoverable and we may incur impairment charges in the future. In
addition, significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, unanticipated competition, loss of key customers or changes in technology or
markets, could require a

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charge
for impairment that can materially and adversely affect our reported net loss and our stockholders' equity.

A sustainable market for microturbines may never develop or may take longer to develop than we anticipate which would adversely affect our results of operations.

Our products represent an emerging market, and we do not know whether our targeted customers will accept our technology or will
purchase our products in sufficient quantities to allow our business to grow. To succeed, demand for our products must increase significantly in existing markets, and there must be strong demand for
products that we introduce in the future. If a sustainable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we have incurred to develop our
products, we may have further impairment of assets, and we may be unable to meet our operational expenses. The development of a sustainable market for our systems may be hindered by many factors,
including some that are out of our control. Examples include:



Our operating results are dependent, in large part, upon the successful commercialization of our products. Failure to produce our products as scheduled and budgeted would
materially and adversely affect our business and financial condition.

We cannot be certain that we will deliver ordered products in a timely manner. Any reliability or quality issues that may arise with
our products could prevent or delay scheduled deliveries. Any such delays or costs could significantly impact our business, financial condition and operating results.

We may not be able to produce our products on a timely basis if we fail to correctly anticipate product supply requirements or if we suffer delays in production resulting
from issues with our suppliers. Our suppliers may not supply us with a sufficient amount of components or components of adequate quality, or they may provide components at significantly increased
prices.

Some of our components are currently available only from a single source or limited sources. We may experience delays in production if
we fail to identify alternative suppliers, or if any parts supply is interrupted, each of which could materially adversely affect our business and operations. In order to reduce manufacturing lead
times and ensure adequate component supply, we enter into agreements with certain suppliers that allow them to procure inventories based upon criteria defined by us. If we fail to anticipate customer
demand properly, an oversupply of parts could result in excess or obsolete inventories, which could adversely affect our business. Additionally, if we fail to correctly anticipate our internal supply
requirements, an undersupply of parts could limit our production capacity. Our inability to meet volume commitments with suppliers could affect the availability or pricing of our parts and

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components.
A reduction or interruption in supply, a significant increase in price of one or more components or a decrease in demand of products could materially adversely affect our business and
operations and could materially damage our customer relationships. Financial problems of suppliers on whom we rely could limit our supply of components or increase our costs. Also, we cannot guarantee
that any of the parts or components that we purchase will be of adequate quality or that the prices we pay for the parts or components will not increase. Inadequate quality of products from suppliers
could interrupt our ability to supply quality products to our customers in a timely manner. Additionally, defects in materials or products supplied by our suppliers that are not identified before our
products are placed in service by our customers could result in higher warranty costs and damage to our reputation. We also outsource certain of our components internationally and expect to increase
international outsourcing of components. As a result of outsourcing internationally, we may be subject to delays in delivery because of regulations associated with the import/export process, delays in
transportation or regional instability.

We may not be able to effectively manage our growth, expand our production capabilities or improve our operational, financial and management information systems, which would
impair our results of operations.

If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on
our business operations, management and other resources. Our ability to manage our growth will require us to expand our production capabilities, continue to improve our operational, financial and
management information systems, and to motivate and effectively manage our employees. We cannot provide assurance that our systems, procedures and controls or financial resources will be adequate, or
that our management will keep pace with this growth. We cannot provide assurance that our management will be able to manage this growth effectively.

Current economic conditions may have an impact on our business and financial condition, including some effects we may not be able to predict.

Current economic conditions may prevent our customers from purchasing our products or delay their purchases, which would adversely
affect our business, financial condition and results of operations. In addition, our ability to access the capital markets may be severely restricted or made very expensive at a time when we need, or
would like, to do so, which could have a material adverse impact on our liquidity and financial resources. Certain industries in which our customers do business and certain geographic areas have been
and could continue to be adversely affected by the continued recession in economic activity.

Product quality expectations may not be met, causing slower market acceptance or warranty cost exposure.

In order to achieve our goal of improving the quality and lowering the total costs of ownership of our products, we may require
engineering changes. Such improvement initiatives may render existing inventories obsolete or excessive. Despite our continuous quality improvement initiatives, we may not meet customer expectations.
Any significant quality issues with our products could have a material adverse effect on our rate of product adoption, results of operations, financial condition and cash flow. Moreover, as we develop
new configurations for our microturbines and as our customers place existing configurations in commercial use, our products may perform below expectations. Any significant performance below
expectations could adversely affect our operating results, financial condition and cash flow and affect the marketability of our products.

We
sell our products with warranties. There can be no assurance that the provision for estimated product warranty will be sufficient to cover our warranty expenses in the future. We
cannot ensure that our efforts to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant incurrence of warranty expense in excess of estimates could have a
material adverse effect on our operating results, financial condition and cash flow. Further, we have at times undertaken

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programs
to enhance the performance of units previously sold. These enhancements have at times been provided at no cost or below our cost. If we choose to offer such programs again in the future, such
actions could result in significant costs.

We operate in a highly competitive market among competitors who have significantly greater resources than we have and we may not be able to compete effectively.

Capstone microturbines compete with several technologies, including reciprocating engines, fuel cells and solar power. Competing
technologies may receive certain benefits, like governmental subsidies or promotion, or be able to offer consumer rebates or other incentives that we cannot receive or offer to the same extent. This
could enhance our competitors' abilities to fund research, penetrate markets or increase sales. We also compete with other manufacturers of microturbines.

Our
competitors include several well-known companies with histories of providing power solutions. They have substantially greater resources than we have and have established
worldwide presence. Because of greater resources, some of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, to devote greater
resources to the promotion and sale of their products than we can or lobby for governmental regulations and policies to create competitive advantages vis-à-vis
our products. We believe that developing and maintaining a competitive advantage will require continued investment by us in product development and quality, as well as attention to product
performance, our product prices, our conformance to industry standards, manufacturing capability and sales and marketing. In addition, current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with third parties, including third parties with whom we have business relationships. Accordingly, new competitors or alliances may
emerge and rapidly acquire significant market share.

Overall,
the market for our products is highly competitive and is changing rapidly. We believe that the primary competitive factors affecting the market for our products, including some
that are outside of our control, include:



There
is no assurance that we will be able to successfully compete against either current or potential competitors or that competition will not have a material adverse effect on our
business, operating results, financial condition and cash flow.

If we do not effectively implement our sales, marketing and service plans, our sales will not grow and our results of operations will suffer.

Our sales and marketing efforts may not achieve intended results and, therefore, may not generate the revenue we anticipate. As a
result of our corporate strategies, we have decided to focus our resources on selected vertical markets. We may change our focus to other markets or applications in the future. There can be no
assurance that our focus or our near term plans will be successful. If we are not able to address markets for our products successfully, we may not be able to grow our business, compete effectively or
achieve profitability.

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We
offer direct sales and service in selected markets. We do not have extensive experience in providing direct sales and service and may not be successful in executing this strategy. In
addition, we may lose existing distributors or service providers or we may have more difficulty attracting new distributors and service providers as a result of this strategy. Further, we may incur
new types of obligations, such as
extended service obligations, that could result in costs that exceed the related revenue. We may encounter new transaction types through providing direct sales and service and these transactions may
require changes to our historic business practices. For example, an arrangement with a third party leasing company may require us to provide a residual value guarantee, which is not consistent with
our past operating practice.

Our sales and results of operations could be materially and adversely impacted by risks inherent in international markets.

As we expand in international markets, customers may have difficulty or be unable to integrate our products into their existing systems
or may have difficulty complying with foreign regulatory and commercial requirements. As a result, our products may require redesign. Any redesign of the product may delay sales or cause quality
issues. In addition, we may be subject to a variety of other risks associated with international business, including import/export restrictions, fluctuations in currency exchange rates and global
economic or political instability. Two of our top distributors are located in Russia and Belgium, and therefore we are particularly susceptible to risks associated with doing business in these two
countries. BPC, a privately owned company located in Russia, accounted for approximately 26% of our net accounts receivable as of March 31, 2011 and approximately 23% of our revenue for the
fiscal year ended March 31, 2011. Verdesis, a Belgian distributor, accounted for approximately 10% of our net accounts receivable as of March 31, 2011 and approximately 4% of our revenue
for the fiscal year ended March 31, 2011.

We cannot be certain of the future effectiveness of our internal controls over financial reporting or the impact thereof on our operations or the market price of our common
stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Reports on
Form 10-K our assessment of the effectiveness of our internal controls over financial reporting. We cannot be certain that our internal controls over financial reporting will remain
effective or that future material changes to our internal controls will be effective. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we might be
subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our common stock or warrants.

We may not be able to retain or develop relationships with OEMs or distributors in our targeted markets, in which case our sales would not increase as expected.

In order to serve certain of our targeted markets, we believe that we must ally ourselves with companies that have particular expertise
or better access to those markets. We believe that retaining or developing relationships with strong OEMs (which to date have typically resold our products under their own brands or packaged
our products with other products as part of an integrated unit) or distributors in these targeted markets can improve the rate of adoption as well as reduce the direct financial burden of introducing
a new technology and creating a new market. Because of OEMs' and distributors' relationships in their respective markets, the loss of an OEM or distributor could adversely impact the ability to
penetrate our target markets. We offer our OEMs and distributors stated discounts from list price for the products they purchase. In the future, to attract and retain OEMs and
distributors we may provide volume price discounts or otherwise incur significant costs that may reduce the potential revenues from these relationships. We may not be able to retain or develop
appropriate OEMs and distributors on a timely basis, and we cannot provide assurance that the OEMs and

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distributors
will focus adequate resources on selling our products or will be successful in selling them. In addition, some of the relationships may require that we grant exclusive distribution rights
in defined territories. These exclusive distribution arrangements could result in our being unable to enter into other arrangements at a time when the OEM or distributor with whom we form a
relationship is not successful in selling our products or has reduced its commitment to market our products. We cannot provide assurance that we will be able to negotiate collaborative relationships
on favorable terms or at all. Our inability to have appropriate distribution in our target markets may adversely affect our financial condition, results of operations and cash flow.

Activities necessary to integrate the acquisition of the microturbine business of CPS and any future acquisitions may result in costs in excess of current expectations or be
less successful than anticipated.

We recently completed the acquisition of certain assets relating to the microturbine business of CPS, and we may acquire other
businesses in the future. The success of these transactions will depend on, among other things, our ability to develop productive relationships with the corresponding distributors and to integrate
assets and personnel, if any, acquired in these transactions and to apply our internal controls processes to these acquired businesses. The integration of any acquired businesses or significant assets
may require significant attention from our management, and the diversion of management's attention and resources could have a material adverse effect on our ability to manage our business.
Furthermore, we may not realize the degree or timing of benefits we anticipated when we first enter into these transactions. If actual integration costs are higher than amounts assumed, if we are
unable to integrate the assets and personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies, our business, financial condition, results of
operations, and cash flows could be materially adversely affected.

We have substantial accounts receivable, and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on our cash flows
and results of operations.

We have substantial accounts receivable as evidenced by days sales outstanding, or DSO, of 78 days as of March 31, 2011.
No assurances can be given that future bad debt expense will not increase above current operating levels. Increased bad debt expense or delays in collecting accounts receivable could have a material
adverse effect on cash flows and results of operations.

Loss of a significant customer could have a material adverse effect on our results of operations.

BPC and Pumps and Service accounted for approximately 23% and 18%, respectively, of our revenue for the fiscal year ended
March 31, 2011. As of March 31, 2011, BPC and Pumps and Service represented 26% and 1% of net accounts receivable, respectively. Loss of BPC, Pumps and Service or any other significant
customers could adversely affect our results of operations.

We may not be able to develop sufficiently trained applications engineering, installation and service support to serve our targeted markets.

Our ability to identify and develop business relationships with companies who can provide quality, cost-effective
application engineering, installation and service can significantly affect our success. The application engineering and proper installation of our microturbines, as well as proper maintenance and
service, are critical to the performance of the units. Additionally, we need to reduce the total installed cost of our microturbines to enhance market opportunities. Our inability to improve the
quality of applications, installation and service while reducing associated costs could affect the marketability of our products.

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Changes in our product components may require us to replace parts held at distributors.

We have entered into agreements with some of our distributors requiring that if we render parts obsolete in inventories they own and
hold in support of their obligations to serve fielded microturbines, we are required to replace the affected stock at no cost to the distributors. It is possible that future changes in our product
technology could involve costs that have a material adverse effect on our results of operations, cash flow or financial position.

We operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our products less economical, thereby affecting
demand for our microturbines.

Our products are subject to federal, state, local and foreign laws and regulations, governing, among other things, emissions and
occupational health and safety. Regulatory agencies may impose special requirements for the implementation and operation of our products or that may significantly affect or even eliminate some of our
target markets. We may incur material costs or liabilities in complying with government regulations. In addition, potentially significant expenditures
could be required in order to comply with evolving environmental and health and safety laws, regulations and requirements that may be adopted or imposed in the future. Furthermore, our potential
utility customers must comply with numerous laws and regulations. The deregulation of the utility industry may also create challenges for our marketing efforts. For example, as part of electric
utility deregulation, federal, state and local governmental authorities may impose transitional charges or exit fees, which would make it less economical for some potential customers to switch to our
products. We can provide no assurances that we will be able to obtain these approvals and changes in a timely manner, or at all. Non-compliance with applicable regulations could have a
material adverse effect on our operating results.

The
market for electricity and generation products is heavily influenced by federal and state government regulations and policies. The deregulation and restructuring of the electric
industry in the United States and elsewhere may cause rule changes that may reduce or eliminate some of the advantages of such deregulation and restructuring. We cannot determine how any deregulation
or restructuring of the electric utility industry may ultimately affect the market for our microturbines. Changes in regulatory standards or policies could reduce the level of investment in the
research and development of alternative power sources, including microturbines. Any reduction or termination of such programs could increase the cost to our potential customers, making our systems
less desirable, and thereby adversely affect our revenue and other operating results.

Utility companies or governmental entities could place barriers to our entry into the marketplace, and we may not be able to effectively sell our products.

Utility companies or governmental entities could place barriers on the installation of our products or the interconnection of the
products with the electric grid. Further, they may charge additional fees to customers who install on-site generation or have the capacity to use power from the grid for
back-up or standby purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our products or increase the cost to our potential
customers for using our systems. This could make our systems less desirable, thereby adversely affecting our revenue and other operating results. In addition, utility rate reductions can make our
products less competitive which would have a material adverse effect on our operations. The cost of electric power generation bears a close relationship to natural gas and other fuels. However,
changes to electric utility tariffs often require lengthy regulatory approval and include a mix of fuel types as well as customer categories. Potential customers may perceive the resulting swings in
natural gas and electric pricing as an increased risk of investing in on-site generation.

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We depend upon the development of new products and enhancements of existing products.

Our operating results depend on our ability to develop and introduce new products, enhance existing products and reduce the costs to
produce our products. The success of our products is dependent on several factors, including proper product definition, product cost, timely completion and introduction of the products,
differentiation of products from those of our competitors, meeting changing customer requirements, emerging industry standards and market acceptance of these products. The development of new,
technologically advanced products and enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends.
There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs and achieve
market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.

Operational restructuring may result in asset impairment or other unanticipated charges.

As a result of our corporate strategies, we have identified opportunities to outsource to third-party suppliers certain functions which
we currently perform. We believe outsourcing can reduce product costs, improve product quality or increase operating efficiency. These actions may not yield the expected results, and outsourcing may
result in production delays or lower quality products. Transitioning to outsourcing may cause certain of our affected employees to leave before the outsourcing is complete. This could result in a lack
of the experienced in-house talent necessary to successfully implement the outsourcing. Further, depending on the nature of operations outsourced and the structure of agreements we reach
with suppliers to perform these functions, we may experience impairment in the value of manufacturing assets related to the outsourced functions or other unanticipated charges, which could have a
material adverse effect on our operating results.

We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales.

We believe that we will need to reduce the unit production cost of our products over time to maintain our ability to offer
competitively priced products. Our ability to achieve cost reductions will depend on our ability to develop low cost design enhancements, to obtain necessary tooling and favorable supplier contracts
and to increase sales volumes so we can achieve economies of scale. We cannot provide assurance that we will be able to achieve any such production cost reductions. Our failure to achieve such cost
reductions could have a material adverse effect on our business and results of operations.

Commodity market factors impact our costs and availability of materials.

Our products contain a number of commodity materials, from metals, which include steel, special high temperature alloys, copper, nickel
and molybdenum, to computer components. The availability of these commodities could impact our ability to acquire the materials necessary to meet our requirements. The cost of metals has historically
fluctuated. The pricing could impact the costs to manufacture our products. If we are not able to acquire commodity materials at prices and on terms satisfactory to us or at all, our operating results
may be materially adversely affected.

Our products involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our results of operations.

The sale of our products typically involves a significant commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. For these and other reasons,

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the
sales cycle associated with our products is typically lengthy and subject to a number of significant risks over which we have little or no control. We expect to plan our production and inventory
levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales in any period fall significantly below anticipated levels, our financial
condition, results of operations and cash flow would suffer. If demand in any period increases well above anticipated levels, we may have difficulties in responding, incur greater costs to respond, or
be unable to fulfill the demand in sufficient time to retain the order, which would negatively impact our operations. In addition, our operating expenses are based on anticipated sales levels, and a
high percentage of our expenses are generally fixed in the short term. As a result of these factors, a small fluctuation in timing of sales can cause operating results to vary materially from period
to period.

Potential intellectual property, labor, product liability, stockholder or other litigation may adversely impact our business.

We may face litigation relating to intellectual property matters, labor matters, product liability, or other matters. We are a party to
stockholder lawsuits alleging violations of securities laws in connection with our June 2000 initial public offering and November 2000 secondary offering described under "Legal Proceedings" in this
Annual Report. An adverse judgment could negatively impact our financial position and results of operations, the trading price of our common
stock and our ability to obtain future financing on favorable terms or at all. Any litigation could be costly, divert management attention or result in increased costs of doing business.

Our success depends in significant part upon the continuing service of management and key employees.

Our success depends in significant part upon the continuing service of our executive officers, senior management and sales and
technical personnel. The failure of our personnel to execute our strategy or our failure to retain management and personnel could have a material adverse effect on our business. Our success will be
dependent on our continued ability to attract, retain and motivate highly skilled employees. There can be no assurance that we can do so.

Our
internal control systems rely on people trained in the execution of the controls. Loss of these people or our inability to replace them with similarly skilled and trained individuals
or new processes in a timely manner could adversely impact our internal control mechanisms.

Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control.

Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control. Our executive offices and
manufacturing facilities are located in southern California. Because the southern California area is located in an earthquake-sensitive area, we are particularly susceptible to the risk of damage to,
or total destruction of, our facilities in southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our products. If an earthquake,
fire or other natural disaster occurs at or near our facilities, our business, financial condition, operating results and cash flow could be materially adversely affected.

If we fail to meet all applicable Nasdaq Global Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market
liquidity of our common stock, impair the value of your investment and adversely affect our ability to raise needed funds.

Our common stock is listed on the Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum financial and other
requirements. On August 23, 2010, we received a notice from the Nasdaq Listing Qualifications Department stating that, for the last 30 consecutive business days, the closing bid price for our
common stock had been below the minimum $1.00 per share requirement for continued listing on the Nasdaq Global Market as set forth in Nasdaq Listing Rule 5450(a)(1). In accordance with Nasdaq
Listing Rule 5810(c)(3)(A), we were provided 180 calendar days, or until

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February 22,
2011, to regain compliance with the minimum bid price requirement. On January 21, 2011, we received a notice from the Nasdaq Listing Qualifications Department stating that
the closing bid price of our common stock had been $1.00 or greater for the previous ten consecutive business days and that we had regained compliance with the minimum bid price requirement. However,
there can be no assurance that we will be able to comply with the continued listing standards in the future.

If
we fail to meet all applicable Nasdaq Global Market requirements in the future and Nasdaq determines to delist our common stock, the delisting could adversely affect the market
liquidity of our common stock and adversely affect our ability to obtain financing for the continuation of our operations. This delisting could also impair the value of your investment.

The market price of our common stock has been and may continue to be highly volatile and you could lose all or part of your investment in our securities.

An investment in our securities is risky, and stockholders could lose their investment in our securities or suffer significant losses
and wide fluctuations in the market value of their investment. The market price of our common stock is highly volatile and is likely to continue to be highly volatile. Given the continued uncertainty
surrounding many variables that may affect our business and the industry in which we operate, our ability to foresee results for future periods is limited. This variability could affect our operating
results and thereby adversely affect our stock price. Many factors that contribute to this volatility are beyond our control and may cause the market price of our common stock to change, regardless of
our operating performance. Factors that could cause fluctuation in our stock price may include, among other things:



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In
addition, the stock market in general, and the Nasdaq Global Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of particular companies affected. The market prices of securities of technology companies and companies servicing the
technology industries have been particularly volatile. These broad market and industry factors may cause a material decline in the market price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. We are
currently subject to litigation relating to our initial public offering and a subsequent common stock offering as described under "Legal Proceedings" in this Annual Report. This type of litigation,
regardless of whether we prevail on the underlying claim, could result in substantial costs and a diversion of management's attention and resources, which could materially harm our financial
condition, results of operations and cash flow.

Provisions in our certificate of incorporation, bylaws and our stockholder rights plan, as well as Delaware law, may discourage, delay or prevent a merger or acquisition at
a premium price.

Provisions of our second amended and restated certificate of incorporation, amended and restated bylaws and our stockholder rights
plan, as well as provisions of the General Corporation Law of the State of Delaware, could discourage, delay or prevent unsolicited proposals to merge with or acquire us, even though such proposals
may be at a premium price or otherwise beneficial to you. These provisions include our board's authorization to issue shares of preferred stock, on terms the board determines in its discretion,
without stockholder approval, and the following provisions of Delaware law that restrict many business combinations.

We
are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which could prevent us from engaging in a business combination with a 15%
or greater
stockholder for a period of three years from the date such stockholder acquired such status unless appropriate board or stockholder approvals are obtained.

Our
board of directors has adopted a stockholder rights plan, pursuant to which one preferred stock purchase right has been issued for each share of our common stock authorized and
outstanding. Until the occurrence of certain prescribed events, the rights are not exercisable and are transferable along with, and only with, each share of our common stock and are evidenced by the
common stock certificates. One preferred stock purchase right will also be issued with each share of our common stock we issue in the future until the rights plan expires or is terminated or we redeem
or exchange the rights for other property in accordance with the terms of the rights plan or at such time, if any, as the rights separate from each share of our common stock and become exercisable.
Each share of Series A Junior Participating Preferred Stock will be entitled to receive, when, as and if declared by our board of directors out of funds legally available for the purpose,
dividends payable in cash in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all dividends or other distributions, including non-cash
dividends (payable in kind), declared on our common stock other than a dividend payable in shares of common stock or a subdivision of the outstanding shares of common stock. The rights plan prohibits
the issuance of additional rights after the rights separate from our common stock. The rights plan is intended to protect our stockholders in the event of an unfair or coercive offer to acquire us.
However, the existence of the rights plan may discourage, delay or prevent a merger or acquisition of us that is not supported by our board of directors.

Item 1B.    Unresolved Staff Comments.

None.

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Item 2.    Properties.

Our principal corporate offices, administrative, sales and marketing, R&D and support facilities consist of approximately 98,000 square
feet of leased office space, warehouse
space and assembly and test space located at 21211 Nordhoff Street in Chatsworth, California. Our lease for those premises expires in July 2014, and we have two five-year options to extend
the term of this lease. We also lease an approximately 79,000 square foot facility at 16640 Stagg Street in nearby Van Nuys, California as an engineering test and manufacturing facility for our
recuperator cores. This lease will expire in December 2012, and we have one five-year option to extend this lease. Management believes our facilities are adequate for our current needs.

Item 3.    Legal Proceedings.

In December 2001, a purported stockholder class action lawsuit was filed in the United States District Court for the Southern District
of New York (the "District Court") against the Company, two of its then officers, and the underwriters of our initial public offering. The suit purports to be a class action filed on behalf of
purchasers of our common stock during the period from June 28, 2000 to December 6, 2000. An amended complaint was filed on April 19, 2002. The plaintiffs allege that the
prospectuses for our June 28, 2000 initial public offering and November 16, 2000 secondary offering were false and misleading in violation of the applicable securities laws because the
prospectuses failed to disclose the underwriter defendants' alleged agreement to allocate stock in these offerings to certain investors in exchange for excessive and undisclosed commissions and
agreements to make additional purchases of stock in the aftermarket at pre-determined prices. Similar complaints have been filed against hundreds of other issuers that have had initial
public offerings since 1998; the complaints have been consolidated into an action captioned In re Initial Public Offering Securities Litigation, No. 21 MC 92. On October 9,
2002, the plaintiffs dismissed, without prejudice, the claims against the named officers and directors in the action against the Company, pursuant to the terms of Reservation of Rights and Tolling
Agreements entered into with the plaintiffs (the "Tolling Agreements"). Subsequent addenda to the Tolling Agreements extended the tolling period through August 27, 2010. The District Court
directed that the litigation proceed within a number of "focus cases" and on October 13, 2004, the District Court certified the focus cases as class actions. Our case is not one of these focus
cases. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the District Court's class certification decision. On
August 14, 2007, the plaintiffs filed their second consolidated amended complaints against the six focus cases and on September 27, 2007, again moved for class certification. On
November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the District Court denied the
motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the
previously certified class period. The motion for class certification was withdrawn without prejudice on October 10, 2008. On April 2, 2009, a stipulation and agreement of settlement
between the plaintiffs, issuer defendants and underwriter defendants was submitted to the District Court for preliminary approval. The District Court granted the plaintiffs' motion for preliminary
approval and preliminarily certified the settlement classes on June 10, 2009. The settlement "fairness" hearing was held on September 10, 2009. On October 6, 2009, the District
Court entered an opinion granting final approval to the settlement and directing that the Clerk of the District Court close these actions. On August 26, 2010, based on the expiration of the
tolling period stated in the Tolling Agreements, the plaintiffs filed a Notice of Termination of Tolling Agreement and Recommencement of Litigation against the named officers and directors. The
plaintiffs stated to the District Court that they do not intend to take any further action against the named officers and directors at this time. Appeals of the opinion granting final approval have
been filed. Because of the inherent uncertainties of litigation and because the settlement remains subject to appeal, the ultimate

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outcome
of the matter is uncertain. Management believes that the outcome of this litigation will not have a material adverse impact on the consolidated financial position and results of operations.

On
October 9, 2007, Vanessa Simmonds, a purported stockholder of the Company, filed suit in the U.S. District Court for the Western District of Washington(the "Washington District
Court") against The Goldman Sachs Group, Inc., Merrill Lynch & Co., Inc., and Morgan Stanley, the lead underwriters of our initial public offering in June 1999, and our
secondary offering of common stock in November 2000, alleging violations of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b). The complaint sought to
recover from the lead underwriters any "short swing profits" obtained by them in violation of Section 16(b). The suit names the Company as a nominal defendant, contained no claims against the
Company, and sought no relief from the Company. Simmonds filed an Amended Complaint on February 27, 2008 (the "Amended Complaint"), naming as defendants Goldman Sachs & Co. and
Merrill Lynch Pierce, Fenner & Smith Inc. and again naming Morgan Stanley. The Goldman Sachs Group, Inc. and Merrill Lynch & Co., Inc. were no longer named as
defendants. The Amended Complaint asserted substantially similar claims as those set forth in the initial complaint. On July 25, 2008, the Company joined with 29 other issuers to file the
Issuer Defendants' Joint Motion to Dismiss. Simmonds filed her opposition to this motion on September 8, 2008, and the Company and the other Issuer Defendants filed a Reply in Support of Their
Joint Motion to Dismiss on October 23, 2008. On March 12, 2009, the Washington District Court granted the Issuer Defendants' Joint Motion to Dismiss, dismissing the complaint without
prejudice on the grounds that Simmonds had failed to make an adequate demand on the Company prior to filing her complaint. In its order, the Washington District Court stated that it would not permit
Simmonds to amend her demand letters while pursuing her claims in the litigation. Because the Washington District Court dismissed the case on the grounds that it lacked subject matter jurisdiction, it
did not specifically reach the issue of whether Simmonds' claims were barred by the applicable statute of limitations. However, the Washington District Court also granted the Underwriters' Joint
Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred by the applicable statute of limitations because the issuers' stockholders had
notice of the potential claims more than five years prior to filing suit. Simmonds filed a Notice of Appeal on April 10, 2009. The underwriters subsequently filed a Notice of Cross Appeal,
arguing that the dismissal of the claims involving the moving issuers should have been with prejudice because the claims were untimely under the applicable statute of limitations. Simmonds filed her
opening brief on appeal on August 26, 2009. On October 2, 2009, the Company and other Issuer Defendants filed a joint response brief, and the underwriters filed a brief in support of
their cross appeal. Simmonds' reply brief and opposition to the cross appeal were filed on November 2, 2009 and the underwriters' reply brief in support of their cross appeals was filed on
November 17, 2009. On October 5, 2010, the Ninth Circuit Court of Appeals (the "Ninth Circuit") heard oral arguments regarding this matter. On December 2, 2010, the Ninth Circuit
affirmed the Washington District Court's decision to dismiss the moving issuers' cases (including the Company's) on the grounds that plaintiff's demand letters were insufficient to put the issuers on
notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the Washington District Court's decision on
the underwriters' motion to dismiss as to the claims arising from the non-moving issuers' initial public offerings, finding plaintiff's claims were not time-barred under the
applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the Washington District Court the same challenges to
plaintiff's demand letters that moving issuers had filed. On December 16, 2010, the underwriters filed a petition for panel rehearing and petition for rehearing en banc. Appellant Vanessa
Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no
further petitions for rehearing may be filed. On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit's mandate in the cases involving the
non-moving issuers. On January 25, 2011, the Ninth Circuit granted the underwriters' motion and ordered that the mandate in the cases

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involving
the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. On January 26, 2011, Appellant
Vanessa Simmonds moved to join the underwriters' motion and requested that the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant's motion and
ruled that the mandate in all cases (including the Company's and other moving issuers) is stayed for ninety days pending Appellant's filing of a petition for writ of certiorari in the United States
Supreme Court. On April 5, 2011, plaintiff filed a Petition for Writ of Certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit's December 2, 2010 decision relating
to the adequacy of the pre-suit demand. Plaintiff's petition was docketed by the Supreme Court on April 7, 2011. On April 15, 2011, underwriter defendants filed a Petition
for Writ of Certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit's December 2, 2010 decision relating to the statute of limitations issue. Underwriter's petition was
docketed by the Supreme Court on April 18, 2011. On May 12, 2011, Vanessa Simmonds filed her Brief in Opposition to the underwriters' Petition. On May 26, 2011, the moving issuer
defendants filed their Brief in Opposition to Vanessa Simmonds' Petition, and on June 6, 2011, Vanessa Simmonds filed her reply to that Brief. Management believes that the outcome of this
litigation will not have a material adverse impact on our consolidated financial position and results of operations.

From
time to time, the Company may become subject to additional legal proceedings, claims and litigation arising in the ordinary course of business. Other than the matters discussed
above, we are not a party to any other material legal proceedings, nor are we aware of any other pending or threatened litigation that would have a material adverse effect on our business, operating
results, cash flows or financial condition should such litigation be resolved unfavorably.

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Price Range of Common Stock

Our common stock is publicly traded on the Nasdaq Global Market under the symbol "CPST". The following table sets forth the low and
high sales prices for each period indicated.

High

LowYear Ended March 31, 2010:First Quarter

$
1.34

$
0.60Second Quarter

$
1.57

$
0.71Third Quarter

$
1.50

$
1.07Fourth Quarter

$
1.45

$
1.06Year Ended March 31, 2011:First Quarter

$
1.35

$
0.97Second Quarter

$
1.02

$
0.62Third Quarter

$
1.10

$
0.73Fourth Quarter

$
2.14

$
0.94


As
of June 7, 2011, the last reported sale price of our common stock on the Nasdaq Global Market was $1.67 per share.

Stockholders

As of June 7, 2011 there were 854 stockholders of record of our common stock. This does not include the number of persons whose
stock is held in nominee or "street name" accounts through brokers.

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Dividend Policy

We currently intend to retain any earnings for use in our business and, therefore, we do not anticipate paying any cash dividends in
the foreseeable future. We have never declared or paid any cash dividends on our capital stock. In the future, the decision to pay any cash dividends will depend upon our results of operations,
financial condition, cash flow and capital expenditure plans, as well as such other factors as our Board of Directors, in its sole discretion, may consider relevant, including approval from Wells
Fargo.

Item 6.    Selected Financial Data.

The selected financial data shown below have been derived from the audited financial statements of Capstone. The historical results are
not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read in conjunction with "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Annual Report.

Amounts
in thousands, except per share data.

Year Ended March 31,2011

2010

2009

2008

2007Statement of Operations:Revenue

$
81,890

$
61,554

$
43,949

$
31,305

$
21,108Cost of goods sold


82,427


69,999


49,277


35,105


26,045Gross loss


(537
)

(8,445
)

(5,328
)

(3,800
)

(5,027
)Operating costs and expenses:Research and development


6,986


6,954


8,125


8,906


9,374Selling, general and administrative


26,203


28,383


28,628


25,622


24,615Loss from operations


(33,726
)

(43,782
)

(42,081
)

(38,328
)

(39,016
)Net loss

$
(38,470
)
$
(67,241
)
$
(41,717
)
$
(36,113
)
$
(36,728
)Net loss per share of common stockbasic and diluted

$
(0.16
)
$
(0.34
)
$
(0.25
)
$
(0.25
)
$
(0.32
)




As of March 31,2011

2010

2009

2008

2007Balance Sheet Data:Cash and cash equivalents

$
33,456

$
47,270

$
19,519

$
42,605

$
60,322Working capital


22,274


30,115


34,741


44,934


72,103Total assets


87,019


103,446


72,329


74,046


97,003Revolving credit facility


7,080


7,571


3,654





Capital lease/note payable obligations


297


302


41


18


46Long-term liabilities


309


274


288


463


561Stockholders' equity

$
34,480

$
46,432

$
50,470

$
53,053

$
81,785


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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a
difference include, but are not limited to, those discussed under Item 1A (Risk Factors) in this Annual Report. The following section is qualified in its entirety by the more detailed
information, including our financial statements and the notes thereto, which appears elsewhere in this Annual Report.

Overview

Capstone is, and has been, the market leader in microturbines based on the number of microturbines sold. We were able to significantly
increase revenues again this year despite the challenging economic conditions worldwide. Management believes that our efforts on the continued growth and broadening of our distribution network and the
stronger than anticipated market acceptance of our new C1000 Series products were the primary reasons for our revenue growth. In addition, management believes that the oil & gas, high rise
buildings, biogas, UPS and hybrid electric vehicle markets can provide potential opportunities to Capstone in the near term.

Our
Chief Executive Officer and Executive Vice President of Sales & Marketing have significant experience in distributed generation and co-generation. They have
successfully sold competing products, including GE Energy Jenbacher, Caterpillar Inc., Deutz Corporation, Waukesha gas engines and other microturbines. Effective April 2011, we filled a newly
created position of Senior Vice President of Program Management. This officer is responsible for the timely execution of our various research and development programs.

We
continue to focus on improving our products and delivery based on customer input, building brand awareness and new channels to market by developing a diversified network of strategic
distribution partners. Our focus is on products and solutions that provide near-term opportunities to drive repeatable business rather than discrete projects for niche markets.

On
February 1, 2010, we entered into an Asset Purchase Agreement with CPS. The Company acquired, subject to an existing license retained by CPS, all of the rights and assets
related to the manufacture and sale of the CPS 100 kW ("TA100") microturbine generator, including intellectual property, design, tooling, drawings, patents, know-how, distribution
agreements and supply agreements. Pursuant to the APA, the Company issued to CPS 1,550,387 shares of common stock at the closing date on February 1, 2010 and agreed to pay additional
consideration of $3.1 million on July 30, 2010 (the "Second Funding Date"). The additional consideration was to be paid, at the Company's discretion, in shares of the Company's common
stock or cash. The Company elected to satisfy the amount due on the Second Funding Date with common stock and issued 3,131,313 shares to CPS.

On
April 28, 2011, we purchased $2.3 million of the remaining TA100 microturbine inventory that was not consumed as part of the TA100 manufacturing process and acquired the
manufacturing equipment. On the closing date of February 1, 2010, the Company and CPS also entered into an agreement pursuant to which we agreed to purchase 125 kW waste heat recovery generator
systems from CPS. In exchange for certain minimum purchase requirements during a three-year period, we have exclusive rights to sell the zero-emission waste heat recovery
generator for all microturbine applications and for applications 500 kW or lower where the source of heat is the exhaust of a reciprocating engine used in a landfill application. We must meet
specified annual sales targets in order to maintain the exclusive rights to sell the waste heat recovery generators.

In
order to increase volume and reduce cost, we focus our efforts in vertical markets that we expect to generate repeat business for the Company. To support our opportunities to grow in
these markets, we continue to enhance the reliability and performance of our products by regularly

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developing
new processes and enhancing training to assist those who apply, install and use our products.

An
overview of our direction, targets and key initiatives follows:





35

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Management
believes that effective execution in each of these key areas will be necessary to leverage Capstone's promising technology and early market leadership into achieving positive
cash flow with growing market presence and improving financial performance. Based on our recent progress and assuming achievement of targeted cost reductions, our financial model indicates that we
will achieve positive cash flow when we ship approximately 200 units in a quarter, depending on an assumed product mix. Management believes our manufacturing facilities located in Chatsworth and Van
Nuys, California have a combined production capacity of approximately 2,000 units per year, depending on product mix. Excluding working capital requirements, management believes we can expand our
combined production capacity to approximately 4,000 units per year, depending on product mix, with approximately $10 to $15 million of capital expenditures. We have not committed to this
expansion nor identified a source for its funding, if available.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent liabilities. On an on-going basis, we
evaluate our estimates, including but not limited to those related to long-lived assets, including intangible assets and fixed assets, bad debts, inventories, warranty obligations,
stock-based compensation, warrant liabilities, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

Management
believes that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



36

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37

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Results of Operations

Year Ended March 31, 2011 Compared to Year Ended March 31, 2010

Revenue.Revenue for Fiscal 2011 increased $20.3 million, or 33%, to $81.9 million from $61.6 million for Fiscal 2010.
The
change in revenue for Fiscal 2011 compared to Fiscal 2010 included a $13.4 million increase in revenue from the North American market, a $12.2 million increase in revenue from the
European market and a $2.4 million increase in revenue from the Asian market, all primarily the result of efforts to improve distribution channels. This overall increase in revenue was offset
by a $5.1 million decrease in revenue from the Australian market, $2.2 million decrease in revenue from the South American market and a $0.4 million decrease in revenue from the
African market because of lower order volume in these regions.

For
Fiscal 2011, revenue from microturbine products increased $17.6 million , or 36%, to $66.3 million from $48.7 million for Fiscal 2010. Overall microturbine
product shipments were 112 units (16.9 megawatts) higher during Fiscal 2011 compared to Fiscal 2010, totaling 611 units (69.7 megawatts) and 499 units (52.8 megawatts),
respectively. Megawatts shipped and revenue during Fiscal 2011 increased as a result of higher sales volume of our C65 microturbine, the introduction of our new TA100, the sale of ten microturbine
rental units and further market adoption of our C200 and C1000 Series product lines. Average revenue per unit increased for Fiscal 2011 to approximately $109,000 compared to approximately $98,000 for
Fiscal 2010.

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For
Fiscal 2011, revenue from our accessories, parts and service increased $2.7 million, or 21%, to $15.6 million from $12.9 million for Fiscal 2010. The increase in
revenue resulted from higher sales of microturbine parts and FPP contracts. For Fiscal 2011, a shortage in certain key parts delayed our ability to ship products as scheduled. The timing of shipments
is subject to change based on several variables (including customer payments and customer delivery schedules), some of which are not in our control and can affect our revenue and backlog. As a result
of such issues, we evaluate historical revenue in conjunction with backlog to anticipate the growth trend of our revenue.

The
following table summarizes our revenue (revenue amounts in millions):

Years Ended March 31,2011

2010Revenue

Megawatts

Units

Revenue

Megawatts

UnitsC30

$
6.0


4.4


148

$
6.9


5.0


161C65


23.4


23.2


356


17.4


17.7


272TA100


5.1


4.1


41


1.2


1.1


11C200


5.3


5.0


25


4.9


5.6


28C600


2.2


2.4


4


2.8


3.0


5C800


4.4


5.6


7


5.0


6.4


8C1000


18.6


24.0


24


10.5


14.0


14Waste heat recovery generator


0.6


0.4


3








Unit upgrades


0.7


0.6


3








Total from Microturbine Products

$
66.3


69.7


611

$
48.7


52.8


499Accessories, Parts and Service


15.6








12.9





Total

$
81.9


69.7


611

$
61.6


52.8


499


Sales
to BPC accounted for 23% and 14% of our revenue for the years ended March 31, 2011 and 2010, respectively. Sales to Pumps and Service accounted for 18% and 4% our revenue
for the years ended March 31, 2011 and 2010, respectively. Sales to Aquatec accounted for 4% and 14% of our revenue for the years ended March 31, 2011 and 2010, respectively.

Gross Loss.Cost of goods sold includes direct material costs, production and service center labor and overhead, inventory charges and
provision for
estimated product warranty expenses. The gross loss was $0.5 million, or 1% of revenue, for Fiscal 2011 compared to a gross loss of $8.4 million, or 14% of revenue, for Fiscal 2010. The
improvement in gross loss of $7.9 million was the result of $10.2 million related to a change in product mix. In addition, we sold more microturbine products and increased parts and FPP
sales during Fiscal 2011. The C200 and C1000 series systems had better margins than in the same period last year as a result of higher average selling prices and lower direct materials costs. The
$10.2 million improvement in gross loss related to product mix was offset by an increase in production and service center labor and overhead expenses of $1.5 million and warranty expense
of $0.8 million. Management has implemented certain initiatives to further reduce direct material costs and other manufacturing and warranty costs as we work to achieve profitability.

Production
and service center labor and overhead expense increased $1.5 million during Fiscal 2011 compared to Fiscal 2010 as the result of part shortages and service center
repairs of the C200 and C1000 Series products.

Warranty
expense is a combination of a standard warranty provision recorded at the time revenue is recognized and changes, if any, in estimates for reliability repair programs.
Reliability repair programs are estimates that are recorded in the period that new information becomes available, including design changes, cost of repair and product enhancements, which can include
both in-warranty and out-of-warranty systems. The increase in warranty expense of $0.8 million reflects an increase in

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the
standard warranty provision of $1.5 million as a result of higher sales volume during Fiscal 2011 compared to the prior year period. In addition, it also reflects a decrease of
$0.7 million in the warranty expense relating to a benefit in reliability repair program reductions in Fiscal 2011.

Research and Development Expenses.R&D expenses include compensation, engineering department expenses, overhead allocations for
administration and
facilities and materials costs associated with development. We had R&D expenses of approximately $7.0 million during each of Fiscal 2011 and Fiscal 2010. R&D expenses are reported net of
benefits from cost-sharing programs, such as DOE grants and Carrier funding. There were approximately $0.9 million of such benefits for Fiscal 2011 and $1.7 million of such
benefits for Fiscal 2010. During Fiscal 2011, benefits from cost-sharing programs decreased $0.8 million, offset by lower spending for salaries of $0.4 million and consulting expense of
$0.4 million. The Carrier cost-sharing program concluded in June 2009. Cost-sharing programs vary from period to period depending on the phases of the programs.
Management expects R&D costs in Fiscal 2012 to be slightly higher than in Fiscal 2011.

Selling, General and Administrative ("SG&A") Expenses.SG&A expenses decreased $2.2 million, or 8%, to $26.2 million
for Fiscal 2011
from $28.4 million for Fiscal 2010. The net decrease in SG&A expenses was comprised of lower consulting expense of $1.3 million, salaries of $0.9 million and professional services
expense, including legal, bank fees, and insurance of $0.9 million, offset by an increase of $0.5 million in facilities expense and $0.4 million in travel expense. Management
expects SG&A expenses in Fiscal 2012 to be higher than in Fiscal 2011 as we refine our distribution channels and advance general and administrative key initiatives.

Other Income.Other income was $32,000 during Fiscal 2011. This other income was primarily the result of our closure of certain offices
that we held
in Italy.

Interest Income.Interest income decreased $4,000, or 50%, to $4,000 for Fiscal 2011 from $8,000 for Fiscal 2010. The decrease in
interest income was
attributable to a general decline in market interest rates that resulted in lower yields earned on our cash and cash equivalents in comparison to interest income in the same period last year.
Management expects interest income in Fiscal 2012 to be higher than in Fiscal 2011 as we continue to invest cash from our operations.

Interest Expense.Interest expense increased $0.2 million, or 29%, to $0.9 million for Fiscal 2011 from $0.7 million for
Fiscal
2010. The increased interest expense resulted from higher average balances outstanding under the revolving Credit Facility. As of March 31, 2011, we had total debt of $7.1 million
outstanding under the revolving Credit Facility.

Change in Fair Value of Warrant Liability.Change in fair value of warrant liability decreased $19.2 million, or 84%, to a charge
of
$3.7 million for Fiscal 2011 from a charge of $22.9 million for Fiscal 2010. In accordance with ASC 815, adopted in Fiscal 2010, warrants previously classified within equity were
reclassified as liabilities. This change in fair value of warrant liability was a result of warrant exercises, revaluing the warrant liability based on the MonteCarlo simulation valuation
model, impacted primarily by the quoted price of the Company's common stock in an active market. The revaluation of the warrant liability has no impact on our cash balances.

Income Tax Provision.Income taxes during Fiscal 2011 increased $0.3 million to a tax expense of $0.2 million from a tax
benefit of
$0.1 million during Fiscal 2010. The increase in income taxes was related to foreign taxes of $0.5 million reduced by a R&D tax credit of $0.2 million that was received during
Fiscal 2010. The effective income tax rate of .63% differs from the federal and state blended statutory rate of 39.51% primarily as a result of recording taxable losses. At March 31, 2011, we
had federal and state net operating loss carryforwards of approximately $576.7 million and $301.6 million, respectively, which may be utilized to reduce future taxable income, subject to
limitations under Section 382 of the Internal Revenue Code of 1986. We provided a valuation allowance for 100% of our

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net
deferred tax asset of $231.0 million at March 31, 2011 because the realization of the benefits of these favorable tax attributes in future income tax returns is not deemed more
likely than not. Similarly, at March 31, 2010, the net deferred tax asset was fully reserved.

Year Ended March 31, 2010 Compared to Year Ended March 31, 2009

Revenue.Revenue for Fiscal 2010 increased $17.7 million, or 40%, to $61.6 million from $43.9 million for Fiscal 2009.
The
overall revenue increase for Fiscal 2010 compared to Fiscal 2009 included a $9.3 million increase in revenue from the European market, a $6.8 million increase in revenue from the
Australian market, a $3.8 million increase in revenue from the South American market and a $0.7 million increase in revenue from the African market, all primarily the result of our
efforts to improve distribution channels. This overall increase in revenue was offset by a $2.9 million decrease in revenue from the North American market because of lower sales volume to one
of our customers and because Fiscal 2009 included unusually large sales to two customers.

Overall
microturbine product shipments were slightly higher during Fiscal 2010 compared to Fiscal 2009 totaling 499 units (52.8 megawatts) and 494 units (34.1 megawatts) respectively.
Megawatts shipped and revenue during Fiscal 2010 increased as a result of the introduction of our new TA100, C200 and C1000 Series product lines. The average revenue per unit increased to $98,000 in
Fiscal 2010 compared to $66,000 per unit for Fiscal 2009 year because of the benefit of a full twelve months of sales of higher priced C200 and C1000 Series systems, which were introduced
during Fiscal 2009.

The
timing of shipments is subject to change based on several variables (including customer payments and customer delivery schedules), some of which are not within our control and can
affect our revenue and backlog. Therefore, we evaluate historical revenue in conjunction with backlog to anticipate the growth trend of our revenue.

The
following table summarizes our revenue (revenue amounts in millions):

Years Ended March 31,2010

2009Revenue

Megawatts

Units

Revenue

Megawatts

UnitsC30

$
6.9


5.0


161

$
4.0


3.1


104C65


17.4


17.7


272


23.8


24.4


375TA100


1.2


1.1


11








C200


4.9


5.6


28


1.4


1.8


9C600


2.8


3.0


5


1.0


1.2


2C800


5.0


6.4


8


1.1


1.6


2C1000 Series


10.5


14.0


14


1.1


2.0


2Total from Microturbine Products

$
48.7


52.8


499

$
32.4


34.1


494Accessories, Parts and Service


12.9








11.5





Total

$
61.6


52.8


499

$
43.9


34.1


494


Sales
to BPC accounted for 14% and 13% of revenues for the year ended March 31, 2010 and 2009, respectively. Sales to Aquatec accounted for 14% and 5% of our revenue for the years
ended March 31, 2010 and 2009, respectively. Sales to UTC accounted for 0.2% and 7% of revenue for year ended March 31, 2010 and 2009, respectively.

Gross Loss.The gross loss was $8.4 million, or 14% of revenue, during Fiscal 2010 compared to $5.3 million, or 12% of
revenue, during
Fiscal 2009. The increase of $3.1 million in gross loss was the result of increased warranty expense of $2.3 million, increased inventory charges of $1.2 million and
$0.6 million related to a change in product mix as we sold more C200 and C1000 Series systems in

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Fiscal
2010, which had a lower margin in Fiscal 2010 than our overall average margin mix from Fiscal 2009, as a result of low introductory pricing and initially higher than planned product cost. This
was offset by a decrease in our production and service center overhead of $1.0 million.

The
increase in warranty expense of $2.3 million consisted of a $1.9 million increase for warranty repairs related to C200 and C1000 Series systems, where early production
units operating at customer sites were updated for improvements, as the product matured during the year and the increase in the per-unit warranty accrual because of the increased volume of
C200 and C1000 Series systems in the field. In addition, the $2.3 million increase also included a $0.4 million increase in warranty programs compared to the prior period because of a
higher benefit recorded in the prior period because of warranty program reductions for units subsequently covered by factory protection plans and our expectation that units will operate beyond the
estimated warranty failure period.

The
increase in inventory charges of $1.2 million was because of charges related to scrap in the manufacturing process of the C200 and C1000 Series products. These charges were
offset by decreased production and service center overhead of $1.0 million. The reduction in overhead was a result of our production cost reduction efforts, primarily related to the decrease in
manufacturing personnel.

Research and Development Expenses.R&D expenses during Fiscal 2010 decreased $1.1 million, or 14%, to $7.0 million from
$8.1 million during Fiscal 2009. R&D expenses are reported net of benefits from cost-sharing programs, such as the DOE grant and Carrier funding. There were approximately
$1.7 million of such benefits during Fiscal 2010 and $8.1 million of such benefits during Fiscal 2009. There were no in-kind services performed under the
cost-sharing programs during Fiscal 2010. In-kind services performed during Fiscal 2009 were valued at $0.2 million and recorded as consulting expenses. The overall
decrease in R&D expenses of $1.1 million resulted from decreased spending for consulting expenses of $2.4 million, supplies of $2.4 million, salary expense of $1.3 million,
facilities expense of $1.3 million and travel expense of $0.1 million, offset by reduced Carrier funding benefits of $6.4 million for the cost-sharing program, which
concluded in June 2009. Cost-sharing programs vary from period to period depending on the phases of the programs.

Selling, General and Administrative Expenses.SG&A expenses decreased $0.2 million to $28.4 million during Fiscal 2010
from
$28.6 million during Fiscal 2009. The net decrease in SG&A expenses was comprised of a decrease of $1.8 million in salary expense, $1.6 million in travel expense,
$0.5 million in consulting services expense and $0.4 million in marketing expense, offset by an increase of $1.8 million in professional services expense, including legal, bank
fees, and insurance, $1.0 million in stock-based compensation expense, $0.8 million in facilities expense and $0.5 million in stock-based compensation to consultants.

Interest Income.Interest income during Fiscal 2010 decreased to $8,000 from $0.5 million during Fiscal 2009. The decrease during
the period
was attributable to lower average cash balances and less cash held in interest-bearing accounts.

Interest Expense.Interest expense during Fiscal 2010 increased to $0.7 million from $0.1 million during Fiscal 2009.
Interest expense
related to the revolving credit facility with Wells Fargo accounted for the increase in interest expense in Fiscal 2010. As of March 31, 2010, we had total debt of $7.6 million
outstanding under the revolving credit facility with Wells Fargo.

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Change in Fair Value of Warrant Liability.The change in fair value of warrant liability was a charge of $22.9 million during
Fiscal 2010.
There was no change in fair value of warrant liability during Fiscal 2009. In accordance with ASC 815, adopted in Fiscal 2010, warrants previously classified within equity were reclassified as
liabilities. This change in fair value of warrant liability was a result of revaluing the warrant liability, impacted primarily by the quoted price of the Company's common stock in an active market.
This revaluation has no impact on the Company's cash balances.

Income Tax Provision.Income taxes during Fiscal 2010 decreased $0.2 million to a tax benefit of $0.1 million from a tax
expense of
$0.1 million during Fiscal 2009. The decrease in income taxes was related to a R&D tax credit of $0.4 million that was received during Fiscal 2010. At March 31, 2010, we had
federal and state net operating loss carryforwards of approximately $576.7 million and $396.9 million, respectively, which may be utilized to reduce future taxable income, subject to
limitations under Section 382 of the Internal Revenue Code of 1986. We provided a valuation allowance for 100% of our net deferred tax asset of $235.4 million at March 31, 2010
because the realization of the benefits of these favorable tax attributes in future income tax returns is not deemed more likely than not. Similarly, at March 31, 2009, the net deferred tax
asset was fully reserved.

Quarterly Results of Operations

The following table presents unaudited quarterly financial information. This information was prepared in accordance with GAAP, and, in
the opinion of management, contains all adjustments necessary for a fair presentation of such quarterly information when read in conjunction with the financial statements included elsewhere herein.
Our operating results for any prior quarters may not necessarily indicate the results for any future periods.



Year Ended March 31, 2011

Year Ended March 31, 2010(Unaudited)

Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter

Fourth
Quarter

Third
Quarter

Second
Quarter

First
QuarterRevenue

$
22,757

$
24,159

$
18,922

$
16,052

$
16,321

$
15,986

$
15,522

$
13,725Cost of goods sold


23,827


23,233


18,803


16,564


18,713


16,204


18,520


16,562Gross margin (loss)


(1,070
)

926


119


(512
)

(2,392
)

(218
)

(2,998
)

(2,837
)Operating costs and expenses:R&D


2,000


1,424


2,040


1,522


1,957


1,965


2,271


761SG&A


7,197


5,959


6,611


6,436


7,887


7,433


6,840


6,223Loss from operations


(10,267
)

(6,457
)

(8,532
)

(8,470
)

(12,236
)

(9,616
)

(12,109
)

(9,821
)Net income (loss)

$
(28,839
)
$
(8,098
)
$
(1,925
)
$
392

$
(12,931
)
$
(7,170
)
$
(31,881
)
$
(15,259
)Net loss per common sharebasic and diluted

$
(0.12
)
$
(0.03
)
$
(0.01
)
$
(0.00
)
$
(0.05
)
$
(0.04
)
$
(0.17
)
$
(0.08
)


Liquidity and Capital Resources

Our cash requirements depend on many factors, including the execution of our plan. We expect to continue to devote substantial capital
resources to running our business and creating the strategic changes summarized herein. Our planned capital expenditures for the year ended March 31, 2012 include approximately
$0.6 million for plant and equipment costs related to manufacturing and operations. We have invested our cash in institutional funds that invest in high quality short-term money
market instruments to provide liquidity for operations and for capital preservation.

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Our
cash and cash equivalent balances decreased $13.8 million during the year ended March 31, 2011, compared to an increase of $27.8 million during the year ended
March 31, 2010. The cash was generated from or used in:

Operating Activities.During the year ended March 31, 2011, we used $21.9 million in cash in our operating activities, which
consisted
of a net loss for the period of $38.5 million, offset by non-cash adjustments (primarily change in fair value of warrant liability, employee stock-based compensation, depreciation
and amortization, warranty and inventory charges) of $13.8 million and cash generated from working capital of $2.8 million. During the year ended March 31, 2010, operating cash
usage was $34.6 million, which consisted of a net loss for the period of $67.2 million and cash used for working capital of $1.3 million offset by non-cash adjustments
of $33.9 million.

During
the year ended March 31, 2011, an additional $4.1 million in cash was generated from working capital compared to the year ended March 31, 2010. The increase
in cash generated from working capital during the year ended March 31, 2011 reflects the following:



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Investing ActivitiesNet cash used in investing activities of $2.3 million during the year ended March 31, 2011 relates to restricted
cash of $1.3 million held as additional security for the Credit Facility (defined below). In addition, we used $1.0 million for the acquisition of fixed assets during the year ended
March 31, 2011. We used $2.0 million for the acquisition of fixed assets during the year ended March 31, 2010.

Financing ActivitiesDuring Fiscal 2011, we generated $10.4 million from financing activities compared to cash generated during Fiscal 2010 of
$64.4 million. The funds generated from financing activities in Fiscal 2011 were primarily the result of the March 2011 warrant exercise transaction described below.

Effective
March 9, 2011, we entered into warrant exercise agreements with (i) the only two holders (the "2009 Holders") of warrants to purchase an aggregate of 3,612,717
shares of the Company's common stock, par value $0.001 per share ("Common Stock"), issued by the Company on May 7, 2009 (the "2009 Warrants") (ii) one holder (the "2008 Holder") of
warrants to purchase an aggregate of 392,191 shares of Common Stock issued by the Company on September 23, 2008 (the "2008 Warrants") and (iii) four holders (the "2007 Holders") of
warrants to purchase an aggregate of 8,468,323 shares of Common Stock issued by the Company on January 24, 2007 (the "2007 Warrants"). Pursuant to the Warrant Exercise Agreements, the 2009
Holders agreed to exercise the 2009 Warrants at the existing exercise price of $0.95 per share in exchange for a fee of an aggregate amount of approximately $1.0 million, the 2008 Holder agreed
to exercise the 2008 Warrants at the existing exercise price of $1.60 per share in exchange for a fee of an aggregate amount of approximately $156,876 and the 2007 Holders agreed to exercise the 2007
Warrants at the existing exercise price of $1.17 per share in exchange for a fee of an aggregate amount of approximately $1.2 million. The net proceeds to the Company in connection with the
exercise of the 2009 Warrants, the 2008 Warrants and the 2007 Warrants, after deducting expenses of approximately $0.4 million, is approximately $11.2 million. Immediately prior to the
exercise of these warrants, we revalued the warrants and recorded a charge of $6.9 million to operations during the three months ended March 31, 2011. In connection with the induced
exercise of the warrants, we modified the warrant agreements, which resulted in a reduction of the charge to operations by $1.0 million during the three months ended March 31, 2011. The
exercise of these warrants resulted in a reduction of the warrant liability of $9.7 million.

The
funds generated from financing activities during Fiscal 2010 were primarily the result of an underwritten offering, a warrant exercise transaction and issuance of new warrants and a
registered offering of our common stock and warrants, which were completed effective February 24, 2010, September 17, 2009 and May 7, 2009, respectively. The underwritten offering
resulted in gross proceeds of approximately $46.0 million and proceeds net of direct transaction costs of $42.4 million. The exercise of warrants and issuance of new warrants in
September 2009 resulted in gross proceeds of approximately $6.5 million and $0.4 million, respectively. The offering of our common stock and warrants in May 2009 resulted in gross
proceeds of approximately $12.5 million and proceeds, net of direct transaction costs, of approximately $11.2 million.

Employee
stock purchases, net of repurchases of shares of our common stock for employee taxes due on vesting of restricted stock units, resulted in approximately $40,000 of net cash
generated during Fiscal 2011, compared with $0.1 million of net cash during Fiscal 2010. During Fiscal 2011 and Fiscal 2010, we generated additional financing from the Credit Facility by
drawing down our line of credit when funds were available.

We
maintain two Credit and Security Agreements (the "Agreements") with Wells Fargo. The Agreements provide the Company with a line of credit of up to $10 million in the aggregate
(the

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"Credit
Facility"). The amount actually available to us may be less and may vary from time to time depending on, among other factors, the amount of eligible inventory and accounts receivable. As
security for the payment and performance of the Credit Facility, we granted a security interest in favor of Wells Fargo in substantially all of our assets. The Agreements will terminate in accordance
with their terms on February 9, 2012 unless terminated sooner. As of March 31, 2011 and 2010, $7.1 million and $7.6 million in borrowings were outstanding, respectively,
under the Credit Facility.

The
Agreements include affirmative covenants as well as negative covenants that prohibit a variety of actions without Wells Fargo's consent, including covenants that limit our ability to
(a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or stock of
another entity, (d) pay dividends on, or purchase, acquire, redeem or retire shares of, our capital stock, (e) sell, assign, transfer or otherwise dispose of all or substantially all of
our assets, (f) change our accounting method or (g) enter into a different line of business. Furthermore, the Agreements contain financial covenants, including (a) a requirement
to maintain a specified minimum book worth, (b) a requirement not to exceed specified levels of losses, (c) a requirement to maintain a specified ratio of minimum cash balances to
unreimbursed line of credit advances, and (d) limitations on our capital expenditures.

Several
times since entering into the Agreements, we were in noncompliance with certain covenants under the Credit Facility. In connection with each event of noncompliance, Wells Fargo
waived the event of default and, on several occasions, we amended the Agreements in response to the default and waiver.

As
a result of our non-compliance with the financial covenant in the Agreements regarding our net income as of March 31, 2010, Wells Fargo imposed default pricing of
an additional 3.0% effective March 1, 2010. In addition, as a condition of the further amendment of the Agreements, Wells Fargo restricted $5.0 million of cash effective June 11,
2010 as additional security for the Credit Facility.

On
June 29, 2010, we entered into an amendment to the Agreements with Wells Fargo to amend the financial covenant related to capital expenditures by adding a limitation on
expenditures for Fiscal 2011. Under the terms of this amendment, we may not incur or contract to incur capital expenditures of more than (i) $4.5 million in the aggregate during Fiscal
2011, and (ii) zero for each subsequent year until the Company and Wells Fargo agree on limits on capital expenditures for subsequent periods based on management's projections for such periods.

On
November 9, 2010, we entered into an amendment to the Agreements with Wells Fargo to provide for the release by Wells Fargo of the $5.0 million in cash restricted since
June 2010 upon the Company's satisfaction of certain conditions. During Fiscal 2011, Wells Fargo released $3.7 million of the restricted cash.

On
March 25, 2011 we entered into a an amendment to the Agreements that allows the Company to form one wholly-owned subsidiary in each of Singapore and the United Kingdom provided
that the amount of cash and cash equivalents that may be held by, or invested in each such subsidiary is within
certain agreed upon limits. This amendment also provides that, if requested by Wells Fargo, the Company will grant Wells Fargo a security interest in 65% of the equity interests of each subsidiary to
secure indebtedness under the Agreements.

As
of March 31, 2011, we determined that we were not in compliance with one of the financial covenants in the Agreements regarding our net income. On June 9, 2011, we
entered into an amendment to the Agreements which provided a waiver of our noncompliance with the financial covenant as of March 31, 2011, and removed the net worth financial covenant for
future periods. Additionally, this amendment also set the financial covenants for Fiscal 2012 and authorized the release of the remaining $1.3 million of restricted cash.

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If
we had not obtained the waivers and amended the Agreements as described above, we would not be able to draw additional funds under the Credit Facility. In addition, the Company has
pledged its accounts receivables, inventories, equipment, patents and other assets as collateral for its Agreements, which would be subject to seizure by Wells Fargo if the Company were in default
under the Agreements and unable to repay the indebtedness. Wells Fargo also has the option to terminate the Agreements or accelerate the indebtedness during a period of noncompliance. Based on our
current forecasts, management believes we will maintain compliance with the covenants contained in the amended Agreements for the next twelve months.

Although
we have made progress on direct material cost reduction efforts, we were behind schedule in reducing costs at the end of Fiscal 2011. Further, we have not been able to fully
achieve our planned number of product shipments partly as a result of shortages from certain key suppliers. If we are unable to improve our performance in the areas discussed above and successfully
meet our financial covenant, we may need to raise additional funds in the near term. We could seek to raise such funds by selling additional securities to the public or to selected investors, or by
obtaining additional debt financing. We cannot be assured that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing additional
equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced (on a fully diluted basis in the case of convertible securities). In addition, the equity or
debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Depending
on the timing and product mix of our future sales and collection of related receivables, our management of inventory costs and the timing of inventory purchases and deliveries
required to fulfill the current backlog, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will require us to achieve
dramatically increased sales volume which is dependent on many factors, including:



Additionally,
the continued credit difficulties in the markets could prevent our customers from purchasing our products or delay their purchases, which would adversely affect our
business, financial condition and results of operations. We have substantial accounts receivable as evidenced by days sales outstanding, or DSO, of 78 days as of March 31, 2011. No
assurances can be given that future bad debt expense will not increase above current operating levels. Increased bad debt expense or delays in collecting accounts receivable could have a material
adverse effect on cash flows and results of operations. In addition, our ability to access the capital markets may be severely restricted or made very expensive at a time when we need, or would like,
to do so, which could have a material adverse impact on our liquidity and financial resources. Certain industries in which our customers do business and certain geographic areas may have been and
could continue to be adversely affected by the recession in economic activity.

Should
we be unable to execute our plans or obtain additional financing that might be needed if our cash needs change, we may be unable to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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Contractual Obligations and Commercial Commitments

At March 31, 2011, our commitments under notes payable, capital leases and non-cancelable operating leases were as
follows:

Payment Due by PeriodTotal

1 Year
or Less

1 - 3
Years

3 - 5
Years

More
than
5 Years(in Thousands)Contractual Obligations:Capital Lease Obligations

$
297

$
214

$
80

$
3

$
Operating Lease Obligations

$
4,521

$
1,792

$
1,551

$
1,178

$
Revolving Credit Facility

$
7,080

$
7,080

$


$


$



As
of March 31, 2011, we had firm commitments to purchase inventories of approximately $21.5 million through Fiscal 2014. Certain inventory delivery dates and related
payments are not firmly scheduled; therefore, amounts under these firm purchase commitments will be payable concurrent with the receipt of the related inventories.

As
of March 31, 2011, we agreed to purchase for cash any remaining TA100 microturbine inventory that was not consumed as part of the TA100 manufacturing process and was not
considered excess or obsolete and to acquire certain TA100 manufacturing equipment. On April 28, 2011, we purchased $2.3 million of the remaining TA100 microturbine inventory that was
not consumed as part of the TA100 manufacturing process and acquired the manufacturing equipment.

Agreements
we have with some of our distributors require that if we render parts obsolete in inventories they own and hold in support of their obligations to serve fielded microturbines,
then we are required to replace the affected stock at no cost to the distributors. While we have never incurred costs or obligations for these types of replacements, it is possible that future changes
in product technology could result and yield costs if significant amounts of inventory are held at distributors. As of March 31, 2011, no significant inventories were held at distributors.

Pursuant
to the terms of our Agreements with Wells Fargo, the minimum interest payable for the Credit Facility is $31,000 each calendar month. The Agreements will terminate in accordance
with their terms on February 9, 2012 unless terminated sooner.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Impact of Recently Issued Accounting Standards

In April 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-17,
Revenue RecognitionMilestone Method ("ASU 2010-17"). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method
of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is
achieved only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving
the milestone should be: (1) commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific
outcome resulting from the vendor's performance to achieve the milestone; (2) related solely to past performance and (3) reasonable relative to all deliverables and payment terms in the
arrangement. No split of an individual milestone is allowed and there can be more than one milestone in an arrangement.

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Accordingly,
an arrangement may contain both substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in
fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We adopted this updated guidance with no impact on our consolidated financial position or results of
operations.

In
September 2009, the FASB issued updated guidance of Accounting Standards Codification ("ASC") 605, "Revenue Recognition," for establishing the criteria for separating consideration in
multiple element arrangements. The updated guidance is effective for fiscal years beginning on or after June 15, 2010 and requires companies allocating the overall consideration to each
deliverable to use an estimated selling price of individual deliverables in the arrangement in the absence of vendor specific evidence or other third party evidence of the selling price for the
deliverables. The updated guidance also provides additional factors that should be considered when determining whether software in a tangible product is essential to its functionality. We adopted this
updated guidance with no impact on our consolidated financial position or results of operations.

Item 7A.    Quantitative and Qualitative Disclosure About Market Risk.

Foreign Currency

We currently develop products in the U.S. and market and sell our products predominantly in North America, Europe and Asia. As a
result, factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets could affect our financial results. As all of our sales and purchases are currently
made in U.S. dollars, we do not utilize foreign exchange contracts to reduce our exposure to foreign currency fluctuations. In the future, as our customers, employees and vendor bases expand, we
anticipate entering into more transactions that are denominated in foreign currencies.

Interest

As of March 31, 2011, we had $7.1 million outstanding under our Credit Facility. A hypothetical 2% change in interest
rates would not have any effect on our payments because interest on our Credit Facility balance of $7.1 million as of March 31, 2011 would still be lower than the minimum interest
payment of approximately $31,000 each calendar month payable pursuant to the Credit Facility.

Item 8.    Financial Statements and Supplementary Data.

Our Consolidated Financial Statements and Financial Statement Schedule included in this Annual Report beginning at
page F-1 are incorporated in this Item 8 by reference.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and

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procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In
connection with the preparation of this Annual Report on Form 10-K for the year ended March 31, 2011, an evaluation was performed under the supervision and
with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective as of March 31,
2011 to ensure that the information required to be disclosed by us in reports we submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the
rules and forms of the SEC and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organization of the Treadway Commission. Based on our evaluation under the framework in Internal ControlIntegrated Framework, our management concluded that the Company maintained
effective internal control over financial reporting as of March 31, 2011. Deloitte & Touche LLP, the Company's independent registered public accounting firm, has issued a report
on the Company's internal control over financial reporting. The report of Deloitte & Touch LLP follows. Projections of any evaluation of effectiveness to future periods are subject to
the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the three month period ended March 31,
2011 which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Capstone Turbine Corporation
Chatsworth, California

We
have audited the internal control over financial reporting of Capstone Turbine Corporation and subsidiaries (the "Company") as of March 31, 2011, based on criteria established
inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on
our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended March 31, 2011 of the Company and our report dated June 14, 2011 expressed an unqualified opinion on those financial statements and financial
statement schedule and includes an explanatory paragraph regarding Capstone Turbine Corporation's adoption of the guidance in FASB ASC Topic 815Derivatives and
Hedging, effective April 1, 2009.

/s/DELOITTE & TOUCHE LLPLos Angeles, California
June 14, 2011

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Item 9B.    Other Information.

On June 9, 2011, our Board of Directors unanimously approved a second amendment (the "Second Amendment") to the Rights
Agreement, dated July 7, 2005, between the Company and Mellon Investor Services LLC (as amended, the "Rights Agreement"). The Rights Agreement, as amended, will be submitted for approval
by the Company's stockholders at the 2011 annual meeting of stockholders.

The
Second Amendment adds an additional "sunset provision," which provides that the Rights Agreement will expire on the 30th day after the 2014 annual meeting of stockholders
unless continuation of the Rights Agreement is approved by the stockholders at that meeting. The Second Amendment also provides for an update to the definition of "Beneficial Owner" to include
derivative interests in the calculation of a stockholder's ownership. In addition, the Second Amendment clarifies the manner in which the exchange provision of the Rights Agreement shall be effected.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

Directors

Information contained under the caption "Proposal 1: Election of Directors to the Board of Directors" included in our proxy statement
relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

Executive Officers

Information contained under the caption "Executive Officers of the Company" included in our proxy statement relating to our 2011 annual
meeting of stockholders is incorporated herein by reference.

Compliance with Section 16(a) of the Exchange Act

Information contained under the caption "Other InformationSection 16(a) Beneficial Ownership Reporting Compliance"
included in our proxy statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

Code of Ethics

Information contained under the caption "Other InformationCode of Business Conduct and Code of Ethics" included in our
proxy statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

Stockholder Nominees

Information contained under the caption "Governance of the Company and Practices of the Board of DirectorsDirector
Recommendation and Nomination Process" included in our proxy statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

Audit and Compliance Committee

Information contained under the caption "Governance of the Company and Practices of the Board of DirectorsBoard
CommitteesAudit Committee" included in our proxy statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

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Table of Contents

Item 11.    Executive Compensation.

Information contained under the captions "Compensation Discussion and Analysis," "Executive Compensation," "Compensation of Directors,"
"Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" included in our proxy statement relating to our 2011 annual meeting of stockholders is incorporated
herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Equity Compensation Plan Information

Information contained under the caption "Securities Authorized for Issuance under Equity Compensation Plans" included in our proxy
statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management

Information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" included in our proxy
statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence.

Information contained under the captions "Other InformationRelated Person Transactions Policies and Procedures" and
"Governance of the Company and Practices of the Board of DirectorsBoard of Directors; Leadership
Structure" included in our proxy statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

Item 14.    Principal Accountant Fees and Services.

Information contained under the caption "Fees and Services of the Independent Registered Public Accounting Firm" included in our proxy
statement relating to our 2011 annual meeting of stockholders is incorporated herein by reference.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules.

The
financial statements, notes and financial statement schedule are listed in the Index to Consolidated Financial Statements on page F-1 of this Report.

Exhibit
Number

Description2.1

Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated February 1, 2010(a)2.2

Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated March 31, 20112.3

Second Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated April 28, 20113.1

Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation(b)3.2

Amended and Restated Bylaws of Capstone Turbine Corporation(c)4.1

Specimen stock certificate(d)4.2

Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock(e)4.3

Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Capstone Turbine Corporation dated September 16, 2008(f)4.4

Rights Agreement, dated July 7, 2005, between Capstone Turbine Corporation and Mellon Investor Services LLC(e)4.5

Amendment No. 1 to Rights Agreement, dated July 3, 2008, between Capstone Turbine Corporation and Mellon Investor Services LLC(g)4.6

Amendment No. 2 to Rights Agreement, dated June 9, 2011, between Capstone Turbine Corporation and Mellon Investor Services LLC4.7

Form of Warrant issued to investors in the September 2009 Warrant Exchange Transaction(h)4.8

Form of Warrant issued to investors in the 2009 registered direct offering(i)4.9

Form of Warrant issued to investors in the 2008 registered direct offering(j)4.10

Form of Warrant issued to investors in the 2007 registered direct offering(k)10.1

Amended and Restated License Agreement, dated August 2, 2000, by and between Solar Turbines Incorporated and Capstone Turbine Corporation(l)10.2

Transition Agreement, dated August 2, 2000, by and between Capstone Turbine Corporation and Solar Turbines Incorporated(l)


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Table of Contents

Exhibit
Number

Description10.3

Lease between Capstone Turbine Corporation and Northpark IndustrialLeahy Division LLC, dated December 1, 1999, as amended, for leased premises at 21211 Nordhoff Street, Chatsworth, California(m)10.4

Lease between Capstone Turbine Corporation and AMB Property, L.P., dated September 25, 2000, as amended, for leased premises at 16640 Stagg Street, Van Nuys, California(n)10.5
*
1993 Incentive Stock Option Plan(o)10.6
*
Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan(p)10.7
*
Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 9, 2009(q)10.8
*
Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 11, 2008(r)10.9
*
Form of Stock Option Agreement for Amended and Restated 2000 Equity Incentive Plan(s)10.10
*
Form of Stock Bonus Agreement for Capstone Turbine Corporation 2000 Equity Incentive Plan(t)10.11
*
Deferred Compensation Plan of Capstone Turbine Corporation(u)10.12
*
Amended and Restated Capstone Turbine Corporation Change of Control Severance Plan(v)10.13

Development and License Agreement between Capstone Turbine Corporation and Carrier Corporation, successor in interest to UTC Power Corporation, dated September 4, 2007(p)10.14

First Amendment to the Development and License Agreement between Capstone Turbine Corporation and Carrier Corporation, successor in interest to UTC Power Corporation, dated January 14, 201110.15

Form of Subscription Agreement between Capstone Turbine Corporation and investors in the 2009 registered direct offering(i)10.16

Form of Subscription Agreement between Capstone Turbine Corporation and investors in the 2008 registered direct offering(j)10.17

Form of Warrant Exercise Agreement between Capstone Turbine Corporation and investors in the September 2009 Warrant Exchange Transaction(h)10.18

Form of Warrant Exercise Agreement between Capstone Turbine Corporation and investors in the March 2011 Warrant Exchange Transaction(w)10.19

Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Domestic Facility)(x)10.20

Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Ex-Im Subfacility)(x)10.21

First Amendment to Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 2009(x)10.22

Second Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated November 5, 2009(y)10.23

Third Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 11, 2010(t)


56

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Table of Contents

Exhibit
Number

Description10.24

Fourth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 29, 2010(z)10.25

Fifth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated November 9, 2010(aa)10.26

Sixth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated March 23, 2011(bb)10.27

Seventh Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 201110.28
*
Capstone Turbine Corporation Executive Performance Incentive Plan(cc)10.29
*
Inducement Stock Option Agreement with Darren R. Jamison, dated December 18, 2006(dd)10.30
*
Restricted Stock Agreement with Darren R. Jamison, dated December 18, 2006(dd)10.31
*
Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, dated December 1, 2006(dd)10.32
*
Amendment to Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(x)10.33
*
Amended and Restated Change of Control Severance Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(x)10.34
*
Letter Agreement between Capstone Turbine Corporation and James D. Crouse, dated January 31, 2007(ee)10.35
*
Inducement Stock Option Agreement with James D. Crouse, dated February 5, 2007(ee)10.36
*
Restricted Stock Agreement with James D. Crouse, dated February 5, 2007(ee)10.37
*
Form of Inducement Stock Option Agreement(ff)10.38
*
Form of Inducement Restricted Stock Unit Agreement(ff)14.1

Code of Business Conduct(gg)14.2

Code of Ethics for Senior Financial Officers and Chief Executive Officer(gg)21

Subsidiary List23

Consent of Independent Registered Public Accounting Firm24

Power of Attorney (included on the signature page of this Form 10-K)31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(a)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on February 5, 2010 (File
No. 001-15957).


57

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Table of Contents

(b)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated May 8, 2000 (File
No. 333-33024).(c)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2005 (File No. 001-15957).(d)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated June 21, 2000 (File
No. 333-33024).(e)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 8, 2005 (File
No. 001-15957).(f)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009 (File No. 001-15957).(g)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 10, 2008 (File
No. 001-15957).(h)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 18, 2009 (File
No. 001-15957).(i)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on May 4, 2009 (File
No. 001-15957).(j)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 18, 2008 (File
No. 001-15957).(k)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on January 19, 2007 (File
No. 001-15957).(l)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on October 16, 2000 (File
No. 000-15957).(m)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 2, 2009 (File
No. 000-15957).(n)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on August 17, 2009 (File
No. 000-15957).(o)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1, dated March 22, 2000 (File
No. 333-33024).(p)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2007 (File No. 001-15957).(q)Incorporated
by reference to Appendix A to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 17, 2009 (File
No. 001-15957).(r)Incorporated
by reference to Appendix B to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 18, 2008 (File
No. 001-15957).(s)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2005 (File No. 001-15957).(t)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2010
(File No. 001-15957).(u)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-8, dated July 31, 2001 (File
No. 333-66390).


58

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Table of Contents

(v)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2005
(File No. 001-15957).(w)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on March 10, 2011 (File
No. 000-15957).(x)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2009
(File No. 001-15957).(y)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for quarterly period ended September 30,
2009 (File No. 001-15957).(z)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 1, 2010 (File
No. 000-15957).(aa)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on November 12, 2010 (File
No. 000-15957).(bb)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on March 25, 2011 (File
No. 000-15957).(cc)Incorporated
by reference to Appendix A to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 18, 2008 (File
No. 001-15957).(dd)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2006 (File No. 001-15957).(ee)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended on March 31,
2007 (File No. 001-15957).(ff)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-8, dated June 17, 2009 (File
No. 333-160049)(gg)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2003 (File No. 001-15957).*Management
contract or compensatory plan or arrangement


59

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PageReport of Independent Registered Public Accounting Firm


F-2Consolidated Financial Statements:Consolidated Balance Sheets as of March 31, 2011 and 2010


F-3For the years ended March 31, 2011, 2010 and 2009:Consolidated Statements of Operations


F-4Consolidated Statements of Stockholders' Equity


F-5Consolidated Statements of Cash Flows


F-6Notes to Consolidated Financial Statements


F-8Financial Statement Schedule:Consolidated schedule for the years ended March 31, 2011, 2010 and 2009:Schedule IIValuation and Qualifying Accounts


F-41


Financial
statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.

F-1

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Capstone Turbine Corporation
Chatsworth, California

We
have audited the accompanying consolidated balance sheets of Capstone Turbine Corporation and subsidiaries (the "Company") as of March 31, 2011 and 2010 and the related
consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2011. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Capstone Turbine Corporation and subsidiaries at
March 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2011, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein.

As
discussed in Note 2 and Note 9 to the consolidated financial statements, the Company changed its method of accounting for warrants with anti-dilution
provisions with the adoption of the guidance in FASB ASC Topic 815Derivatives and Hedging, effective April 1, 2009.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
March 31, 2011, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated June 14, 2011, expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/DELOITTE & TOUCHE LLPLos Angeles, California
June 14, 2011

F-2

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except share amounts)

March 31,
2011

March 31,
2010AssetsCurrent Assets:Cash and cash equivalents

$
33,456

$
47,270Accounts receivable, net of allowance for doubtful accounts of $212 at March 31, 2011 and $121 at March 31, 2010


19,329


18,464Inventories


19,267


19,645Prepaid expenses and other current assets


2,369


1,335Total current assets


74,421


86,714Property, plant and equipment, net


5,939


8,247Non-current portion of inventories


1,454


3,588Intangible assets, net


3,574


4,643Restricted cash


1,250


Other assets


381


254Total

$
87,019

$
103,446Liabilities and Stockholders' EquityCurrent Liabilities:Accounts payable and accrued expenses

$
20,292

$
15,338Accrued salaries and wages


1,555


1,741Accrued warranty reserve


1,081


1,036Deferred revenue


1,153


923Revolving credit facility


7,080


7,571Current portion of notes payable and capital lease obligations


214


161Warrant liability


20,772


26,803Other current liabilities





3,026Total current liabilities


52,147


56,599Long-term portion of notes payable and capital lease obligations


83


141Other long-term liabilities


309


274Commitments and contingencies (Note 11)





Stockholders' Equity:Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued





Common stock, $.001 par value; 415,000,000 shares authorized; 259,544,911 shares issued and 258,595,291 shares outstanding at March 31, 2011;
243,015,511 shares issued and 242,119,402 shares outstanding at March 31, 2010


260


243Additional paid-in capital


747,962


721,408Accumulated deficit


(712,648
)

(674,178
)Treasury stock, at cost; 949,620 shares at March 31, 2011 and 896,109 shares at March 31, 2010


(1,094
)

(1,041
)Total stockholders' equity


34,480


46,432Total

$
87,019

$
103,446


See
accompanying notes to consolidated financial statements.

F-3

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share amounts)

Years Ended March 31,2011

2010

2009Revenue

$
81,890

$
61,554

$
43,949Cost of goods sold


82,427


69,999


49,277Gross loss


(537
)

(8,445
)

(5,328
)Operating expenses:Research and development


6,986


6,954


8,125Selling, general and administrative


26,203


28,383


28,628Total operating expenses


33,189


35,337


36,753Loss from operations


(33,726
)

(43,782
)

(42,081
)Other income


32





Interest income


4


8


515Interest expense


(873
)

(673
)

(69
)Change in fair value of warrant liability


(3,667
)

(22,853
)

Loss before income taxes


(38,230
)

(67,300
)

(41,635
)(Benefit) provision for income taxes


240


(59
)

82Net loss

$
(38,470
)
$
(67,241
)
$
(41,717
)Net loss per common sharebasic and diluted

$
(0.16
)
$
(0.34
)
$
(0.25
)Weighted average shares used to calculate basic and diluted net loss per common share


245,941


199,579


164,462


See
accompanying notes to consolidated financial statements.

F-4

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands, except share amounts)

Common Stock





Treasury StockAdditional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
EquityShares

Amount

Shares

AmountBalance, March 31, 2008


148,238,852


148


626,952


(573,383
)

660,541


(664
)

53,053Purchase of treasury stock














157,399


(298
)

(298
)Vested restricted stock awards


691,174


1


(1
)










Stock-based compensation








3,320











3,320Exercise of stock options and employee stock purchases


1,197,582


1


2,411











2,412Stock awards to Board of Directors


102,886





101











101Warrants exercised


3,172,367


3


4,121











4,124Issuance of common stock, net of issuance costs


21,485,660


22


29,453











29,475Net loss











(41,717
)







(41,717
)Balance, March 31, 2009


174,888,521


175


666,357


(615,100
)

817,940


(962
)

50,470Purchase of treasury stock














78,169


(79
)

(79
)Vested restricted stock awards


786,389


1


(1
)










Stock-based compensation








4,560











4,560Exercise of stock options and employee stock purchases


246,857





213











213Stock awards to Board of Directors


57,532





66











66Cumulative effect of adoption of new accounting pronouncement








(14,750
)

8,163








(6,587
)Warrants exercised


7,225,434


7


15,012











15,018Issuance of common stock, net of issuance costs


58,260,391


58


48,155











48,214Issuance of common stock for Calnetix Power Solutions acquisition


1,550,387


2


1,796











1,798Net loss











(67,241
)







(67,241
)Balance, March 31, 2010


243,015,511

$
243

$
721,408

$
(674,178
)

896,109

$
(1,041
)
$
46,432Purchase of treasury stock














53,511


(53
)

(53
)Vested restricted stock awards


742,460


1


(1
)










Stock-based compensation








2,318











2,318Exercise of stock options and employee stock purchases


72,842





74











74Stock awards to Board of Directors


109,554





100











100Warrants exercised


12,473,231


13


20,968











20,981Issuance of common stock for Calnetix Power Solutions acquisition, net of issuance costs


3,131,313


3


3,095











3,098Net loss











(38,470
)







(38,470
)Balance, March 31, 2011


259,544,911

$
260

$
747,962

$
(712,648
)

949,620

$
(1,094
)
$
34,480


See accompanying notes to consolidated financial statements.

F-5

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

Year Ended March 31,2011

2010

2009Cash Flows from Operating Activities:Net loss

$
(38,470
)
$
(67,241
)
$
(41,717
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


3,823


3,496


2,959Amortization of deferred financing costs


193


83


10Interest expense on second funding liability


55


35


Provision for allowance for doubtful accounts


231


172


15Inventory write-down


1,123


1,238


786Provision (benefit) for warranty expenses


2,089


1,336


(944
)Loss on disposal of equipment


213


30


7Stock-based compensation


2,418


4,626


3,421Change in fair value of warrant liability


3,667


22,853


Changes in operating assets and liabilities:Accounts receivable


(1,096
)

(7,765
)

(4,118
)Inventories


1,764


6,069


(14,355
)Prepaid expenses and other assets


(910
)

348


144Accounts payable and accrued expenses


4,966


4,134


3,645Accrued salaries and wages and long term liabilities


(151
)

(335
)

368Accrued warranty reserve


(2,044
)

(2,644
)

(1,303
)Deferred revenue


230


(248
)

391Other current liabilities





(815
)

(4,843
)Net cash used in operating activities


(21,899
)

(34,628
)

(55,534
)Cash Flows from Investing Activities:Acquisition of and deposits on equipment and leasehold improvements


(1,047
)

(2,002
)

(6,754
)Proceeds from disposal of equipment








20Changes in restricted cash


(1,250
)




33Net cash used in investing activities


(2,297
)

(2,002
)

(6,701
)Cash Flows from Financing Activities:Net (repayment) proceeds from revolving credit facility


(491
)

3,917


3,654Payment of deferred financing costs





(186
)

(202
)Repayment of notes payable and capital lease obligations


(448
)

(80
)

(16
)Net proceeds from employee stock-based transactions


39


138


2,114Net proceeds from issuance of common stock and warrants





54,089


29,475Proceeds from exercise of common stock warrants


11,282


6,503


4,124Net cash provided by financing activities


10,382


64,381


39,149Net increase (decrease) in Cash and Cash Equivalents


(13,814
)

27,751


(23,086
)Cash and Cash Equivalents, Beginning of Year


47,270


19,519


42,605Cash and Cash Equivalents, End of Year

$
33,456

$
47,270

$
19,519Supplemental Disclosures of Cash Flow Information:Cash paid during the year for:Interest

$
624

$
540

$
29Income taxes

$


$
80

$
2Cash received during the period for income tax refund

$
222

$
381





See accompanying notes to consolidated financial statements.

F-6

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

Supplemental Disclosures of Non-Cash Information:

During the years ended March 31, 2011 and 2010, the Company issued
3,131,313 and 1,550,387 shares of common stock, respectively, to Calnetix Power Solutions, Inc. in connection with the acquisition of the Calnetix microturbine generator product line. See
Note 14Acquisition, for tangible and intangible assets acquired and details of the acquisition.

In connection with the March 9, 2011 exercise of warrants, the Company recorded $11.2 million
to additional paid-in capital to settle the warrant liability.

In connection with the September 17, 2009 exercise of warrants, the Company recorded
$8.5 million to additional paid-in capital to settle the warrant liability.

In connection with the May 7, 2009 issuance of common stock and warrants, the Company recorded
$5.5 million to warrant liability to record the fair value of the warrants on the date of issuance.

During the year ended March 31, 2011, the Company incurred $443 thousand of insurance
contracts financed by notes payable. There were no insurance contracts financed by notes payable during the years ended March 31, 2010 and 2009.

During the year ended March 31, 2010, the Company incurred $224 thousand of capital
expenditures that were funded by capital lease borrowings. There were no capital expenditures funded by capital lease borrowings during the years ended March 31, 2011 and 2009.

Included in accounts payable at March 31, 2011, 2010 and 2009 is $78 thousand,
$91 thousand, and $371 thousand of fixed asset purchases, respectively.

During the years ended March 31, 2010 and 2009, the Company purchased fixed assets in consideration
for the issuance of a note payable of $117 thousand and $40 thousand, respectively. There were no fixed assets purchased with a note payable during the year ended March 31, 2011.

See accompanying notes to consolidated financial statements.

F-7

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and Basis of Presentation

Capstone Turbine Corporation (the "Company") develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation
applications, including cogeneration (combined heat and power ("CHP"), integrated combined heat and power ("ICHP"), and combined cooling, heat and power ("CCHP")), resource recovery (including
"renewable" fuels) and secure power. In addition, the Company's microturbines can be used as battery charging generators for hybrid electric vehicle applications. The Company was organized in 1988 and
has been commercially producing its microturbine generators since 1998.

The
Company has incurred significant operating losses since its inception. Management anticipates incurring additional losses until the Company can produce sufficient revenue to cover
its operating costs. To date, the Company has funded its activities primarily through private and public equity offerings. As of March 31, 2011, the Company had $106.4 million, or 669
units, in backlog, all of which are expected to be shipped within the next twelve months. However, the timing of shipments is subject to change based on several variables (including customer payments
and changes in customer delivery schedules), some of which are beyond the Company's control and can affect the Company's revenue and backlog. Although the Company has made progress on direct material
cost reduction efforts, the Company was behind schedule in reducing costs at the end of Fiscal 2011. Further, the Company has not been able to fully achieve its planned number of product shipments
partly as a result of shortages from certain suppliers. If the Company is unable to improve its performance in the areas discussed above and meet its financial covenants with Wells Fargo as further
described under Note 10Revolving Credit Facility in this Form 10-K, the Company may need to raise additional funds in the near term. The Company could seek to
raise such funds by selling additional securities to the public or to selected investors, or by obtaining debt financing. There is no assurance that the Company will be able to obtain additional funds
on commercially favorable terms, or at all. If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing
stockholders would be reduced. In addition, any
equity or debt securities that it would issue may have rights, preferences or privileges senior to those of the holders of its common stock. Should the Company be unable to execute its plans or obtain
additional financing that might be needed if the Company's cash needs change, the Company may be unable to continue as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

The
consolidated financial statements include the accounts of the Company, Capstone Turbine Singapore Pte., Ltd., its wholly owned subsidiary that was formed in February 2011, and
Capstone Turbine International, Inc., its wholly owned subsidiary that was formed in June 2004, after elimination of inter-company transactions.

The
Company has conducted a subsequent events review through the date the financial statements were issued, and has concluded that there were no subsequent events requiring adjustments
or additional disclosures to the Company's financial statements at March 31, 2011.

2. Summary of Significant Accounting Policies

Cash EquivalentsThe Company considers only those investments that are highly liquid and readily convertible to cash with
original maturities of
three months or less at date of purchase as cash equivalents.

F-8

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Restricted CashAs of March 31, 2011, the Company maintained $1.3 million as additional security for its line of credit
with Wells
Fargo. See Note 10Revolving Credit Facility, for discussion of the line of credit with Wells Fargo.

Fair Value of Financial InstrumentsThe carrying value of certain financial instruments, including cash equivalents, accounts
receivable, accounts
payable, revolving credit facility and notes payable approximate fair market value based on their short-term nature. See Note 9Fair Value Measurements, for disclosure
regarding the fair value of financial instruments.

Accounts ReceivableThe Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of
customers to make
required payments.

InventoriesThe Company values inventories at first in first out ("FIFO") and lower of cost or market. The composition of
inventory is routinely
evaluated to identify slow-moving, excess, obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if write-downs are required. Included
in the assessment is a review for obsolescence as a result of engineering changes in the Company's products. All inventories expected to be used in more than one year are classified as
long-term.

Depreciation and AmortizationDepreciation and amortization are provided for using the straight-line method over the estimated
useful
lives of the related assets, ranging from two to ten years. Leasehold improvements are amortized over the period of the lease or the estimated useful lives of the assets, whichever is shorter.
Intangible assets that have finite useful lives are amortized over their estimated useful lives using the straight-line method with the exception of the backlog of 100 kW microturbines
("TA100") acquired from Calnetix Power Solutions, Inc. ("CPS"). Purchased backlog is amortized based on unit sales.

Long-Lived AssetsThe Company reviews the recoverability of long-lived assets, including intangible assets with finite lives,
whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the expected future cash flows from
the use of such assets (undiscounted and without interest charges) are less than the carrying value, the Company may be required to record a write-down, which is determined based on the
difference between the carrying value of the assets and their estimated fair value. The Company performed an analysis as of March 31, 2011 and determined that the estimated undiscounted cash
flows of the long-lived assets exceeded the carrying value of the assets and no write-down was necessary. Intangible assets include a manufacturing license, trade name,
technology, backlog and customer relationships. See Note 5Intangible Assets.

The
estimation of future cash flows requires significant estimates of factors that include future sales growth and gross margin performance. If our sales growth, gross margin performance
or other estimated operating results are not achieved at or above our forecasted level, or inflation exceeds our forecast the carrying value of our asset groups may prove to be unrecoverable and we
may incur impairment charges in the future.

Deferred RevenueDeferred revenue consists of deferred product and service revenue and customer deposits. Deferred revenue will
be recognized when
earned in accordance with the Company's revenue recognition policy. The Company has the right to retain all or part of customer deposits under certain conditions.

F-9

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

RevenueThe Company's revenue consists of sales of products, parts and accessories and service, net of discounts. Capstone's
distributors purchase
products and parts for sale to end users and are also required to provide a variety of additional services, including application engineering, installation, commissioning and
post-commissioning repair and maintenance service. The Company's standard terms of sales to distributors and direct end-users include transfer of title, care, custody and
control at the point of shipment, payment terms ranging from full payment in advance of shipment to payment in 90 days, no right of return or exchange, and no post-shipment
performance obligations by Capstone except for warranties provided on the products and parts sold. Revenue is generally recognized and earned when all of the following criteria are satisfied:
(a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectibility is reasonably assured; and (d) delivery has occurred or
service has been rendered. Delivery generally occurs when the title and the risks and rewards of ownership have substantially transferred to the customer. Service performed by the Company has
consisted primarily of commissioning and time and materials based contracts. The time and materials contracts are usually related to out-of-warranty units. Service revenue
derived from time and materials contracts is recognized as performed. The Company also provides maintenance service contracts to customers of its existing install base. The maintenance service
contracts are agreements to perform certain agreed-upon service to maintain a product for a specified period of time. Service
revenue derived from maintenance service contracts is recognized on a straight-line basis over the contract period. The Company occasionally enters into agreements that contain multiple
elements, such as sale of equipment, installation, engineering and/or service. For multiple-element arrangements, the Company recognizes revenue for delivered elements when the delivered item has
stand- alone value to the customer, the Company's estimated selling price of each element is known and customer acceptance provisions, if any, have occurred. The Company allocates the total contract
value among each element based on their relative selling prices.

WarrantyThe Company provides for the estimated costs of warranties at the time revenue is recognized. The specific terms and
conditions of those
warranties vary depending upon the product sold, geography of sale and the length of extended warranties sold. The Company's product warranties generally start from the delivery date and continue for
up to eighteen months. Factors that affect the Company's warranty obligation include product failure rates, anticipated hours of product operations and costs of repair or replacement in correcting
product failures. These factors are estimates that may change based on new information that becomes available each period. Similarly, the Company also accrues the estimated costs to address
reliability repairs on products no longer in warranty when, in the Company's judgment, and in accordance with a specific plan developed by the Company, it is prudent to provide such repairs. The
Company assesses the adequacy of recorded warranty liabilities quarterly and makes adjustments to the liability as necessary. When the Company has sufficient evidence that product changes are altering
the historical failure occurrence rates, the impact of such changes is then taken into account in estimating future warranty liabilities.

Research and Development ("R&D")The Company accounts for grant distributions and development funding as offsets to R&D expenses and both
are recorded as the related costs are incurred. Total offsets to R&D expenses amounted to $0.9 million, $1.7 million and $8.1 million for the years ended March 31, 2011,
2010 and 2009, respectively.

Income TaxesDeferred income tax assets and liabilities are computed for differences between the consolidated financial
statement and income tax
basis of assets and liabilities. Such deferred income tax

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

asset
and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred income tax assets to the amounts expected to be realized.

ContingenciesThe Company records an estimated loss from a loss contingency when information
available prior to issuance of its financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated.

Risk ConcentrationsFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily
of cash and cash
equivalents and accounts receivable. Cash held in institutions periodically exceeds amounts insured by the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with
high credit quality institutions. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses.

The
Company sells microturbines and related parts and service. Sales to Banking Production Centre ("BPC"), one of the Company's Russian distributors, and Pumps and Service Company
("Pumps and Service"), one of the Company's domestic distributors, accounted for 23% and 18%, respectively, of revenue for the year ended March 31, 2011. Sales to BPC accounted for 23%, 14% and
13% of the Company's revenue for the years ended March 31, 2011, 2010 and 2009, respectively. Sales to Pumps and Service accounted for 18%, 4% and 6% of the Company's revenue for the years
ended March 31, 2011, 2010 and 2009, respectively. Sales to Aquatec-Maxcon Pty Ltd. ("Aquatec"), the Company's Australian distributor, accounted for 4%, 14% and 5% of the Company's
revenue for the years ended March 31, 2011, 2010 and 2009, respectively. Additionally, BPC and Verdesis S.A. ("Verdesis"), the Company's Belgian distributor, accounted for 26% and 10%,
respectively, of net accounts receivable as of March 31, 2011. BPC and Greenvironment plc, the Company's Finnish distributor, accounted for 20% and 16%, respectively, of net accounts
receivable as of March 31, 2010

Several
components of the Company's products are available from a limited number of suppliers. An interruption in supply could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.

Estimates and AssumptionsThe preparation of financial statements in conformity with accounting principles generally accepted in
the United States of
America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include accounting for
doubtful accounts, stock-based compensation, inventory write-downs, valuation of long-lived assets including intangible assets with finite lives, product warranties, income taxes and other
contingencies. Actual results could differ from those estimates.

Net Loss Per Common ShareBasic loss per common share is computed using the weighted-average number of common shares outstanding
for the period.
Diluted loss per share is also computed without consideration to potentially dilutive instruments because the Company incurred losses which would make such instruments antidilutive. Outstanding stock
options at March 31, 2011, 2010 and 2009 were 10.1 million, 9.2 million and 9.2 million, respectively. Outstanding restricted stock units at March 31, 2011, 2010 and
2009 were 1.5 million, 1.7 million and 2.5 million, respectively. As of March 31, 2011,

F-11

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

2010
and 2009, the number of warrants excluded from diluted net loss per common share computations was approximately 21.7 million, 34.1 million and 23.7 million, respectively.

Stock-Based CompensationOptions or stock awards are recorded at their estimated fair value at the measurement date.

Restructuring CostsThe Company did not record severance costs during Fiscal 2011. In February 2010, the Company eliminated 28
employees, or 13% of
its workforce. As a result of this restructuring activity, $0.2 million in severance costs were expensed during Fiscal 2010. As of March 31, 2010, the Company had approximately $44,000
in remaining severance cost accruals recorded and scheduled for payment during the first quarter of Fiscal 2011. Beginning in December 2008 and continuing into March 2009, the Company eliminated 42
employees, or 17%, of its workforce. As a result of this restructuring activity, $0.6 million in severance costs were expensed during Fiscal 2009. As of March 31, 2009, the Company had
$0.2 million in remaining severance costs accrued which were paid during the first quarter of Fiscal 2010.

Segment ReportingThe Company is considered to be a single operating segment. The business activities of this operating segment
are the development,
manufacture and sale of turbine generator sets and their related parts and service. Following is the geographic revenue information based on the primary operating location of the Company's customers:

Year Ended March 31,2011

2010

2009(In thousands)North America

$
31,854

$
18,382

$
21,309United States


25,630


12,950


16,708Mexico


5,416


4,231


4,496All others


808


1,201


105Europe

$
36,030

$
23,871

$
14,627Russia


20,655


9,592


5,582All others


15,375


14,279


9,045Asia

$
7,811

$
5,325

$
2,123Australia

$
3,754

$
8,891

$
5,232All others

$
2,441

$
5,085

$
658Total Revenue

$
81,890

$
61,554

$
43,949


F-12

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

The following table summarizes the Company's revenue by product:

Year Ended March 31,2011

2010

2009(In thousands)C30

$
6,043

$
6,888

$
4,003C65


23,377


17,406


23,779TA100


5,121


1,208


C200


5,289


4,929


1,419C600


2,172


2,801


893C800


4,362


5,101


1,098C1000


18,619


10,395


1,145Waste heat recovery generator


627





Unit upgrades


704





Total from Microturbine Products

$
66,314

$
48,728

$
32,337Accessories, Parts and Service


15,576


12,826


11,612Total

$
81,890

$
61,554

$
43,949


Substantially
all of the Company's operating assets are in the United States.

Recent Accounting PronouncementsIn April 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU")
2010-17, Revenue RecognitionMilestone Method ("ASU 2010-17"). ASU 2010-17 provides guidance on the criteria that should be met for determining whether
the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which
the milestone is achieved only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be considered substantive. The consideration
earned by achieving the milestone should be: (1) commensurate with either the level of effort required to achieve
the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor's performance to achieve the milestone; (2) related solely to
past performance and (3) reasonable relative to all deliverables and payment terms in the arrangement. No split of an individual milestone is allowed and there can be more than one milestone in
an arrangement. Accordingly, an arrangement may contain both substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved
in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The Company adopted this updated guidance with no impact on its consolidated financial position or
results of operations.

In
September 2009, the FASB issued updated guidance of Accounting Standards Codification ("ASC") 605, "Revenue Recognition," for establishing the criteria for separating consideration in
multiple element arrangements. The updated guidance is effective for fiscal years beginning on or after June 15, 2010 and requires companies allocating the overall consideration to each
deliverable to use an estimated selling price of individual deliverables in the arrangement in the absence of vendor specific evidence or other third party evidence of the selling price for the
deliverables. The updated guidance also provides additional factors that should be considered when determining whether software in a

F-13

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

tangible
product is essential to its functionality. The Company adopted this updated guidance with no impact on its consolidated financial position or results of operations.

3. Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost on the first-in, first-out method) or market and consisted of the following
as of March 31, 2011 and 2010:

2011

2010(In thousands)Raw materials

$
18,649

$
19,772Work in process


290


583Finished goods


1,782


2,878Total


20,721


23,233Less non-current portion


1,454


3,588Current portion

$
19,267

$
19,645


The
non-current portion of inventories represents that portion of the inventories in excess of amounts expected to be used in the next twelve months. The non-current
inventories are primarily comprised of repair parts for older generation products that are still in operation, but are not technologically compatible with current configurations. The weighted average
age of the non-current portion of inventories on hand as of March 31, 2011 is 3.21 years. The Company expects to use the non-current portion of the inventories on hand as of
March 31, 2011 over the periods presented in the following table:

Expected Period of Use

Non-current Inventory
Balance Expected to be Used(In thousands)13 to 24 months

$
75825 to 36 months


24137 to 48 months


455Total

$
1,454


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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Property, Plant and Equipment

Property, plant and equipment as of March 31, 2011 and 2010 consisted of the following:

2011

2010

Estimated
Useful Life(In thousands)Machinery, rental equipment, equipment, automobiles and furniture

$
21,635

$
22,543

2 - 10 yearsLeasehold improvements


9,663


9,654

10 yearsMolds and tooling


4,773


4,930

2 - 5 years36,071


37,127Less, accumulated depreciation


(30,132
)

(28,880
)Total property, plant and equipment, net

$
5,939

$
8,247


Depreciation
expense for property, plant and equipment was $2.8 million, $3.2 million and $2.7 million for the years ended March 31, 2011, 2010 and 2009,
respectively.

During
the three months ended September 30, 2010, the Company sold ten of its microturbine rental units for approximately $430,000. The net book value of the rental equipment
related to this sale was approximately $365,000. The Company recognized this sale as revenue and the cost of the units as cost of goods sold.

During
the three months ended September 30, 2009, the Company determined the depreciation of its leasehold improvements had changed from an original estimate of eight years to a
revised estimate of 9.1 years because of the extension of lease terms for both manufacturing facilities located in Chatsworth and Van Nuys, California. This change in the estimated depreciation
of the leasehold improvements resulted in a decrease in the annual depreciation from $1.3 million per year to $0.9 million per year in Fiscal 2010, a decrease from $0.8 million
per year to $0.5 million per year in Fiscal 2011, an increase from $0.2 million per year to $0.5 million per year in Fiscal 2012, an increase from $23,000 per year to
$0.4 million per year in Fiscal 2013, and an increase from $22,000 per year to $0.1 million per year in Fiscal 2014. The change in accounting estimate did not result in a change to net
loss per common share for the year ended March 31, 2010.

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Intangible Assets

Intangible assets consisted of the following (in thousands):

March 31, 2011Weighted
Average
Amortization
Period

Intangible
Assets,
Gross

Accumulated
Amortization

Intangible
Assets, NetManufacturing license

17 years

$
3,700

$
3,388

$
312Technology

10 years


2,240


261


1,979Parts and service customer relationships

5 years


1,080


252


828TA100 customer relationships

2 years


617


360


257Backlog

1.2 years


490


292


198Trade name

1.2 years


69


69


Total



$
8,196

$
4,622

$
3,574




March 31, 2010Weighted
Average
Amortization
Period

Intangible
Assets,
Gross

Accumulated
Amortization

Intangible
Assets, NetManufacturing license

17 years

$
3,700

$
3,338

$
362Technology

10 years


2,240


37


2,203Parts and service customer relationships

5 years


1,080


26


1,054TA100 customer relationships

2 years


617


51


566Backlog

1.2 years


490


91


399Trade name

1.2 years


69


10


59Total



$
8,196

$
3,553

$
4,643


Amortization
expense for the intangible assets was $1.1 million, $0.3 million, and $0.3 million for the years ended March 31, 2011, 2010 and 2009.

Expected
future amortization expense of intangible assets as of March 31, 2011 is as follows:

Year Ending March 31,

Amortization
Expense(In thousands)2012

$
7462013


4892014


4892015


4742016


273Thereafter


1,103Total expected future amortization

$
3,574


F-16

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Intangible Assets (Continued)

On
February 1, 2010, the Company acquired the TA100 microturbine generator product line (the "MPL") from CPS to expand the Company's microturbine product line and
to gain relationships with distributors to supply the Company's products. See Note 14Acquisition, for discussion of the MPL acquired from CPS. The acquired intangible assets
include technology, parts and service customer relationships, the MPL customer relationships, backlog and trade name. These intangible assets have estimated useful lives between one and ten years. The
fair value assigned to identifiable intangible assets acquired has been determined primarily by using the income approach. Purchased identifiable intangible assets, except for backlog, are amortized
on a straight-line basis over their respective useful lives and classified as a component of cost of goods sold or selling, general and administrative expenses based on the function of the
underlying asset. Backlog is amortized on a per unit basis as the backlog units are sold and presented as a component of cost of goods sold.

The
manufacturing license provides the Company with the ability to manufacture recuperator cores previously purchased from Solar Turbines Incorporated ("Solar"). The Company is required
to pay a per-unit royalty fee over a seventeen-year period for cores manufactured and sold by the Company using the technology. Royalties of approximately $62,800, $56,000, and
$52,100 were earned by Solar for the years ended March 31, 2011, 2010 and 2009, respectively. Earned royalties of approximately $17,700 and $44,600 were unpaid as of March 31, 2011 and
2010, respectively, and are included in accrued expenses in the accompanying balance sheets.

During
Fiscal 2009, the Company began using its intangible asset manufacturing license technology in its new line of C200 and C1000 Series products. As a result, the Company changed its
accounting estimate and adjusted the amortization period to end in conjunction with the termination of the manufacturing license agreement on August 2, 2017. The effect of the change in the
accounting estimate on the loss from operations and net loss for the year ended March 31, 2009 was a decrease from approximately $42,136,000 to $42,081,000 and a decrease from approximately
$41,772,000 to $41,717,000, respectively. The change in accounting estimate did not result in a change to net loss per common share for the year ended March 31, 2009.

6. Accrued Warranty Reserve

Changes in the accrued warranty reserve are as follows as of March 31, 2011, 2010 and 2009:

2011

2010

2009(In thousands)Balance, beginning of the period

$
1,036

$
2,344

$
4,591Standard warranty provision


2,015


492


353Changes for accrual related to reliability repair programs


74


844


(1,297
)Deductions for warranty claims


(2,044
)

(2,644
)

(1,303
)Balance, end of the period

$
1,081

$
1,036

$
2,344


7. Income Taxes

ASC 740, Income Taxes (formerly FIN 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109) ("ASC 740"), clarifies the
accounting for income taxes by

F-17

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Income Taxes (Continued)

prescribing
a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on management's evaluation, the total amount of unrecognized tax benefits related to research
and development credits as of March 31, 2011 and 2010 was $2.0 million and $1.8 million, respectively. There were no interest or penalties related to unrecognized tax benefits as
of March 31, 2011 or March 31, 2010. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2011 and March 31,
2010 was $2.0 million and $1.8 million, respectively. However, this impact would be offset by an equal increase in the deferred tax valuation allowance as the Company has recorded a full
valuation allowance against its deferred tax assets because of uncertainty as to future realization. The fully reserved recognized federal and state deferred tax assets related to research and
development credits balance as of March 31, 2011 and 2010 was $9.0 million and $9.1 million, and $7.6 million and $6.1 million, respectively.

A
reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows (in thousands):

Balance at March 31, 2008

$
2,479Gross decrease related to prior year tax positions


(1,177
)Gross increase related to current year tax positions


73Lapse of statute of limitations


Balance at March 31, 2009

$
1,375Gross increase related to prior year tax positions


325Gross increase related to current year tax positions


106Lapse of statute of limitations


Balance at March 31, 2010

$
1,806Gross increase related to prior year tax positions


Gross increase related to current year tax positions


167Lapse of statute of limitations


Balance at March 31, 2011

$
1,973


The
Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S.
federal, state, local or non-U.S. income tax examinations by tax authorities for the years before 2005. However, net operating loss carryforwards remain subject to examination to the
extent they are carried forward and impact a year that is open to examination by tax authorities. The Company's evaluation was performed for the tax years which remain subject to examination by major
tax jurisdictions as of March 31, 2011. The Internal Revenue Service has initiated an examination of our United States federal income tax return for 2010. When applicable, the Company accounts
for interest and penalties generated by tax contingencies as interest and other expense, net in the statements of operations.

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Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Income Taxes (Continued)

The
Company's deferred tax assets and liabilities consisted of the following at March 31, 2011 and 2010:

2011

2010(In thousands)Deferred tax assets:Inventories

$
1,213

$
1,554Warranty reserve


427


417Deferred revenue


326


335Net operating loss ("NOL") carryforwards


212,705


220,637Tax credit carryforwards


16,573


16,325Depreciation, amortization and impairment loss


3,945


3,003Other


4,505


4,389Deferred tax assets


239,694


246,660Valuation allowance for deferred tax assets


(231,009
)

(235,352
)Deferred tax assets, net of valuation allowance


8,685


11,308Deferred tax liabilities:Federal benefit of state taxes


(8,685
)

(11,308
)Net deferred tax assets

$


$



Because
of the uncertainty surrounding the timing of realizing the benefits of favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against
its deferred income tax assets. The change in valuation allowance for Fiscal 2011, 2010 and 2009 was $4.3 million, $28.8 million and $11.8 million, respectively.

The
Company's NOL and tax credit carryforwards for federal and state income tax purposes at March 31, 2011 were as follows (in thousands):

Amount

Expiration
Period(In thousands)Federal NOL

$
576,716

2011 - 2030State NOL

$
301,616

2011 - 2030Federal tax credit carryforwards

$
8,997

2011 - 2030State tax credit carryforwards

$
7,576

Indefinite


The
NOLs and federal and state tax credits can be carried forward to offset future taxable income, if any. Utilization of the net operating losses and tax credits are subject to an
annual limitation of approximately $57.6 million due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The federal tax credit
carryforward is a research and development credit, which may be carried forward. The state tax credits consist of a research and development credit can be carried forward indefinitely.

Tax
benefits arising from the disposition of certain shares issued upon exercise of stock options within two years of the date of grant or within one year of the date of exercise by the
option holder ("Disqualifying Dispositions") provide the Company with a tax deduction equal to the difference

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Income Taxes (Continued)

between
the exercise price and the fair market value of the stock on the date of exercise. Approximately $27.7 million of the Company's federal and state NOL carryforwards as of
March 31, 2011 were generated by Disqualifying Dispositions of stock options and exercises of nonqualified stock options. Upon realization, if any, tax benefits of approximately
$10.4 million associated with these stock options would be excluded from the provision for income taxes and credited directly to additional paid-in-capital.

A
reconciliation of income tax (benefit) expense to the federal statutory rate follows:

Year Ended March 31,2011

2010

2009(In thousands)Federal income tax at the statutory rate

$
(12,997
)
$
(22,883
)
$
(14,194
)State taxes, net of federal effect


(1,390
)

(2,749
)

(1,705
)Foreign taxes


461


322


80R&D tax credit


(367
)

(4,037
)

4,384Rate change


1,541





Warrant liability


9,981





Expiring NOL


6,278





Valuation allowance


(4,343
)

28,817


11,759Other


1,076


471


(242
)Income tax (benefit) expense

$
240

$
(59
)
$
82


8. Stockholders' Equity

Stock Plans

1993 Incentive Stock Plan and 2000 Equity Incentive Plan

In 1993, the Board of Directors adopted and the stockholders approved the 1993 Incentive Stock Plan ("1993 Plan"). A total of 7,800,000
shares of common stock were initially reserved for issuance under the 1993 Plan. In June 2000, the Company adopted the 2000 Equity Incentive Plan ("2000 Plan") as a successor plan to the 1993 Plan.
The 2000 Plan provides for awards of up to 11,180,000 shares of common stock, plus 7,800,000 shares previously authorized under the 1993 Plan; provided, however, that the maximum aggregate number of
shares which may be issued is 18,980,000 shares. The 2000 Plan is administered by the Compensation Committee designated by the Board of Directors. The Compensation Committee's authority includes
determining the number of incentive awards and vesting provisions. As of March 31, 2011, there were 1,209,921 shares available for future grant.

As
of March 31, 2011, the Company had outstanding 3,700,000 non-qualified common stock options issued outside of the 2000 Plan. These stock options were granted at
exercise prices equal to the fair market value of the Company's common stock on the grant date as inducement grants to new officers and employees of the Company. Included in the 3,700,000 options were
2,000,000 options granted to the Company's President and Chief Executive Officer, 850,000 options granted to the Company's Executive Vice President of Sales and Marketing, 650,000 options granted to
the Company's former Senior Vice President of Customer Service and 200,000 options granted to the Company's Senior Vice President of Human Resources. Additionally, the Company had outstanding 87,500

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stockholders' Equity (Continued)

restricted
stock units issued outside of the 2000 Plan. These restricted stock units were issued prior to Fiscal 2008 as inducement grants to new officers of the Company. The 87,500 units consisted of
50,000 units granted to the Company's Executive Vice President of Sales and Marketing and 37,500 granted to the Company's former Senior Vice President of Customer Service. Although the options and
units were not granted under the 2000 Plan, they are governed by terms and conditions identical to those under the 2000 Plan.

All
options are subject to the following vesting provisions: one-fourth vests one year after the issuance date and 1/48th vests on the first day of each full
month thereafter, so that all shall be vested on the first day of the 48th month after the issuance date. All outstanding options have a contractual term of ten years. The restricted stock
units vest in equal installments over a period of two
or four years. For restricted stock units with two year vesting, one-half of such units vest one year after the issuance date and the other half vest two years after the issuance date. For
restricted stock units with four year vesting, one-fourth vest annually beginning one year after the issuance date.

Options
or stock awards issued to non-employees who are not directors of the Company are recorded at their estimated fair value at the measurement date using the
Black-Scholes valuation method. There were no shares issued to consultants during the year ended March 31, 2011. During the year ended March 31, 2010, the Company issued options to
purchase 250,000 shares of common stock to consultants under the 2000 Plan. During the year ended March 31, 2009, the Company issued 100,000 shares of stock awards to consultants under the 2000
Plan.

In
June 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the "Purchase Plan"), which provides for the granting of rights to purchase common stock to regular full and
part-time employees or officers of the Company and its subsidiaries. Under the Purchase Plan, shares of common stock will be issued upon exercise of the purchase rights. Under the Purchase
Plan, an aggregate of 900,000 shares may be issued pursuant to the exercise of purchase rights. In August 2010, the Board of Directors adopted and the stockholders approved an amendment and
restatement of the Purchase Plan. The amendment and restatement includes an increase of 500,000 shares of Common Stock that will be available under the Purchase Plan and extends the term of the
Purchase Plan for a period of ten years. As amended, the Purchase Plan will continue by its terms through June 30, 2020, unless terminated sooner, and will reserve for issuance a total of
1,400,000 shares of Common Stock. The maximum amount that an employee can contribute during a purchase right period is $25,000 or 15% of the employee's regular compensation. Under the Purchase Plan,
the exercise price of a purchase right is 95% of the fair market value of such shares on the last day of the purchase right period. The fair market value of the stock is its closing price as reported
on the Nasdaq Stock Market on the day in question. During the fiscal years ended March 31, 2011, 2010 and 2009, the Company issued a total of 25,133, 51,313 and 55,187 shares of stock,
respectively, to regular full and part-time employees or officers of the Company who elected to participate in the Purchase Plan. As of March 31, 2011, there were 486,306 shares
available for future grant under the Purchase Plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stockholders' Equity (Continued)

Valuation and Expense Information

For the fiscal years ended March 31, 2011, 2010 and 2009, the Company recognized stock-based compensation expense of
$2.4 million, $4.6 million and $3.4 million, respectively. The following table summarizes, by statement of operations line item, stock-based compensation expense for the years
ended March 31, 2011, 2010 and 2009 (in thousands):

Fiscal Year
Ended March 31,2011

2010

2009Cost of goods sold

$
209

$
238

$
519Research and development


211


643


631Selling, general and administrative


1,998


3,745


2,203Revenue








68Stock-based compensation expense

$
2,418

$
4,626

$
3,421


The
Company calculated the estimated fair value of each stock option on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions:

Fiscal Year
Ended March 31,2011

2010

2009Risk-free interest rates


3.1
%

2.3
%

2.4
%Expected lives (in years)


5.0


6.2


4.9Dividend yield



%


%


%Expected volatility


97.9
%

90.5
%

98.7
%


The
Company's computation of expected volatility for the fiscal years ended March 31, 2011, 2010 and 2009 was based on historical volatility. The expected life, or term, of
options granted is derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. Management has selected a risk-free
rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the options' expected term. Included in the calculation of stock-based compensation expense is the
Company's estimated forfeiture rate. Stock-based compensation expense is based on awards that are ultimately expected to vest and accordingly, stock-based compensation recognized in the fiscal years
ended March 31, 2011, 2010 and
2009 has been reduced by estimated forfeitures. Management's estimate of forfeitures is based on historical forfeitures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stockholders' Equity (Continued)

Information
relating to all outstanding stock options, except for rights associated with the Purchase Plan, is as follows:

Shares

Weighted-
Average
Exercise Price

Weighted-
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value(in years)Options outstanding at March 31, 2010


9,183,577

$
1.61Granted


1,086,600

$
1.02Exercised


(47,709
)
$
1.05Forfeited, cancelled or expired


(76,478
)
$
6.65Options outstanding at March 31, 2011


10,145,990

$
1.51


6.40

$
5,905,451Options fully vested at March 31, 2011 and those expected to vest beyond March 31, 2011


9,911,678

$
1.52


6.34

$
5,722,606Options exercisable at March 31, 2011


7,828,038

$
1.65


5.80

$
4,082,239


The
weighted average per share grant date fair value of options granted during the fiscal years ended March 31, 2011, 2010 and 2009 was $1.02, $0.95 and $1.02, respectively. The
total intrinsic value of option exercises during the fiscal years ended March 31, 2011, 2010 and 2009, was approximately $35,000, $0.1 million and $1.2 million, respectively. As
of March 31, 2011, there was approximately $1.3 million of total compensation cost related to unvested stock option awards that is expected to be recognized as expense over a weighted
average period of 2.4 years.

During
the fiscal years ended March 31, 2011, 2010 and 2009 the Company issued a total of 109,554, 57,532 and 102,866 shares of stock, respectively, to non-employee
directors who elected to take payment of all or any part of the directors' fees in stock in lieu of cash. For each term of the Board of Directors (beginning on the date of an annual meeting of
stockholders and ending on the date immediately preceding the next annual meeting of stockholders), a non-employee director may elect to receive, in lieu of all or any portion of their
annual retainer or committee fee cash payment, a stock award. The shares of stock were valued based on the closing price of the Company's common stock on the date of grant, and the weighted average
grant date fair value for these shares during each of the fiscal years ended March 31, 2011, 2010 and 2009 was $0.91, $1.15 and $0.98, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stockholders' Equity (Continued)

The
following table outlines the restricted stock unit activity:

Restricted Stock Units

Shares

Weighted
Average Grant
Date Fair
ValueNonvested restricted stock units outstanding at March 31, 2010


1,734,504

$
0.91Granted


647,040

$
1.04Vested and issued


(742,460
)
$
0.90Forfeited


(124,886
)
$
1.00Nonvested restricted stock units outstanding at March 31, 2011


1,514,198

$
1.81Restricted stock units expected to vest beyond March 31, 2011


1,328,942

$
1.81


The
restricted stock units were valued based on the closing price of the Company's common stock on the date of issuance, and compensation cost is recorded on a straight-line
basis over the vesting period. The related compensation expense recognized has been reduced by estimated forfeitures. The Company's estimate of forfeitures is based on historical forfeitures.

The
total fair value of restricted stock units vested and issued by the Company during the years ended March 31, 2011, 2010 and 2009 was approximately $0.8 million,
$0.9 million and $1.2 million, respectively. The Company recorded expense of approximately $1.0 million, $1.0 million and $0.8 million associated with its restricted
stock awards and units for the fiscal years ended March 31, 2011, 2010 and 2009, respectively. As of March 31, 2011, there was approximately $0.9 million of total compensation
cost related to unvested restricted stock units that is expected to be recognized as expense over a weighted average period of 2.0 years.

Stockholder Rights Plan

The Company has entered into a rights agreement, as amended, with Mellon Investor Services LLC, as rights agent. In connection
with the rights agreement, the Company's board of directors authorized and declared a dividend distribution of one preferred stock purchase right for each share of the Company's common stock
authorized and outstanding. Each right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $0.001 per share, at a purchase price of $10.00 per unit, subject to adjustment. The description and terms of the rights are set forth in the rights agreement. Initially,
the rights are attached to all common stock certificates representing shares then outstanding, and no separate rights certificates are distributed. Subject to certain exceptions specified in the
rights agreement, the rights will separate from the common stock and will be exercisable upon the earlier of (i) 10 days following a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of common stock, other than as a result of repurchases of
stock by the Company or certain inadvertent actions by institutional or certain other stockholders, or (ii) 10 days (or such later date as the Company's board of directors shall
determine) following the commencement of a tender offer or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stockholders' Equity (Continued)

exchange
offer (other than certain permitted offers described in the rights agreement) that would result in a person or group beneficially owning 20% or more of the outstanding shares of the Company's
common stock. On June 9, 2011, the Company's board of directors unanimously approved a second amendment to the rights agreement. The rights agreement, as amended, will be submitted for approval
by the Company's stockholders at the 2011 annual meeting of stockholders. The second amendment adds an additional "sunset provision," which provides that the rights agreement will expire on the
30th day after the 2014 annual meeting of stockholders unless continuation of the rights agreement is approved by the stockholders at that meeting. The second amendment also provides for an
update to the definition of "Beneficial Owner" to include derivative interests in the calculation of a stockholder's ownership. In addition, the second amendment clarifies the manner in which the
exchange provision of the rights agreement shall be effected. The rights are intended to protect the Company's stockholders in the event of an unfair or coercive offer to acquire the Company. The
rights, however, should not affect any prospective offeror willing to make an offer at a fair price and otherwise in the best interests of the Company and its stockholders, as determined by the board
of directors. The rights should also not interfere with any merger or other business combination approved by the board of directors.

Underwritten and Registered Direct Placement of Common Stock

Effective March 9, 2011, the Company entered into warrant exercise agreements with (i) the only two holders (the "2009
Holders") of warrants to purchase an aggregate of 3,612,717 shares of the Company's common stock, par value $0.001 per share ("Common Stock"), issued by the Company on May 7, 2009 (the "2009
Warrants") (ii) one holder (the "2008 Holder") of warrants to purchase an aggregate of 392,191 shares of Common Stock issued by the Company on September 23, 2008 (the "2008 Warrants")
and (iii) four holders (the "2007 Holders") of warrants to purchase an aggregate of 8,468,323 shares of Common Stock issued by the Company on January 24, 2007 (the "2007 Warrants").
Pursuant to the Warrant Exercise Agreements, the 2009 Holders agreed to exercise the 2009 Warrants at the existing exercise price of $0.95 per share in exchange for a fee of an aggregate amount of
approximately $1.0 million, the 2008 Holder agreed to exercise the 2008 Warrants at the existing exercise price of $1.60 per share in exchange for a fee of an aggregate amount of approximately
$156,876 and the 2007 Holders agreed to exercise the 2007 Warrants at the existing exercise price of $1.17 per share in exchange for a fee of an aggregate amount of approximately $1.2 million.
The net proceeds to the Company in connection with the exercise of the 2009 Warrants, the 2008 Warrants and the 2007 Warrants, after deducting expenses of approximately $0.4 million, is
approximately $11.2 million. Immediately prior to the exercise of these warrants, the Company revalued the warrants and recorded a charge of $6.9 million to operations during the three
months ended March 31, 2011. In connection with the induced exercise of the warrants, the Company modified the warrant agreements, which resulted in a reduction of the charge to operations by
$1.0 million during the three months ended March 31, 2011. The exercise of these warrants resulted in a reduction of the warrant liability of $9.7 million.

Effective
February 24, 2010, the Company completed an underwritten public offering in which it sold 43.8 million shares of the Company's common stock, par value $.001 per
share, at a price of $1.05 per share. The sale resulted in gross proceeds of approximately $46.0 million and proceeds, net of direct transaction costs, of approximately $42.5 million.

Effective
September 17, 2009, the Company entered into warrant exercise agreements with the holders (the "Holders") of warrants to purchase an aggregate of 7.2 million
shares of the Company's

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stockholders' Equity (Continued)

common
stock, par value $0.001 per share, issued by the Company to such Holders on May 7, 2009 (the "Initial Warrants"). Pursuant to the warrant exercise agreements, the Company agreed to issue
and sell to the Holders new warrants to purchase an aggregate of 5.8 million shares of common stock (the "New Warrants") in exchange for the exercise in full of the Initial Warrants at the
reduced exercise price of $0.90 per share. In connection with the induced exercise of the warrants, the Company modified the warrant agreements, which resulted in a charge of $3.8 million to
operations during the three months ended September 30, 2009. The offering price of the New Warrants acquired by the Holders was $0.0625 per share of common stock, and the initial exercise price
of the New Warrants was $1.42 per share. The New Warrants are exercisable during the period beginning on September 17, 2009 and
continuing through May 7, 2016 and include certain weighted average anti-dilution provisions, subject to certain limitations. The sale of the New Warrants resulted in gross proceeds
of approximately $0.4 million and the Company recorded a $6.4 million warrant liability, which represented the fair value of the New Warrants on the date of issuance, resulting in a
charge of $6.0 million to operations during the three months ended September 30, 2009. The exercise of the Initial Warrants resulted in gross proceeds of approximately
$6.5 million. The February 2010 underwritten public offering triggered certain anti-dilution provisions in the warrants outstanding prior to the offering. As a result, the exercise
price of each warrant previously outstanding was adjusted. Following such adjustments, warrants issued in September 2009 and still outstanding as of March 31, 2011 represented warrants to
purchase 5.8 million shares at an exercise price of $1.34 per share. These warrants are classified as liabilities under the caption "Warrant liability" and recorded at estimated fair value with
the corresponding charge under the caption "Change in fair value of warrant liability." See Note 9Fair Value Measurements for disclosure regarding the fair value of financial
instruments.

Effective
May 7, 2009, the Company completed a registered direct placement in which it sold 14.4 million shares of the Company's common stock, par value $.001 per share,
and warrants to purchase 10.8 million shares of common stock with an initial exercise price of $0.95 per share, at a unit price of $0.865 per unit. Each unit consisted of one share of common
stock and a warrant to purchase 0.75 shares of common stock. The seven-year warrants are immediately exercisable and include certain weighted average anti-dilution provisions,
subject to certain limitations. The sale resulted in gross proceeds of approximately $12.5 million and proceeds, net of direct transaction costs, of approximately $11.2 million. As
discussed above, on March 9, 2011, warrants to purchase 3.6 million shares were exercised resulting in proceeds of approximately $2.4 million. As of March 31, 2011, none of
the warrants issued in May 2009 were outstanding. As of March 31, 2010, these warrants are classified as liabilities under the caption "Warrant liability" in the accompanying balance sheets and
recorded at estimated fair value with the corresponding charge under the caption "Change in fair value of warrant liability" in the accompanying statements of operations. See
Note 9Fair Value Measurements for disclosure regarding the fair value of financial instruments.

Effective
September 23, 2008, the Company completed a registered direct placement in which it sold 21.5 million shares of the Company's common stock, par value $.001 per
share, and warrants to purchase 6.4 million shares of common stock with an initial exercise price of $1.92 per share, at a price of $14.90 per unit. Each unit consisted of ten shares of common
stock and warrants to purchase three shares of common stock. The five-year warrants are immediately exercisable and include anti-dilution provisions, subject to certain
limitations. Additionally, the Company has the right, at its option, to accelerate the expiration of the exercise period of the outstanding warrants issued in the offering, in whole or from time to
time in part, at any time after the second anniversary of the original issue date

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stockholders' Equity (Continued)

of
the warrants, subject to certain limitations. The sale resulted in gross proceeds of approximately $32.0 million and proceeds, net of direct incremental costs, of the offering of
approximately $29.5 million. As discussed above, on March 9, 2011, warrants to purchase 0.4 million shares were exercised resulting in proceeds of approximately
$0.5 million. The February 2010, September 2009 and May 2009 underwritten public offerings triggered certain anti-dilution provisions in the
warrants outstanding prior to each of the offerings. As a result, the number of shares to be received upon exercise and the exercise price of each warrant previously outstanding were adjusted.
Following such adjustments, warrants issued in September 2008 and still outstanding as of March 31, 2011 represented warrants to purchase 7.3 million shares at an exercise price of $1.60
per share. These warrants are classified as liabilities under the caption "Warrant liability" in the accompanying balance sheets and recorded at estimated fair value with the corresponding charge
under the caption "Change in fair value of warrant liability" in the accompanying statement of operations. See Note 9Fair Value Measurements for disclosure regarding the fair value
of financial instruments.

Effective
January 24, 2007, the Company completed a registered direct placement in which it sold 40 million shares of the Company's common stock, par value $.001 per share,
and warrants to purchase 20 million shares of common stock with an initial exercise price of $1.30 per share, at a price of $1.14 per unit. Each unit consisted of one share of common stock and
warrants to purchase 0.5 shares of common stock. The five-year warrants were immediately exercisable and include anti-dilution provisions, subject to certain limitations.
During Fiscal 2009, warrants to purchase 3.2 million shares were exercised resulting in proceeds of approximately $4.1 million. During Fiscal 2011, warrants to purchase
8.5 million shares were exercised resulting in gross proceeds of approximately $8.7 million. The February 2010 and May 2009 underwritten public offerings triggered certain
anti-dilution provisions in the warrants outstanding prior to the offering. As a result, the number of shares to be received upon exercise and the exercise price of each warrant previously
outstanding were adjusted. Following such adjustments, the warrants issued in January 2007 and still outstanding as of March 31, 2011 represented warrants to purchase 8.5 million shares
at an exercise price of $1.17 per share. These warrants are classified as liabilities under the caption "Warrant liability" in the accompanying balance sheets and recorded at estimated fair value with
the corresponding charge under the caption "Change in fair value of warrant liability" in the accompanying statements of operations. See Note 9Fair Value Measurements for
disclosure regarding the fair value of financial instruments.

9. Fair Value Measurements

The FASB has established a framework for measuring fair value in generally accepted accounting principles. That framework provides a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair
value hierarchy are described as follows:

Level 1.Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2.Inputs to the valuation methodology include:



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Fair Value Measurements (Continued)



If
the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Level 3.Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The
asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The
table below presents our assets and liabilities that are measured at fair value on a recurring basis during the fiscal year ended March 31, 2011 and are categorized using the
fair value hierarchy (in thousands):

Fair Value Measurements at March 31, 2011Total

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Cash Equivalents

$
8,289

$
8,289

$


$
Restricted cash

$
1,250

$
1,250

$


$
Warrant Liability

$
(20,772
)
$


$


$
(20,772
)


Cash
equivalents includes cash held in money market and U.S. treasury funds at March 31, 2011.

The
table below presents our assets and liabilities that are measured at fair value on a recurring basis during the fiscal year ended March 31, 2010 and are categorized using the
fair value hierarchy(in thousands):

Fair Value Measurements at March 31, 2010Total

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Quoted Prices in
Active Markets for
Identical Assets
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Cash Equivalents

$
39,191

$
39,191

$


$
Warrant Liability

$
(26,803
)
$


$


$
(26,803
)CPS Second Funding Liability

$
(3,026
)
$


$
(3,026
)
$



Basis for Valuation

The carrying values reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and
accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. As the Company's obligations under the Credit Facility are based
on adjustable market interest rates, the Company has determined that the carrying value approximates the fair value. The fair value of the CPS Second Funding Liability was

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Fair Value Measurements (Continued)

computed
using a discounted cash flow model using estimated market rates. The carrying values and estimated fair values of these obligations are as follows (in thousands):

As of
March 31, 2011

As of
March 31, 2010Carrying
Value

Estimated
Fair Value

Carrying
Value

Estimated
Fair ValueObligations under the credit facility

$
7,080

$
7,080

$
7,571

$
7,571CPS Second Funding Liability

$


$


$
3,026

$
3,100


Effective
April 1, 2009, the Company adopted the amended provisions of ASC 815 on determining what types of instruments or embedded features in an instrument held by a reporting
entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in ASC 815. Warrants issued by the Company in prior periods with certain
anti-dilution provisions for the holder are no longer considered indexed to the Company's own stock, and therefore no longer qualify for the scope exception and must be accounted for as
derivatives. These warrants were reclassified as liabilities under the caption "Warrant liability" and recorded at estimated fair value at each reporting date, computed using the
MonteCarlo simulation valuation method. The Company will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise of the warrants, at which
time the liability will be reclassified to stockholders' equity, or expiration of the warrants. Changes in the liability from period to period are recorded in the Statements of Operations under the
caption "Change in fair value of warrant liability." On April 1, 2009, the Company recorded a cumulative effect adjustment based on the grant date fair value of the warrants issued in September
2008 and January 2007 that were outstanding at April 1, 2009 and the change in fair value of the warrant liability through April 1, 2009.

The
Company recorded the following cumulative effect of change in accounting principle pursuant to its adoption of the amendment as of April 1, 2009 (in thousands):

Additional
Paid-In-Capital

Warrant
Liability

Accumulated
DeficitGrant date fair value of previously issued warrants outstanding as of April 1, 2009

$
14,750

$
(14,750
)
$
Change in fair value of previously issued warrants outstanding as of April 1, 2009





(8,163
)

(8,163
)Cumulative effect of change in accounting principle

$
14,750

$
(6,587
)
$
(8,163
)


During
the three months ended September 30, 2009, the Company sold and issued additional warrants that provide certain anti-dilution protections for the Holders. See
Note 8Stockholders' EquityUnderwritten and Registered Direct Placement of Common Stock for further discussion.

The
fair value of the Company's warrant liability (see Note 8Stockholders' EquityUnderwritten and Registered Direct Placement of Common Stock) recorded
in the Company's financial statements is determined using the MonteCarlo simulation valuation method and the quoted price of the Company's common stock in an active market, a
Level 3 measurement. In the notes to its consolidated financial statements for the year ended March 31, 2010, the Company classified the inputs to determine

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Fair Value Measurements (Continued)

the
fair value of the warrant liability as Level 2 in the fair value hierarchy; however, the Company has reclassified such warrant liability as Level 3 for all periods presented because
the Company's fair value determination was made using significant unobservable inputs. Volatility is based on the actual market activity of the Company's stock. The expected life is based on the
remaining contractual term of the warrants and the risk free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants' expected
life.

The
Company calculated the estimated fair value of warrants on the date of issuance and at each subsequent reporting date using the following assumptions:

Fiscal Year Ended
March 31, 2011

Fiscal Year Ended
March 31, 2010Risk-free interest rates range

0.2% to 2.1%

1.2% to 3.4%Contractual term (in years)

0.8 years to 5.1 years

1.8 years to 6.8 yearsExpected volatility range

60.0% to 92.3%

88.1% to 108.0%


From
time to time, the Company sells common stock warrants that are derivative instruments. The Company does not enter into speculative derivative agreements and does not enter into
derivative agreements for the purpose of hedging risks.

As
discussed above, the Company adopted authoritative guidance issued by the FASB on contracts in an entity's own equity that requires the common stock warrants to be classified as
liabilities at their estimated fair value with changes in fair value at each reporting date recognized in the statement of operations. Prior to April 1, 2009, none of the assets and liabilities
of the Company included in the consolidated balance sheets were measured at fair value using significant unobservable inputs (Level 3). The table below provides a reconciliation of the
beginning and ending balances for the warrant liability which is measured at fair value using significant unobservable inputs (Level 3) (in thousands):

Warrant liability:Balance as of April 1, 2009

$
8,163Total realized and unrealized (gains) losses:Expense included in Change in fair value of warrant liability


22,853Purchases, issuances and settlements


(4,213
)Balance at March 31, 2010

$
26,803Total realized and unrealized (gains) losses:Expense included in Change in fair value of warrant liability


3,667Purchases, issuances and settlements


(9,698
)Balance at March 31, 2011

$
20,772


10. Revolving Credit Facility

The Company maintains two Credit and Security Agreements (the "Agreements") with Wells Fargo Bank, National Association ("Wells Fargo"). The Agreements provide the Company with a line of
credit of up to $10 million in the aggregate (the "Credit Facility"). The amount actually available to the Company may be less and may vary from time to time depending on, among other factors,
the amount of its eligible inventory and accounts receivable. As security for the payment and performance of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Revolving Credit Facility (Continued)

Credit
Facility, the Company granted a security interest in favor of Wells Fargo in substantially all of the assets of the Company. As of March 31, 2010, the Company had a standby letter of
credit for one of its customers in the amount of $0.5 million. This letter of credit limits the amount the Company can borrow on its Credit Facility with Wells Fargo. The Agreements will
terminate in accordance with their terms on February 9, 2012 unless terminated sooner.

The
Agreements include affirmative covenants as well as negative covenants that prohibit a variety of actions without Wells Fargo's consent, including covenants that limit the Company's
ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or
stock of another entity, (d) pay dividends on, or purchase, acquire, redeem or retire shares of, the Company's capital stock, (e) sell, assign, transfer or otherwise dispose of all or
substantially all of the Company's assets, (f) change the Company's accounting method or (g) enter into a different line of business. Furthermore, the Agreements contain financial
covenants, including (a) a requirement to maintain a specified minimum book worth, (b) a requirement not to exceed specified levels of losses, (c) a requirement to maintain a
specified ratio of minimum cash balances to unreimbursed line of credit advances, and (d) limitations on the Company's capital expenditures.

Several
times since entering into the Agreements, the Company was in noncompliance with certain covenants under the Credit Facility. In connection with each event of noncompliance, Wells
Fargo waived the event of default and, on several occasions, the Company amended the Agreements in response to the default and waiver.

As
a result of the Company's non-compliance with the financial covenant in the Agreements regarding the Company's net income as of March 31, 2010, Wells Fargo imposed
default pricing of an additional 3.0% effective March 1, 2010. In addition, as a condition of the further amendment of the Agreements, Wells Fargo restricted $5.0 million of cash
effective June 11, 2010 as additional security for the Credit Facility.

On
June 29, 2010, the Company entered into an amendment to the Agreements with Wells Fargo to amend the financial covenant related to capital expenditures by adding a limitation
on expenditures for Fiscal 2011. Under the terms of this amendment, the Company may not incur or contract to incur capital expenditures of more than (i) $4.5 million in the aggregate
during Fiscal 2011, and (ii) zero for each subsequent year until the Company and Wells Fargo agree on limits on capital expenditures for subsequent periods based on management's projections for
such periods.

On
November 9, 2010, the Company entered into an amendment to the Agreements with Wells Fargo to provide for the release by Wells Fargo of the $5.0 million in cash
restricted since June 2010 upon the Company's satisfaction of certain conditions. During Fiscal 2011, Wells Fargo released $3.7 million of the restricted cash.

On
March 25, 2011 the Company entered into an amendment to the Agreements that allows the Company to form one wholly-owned subsidiary in each of Singapore and the United Kingdom
provided that the amount of cash and cash equivalents that may be held by, or invested in each such subsidiary is within certain agreed upon limits. This amendment also provides that, if requested by
Wells Fargo, the Company will grant Wells Fargo a security interest in 65% of the equity interests of each subsidiary to secure indebtedness under the Agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Revolving Credit Facility (Continued)

As
of March 31, 2011, the Company determined that it was not in compliance with one of the financial covenants in the Agreements regarding net income. On June 9, 2011, the
Company entered into an amendment to the Agreements which provided a waiver of the Company's noncompliance with this financial covenant as of March 31, 2011 and removed the net worth financial
covenant for future periods. Additionally, this amendment also set the financial covenants for Fiscal 2012 and authorized the release of the remaining $1.3 million of restricted cash.

If
the Company had not obtained the waivers and amended the Agreements as described above, the Company would not be able to draw additional funds under the Credit Facility. In addition,
the Company has pledged its accounts receivables, inventories, equipment, patents and other assets as
collateral for its Agreements, which would be subject to seizure by Wells Fargo if the Company were in default under the Agreements and unable to repay the indebtedness. Wells Fargo also has the
option to terminate the Agreements or accelerate the indebtedness during a period of noncompliance. Based on the Company's current forecasts, the Company believes it will maintain compliance with the
covenants contained in the amended Agreements for the next twelve months.

The
Company is required to maintain a Wells Fargo collection account for cash receipts on all of its accounts receivable. These amounts are immediately applied to reduce the outstanding
amount on the Credit Facility. The floating rate for line of credit advances is the greater of the Prime Rate plus applicable margin or 5% plus applicable margin, subject to a minimum interest floor.
Based on the revolving nature of the Company's borrowings and payments, the Company classifies all outstanding amounts as current liabilities. The applicable margin varies based on net income and the
minimum interest floor is set at $31,000 per month. The Company's borrowing rate at March 31, 2011 and 2010 was 7.5% and 10.5%, respectively.

The
Company incurred $0.2 million in origination fees in 2009. These fees were capitalized and are being amortized to interest expense through February 2012. The Company is also
required to pay an annual unused line fee of one-quarter of one percent of the daily average of the maximum line amount and 1.5% interest with respect to each letter of credit issued by
Wells Fargo. These amounts, if any, are also recorded as interest expense by the Company. As of March 31, 2011 and 2010, $7.1 million and $7.6 million in borrowings were
outstanding, respectively, under the Credit Facility. Interest expense related to the Credit Facility during the year ended March 31, 2011 was $0.8 million, which includes
$0.2 million in amortization of deferred financing costs. Interest expense related to the Credit Facility during the year ended March 31, 2010 was $0.6 million, which includes
$0.1 million in amortization of deferred financing costs.

11. Commitments and Contingencies

Purchase Commitments

As of March 31, 2011, the Company had firm commitments to purchase inventories of approximately $21.5 million through
Fiscal 2014. Certain inventory delivery dates and related payments are not firmly scheduled; therefore amounts under these firm purchase commitments will be payable upon the receipt of the related
inventories.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)

Lease Commitments

The Company leases offices and manufacturing facilities under various non-cancelable operating leases expiring at various
times through the fiscal year ending March 31, 2015. All of the leases require the Company to pay maintenance, insurance and property taxes. The lease agreements for primary office and
manufacturing facilities provide for rent escalation over the lease term and renewal options for five-year periods. Rent expense is recognized on a straight-line basis over the
term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent, which is included in other long-term liabilities in the
accompanying consolidated balance sheets. The balance of deferred rent was approximately $0.3 million as of March 31, 2011 and 2010. Rent expense was approximately $2.4 million,
$2.3 million and $2.1 million for the years ended March 31, 2011, 2010 and 2009, respectively.

On
August 27, 2009, the Company entered into a second amendment (the "Chatsworth Amendment") to the Lease Agreement, dated December 1, 1999, for leased premises used by the
Company for primary office space, engineering testing and manufacturing located in Chatsworth, California. The Chatsworth Amendment extends the term of the Lease Agreement from May 31, 2010 to
July 31, 2014. The Company has two five-year options to extend the term of the Lease Agreement beyond July 31, 2014. The Chatsworth Amendment also sets the monthly base rent
payable by the Company under the Lease Agreement at $67,000 per month, with an annual increase in the base rent on August 1, 2010, August 1, 2011, August 1, 2012 and
August 1, 2013. On such dates, the base rent shall increase by 5% of the base rent in effect at the time of the increase or a percentage equivalent to the increase in the Consumer Price Index,
whichever is greater.

On
August 11, 2009, the Company entered into a second amendment (the "Van Nuys Amendment") to the Lease Agreement, dated September 25, 2000, for leased premises used by the
Company for engineering testing and manufacturing located in Van Nuys, California. The Van Nuys Amendment extends the term of the Lease Agreement from November 30, 2010 to December 31,
2012. The Company has one five-year option to extend the term of the Lease Agreement beyond December 31, 2012. The Van Nuys Amendment also adjusts the monthly base rent payable by
the Company under the Lease Agreement to the following: $51,000 per month from April 1, 2009 through September 30, 2010; $56,000 per month from October 1, 2010 through
December 31, 2011; and $60,000 per month from January 1, 2012 through December 31, 2012.

At
March 31, 2011, the Company's minimum commitments under non-cancelable operating leases were as follows:

Year Ending March 31,

Operating
Leases(In thousands)2012

$
1,7922013


1,5512014


8982015


2802016


Total minimum lease payments

$
4,521


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)

During
the three months ended September 30, 2009, the Company entered into a 24-month capital lease to finance approximately $61,000 of computer equipment and an
18-month capital lease to finance approximately $163,000 for a forklift. As of March 31, 2011, the 18-month capital lease was paid in full.

During
the three months ended March 31, 2010, the Company purchased office copiers that were financed with notes payable. The outstanding balance of the notes payable was
approximately $0.1 million as of March 31, 2011 and 2010. The notes bear interest at 11.0% with principal and interest paid monthly through December 2014. The related office copiers
collateralize the notes payable.

During
the three months ended December 31, 2010, the Company incurred $0.4 million of insurance contracts financed by notes payable. The outstanding balance of the notes
payable as of March 31, 2011
was approximately $0.2 million. The notes bear interest at 4.5% with principal and interest paid monthly through July 2011.

The
Company owns automobiles that it has financed with notes payable. The outstanding balances of the notes payable as of March 31, 2011 and 2010 were approximately $20,000 and
$28,000, respectively. The notes bear interest at 6.8% with principal and interest paid monthly through June 2013. The related automobiles collateralize the notes payable.

Other Commitments

On April 28, 2011, the Company purchased $2.3 million of the remaining TA100 microturbine inventory that was not consumed
as part of the TA100 manufacturing process and acquired the manufacturing equipment. See Note 14Acquisition, for discussion of commitments associated with the MPL acquired from
CPS.

In
September 2010, the Company was awarded a grant from the U.S. Department of Energy ("DOE") for the research, development and testing of a more efficient microturbine Combined Heat and
Power (CHP) system. Part of the improved efficiency will come from an improved microturbine design, with a projected electrical efficiency of 42% and power output of 370 kW. The project is estimated
to last 24 months and cost approximately $17.4 million. The DOE will contribute $5.0 million toward the project, and the Company will incur approximately $12.4 million in
research and development expense. The Company billed the DOE under the contract for this project a cumulative amount of $0.3 million through March 31, 2011.

In
November 2009, the Company was awarded a grant from the DOE for the research, development and testing of a more fuel flexible microturbine capable of operating on a wider variety of
biofuels. The project is estimated to last 24 months and cost approximately $3.8 million. The DOE will contribute $2.5 million under the program, and the Company will incur
approximately $1.3 million in research and development expense. The Company billed the DOE under this contract a cumulative amount of $1.0 million through March 31, 2011.

Agreements
the Company has with some of its distributors require that if the Company renders parts obsolete in inventories they own and hold in support of their obligations to serve
fielded microturbines, then the Company is required to replace the affected stock at no cost to the distributors. While the Company has never incurred costs or obligations for these types of
replacements, it is possible that future changes in the Company's product technology could result and yield costs to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)

Company
if significant amounts of inventory are held at distributors. As of March 31, 2011, no significant inventories were held at distributors.

Legal Matters

In December 2001, a purported stockholder class action lawsuit was filed in the United States District Court for the Southern District
of New York (the "District Court") against the Company, two of its then officers, and the underwriters of the Company's initial public offering. The suit purports to be a class action filed on behalf
of purchasers of the Company's common stock during the period from June 28, 2000 to December 6, 2000. An amended complaint was filed on April 19, 2002. The plaintiffs allege that
the prospectuses for the Company's June 28, 2000 initial public offering and November 16, 2000 secondary offering were false and misleading in violation of the applicable securities laws
because the prospectuses failed to disclose the underwriter defendants' alleged agreement to allocate stock in these offerings to certain investors in exchange for excessive and undisclosed
commissions and agreements to make additional purchases of stock in the aftermarket at pre-determined prices. Similar complaints have been filed against hundreds of other issuers that have
had initial public offerings since 1998; the complaints have been consolidated into an action captioned In re Initial Public Offering Securities Litigation, No. 21 MC 92. On October 9,
2002, the plaintiffs dismissed, without prejudice, the claims against the named officers and directors in the action against the Company, pursuant to the terms of Reservation of Rights and Tolling
Agreements entered into with the plaintiffs (the "Tolling Agreements"). Subsequent addenda to the Tolling Agreements extended the tolling period through August 27, 2010. The District Court
directed that the litigation proceed within a number of "focus cases" and on October 13, 2004, the District Court certified the focus cases as class actions. The Company's case is not one of
these focus cases. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the District Court's class certification
decision. On August 14, 2007, the plaintiffs filed their second consolidated amended complaints against the six focus cases and on September 27, 2007, again moved for class
certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the
District Court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those
who purchased outside the previously certified class period. The motion for class certification was withdrawn without prejudice on October 10, 2008. On April 2, 2009, a stipulation and
agreement of settlement between the plaintiffs, issuer defendants and underwriter defendants was submitted to the District Court for preliminary approval. The District Court granted the plaintiffs'
motion for preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The settlement "fairness" hearing was held on September 10, 2009. On
October 6, 2009, the District Court entered an opinion granting final approval to the settlement and directing that the Clerk of the District
Court close these actions. On August 26, 2010, based on the expiration of the tolling period stated in the Tolling Agreements, the plaintiffs filed a Notice of Termination of Tolling Agreement
and Recommencement of Litigation against the named officers and directors. The plaintiffs stated to the District Court that they do not intend to take any further action against the named officers and
directors at this time. Appeals of the opinion granting final approval have been filed. Because of the inherent uncertainties of litigation and because the settlement remains subject to appeal, the
ultimate outcome of the matter is uncertain. Management believes that the outcome of this litigation will not have a material adverse impact on its consolidated financial position and results of
operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)

On October 9, 2007, Vanessa Simmonds, a purported stockholder of the Company, filed suit in the U.S. District Court for the Western District of Washington (the "Washington
District Court") against The Goldman Sachs Group, Inc., Merrill Lynch & Co., Inc., and Morgan Stanley, the lead underwriters of the Company's initial public offering in
June 1999, and the Company's secondary offering of common stock in November 2000, alleging violations of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78p(b). The complaint sought to recover from the lead underwriters any "short-swing profits" obtained by them in violation of Section 16(b). The suit names the Company as a
nominal defendant, contained no claims against the Company, and sought no relief from the Company. Simmonds filed an Amended Complaint on February 27, 2008 (the "Amended Complaint"), naming as
defendants Goldman Sachs & Co. and Merrill Lynch Pierce, Fenner & Smith Inc. and again naming Morgan Stanley. The Goldman Sachs Group, Inc. and Merrill
Lynch & Co., Inc. were no longer named as defendants. The Amended Complaint asserted substantially similar claims as those set forth in the initial complaint. On July 25,
2008, the Company joined with 29 other issuers to file the Issuer Defendants' Joint Motion to Dismiss. Simmonds filed her opposition to this motion on September 8, 2008, and the Company and the
other Issuer Defendants filed a Reply in Support of Their Joint Motion to Dismiss on October 23, 2008. On March 12, 2009, the Washington District Court granted the Issuer Defendants'
Joint Motion to Dismiss, dismissing the complaint without prejudice on the grounds that Simmonds had failed to make an adequate demand on the Company prior to filing her complaint. In its order, the
Washington District Court stated that it would not permit Simmonds to amend her demand letters while pursuing her claims in the litigation. Because the Washington District Court dismissed the case on
the grounds that it lacked subject matter jurisdiction, it did not specifically reach the issue of whether Simmonds' claims were barred by the applicable statute of limitations. However, the
Washington District Court also granted the Underwriters' Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred by the applicable
statute of limitations because the issuers' stockholders had notice of the potential claims more than five years prior to filing suit. Simmonds filed a Notice of Appeal on April 10, 2009. The
underwriters subsequently filed a Notice of Cross-Appeal, arguing that the dismissal of the claims involving the moving issuers should have been with prejudice because the claims were untimely under
the applicable statute of limitations. Simmonds filed her opening brief on appeal on August 26, 2009. On October 2, 2009, the Company and other Issuer Defendants filed a joint response
brief, and the underwriters filed a brief in support of their cross-appeal. Simmonds' reply brief and opposition to the cross-appeal were filed on November 2, 2009 and the underwriters' reply
brief in support of their cross-appeals was filed on November 17, 2009. On October 5, 2010, the Ninth Circuit Court of Appeals (the "Ninth Circuit") heard oral arguments regarding this
matter. On December 2, 2010, the Ninth Circuit affirmed the Washington District Court's decision to dismiss the moving issuers' cases (including the Company's) on the grounds that plaintiff's
demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed
and remanded the Washington District Court's decision on the underwriters' motion to dismiss as to the claims arising from the non-moving issuers' initial public offerings, finding
plaintiff's claims were not time-barred under the applicable statute of limitations. In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in
the Washington District Court the same challenges to plaintiff's demand letters that moving issuers had filed. On December 16, 2010, the underwriters filed a petition for panel rehearing and
petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions
for rehearing en banc. It further ordered that no further

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)

petitions
for rehearing may be filed. On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit's mandate in the cases involving the non-moving
issuers. On January 25, 2011, the Ninth Circuit granted the underwriters' motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days
pending the filing of a petition for writ of certiorari in the United States Supreme Court. On January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters' motion and requested
that the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant's motion and ruled that the mandate in all cases (including the Company's and
other moving issuers) is stayed for ninety days pending Appellant's filing of a petition for writ of certiorari in the United States Supreme Court. On April 5, 2011, plaintiff filed a Petition
for Writ of Certiorari with the U.S. Supreme Court seeking
reversal of the Ninth Circuit's December 2, 2010 decision relating to the adequacy of the pre-suit demand. Plaintiff's petition was docketed by the Supreme Court on April 7,
2011. On April 15, 2011, underwriter defendants filed a Petition for Writ of Certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit's December 2, 2010 decision
relating to the statute of limitations issue. Underwriter's petition was docketed by the Supreme Court on April 18, 2011. On May 12, 2011, Vanessa Simmonds filed her Brief in Opposition
to the underwriters' Petition. On May 26, 2011, the moving issuer defendants filed their Brief in Opposition to Vanessa Simmonds' Petition, and on June 6, 2011, Vanessa Simmonds filed
her reply to that Brief. Management believes that the outcome of this litigation will not have a material adverse impact on its consolidated financial position and results of operations.

From
time to time, the Company may become subject to additional legal proceedings, claims and litigation arising in the ordinary course of business. Other than the matters discussed
above, the Company is not a party to any other material legal proceedings, nor is the Company aware of any other pending or threatened litigation that would have a material adverse effect on the
Company's business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

12. Employee Benefit Plans

The Company maintains a defined contribution 401(k) profit-sharing plan in which all employees are eligible to participate. Employees may contribute up to Internal Revenue Service annual
limits or, if less, 90% of their eligible compensation. Employees are fully vested in their contributions to the plan. The plan also provides for both Company matching and discretionary contributions,
which are determined by the Board of Directors. The Company began matching 50 cents on the dollar up to 4% of the employee's contributions in October 2006. Prior to that date, no Company contributions
had been made since the inception of the plan. The Company's match vests 25% a year over four years starting from the employee's hire date. The expense recorded by the Company for each of the years
ended March 31, 2011, 2010 and 2009 was approximately $0.2 million.

13. Other Current Liabilities

In September 2007, the Company entered into a Development and License Agreement (the "Development Agreement") with UTC Power Corporation ("UTCP"), a division of United Technologies
Corporation. The Development Agreement engaged UTCP to fund and support the Company's continued development and commercialization of the Company's 200 kilowatt ("C200") microturbine. Pursuant to the
terms of the Development Agreement, UTCP contributed $12.0 million in cash and approximately $800,000 of in-kind services toward the Company's efforts to develop the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Other Current Liabilities (Continued)

C200.
In return, the Company agreed to pay to UTCP an ongoing royalty of 10% of the sales price of the C200 sold to customers other than UTCP until the aggregate of UTCP's cash and in-kind
services investment had been recovered and, thereafter, the royalty would be reduced to 5% of the sales price. In August 2009, the Development Agreement was assigned by UTCP to Carrier Corporation
("Carrier").

The
Company recorded the benefits from this Development Agreement as a reduction of research and development ("R&D") expenses. During the year ended March 31, 2010, the Company
recognized approximately $1.3 million of such benefits and there were no in-kind services for the year ended March 31, 2010. During the year ended March 31, 2009, the
Company recognized approximately $8.1 million of such benefits and received a total of $0.2 million of in-kind services. In-kind services performed by Carrier
under the cost-sharing program were recorded as consulting expense within R&D expenses. Funding in excess of expenses incurred was recorded in Other Current Liabilities. The program
concluded in June 2009 and, therefore, there was no funding in excess of expenses recorded in Other Current Liabilities as of March 31, 2011 and March 31, 2010. The reduction of R&D
expenses was recognized on a percentage of completion basis, limited by the amount of funding received and/or earned based on milestone deliverables.

On
January 14, 2011, the Company entered into an amendment to the Development Agreement with Carrier. The amendment amends the royalty payment from a certain percentage of the
sales prices to a predetermined fixed rate for each microturbine system covered by the amendment. Carrier earned $1.9 million and $1.5 million in royalties for C200 and C1000 Series
system sales during the year ended March 31, 2011 and 2010, respectively. Earned royalties of $1.7 million and $0.2 million were unpaid as of March 31, 2011 and
March 31, 2010, respectively, and are included in accrued expenses in the accompanying balance sheets.

14. Acquisition

On February 1, 2010 (the "Closing Date"), the Company acquired the MPL from CPS to expand the Company's microturbine product line and to gain relationships with distributors to
supply the Company's products. The Company entered into an Asset Purchase Agreement ("APA"), subject to an existing license retained by CPS, to purchase all of the rights and assets related to the
manufacture and sale of the MPL, including intellectual property, design, tooling, drawings, patents, know-how, distribution and supply agreements.

The
table below summarizes the consideration paid for the rights and assets of the MPL on the Closing Date. No voting interests in CPS were acquired in this transaction.

Description

Purchase Price(In thousands)Stock issued at Closing Date

$
1,798Fair value of consideration at Second Funding Date, stock or cash


2,990Total purchase consideration

$
4,788


Pursuant
to the APA, the Company issued to CPS 1,550,387 shares of common stock at the Closing Date and agreed to pay additional consideration of $3.1 million on July 30,
2010 (the "Second

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14. Acquisition (Continued)

Funding
Date"). The additional consideration was to be paid, at the Company's discretion, in shares of the Company's common stock or cash. The Company elected to satisfy the amount due on the Second
Funding Date with common stock and issued 3,131,313 shares to CPS. This second payment constituted a financial instrument which was accounted for as a liability at fair value at the acquisition date
in accordance with ASC 480, "Distinguishing Liabilities from Equity." This liability was recorded at fair value on the Closing Date and was accreted to its full settlement value at the Second Funding
Date by recording the increase to interest expense.

The
Company determined that the CPS transaction constitutes a business combination in accordance with ASC 805, "Business Combinations." The purchase price was allocated to the tangible
and intangible assets acquired based on their estimated fair values on the acquisition date. The Company incurred $0.1 million of costs during Fiscal 2010 related to the acquisition of the MPL.
These costs are recorded in selling, general and administrative expenses in the accompanying statement of operations. In October 2010, General Electric Company purchased certain assets of CPS,
including the 125 kW waste heat recovery generator systems product line.

The
following table presents the purchase price allocation:

Description

Purchase Price(In thousands)Manufacturing equipment

$
292Intangible Assets:Technology


2,240Parts/service customer relationships


1,080TA100 customer relationships


617Backlog


490Trade name


69Total purchase consideration

$
4,788


Acquired
intangible assets have estimated useful lives between one and ten years. The fair value assigned to identifiable intangible assets acquired has been determined primarily by
using the income approach. Purchased identifiable intangible assets, except for backlog, are amortized on a straight-line basis over their respective useful lives and classified as a
component of cost of goods sold or selling, general and administrative expenses based on the function of the underlying asset. Backlog is amortized on a per unit basis as the backlog units are sold
and presented as a component of cost of goods sold.

The
financial results of the MPL have been included in the Company's Statements of Operations commencing on the Closing Date. Total revenue and net loss generated from the MPL subsequent
to the Closing Date were $1.3 million and $32,500, respectively. The following unaudited pro forma

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Acquisition (Continued)

financial
information presents the results as if the MPL acquisition had occurred at the beginning of each year (in thousands):

Fiscal Year
Ended March 31,2010

2009Revenue

$
64,279

$
49,474Net Loss


(69,977
)

(44,446
)


Supply Agreement

On the Closing Date, the Company and CPS entered into a manufacturing supply agreement under which CPS would continue to manufacture
the TA100 microturbines for the Company through March 31, 2011 (the "Transition Period"). During the Transition Period, CPS leased from the Company on a royalty-free basis the
intellectual property required to manufacture TA100 microturbines.

The
Company agreed to purchase for cash at the end of the Transition Period any remaining TA100 microturbine inventory that was not consumed as part of the TA100 manufacturing process
and was not considered excess or obsolete and to obtain title to certain TA100 manufacturing equipment. The manufacturing equipment is accounted for as a capital lease at the acquisition date under
ASC 840 "Leases" and recorded at fair value.

On
April 28, 2011, the Company purchased $2.3 million of the remaining TA100 microturbine inventory that was not consumed as part of the TA100 manufacturing process and
acquired the manufacturing equipment.

Original Equipment Manufacturer ("OEM")Agreement

On the Closing Date, the Company also entered into an agreement with CPS to purchase 125 kW waste heat recovery generator systems from
CPS. In exchange for certain minimum purchase requirements during a three-year period, the Company has exclusive rights to sell the zero-emission waste heat recovery generator
for all microturbine applications and for applications 500 kW or lower where the source of heat is the exhaust of a reciprocating engine used in a landfill application. The Company must meet specified
annual sales targets in order to maintain the exclusive rights to sell the waste heat recovery generators. The OEM agreement is being treated as a separate transaction from the MPL acquisition.

F-40

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Table of Contents

SCHEDULE II

CAPSTONE TURBINE CORPORATION        VALUATION AND QUALIFYING ACCOUNTS        FOR THE YEARS ENDED MARCH 31, 2011, 2010 and 2009        (In thousands)

Allowance for Doubtful Accounts:Balance, March 31, 2008

$
629Additions charged to costs and expenses


273Deductions


(258
)Balance, March 31, 2009


644Additions charged to costs and expenses


420Deductions


(943
)Balance, March 31, 2010


121Additions charged to costs and expenses


359Deductions


(268
)Balance, March 31, 2011

$
212


F-41

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Table of Contents

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

CAPSTONE TURBINE CORPORATIONDate: June 14, 2011

By:

/s/ EDWARD I. REICH Edward I. Reich Executive Vice President, Chief Financial Officer
(Principal Financial Officer)


KNOW
ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Capstone Turbine Corporation, hereby severally constitute Darren R. Jamison and Edward I. Reich, and
each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, this Annual Report on
Form 10-K and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable
Capstone Turbine Corporation to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.

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

Signature

Title

Date/s/ DARREN R. JAMISON Darren R. Jamison

Chief Executive Officer and Director (Principal Executive Officer)

June 14, 2011/s/ EDWARD I. REICH Edward I. Reich

Chief Financial Officer (Principal Financial Officer)

June 14, 2011/s/ JAYME L. BROOKS Jayme L. Brooks

Chief Accounting Officer (Principal Accounting Officer)

June 14, 2011/s/ GARY D. SIMON Gary D. Simon

Chairman of the Board of Directors

June 14, 2011/s/ RICHARD K. ATKINSON Richard K. Atkinson

Director

June 14, 2011/s/ JOHN V. JAGGERS John V. Jaggers

Director

June 14, 2011


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Table of Contents

Signature

Title

Date/s/ NOAM LOTAN Noam Lotan

Director

June 14, 2011/s/ GARY J. MAYO Gary J. Mayo

Director

June 14, 2011/s/ ELIOT G. PROTSCH Eliot G. Protsch

Director

June 14, 2011/s/ HOLLY A. VAN DEURSEN Holly A. Van Deursen

Director

June 14, 2011/s/ DARRELL J. WILK Darrell J. Wilk

Director

June 14, 2011


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Table of Contents

Exhibit Index

Exhibit
Number

Description2.1

Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated February 1, 2010(a)2.2

Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated March 31, 20112.3

Second Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated April 28, 20113.1

Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation(b)3.2

Amended and Restated Bylaws of Capstone Turbine Corporation(c)4.1

Specimen stock certificate(d)4.2

Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock(e)4.3

Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Capstone Turbine Corporation dated September 16, 2008(f)4.4

Rights Agreement, dated July 7, 2005, between Capstone Turbine Corporation and Mellon Investor Services LLC(e)4.5

Amendment No. 1 to Rights Agreement, dated July 3, 2008, between Capstone Turbine Corporation and Mellon Investor Services LLC(g)4.6

Amendment No. 2 to Rights Agreement, dated June 9, 2011, between Capstone Turbine Corporation and Mellon Investor Services LLC4.7

Form of Warrant issued to investors in the September 2009 Warrant Exchange Transaction(h)4.8

Form of Warrant issued to investors in the 2009 registered direct offering(i)4.9

Form of Warrant issued to investors in the 2008 registered direct offering(j)4.10

Form of Warrant issued to investors in the 2007 registered direct offering(k)10.1

Amended and Restated License Agreement, dated August 2, 2000, by and between Solar Turbines Incorporated and Capstone Turbine Corporation(l)10.2

Transition Agreement, dated August 2, 2000, by and between Capstone Turbine Corporation and Solar Turbines Incorporated(l)10.3

Lease between Capstone Turbine Corporation and Northpark IndustrialLeahy Division LLC, dated December 1, 1999, as amended, for leased premises at 21211 Nordhoff Street, Chatsworth, California(m)10.4

Lease between Capstone Turbine Corporation and AMB Property, L.P., dated September 25, 2000, as amended, for leased premises at 16640 Stagg Street, Van Nuys, California(n)10.5
*
1993 Incentive Stock Option Plan(o)10.6
*
Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan(p)10.7
*
Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 9, 2009(q)


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Table of Contents

Exhibit
Number

Description10.8
*
Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 11, 2008(r)10.9
*
Form of Stock Option Agreement for Amended and Restated 2000 Equity Incentive Plan(s)10.10
*
Form of Stock Bonus Agreement for Capstone Turbine Corporation 2000 Equity Incentive Plan(t)10.11
*
Deferred Compensation Plan of Capstone Turbine Corporation(u)10.12
*
Amended and Restated Capstone Turbine Corporation Change of Control Severance Plan(v)10.13

Development and License Agreement between Capstone Turbine Corporation and Carrier Corporation, successor in interest to UTC Power Corporation, dated September 4, 2007(p)10.14

First Amendment to the Development and License Agreement between Capstone Turbine Corporation and Carrier Corporation, successor in interest to UTC Power Corporation, dated January 14, 201110.15

Form of Subscription Agreement between Capstone Turbine Corporation and investors in the 2009 registered direct offering(i)10.16

Form of Subscription Agreement between Capstone Turbine Corporation and investors in the 2008 registered direct offering(j)10.17

Form of Warrant Exercise Agreement between Capstone Turbine Corporation and investors in the September 2009 Warrant Exchange Transaction(h)10.18

Form of Warrant Exercise Agreement between Capstone Turbine Corporation and investors in the March 2011 Warrant Exchange Transaction(w)10.19

Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Domestic Facility)(x)10.20

Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Ex-Im Subfacility)(x)10.21

First Amendment to Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 2009(x)10.22

Second Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated November 5, 2009(y)10.23

Third Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 11, 2010(t)10.24

Fourth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 29, 2010(z)10.25

Fifth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated November 9, 2010(aa)10.26

Sixth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated March 23, 2011(bb)10.27

Seventh Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 201110.28
*
Capstone Turbine Corporation Executive Performance Incentive Plan(cc)10.29
*
Inducement Stock Option Agreement with Darren R. Jamison, dated December 18, 2006(dd)10.30
*
Restricted Stock Agreement with Darren R. Jamison, dated December 18, 2006(dd)


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Table of Contents

Exhibit
Number

Description10.31
*
Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, dated December 1, 2006(dd)10.32
*
Amendment to Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(x)10.33
*
Amended and Restated Change of Control Severance Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(x)10.34
*
Letter Agreement between Capstone Turbine Corporation and James D. Crouse, dated January 31, 2007(ee)10.35
*
Inducement Stock Option Agreement with James D. Crouse, dated February 5, 2007(ee)10.36
*
Restricted Stock Agreement with James D. Crouse, dated February 5, 2007(ee)10.37
*
Form of Inducement Stock Option Agreement(ff)10.38
*
Form of Inducement Restricted Stock Unit Agreement(ff)14.1

Code of Business Conduct(gg)14.2

Code of Ethics for Senior Financial Officers and Chief Executive Officer(gg)21

Subsidiary List23

Consent of Independent Registered Public Accounting Firm24

Power of Attorney (included on the signature page of this Form 10-K)31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(a)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on February 5, 2010 (File
No. 001-15957).(b)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated May 8, 2000 (File
No. 333-33024).(c)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2005 (File No. 001-15957).(d)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated June 21, 2000 (File
No. 333-33024).(e)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 8, 2005 (File
No. 001-15957).(f)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009 (File No. 001-15957).(g)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 10, 2008 (File
No. 001-15957).(h)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 18, 2009 (File
No. 001-15957).


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Table of Contents

(i)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on May 4, 2009 (File
No. 001-15957).(j)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 18, 2008 (File
No. 001-15957).(k)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on January 19, 2007 (File
No. 001-15957).(l)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on October 16, 2000 (File
No. 000-15957).(m)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 2, 2009 (File
No. 000-15957).(n)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on August 17, 2009 (File
No. 000-15957).(o)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1, dated March 22, 2000 (File
No. 333-33024).(p)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2007 (File No. 001-15957).(q)Incorporated
by reference to Appendix A to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 17, 2009 (File
No. 001-15957).(r)Incorporated
by reference to Appendix B to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 18, 2008 (File
No. 001-15957).(s)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2005 (File No. 001-15957).(t)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2010
(File No. 001-15957).(u)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-8, dated July 31, 2001 (File
No. 333-66390).(v)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2005
(File No. 001-15957).(w)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on March 10, 2011 (File
No. 000-15957).(x)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2009
(File No. 001-15957).(y)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for quarterly period ended September 30,
2009 (File No. 001-15957).(z)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 1, 2010 (File
No. 000-15957).(aa)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on November 12, 2010 (File
No. 000-15957).(bb)Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on March 25, 2011 (File
No. 000-15957).(cc)Incorporated
by reference to Appendix A to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 18, 2008 (File
No. 001-15957).


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Table of Contents

(dd)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2006 (File No. 001-15957).(ee)Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended on March 31,
2007 (File No. 001-15957).(ff)Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-8, dated June 17, 2009 (File
No. 333-160049)(gg)Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2003 (File No. 001-15957).*Management
contract or compensatory plan or arrangement


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