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developments relating to litigation or governmental investigations; and



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decreases in oil, natural gas and electricity prices.

        In addition, the stock market in general, and the NASDAQNasdaq 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- actionclass-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 itsuch stockholder acquired such status unless appropriate board or stockholder approvals are obtained.

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        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.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

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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. NoticesOn August 26, 2010, based on the expiration of appealthe 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, and managementuncertain. 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"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,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.cross appeal. Simmonds' reply brief and opposition to the cross-appealcross appeal were filed on November 2, 2009 and the underwriters' reply brief in support of their cross-appeals werecross 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.

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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 NASDAQNasdaq Global Market under the symbol "CPST". The following table sets forth the low and high sales prices for each period indicated.

        As of June 7, 2010,2011, the last reported sale price of our common stock on the NASDAQNasdaq Global Market was $1.09$1.67 per share.

Stockholders

        As of June 7, 20102011 there were 880854 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.

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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.

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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 difficultchallenging 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 C200 and 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 will continue tocan provide strong potential upside opportunities to Capstone in the near term.

        Our Chief Executive Officer and Executive Vice President of Sales & Marketing and Senior Vice President of Customer Service have approximately 60 years of combinedsignificant experience in distributed generation and co-generation. This team hasThey have successfully sold competing products, including GE Energy Jenbacher, gas engines, and 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 transaction, on February 23, 2010,APA, the Company issued to CPS 1,550,387 shares of common stock ofat the Companyclosing date on February 1, 2010 and agreed to pay additional consideration of $3.1 million on July 30, 2010.2010 (the "Second Funding Date"). The additional consideration maywas to be paid, at the Company's discretion, in a currently undetermined numbershares of shares,the Company's common stock or cash. If settled inThe Company elected to satisfy the amount due on the Second Funding Date with common stock the numberand issued 3,131,313 shares to CPS.

        On April 28, 2011, we purchased $2.3 million of shares of common stock issuable on July 30, 2010 will be equal to $3.1 million divided by the average closing share price of the common stock for the 30-day trading period ending on the trading date immediately preceding the issuance.

        CPS will continue to manufacture the TA100 microturbines for Capstone through March 31, 2011. We have agreed to purchase for cash any remaining TA100 microturbine inventory remaining after March 31, 2011 that haswas not been consumed as part of the TA100 manufacturing process and is not considered in excess or obsolete and we will obtain title to certain TA100acquired 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.

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        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:

1)

Focus on Vertical Markets—Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and applications (CHP(energy efficiency, renewable energy, natural resources, critical power supply and CCHP, resource recovery, hybrid electric vehicles and secure power)mobile products), we identify specific targeted vertical market segments. Within each of these segments, we identify what we believe to be the critical factors to success and base our plans on those factors.

During Fiscal 2010,2011, we booked orders for 77.291.9 megawatts and shipped 52.869.7 megawatts of products, resulting in 96.4118.6 megawatts in backlog at the end of the fiscal year. Our actual product shipments in Fiscal 20102011 were: 38%41% for use in CHPenergy efficiency applications, 7%14% for use in CCHPrenewable energy applications, 22%39% for use in resource recoverynatural resources applications and 33%6% for use in other applications (including hybrid electric vehiclescritical power supply and secure power)mobile products).

2)

Sales and Distribution Channel—We seek out distributors and representatives that have business experience and capabilities to support our growth plans in our targeted markets. In North America, we currently have 3836 distributors and OEMs, which includes teninclude six distributors added as a result of the CPS transaction. Internationally, outside of North America, we currently have 5561 distributors and OEMs, which includes eightinclude 11 distributors added as a result of the CPS transaction. We continue to refine the distribution channels to address our specific targeted markets.



3)

Service—We serve our customers directly and through qualified distributors, and ASCs, all of whomwho will perform their service work using technicians specifically trained by Capstone. 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 ASCsdistributors 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 ASPs and must be employed by an ASCa distributor in order to perform work pursuant to a Capstone FPP. The majority of our distributorsFPPs are ASCs.generally paid quarterly in advance. Our FPP backlog at the end of Fiscal 20102011 was $17.1$29.7 million which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2024.2026. Service revenue in Fiscal 20102011 was approximately 8% of total revenue.



4)

Product Robustness and Life Cycle Maintenance Costs—To provide us with the ability to evaluate microturbine performance in the field, we developed a "real-time" remote monitoring and diagnostic feature. This feature allows us to monitor installed units and rapidly collect operating data on a continual basis. We use this information to anticipate and more quickly respond to field performance issues, evaluate component robustness and identify areas for continuous improvement. This feature is important in allowing us to better serve our customers.



5)

New Product Development—Our new product development is targeted specifically to meet the needs of our selected vertical markets. We expect that our existing product platforms, the C30, C60 Series,C65, TA100, C200 and C1000 Series microturbines, will be our foundational product lines for the foreseeable future. Our product development efforts are centered on enhancing the features of these base products. We are currently focusing efforts on developing a more efficient microturbine Combined Heat and Power (CHP) system. The first phase of the

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the featuresdevelopment 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 these base products. Our C200 product beta testing was successfully implemented during Fiscal 2005 and 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, 800250 kW and 600 kW solutionsprojected electrical efficiency of 35%. The second phase of the program is expected to incorporate further engine efficiency improvements, resulting in a single ISO-sized container. Our C1000 product betawith a projected electrical efficiency of 42% and targeted power output of 370 kW. The DOE awarded us a grant of $5.0 million in support of this development program.

In addition, we are developing and testing was successfully implemented during Fiscal 2009 and the first commercial shipment wasa fuel flexible microturbine system capable of operating on December 29, 2008.synthetic gas fuel mixtures containing varying amounts of hydrogen.

6)

Cost and Core Competencies—We are makingcontinuing to make progress towards achieving overall cost improvementsimprovement goals through design and manufacturability changes, robotics, parts commonality, tier one suppliers and lower cost offshore suppliers. In conjunction with these changes, we launched a strategic supply chain initiative to develop suppliers on a global basis. We continue to review avenues for cost reduction by sourcing to the best value supply chain option. We have made progress and plan to continue diversifying our suppliers internationally and within the United States. Management also expects to leveragebe able to continue leveraging our costs as product volumes increase.

        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, which iswith approximately $10 to $15 million of capital expenditures. We have not reflective of what is in our current backlog.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.

•

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. Factors that are considered important that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors

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include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on undiscounted estimated future cash flows compared with the carrying value of the related assets. If the undiscounted estimated future cash flows areis less than the carrying value, an impairment loss is recognized and the loss is measured by the difference between the carrying value and the estimated fair value of the assets, with suchassets. The estimated fair valuesvalue of the assets are determined using the best information available, which generally is an estimate of the future discounted estimated future cash flows offlow associated with the assets using a discount rate that approximates our




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the weighted-average cost of capital.capital for the Company. On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. Intangible assets include a manufacturing license, trade name, technology, backlog and customer relationships. We reevaluate the useful life determinations for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.

The estimation of future cash flows requires significant estimates of factors that include future sales growth and gross margin performance and reductions in operating expenses. This estimation includes the performance of our recently acquired TA100 product line.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. A significant assumption in our forecasts is our ability to reduce our direct material costs. Based on our current forecasts, if we were not able to achieve 80% of ouradditional significant cost reduction estimates,reductions, our estimated undiscounted cash flows couldmay not exceed the carrying value of our long-lived assets, which could result in a future impairment of our long-lived assets. The Company performed an analysis as of March 31, 20102011 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. See Note 5—Intangible Assets in the "Notes to Consolidated Financial Statements."

•

Our inventories are valued at first in first out ("FIFO") and lower of cost or market. We routinely evaluate the composition of our inventories and identify slow-moving, excess, obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if write-downs are required. Included in this assessment is a review for obsolescence as a result of engineering changes in our product. Future product enhancement and development may render certain inventories obsolete, resulting in additional write-downs of inventories. In addition, inventories are classified as current or long-term based on our sales forecast. A change in forecast could impact the classification of inventories.



•

We provide for the estimated cost of warranties at the time revenue from sales is recognized. We also accrue the estimated costs to address reliability repairs on products no longer under warranty when, in our judgment, and in accordance with a specific plan developed by us, it is prudent to provide such repairs. We estimate warranty expenses based upon historical and projected product failure rates, estimated costs of parts, labor and shipping to repair or replace a unit and the number of units covered under the warranty period. While we engage in extensive quality programs and processes, our warranty obligation is affected by failure rates and service costs in correcting failures. As we have more units commissioned and longer periods of actual performance, additional data becomes available to assess expected warranty costs. When we have 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. Changes in estimates are recorded in the period that new information, such as design changes, cost of repair and product enhancements, becomes available. Should actual failure rates or service costs differ from our estimates, revisions to the warranty liability would be required and could be material to our financial condition, results of operations and cash flow.




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•

Our revenue consists of sales of products, parts, accessories and service, net of discounts. Our 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 service. Our 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 us except for warranties provided on




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the products and parts sold. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, selling price is fixed or determinable and collectability is reasonably assured. We occasionally enter into agreements that contain multiple elements, such as equipment, installation, engineering and/or service. For multiple- elementmultiple-element arrangements, we recognize revenue for delivered elements when the delivered item has stand-alone value to the customer, fair valuesthe Company's estimated selling price of undelivered elements areeach element is known and customer acceptance, if required, has occurred.

We allocate the total contract value among each element based on its relative selling price.



•

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate all accounts aged over 60 days or past payment terms. If the financial condition of our customers deteriorates or if other conditions arise that result in an impairment of their ability or intention to make payments, additional allowances may be required.



•

We have a history of unprofitable operations. These losses generated significant federal and state net operating loss ("NOL") carryforwards. We record a valuation allowance against the net deferred income tax assets associated with these NOLs if it is "more likely than not" that we will not be able to utilize them to offset future income taxes. Because of the uncertainty surrounding the timing of realizing the benefits of our favorable tax attributes in future income tax returns, a valuation allowance has been provided against all of our net deferred income tax assets. We currently provide for income taxes only to the extent that we expect to pay cash taxes, primarily state taxes. It is possible, however, that we could be profitable in the future at levels which could cause management to determine that it is more likely than not that we will realize all or a portion of the NOL carryforwards. Upon reaching such a conclusion, we would record the estimated net realizable value of the deferred income tax asset at that time. Such adjustment would increase income in the period that the determination was made.



•

We record an estimated loss from a loss contingency when information available prior to issuance of our 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. Accounting for contingencies, such as legal matters, requires us to use our judgment. Any unfavorable outcome of litigation or other contingencies could have an adverse impact on our financial condition, results of operations and cash flow.



•

We recognize stock-based compensation expense associated with stock options in the statement of operations. Determining the amount of stock-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of stock options. We calculate the grant-date fair values using the Black—Scholes valuation model.

The use of Black-ScholesBlack—Scholes model requires us to make estimates of the following assumptions:

•

Expected volatility—The estimated stock price volatility was derived based upon the Company's actual historic stock prices over the expected option life, which represents the Company's best estimate of expected volatility.




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•

Expected option life—For Fiscal 2008, the Company's estimate of an expected option life was calculated in accordance with the Staff Accounting Bulletin No. 107 simplified method for calculating the expected term assumption. In Fiscal 2010 and 2009, theThe expected life, or term, of options granted was derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding.






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•

Risk-free interest rate—We used the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life assumption as the risk-free interest rate.

The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. We estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term "forfeitures" is distinct from "cancellations" or "expirations" and represents only the unvested portion of the surrendered option. We review historical forfeiture data and determine the appropriate forfeiture rate based on that data. We re-evaluate this analysis periodically and adjust the forfeiture rate as necessary. Ultimately, we recognize the actual expense over the vesting period only for the shares that vest.

•

As discussed in Note 9—Fair Value Measurements in the "Notes to Consolidated Financial Statements", we adopted the updated guidance of ASC 815 which requires that our warrants be accounted for as derivative instruments and that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrants. We calculate the fair values using the Black-Scholes valuationMonte–Carlo simulation model.

The use of the Black-ScholesMonte–Carlo simulation model requires us to make estimates of the following assumptions:

•

Expected volatility—The estimated stock price volatility was derived based upon the Company's actual historic stock prices over the contractual life of the warrants, which represents the Company's best estimate of expected volatility.



•

Risk-free interest rate—We used the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the warrant contractual life assumption as the risk-free interest rate.

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									2010
		Revenue			Megawatts			Units			Revenue			Megawatts			Units
C30		$	6.0			4.4			148		$	6.9			5.0			161
C65			23.4			23.2			356			17.4			17.7			272
TA100			5.1			4.1			41			1.2			1.1			11
C200			5.3			5.0			25			4.9			5.6			28
C600			2.2			2.4			4			2.8			3.0			5
C800			4.4			5.6			7			5.0			6.4			8
C1000			18.6			24.0			24			10.5			14.0			14
Waste 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			499
Accessories, 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 is reported net of allowances.    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 the same period lastFiscal 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 quarterly revenue and backlog. Therefore, we evaluate historical revenue in conjunction with backlog to anticipate the growth trend of our revenue.




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

		Years Ended March 31,																			Years Ended March 31,
		2010									2009										2010									2009
		Revenue			Megawatts			Units			Revenue			Megawatts			Units				Revenue			Megawatts			Units			Revenue			Megawatts			Units
C30		$	6.9			5.0			161		$	4.0			3.1			104			$	6.9			5.0			161		$	4.0			3.1			104
C60 Series			17.4			17.7			272			23.8			24.4			375
C65																						17.4			17.7			272			23.8			24.4			375
TA100			1.2			1.1			11			—			—			—				1.2			1.1			11			—			—			—
C200			4.9			5.6			28			1.4			1.8			9				4.9			5.6			28			1.4			1.8			9
C600			2.8			3.0			5			1.0			1.2			2				2.8			3.0			5			1.0			1.2			2
C800			5.0			6.4			8			1.1			1.6			2				5.0			6.4			8			1.1			1.6			2
C1000 Series			10.5			14.0			14			1.1			2.0			2				10.5			14.0			14			1.1			2.0			2
Total from Microturbine Products		$	48.7			52.8			499		$	32.4			34.1			494			$	48.7			52.8			499		$	32.4			34.1			494
Accessories, Parts and Service			12.9			—			—			11.5			—			—				12.9			—			—			11.5			—			—
Total		$	61.6			52.8			499		$	43.9			34.1			494			$	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.    Cost of goods sold includes direct material costs, production and service center overhead, inventory charges and provision for estimated product warranty expenses.    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 currently havehad 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 iswas offset by a decrease in our production and service center overhead of $1.0 million.

        Warranty expense is a combination of a per-unit warranty accrual recorded at the time revenue is recognized and changes, if any, in estimates for warranty programs. Warranty program 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 $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 and yield issues 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.




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        Management expects we will continue to incur gross losses until we are able to achieve higher unit sales volumes to cover our fixed manufacturing costs. We have taken steps to further reduce direct material costs and other manufacturing and warranty costs as we work to achieve profitability.

        Research and Development Expenses.    R&D expenses include compensation, engineering department expenses, overhead allocations for administration and facilities and materials costs associated with development.    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 UTCPCarrier 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 UTCPCarrier 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. Management expects R&D expenses in Fiscal 2011 to be slightly lower than in Fiscal 2010.

        Selling, General and Administrative ("SG&A") 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. Management expects SG&A expenses in Fiscal 2011 to be slightly lower than in Fiscal 2010.

        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. Management expects interest income to increase for Fiscal 2011 as we invest cash received from our February 2010 offering into 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, based on the Black-Scholes valuation model andimpacted 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




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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.

Year Ended March 31, 2009 Compared to Year Ended March 31, 2008

        Revenue.    Revenue for Fiscal 2009 increased $12.6 million, or 40%, to $43.9 million from $31.3 million for Fiscal 2008. The overall revenue increase for Fiscal 2009 compared to the previous year included a $9.0 million increase in revenue from the North American market, a $4.6 million increase in revenue from the Asian market, a $1.4 million increase in revenue from the European market, all primarily the result of efforts to improve distribution channels. South American market revenue for Fiscal 2009 was $2.4 million lower than the previous year because Fiscal 2008 included an unusually large product sale for this historically small revenue market. Overall microturbine product shipments were slightly higher during Fiscal 2009 compared to Fiscal 2008 totaling 494 units (34.1 megawatts) and 434 units (22.5 megawatts) respectively. Megawatts shipped and revenue during Fiscal 2009 increased as a result of increased shipments of our C60 Series product and the introduction of our new C200 and C1000 Series product lines. The average revenue per unit increased to $66,000 in Fiscal 2009 compared to $72,000 per unit for Fiscal 2008. 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 quarterly 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,
		2009									2008
		Revenue			Megawatts			Units			Revenue			Megawatts			Units
C30		$	4.0			3.1			104		$	6.4			5.0			165
C60 Series			23.8			24.4			375			15.3			17.5			269
C200			1.4			1.8			9			—			—			—
C600			1.0			1.2			2			—			—			—
C800			1.1			1.6			2			—			—			—
C1000 Series			1.1			2.0			2			—			—			—
Total from Microturbine Products		$	32.4			34.1			494		$	21.7			22.5			434
Accessories, Parts and Service			11.5			—			—			9.6			—			—
Total		$	43.9			34.1			494		$	31.3			22.5			434

        One customer accounted for 13% of revenue for Fiscal 2009. For Fiscal 2008, two customers accounted for 18% and 13% of revenue, respectively. Sales to BPC accounted for 13% and 18% of revenues for Fiscal 2009 and 2008, respectively. Sales to UTC accounted for 7% and 13% of revenue for Fiscal 2009 and 2008, respectively.

        Gross Loss.    The gross loss was $5.3 million, or 12% of revenue, for Fiscal 2009 compared to $3.8 million, or 12% of revenue, for Fiscal 2008. The increase in gross loss reflected increased manufacturing costs of $2.9 million because of the product launch of the C200 and C1000 Series systems offset by an improvement of $0.1 million as a result of a higher margin product mix, primarily because of increased sales of C60 Series systems and reduced warranty expense of $1.3 million. Warranty expense for unit shipments increased slightly as a result of higher shipment volumes and the product launch of the C200 and C1000 Series systems offset by a decrease in the estimated cost of repair. In addition, the warranty expense increase was offset by a $1.3 million reduction in warranty programs because of units subsequently covered by factory protection plans, units decommissioned and our expectation that units will fall outside of the estimated warranty failure period.




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        Research and Development Expenses.    R&D expenses for Fiscal 2009 decreased $0.8 million, or 9%, to $8.1 million from $8.9 million for Fiscal 2008. R&D expenses are reported net of benefits from cost-sharing programs, such as the DOE and the UTCP funding. There were approximately $8.1 million of such benefits for Fiscal 2009 and $3.0 million of such benefits for Fiscal 2008. In-kind services performed by UTCP under the cost-sharing program for each of Fiscal 2009 and 2008 were valued at $0.2 million and recorded as consulting expense. The overall decrease in R&D expenses of $0.8 million resulted from the increased recognition of $5.1 million of funding from UTCP for the cost-sharing program. This benefit was offset by increased spending for supplies of $2.3 million, labor costs of $1.4 million, consulting fees of $0.4 million and facilities expense of $0.2 million. Cost-sharing programs vary from period to period depending on the phases of the programs.

        Selling, General and Administrative Expenses.    SG&A expenses increased $3.0 million, or 12%, to $28.6 million for Fiscal 2009 from $25.6 million for Fiscal 2008. The net increase in SG&A expenses was comprised of an increase of $1.9 million in labor expense, $1.6 million related to travel expense, $0.3 million of marketing expense and $0.1 million in professional services expense, including accounting, legal and insurance expense, offset by a decrease for a change in estimate of legal accruals of $0.4 million, supplies of $0.3 million and consulting expense of $0.2 million. The increase in labor and travel costs reflected the continued effort to develop worldwide distributors and the launch of the C200 and C1000 Series systems.

        Interest Income.    Interest income for Fiscal 2009 decreased $1.7 million, or 77%, to $0.5 million from $2.2 million for Fiscal 2008. The decrease during Fiscal 2009 was attributable to lower average cash balances and interest rates.

        Interest Expense.    Interest expense for Fiscal 2009 increased $62,000, or 886%, to $69,000 from $7,000 for Fiscal 2008. Interest expense related to the revolving credit facility with Wells Fargo accounted for the increase in interest expense in Fiscal 2009.

        Income Tax Provision.    At March 31, 2009, we had federal and state net operating loss carryforwards of approximately $508.6 million and $341.8 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 $210.6 million at March 31, 2009 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, 2008, 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.




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Amounts in thousands, except per share data


			Year Ended March 31, 2010												Year Ended March 31, 2009														Year Ended March 31, 2011												Year Ended March 31, 2010
(Unaudited)	(Unaudited)		Fourth Quarter			Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter			(Unaudited)		Fourth Quarter			Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Revenue	Revenue		$	16,321		$	15,986		$	15,522		$	13,725		$	11,822		$	11,482		$	13,121		$	7,524		Revenue		$	22,757		$	24,159		$	18,922		$	16,052		$	16,321		$	15,986		$	15,522		$	13,725
Cost of goods sold	Cost of goods sold			18,713			16,204			18,520			16,562			14,727			12,083			13,448			9,019		Cost of goods sold			23,827			23,233			18,803			16,564			18,713			16,204			18,520			16,562
	Gross loss			(2,392	)		(218	)		(2,998	)		(2,837	)		(2,905	)		(601	)		(327	)		(1,495	)	Gross margin (loss)			(1,070	)		926			119			(512	)		(2,392	)		(218	)		(2,998	)		(2,837	)
Operating costs and expenses:	Operating costs and expenses:																										Operating costs and expenses:
	R&D			1,957			1,965			2,271			761			2,076			2,048			2,017			1,984		R&D			2,000			1,424			2,040			1,522			1,957			1,965			2,271			761
	SG&A			7,887			7,433			6,840			6,223			6,929			7,441			7,720			6,538		SG&A			7,197			5,959			6,611			6,436			7,887			7,433			6,840			6,223
	Loss from operations			(12,236	)		(9,616	)		(12,109	)		(9,821	)		(11,910	)		(10,090	)		(10,064	)		(10,017	)	Loss from operations			(10,267	)		(6,457	)		(8,532	)		(8,470	)		(12,236	)		(9,616	)		(12,109	)		(9,821	)
	Net loss		$	(12,931	)	$	(7,170	)	$	(31,881	)	$	(15,259	)	$	(11,954	)	$	(10,035	)	$	(9,911	)	$	(9,817	)	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		$	(0.05	)	$	(0.04	)	$	(0.17	)	$	(0.08	)	$	(0.06	)	$	(0.06	)	$	(0.06	)	$	(0.07	)	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. Based on our current forecasts and assumptions, we believe that our existing cash and cash equivalents are sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. Our planned capital expenditures for Fiscal 2011the year ended March 31, 2012 include approximately $2.0$0.6 million for rental units, and plant and equipment costs related to manufacturing and operations. The majority of the $2.0 million relates to the rental units, which can be built primarily from inventory on hand. 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 increaseddecreased $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, compared to a decrease of $23.1 million during the year ended March 31, 2009.2010. The cash was generated from or used in:

Operating ActivitiesActivities.—During the year ended March 31, 20102011, we used $34.6$21.9 million in cash in our operating activities, which primarily consisted of a net loss for the period of approximately $67.2$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 $33.9$13.8 million and cash used forgenerated from working capital of approximately $1.3$2.8 million. This compared to operating cash usage of $55.5 million duringDuring the year ended March 31, 2009,2010, operating cash usage was $34.6 million, which consisted of a net loss for the period of approximately $41.7 million, offset by non-cash adjustments (primarily employee stock-based compensation, depreciation and amortization, warranty and inventory charges) of $6.3$67.2 million and cash used for working capital of approximately $20.1$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:

•

An increase in accounts receivable of $1.1 million during the year ended March 31, 2011 compared to an increase in accounts receivable of $7.8 million during the year ended March 31, 2010. The change in working capital of $18.8accounts receivable decreased $6.7 million was primarily attributableduring the year ended March 31, 2011 compared to the change in inventory which had decreased $20.4 million for Fiscalyear ended March 31, 2010 compared to Fiscal 2009 as a result of our initiatives to reduce inventory. Additionally, the change in working capital was attributable to the change in other current liabilities which had decreased $4.0 million for Fiscal 2010 compared to Fiscal 2009 because of the completion of certain UTCP Development Agreement milestones, offset by accounts receivable which had increased $3.6 million because of the timing of collections and collectionhigher sales occurring at the end of sales, anthe period.



•

An increase in warranty claims spendingaccounts payable and accrued expenses of $1.3$5.0 million andduring the year ended March 31, 2011 compared to an increase in accounts payable and accrued expenses of $4.1 million during the year ended March 31, 2010. The change in accounts payable and accrued expenses increased $0.9 million during the year ended March 31, 2011 compared to the year ended March 31, 2010 primarily because of an increase in inventory purchases as a result of higher unit shipments.



•

No change in other current liabilities during the year ended March 31, 2011 compared to a decrease in other current liabilities of $0.8 million during the year ended March 31, 2010. Other current liabilities during the year ended March 31, 2011 remained stable as certain Carrier Corporation Development Agreement milestones were completed during the first quarter of Fiscal 2010.



•

A decrease in accrued warranty reserve of $2.0 million during the year ended March 31, 2011 compared to a decrease in accrued warranty reserve of $2.6 million during the year ended March 31, 2010. The change in accrued warranty reserve decreased $0.6 million during the year ended March 31, 2011 compared to the year ended March 31, 2010 because of lower warranty costs incurred in the current year for our C200 and C1000 Series systems.



•

An increase in deferred revenues of $0.2 million during the year ended March 31, 2011 compared to a decrease in deferred revenues of $0.3 million during the year ended March 31, 2010. The change in deferred revenues increased $0.5 million overduring the year ended March 31, 2011 compared to the year ended March 31, 2010 because of an increase in advanced payments from our comprehensive FPP service programs compared to the same periodsperiod last year.



•

An increase in prepaid expenses and other current assets of $0.9 million during the year ended March 31, 2011 compared to a decrease in prepaid expenses and other current assets of $0.3 million during the year ended March 31, 2010. The change in prepaid expenses and other current assets increased $1.2 million during the year ended March 31, 2011 compared to the year ended March 31, 2010 because of purchases of inventory.

prepaid inventory held at vendor sites for which title remains with the vendor.




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•

A decrease in inventory of $1.8 million during the year ended March 31, 2011 compared to a decrease in inventory of $6.1 million during the year ended March 31, 2010. Management initiatives to reduce inventory resulted in further reductions in inventory levels.

Investing Activities—Net cash used in investing activities related primarilyof $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 ofduring the year ended March 31, 2011. We used $2.0 million and $6.7 million for Fiscal 2010 and 2009, respectively. Our cash usage for investing activities was relatively low related to capital expenditures compared to Fiscal 2009. However, in Fiscal 2009 we increased cash usage for investing activities as a resultthe acquisition of investments in production equipment and leasehold improvements related tofixed assets during the C200 and C1000 Series products.year ended March 31, 2010.

Financing Activities—During Fiscal 2010,2011, we generated $64.4$10.4 million from financing activities compared to cash generated during Fiscal 20092010 of $39.2$64.4 million. The funds generated from financing activities in Fiscal 20102011 were primarily the result of the February 2010 registered offering of our common stock, the September 2009March 2011 warrant exercise transaction and the May 2009 registered offering of our common stock and warrants described below.

Effective February 24, 2010, we completed an underwritten offering in which we sold 43.8 million shares of the Company's common stock at a price of $1.05 per share, resulting in gross proceeds of approximately $46.0 million. We incurred approximately $3.6 million in direct costs in connection with the offering.

Effective September 17, 2009,March 9, 2011, we entered into warrant exercise agreements with (i) the only two holders (the "Holders""2009 Holders") of warrants to purchase an aggregate of 7.2 million3,612,717 shares of the Company's common stock, par value $0.001 per share ("Common Stock"), issued by the Company to such Holders on May 7, 2009 (the "Initial"2009 Warrants"). Pursuant to the warrant exercise agreements, we agreed to issue and sell to the Holders new (ii) one holder (the "2008 Holder") of warrants to purchase an aggregate of 5.8 million392,191 shares of common stockCommon Stock issued by the Company on September 23, 2008 (the "New"2008 Warrants") in exchange forand (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 in full of the Initial2009 Warrants at the reduced exercise price of $0.90 per share. The sale of New Warrants resulted in gross proceeds of approximately $0.4 million. The exercise of the Initial Warrants resulted in gross proceeds of approximately $6.5 million.

Effective May 7, 2009, we completed a registered offering in which we sold 14.4 million shares of the Company's common stock and warrants to purchase 10.8 million shares of common stock with an initialexisting exercise price of $0.95 per share resulting in gross proceedsexchange for a fee of an aggregate amount of approximately $12.5$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. We incurred approximately $1.3 million in direct costsThe net proceeds to the Company in connection with the offering.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 20092010 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 waswere completed effective February 24, 2010, September 23, 2008.17, 2009 and May 7, 2009, respectively. The saleunderwritten offering resulted in gross proceeds of approximately $32.0$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 $29.5$11.2 million. The exercise of options and warrants yielded approximately $6.1 million in cash during Fiscal 2009.

Employee stock purchases, net of repurchases of shares of our common stock for employee taxes due on vesting of restricted stock units, yieldedresulted in approximately $40,000 of net cash generated during Fiscal 2011, compared with $0.1 million of net cash during each of Fiscal 20102010. During Fiscal 2011 and 2009. During Fiscal 2010, we generated additional financing from the Credit Facility (defined below) 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 "Credit




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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, and 2009, $7.6$7.1 million and $3.7$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




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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.

        As of March 31, 2009, we determined thatSeveral times since entering into the Agreements, we were not in compliancenoncompliance with financialcertain covenants inunder the Agreements regarding our net worth and net income. On May 3, 2009, we received fromCredit Facility. In connection with each event of noncompliance, Wells Fargo a waiverwaived the event of our noncompliance with these two financial covenants as of March 31, 2009default and, on June 9, 2009,several occasions, we amended the Agreements to revise these covenants.

        On September 22, 2009, we received from Wells Fargo a notice of default of our noncompliance with a financial covenant in the Agreements regarding our net worth as of June 30, 2009 and July 31, 2009 and a second financial covenant regarding our net income as of June 30, 2009. On October 28, 2009, we received an additional notice of default regarding our noncompliance with the net worth covenant as of August 31, 2009. These defaults were the result of our adoption of ASC 815 and the increase in C1000 Series sales, which had lower initial margins during the six months ended September 30, 2009. On November 5, 2009, we received from Wells Fargo a waiver of our noncompliance with these covenants and amended the financial covenants in the Agreements to reflect the effects of the new accounting treatment relatedresponse to the fair value of our warrant liability, effective September 30, 2009,default and the fluctuation of product mix, effective September 30, 2009.waiver.

        As a result of the amendment, we were in compliance with the amended financial covenants as of September 30, 2009.

        As of March 31, 2010, we determined that we were not in complianceour non-compliance with the financial covenant in the Agreements regarding our net income. On May 11,income as of March 31, 2010, we received a notice of default from Wells Fargo related to our noncompliance. As a result, Wells Fargo imposed default pricing of an additional 3.0% effective March 1, 2010. On June 11, 2010, we received from Wells Fargo a waiver of our noncompliance with the financial covenantIn addition, as of March 31, 2010 and amended the Agreements to set the covenants for Fiscal 2011. As a condition of the amendedfurther amendment of the Agreements, we haveWells 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 waiverwaivers and amended the Agreements as described above, we would not be able to draw additional funds under the Credit Facility. In addition, we havethe Company has pledged ourits accounts receivables, inventories, equipment, patents and other assets as collateral under thefor its Agreements, which would be subject to seizure by Wells Fargo if wethe 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, we believemanagement believes we will maintain compliance with the covenants contained in the amended Agreements for the next twelve monthsmonths.

        Management believes thatAlthough 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 existing cashplanned 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 cash equivalents are sufficient, tosuccessfully meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months; however, if our anticipated cash needs change, it is possible thatfinancial covenant, we may decideneed to raise additional capitalfunds in the future.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 provide assurancebe assured that we will be able to obtain additional funds on commercially favorable terms, or at all, especially given the state of worldwide capital markets.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.




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        Although we believe we have sufficient capital to fund our working capital and capital expenditures for at least the next twelve months, dependingDepending on the timing and product mix of our future sales and collection of related receivables, managingour 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:

•

the market acceptance of our products and services;



•

our business, product and capital expenditure plans;



•

capital improvements to new and existing facilities;



•

our competitors' response to our products and services;



•

our relationships with customers, distributors, dealers and project resellers; and



•

our customers' ability to afford and/or finance our products.

        Additionally, the continued credit crisisdifficulties 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, 2010,2011, our commitments under notes payable, capital leases and non-cancelable operating leases were as follows:

		Payment Due by Period																Payment Due by Period
		Total			Less than 1 Year			1 - 3 Years			3 - 5 Years			More than 5 Years				Total			1 Year or Less			1 - 3 Years			3 - 5 Years			More than 5 Years
		(in Thousands)																(in Thousands)
Contractual Obligations:
Long-term Debt and Capital Lease Obligations		$	302		$	167		$	127		$	8		$	—
Capital Lease Obligations																		$	297		$	214		$	80		$	3		$	—
Operating Lease Obligations		$	5,996		$	1,768		$	3,948		$	280		$	—			$	4,521		$	1,792		$	1,551		$	1,178		$	—
CPS Microturbine Product Line Acquisition Obligation		$	3,026		$	3,026		$	—		$	—		$	—
Revolving Credit Facility		$	7,571		$	7,571		$	—		$	—		$	—			$	7,080		$	7,080		$	—		$	—		$	—

        As of March 31, 2010,2011, we had firm commitments to purchase inventories of approximately $18.9$21.5 million through Fiscal 2013.2014. 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 and ASCs 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 or ASCs.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




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at distributors or ASCs.distributors. As of March 31, 2010,2011, no significant inventories were held at distributors or ASCs.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 FebruaryApril 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-09, "Subsequent Events (Topic 855)—Amendments to Certain Recognition and Disclosure Requirements"2010-17, Revenue Recognition—Milestone Method ("ASU 2010-09"2010-17"). ASU 2010-09 was issued to change certain2010-17 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 original codification andperiod in which the milestone is achieved only if the milestone meets all criteria to clarify other portions. Allbe 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 amendments in ASU 2010-09 are effective upon issuancevalue of the finalitem 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 2010-09, except for the use of the issued date for conduit debt obligors, which2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim or annual periods endingwithin those years, beginning on or after June 15, 2010. We determined thatadopted this updated guidance haswith no impact on our consolidated financial position or results of operations.

        In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 provides amended disclosure requirements related to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. We adopted ASU 2010-06 with no impact on disclosures. See Note 9—Fair Value Measurements in the "Notes to Consolidated Financial Statements" for disclosure regarding the fair value of financial instruments.

        In September 2009, the FASB issued updated guidance of ASCAccounting Standards Codification ("ASC") 605, "Revenue Recognition," for establishing the criteria for separating consideration in multiple-elementmultiple 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-specificvendor specific evidence or other third-partythird 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 are evaluating any impact that the adoption of this updated guidance may have on our consolidated financial position or results of operations.

        In August 2009, the FASB issued ASU 2009-05, "Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value an Update 2009-05" ("ASU 2009-05"). ASU 2009-05 amends subtopic 820-10, "Fair Value Measurements and Disclosures—Overall" and provides clarification for the fair value measurement of liabilities in circumstances where quoted prices for an identical liability in an active market are not available. ASU 2009-05 is effective for the first reporting period beginning after issuance. We adopted ASU 2009-05 with no impact on our consolidated financial position or results of operations.

        Effective July 1, 2009, we adopted the FASB ASC 105, "Generally Accepted Accounting Principles—Overall" ("ASC 105"). ASC 105 establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with




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GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue any new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue ASUs. The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.

        In May 2009, the FASB issued ASC 855, "Subsequent Events" ("ASC 855"). This should not result in significant changes in the subsequent events that an entity reports. Rather, ASC 855 introduces the concept of financial statements being available to be issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained. We adopted ASC 855 with no impact on our consolidated financial position or results of operations. See Note 1—Description of the Company and Basis of Presentation in the "Notes to Consolidated Financial Statements" for further discussion.

        In April 2009, the FASB issued updated guidance of ASC 820, "Fair Value Measurements." The updated guidance is effective for interim and annual periods ending after June 15, 2009 and provides guidance on how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. The updated guidance modifies the requirements for recognizing other-than-temporarily impaired debt securities and revises the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. The updated guidance also enhances the disclosure of instruments for both interim and annual periods. We adopted this updated guidance with no impact on our consolidated financial position or results of operations. See Note 9—Fair Value Measurements in the "Notes to Consolidated Financial Statements", for disclosure regarding the fair value of financial instruments.

        In June 2008, the FASB issued updated guidance of ASC 815, "Derivatives and Hedging" ("ASC 815"), that is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The updated guidance specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to our own stock and (b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. The updated guidance provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and is able to qualify for the scope exception. The adoption of this updated guidance affects our accounting for warrants with certain anti-dilution provisions. Warrants with certain anti-dilution provisions may no longer be recorded as equity. We adopted this updated guidance as of April 1, 2009. See Note 9—Fair Value Measurements in the "Notes to Consolidated Financial Statements", for disclosure regarding the fair value of financial instruments.

        In April 2008, the FASB issued updated guidance of ASC 350, "Intangibles—Goodwill and Other," removing the requirement for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions associated with the intangible asset. The intent of the




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updated guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under ASC 805, "Business Combinations," and other U.S. generally accepted accounting principles. The updated guidance replaces the previous useful-life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. This updated guidance applies to all intangible assets, whether acquired in a business combination or otherwise and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. We determined that this updated guidance has no impact on our consolidated financial position or results of operations.

        In March 2008, the FASB issued updated guidance of ASC 815, "Derivatives and Hedging" which is effective for fiscal years and interim periods beginning after November 15, 2008, with earlier adoption encouraged. This updated guidance is intended to improve transparency in financial reporting by requiring enhanced disclosures of the Company's derivative instruments and hedging activities and their effects on the Company's financial position, financial performance, and cash flows. This updated guidance applies to all derivative instruments, as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. The updated guidance impacts only the Company's disclosure requirements and therefore will not have an impact on the Company's consolidated financial position or results of operations. We adopted the updated guidance and included the additional required disclosures. See Note 9—Fair Value Measurements in the "Notes to Consolidated Financial Statements", for disclosure of derivative instruments.

        In December 2007, the FASB issued updated guidance of ASC 810, "Consolidation." This updated guidance establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The updated guidance also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This updated guidance was effective for fiscal years beginning after December 15, 2008. We determined that this updated guidance has 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, 2010,2011, we had $7.6$7.1 million outstanding under our Credit Facility. A hypothetical 2% change in interest rates would not have any effect on our interest expense or interest payments because interest on our Credit Facility balance of $7.6$7.1 million as of March 31, 20102011 would still be lower than the minimum interest payment of approximately $31,000 each calendar month payable pursuant to the Credit Facility.




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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, 2010,2011, 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, 20102011 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, 2010.2011. 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, 20102011 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 subsidiarysubsidiaries (the "Company") as of March 31, 2010,2011, based on criteria established inInternal Control—Integrated Framework issued 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, 2010,2011, based on the criteria established inInternal 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, 20102011 of the Company and our report dated June 14, 20102011 expressed an unqualified opinion on those financial statements and financial statement schedule and




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includes an explanatory paragraph regarding Capstone Turbine Corporation's adoption of the guidance originally issued in Emerging Issues Task Force No. 07-05, "Determining Whether an Instrument (or Embedded Feature) is Indexed on an Entity's Own Stock", (codified in FASB ASC Topic 815—Derivatives and Hedging)Hedging, effective April 1, 2009.

/s/DELOITTE & TOUCHE LLP
Los Angeles, California
June 14, 20102011




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Item 9B.    Other Information.


        None.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 20102011 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 20102011 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 20102011 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 20102011 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 20102011 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 20102011 annual meeting of stockholders is incorporated herein by reference.




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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 20102011 annual meeting of stockholders is incorporated herein by reference.




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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 20102011 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 20102011 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"Directors; Leadership Structure" included in our proxy statement relating to our 20102011 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 20102011 annual meeting of stockholders is incorporated herein by reference.




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PART IV


Item 15.    Exhibits and Financial Statement Schedules.


(a)

1. and 2.    Financial statements and financial statement schedule

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

(a)

3.    Index to Exhibits.

Exhibit Number			Description
	1		Underwriting Agreement between Capstone Turbine Corporation and Lazard Capital Markets, LLC, dated February 19, 2010(a)
	22.1		Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated February 1, 2010(b)2010(a)
	2.2		Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated March 31, 2011
	3.1 2.3		Second Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated April 28, 2011
	3.1		Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation(c)Corporation(b)
	3.2
	3.2		Amended and Restated Bylaws of Capstone Turbine Corporation(d)Corporation(c)
	4.1		Specimen stock certificate(d)
	4.1 4.2		Specimen stock certificate(e)
	4.2		Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock(f)Stock(e)
	4.3
	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(g)2008(f)
	4.4
	4.4		Rights Agreement, dated July 7, 2005, between Capstone Turbine Corporation and Mellon Investor Services LLC(f)LLC(e)
	4.5
	4.5		Amendment No. 1 to Rights Agreement, dated July 3, 2008, between Capstone Turbine Corporation and Mellon Investor Services LLC(h)LLC(g)
	4.6		Amendment No. 2 to Rights Agreement, dated June 9, 2011, between Capstone Turbine Corporation and Mellon Investor Services LLC
	4.6 4.7		Form of Warrant issued to investors in the September 2009 Warrant Exchange Transaction(i)Transaction(h)
	4.8
	4.7		Form of Warrant issued to investors in the 2009 registered direct offering(j)offering(i)
	4.9
	4.8		Form of Warrant issued to investors in the 2008 registered direct offering(k)offering(j)
	4.10
	4.9		Form of Warrant issued to investors in the 2007 registered direct offering(l)offering(k)
	10.1
	10.1		Amended and Restated License Agreement, dated August 2, 2000, by and between Solar Turbines Incorporated and Capstone Turbine Corporation(m)Corporation(l)
	10.2
	10.2		Transition Agreement, dated August 2, 2000, by and between Capstone Turbine Corporation and Solar Turbines Incorporated(m)Incorporated(l)




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				Exhibit Number			Description
	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(n)California(m)
	10.4
	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(o)California(n)
	10.5
	10.5	*	1993 Incentive Stock Option Plan(p)Plan(o)
	10.6




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Exhibit Number			Description
	10.6	*	Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan(q)Plan(p)
	10.7
	10.7	*	Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 9, 2009(r)2009(q)
	10.8
	10.8	*	Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 11, 2008(s)2008(r)
	10.9
	10.9	*	Form of Stock Option Agreement for Amended and Restated 2000 Equity Incentive Plan(t)Plan(s)
	10.10
	10.10	*	Form of Stock Bonus Agreement for Capstone Turbine Corporation 2000 Equity Incentive PlanPlan(t)
	10.11
	10.11	*	Deferred Compensation Plan of Capstone Turbine Corporation(u)
	10.12
	10.12	*	Amended and Restated Capstone Turbine Corporation Change of Control Severance Plan(v)
	10.13
	10.13		Development and License Agreement between Capstone Turbine Corporation and Carrier Corporation, successor in interest to UTC Power Corporation, dated September 4, 2007(q)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, 2011
	10.14 10.15		Form of Subscription Agreement between Capstone Turbine Corporation and investors in the 2009 registered direct offering(j)offering(i)
	10.16
	10.15		Form of Subscription Agreement between Capstone Turbine Corporation and investors in the 2008 registered direct offering(k)offering(j)
	10.17
	10.16		Form of Warrant Exercise Agreement between Capstone Turbine Corporation and investors in the September 2009 Warrant Exchange Transaction(i)Transaction(h)
	10.18		Form of Warrant Exercise Agreement between Capstone Turbine Corporation and investors in the March 2011 Warrant Exchange Transaction(w)
	10.17 10.19		Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Domestic Facility)(w)(x)
	10.20
	10.18		Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Ex-Im Subfacility)(w)(x)
	10.21
	10.19		First Amendment to Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 2009(w)2009(x)
	10.22
	10.20		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(x)2009(y)
	10.23
	10.21		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
	10.22	*	Capstone Turbine Corporation Executive Performance Incentive Plan(y)
	10.23	*	Inducement Stock Option Agreement with Darren R. Jamison, dated December 18, 2006(z)
	10.24	*	Restricted Stock Agreement with Darren R. Jamison, dated December 18, 2006(z)
	10.25	*	Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, dated December 1, 2006(z)
	10.26	*	Amendment to Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(w)
	10.27	*	Amended and Restated Change of Control Severance Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(w)
			2010(t)




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Exhibit Number			Description
	10.2810.24		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, 2011
	10.28	*	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(aa)2007(ee)
	10.35
	10.29	*	Inducement Stock Option Agreement with James D. Crouse, dated February 5, 2007(aa)2007(ee)
	10.36
	10.30	*	Restricted Stock Agreement with James D. Crouse, dated February 5, 2007(aa)2007(ee)
	10.37
	10.31	*	Form of Inducement Stock Option Agreement(bb)Agreement(ff)
	10.38
	10.32	*	Form of Inducement Restricted Stock Unit Agreement(bb)Agreement(ff)
	14.1
	14.1		Code of Business Conduct(cc)Conduct(gg)
	14.2
	14.2		Code of Ethics for Senior Financial Officers and Chief Executive Officer(cc)Officer(gg)
	21		Subsidiary List
	21 23		Subsidiary List(aa)
	23		Consent of Independent Registered Public Accounting Firm
	24
	24		Power of Attorney (included on the signature page of this Form 10-K)
	31.1
	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2
	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32
	32		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 19, 2010 (File No. 000-15957).



(b)

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





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(c)(b)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated May 8, 2000 (File No. 333-33024).



(d)(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).



(e)(d)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated June 21, 2000 filed on July 10, 2008 (File No. 333-33024).



(f)(e)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 8, 2005 (File No. 001-15957).



(g)(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).



(h)(g)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 10, 2008 (File No. 001-15957).



(i)(h)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 18, 2009 (File No. 001-15957).



(j)(i)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on May 4, 2009 (File No. 001-15957).



(k)(j)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 18, 2008 (File No. 001-15957).






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(l)(k)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on January 19, 2007 (File No. 001-15957).



(m)(l)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on October 16, 2000 (File No. 000-15957).



(n)(m)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 2, 2009 (File No. 000-15957).



(o)(n)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on August 17, 2009 (File No. 000-15957).



(p)(o)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A,S-1, dated March 22, 2000 (File No. 333-33024).



(q)(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).



(r)(q)

Incorporated by reference to Appendix A to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 17, 2009 (File No. 001-15957).



(s)(r)

Incorporated by reference to Appendix B to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 18, 2008 (File No. 001-15957).



(t)(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).





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).



(x)(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).



(y)(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).



(z)(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).



(aa)(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).



(bb)(ff)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-8, dated June 17, 2009 (File No. 333-160049)



(cc)(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




Table of Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARYSUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


			Page
Report of Independent Registered Public Accounting Firm				F-2
Consolidated Financial Statements:
	Consolidated Balance Sheets as of March 31, 20102011 and 20092010			F-3
For the years ended March 31, 2011, 2010 2009 and 2008:2009:
	Consolidated Statements of Operations			F-4
	Consolidated Statements of Stockholders' Equity			F-5
	Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements				F-8
Financial Statement Schedule:
	Consolidated schedule for the years ended March 31, 2011, 2010 2009 and 2008:2009:
	Schedule II—Valuation and Qualifying Accounts			F-39F-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.




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 subsidiarysubsidiaries (the "Company") as of March 31, 20102011 and 20092010 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2010.2011. 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 the Company as ofCapstone Turbine Corporation and subsidiaries at March 31, 20102011 and 2009,2010, and the results of itstheir operations and itstheir cash flows for each of the three years in the period ended March 31, 2010,2011, 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, presentspresent 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 originally issued in Emerging Issues Task Force No. 07-05, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock" (codified in FASB ASC Topic 815—Derivatives and Hedging)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, 2010,2011, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 14, 20102011, expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/DELOITTE & TOUCHE LLP
Los Angeles, California
June 14, 20102011




Table of Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARYSUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


						March 31, 2010			March 31, 2009								March 31, 2011			March 31, 2010
Assets	Assets											Assets
Current Assets:	Current Assets:											Current Assets:
	Cash and cash equivalents					$	47,270		$	19,519		Cash and cash equivalents					$	33,456		$	47,270
	Accounts receivable, net of allowance for doubtful accounts of $121 in 2010 and $644 in 2009						18,464			10,871		Accounts receivable, net of allowance for doubtful accounts of $212 at March 31, 2011 and $121 at March 31, 2010						19,329			18,464
	Inventories						19,645			24,379		Inventories						19,267			19,645
	Prepaid expenses and other current assets						1,335			1,515		Prepaid expenses and other current assets						2,369			1,335
				Total current assets			86,714			56,284					Total current assets			74,421			86,714
Property, plant and equipment, net	Property, plant and equipment, net						8,247			9,432		Property, plant and equipment, net						5,939			8,247
Non-current portion of inventories	Non-current portion of inventories						3,588			5,883		Non-current portion of inventories						1,454			3,588
Intangible assets, net	Intangible assets, net						4,643			411		Intangible assets, net						3,574			4,643
Restricted cash												Restricted cash						1,250			—
Other assets	Other assets						254			319		Other assets						381			254
			Total			$	103,446		$	72,329				Total			$	87,019		$	103,446
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity											Liabilities and Stockholders' Equity
Current Liabilities:	Current Liabilities:											Current Liabilities:
	Accounts payable and accrued expenses					$	15,338		$	11,484		Accounts payable and accrued expenses					$	20,292		$	15,338
	Accrued salaries and wages						1,741			2,062		Accrued salaries and wages						1,555			1,741
	Accrued warranty reserve						1,036			2,344		Accrued warranty reserve						1,081			1,036
	Deferred revenue						923			1,171		Deferred revenue						1,153			923
	Revolving credit facility						7,571			3,654		Revolving credit facility						7,080			7,571
	Current portion of notes payable and capital lease obligations						161			13		Current portion of notes payable and capital lease obligations						214			161
	Warrant liability						26,803			—		Warrant liability						20,772			26,803
	Other current liabilities						3,026			815		Other current liabilities						—			3,026
			Total current liabilities				56,599			21,543				Total current liabilities				52,147			56,599
Long-term portion of notes payable and capital lease obligations	Long-term portion of notes payable and capital lease obligations						141			28		Long-term portion of notes payable and capital lease obligations						83			141
Other long-term liabilities	Other long-term liabilities						274			288		Other long-term liabilities						309			274
Commitments and contingencies (Note 11)	Commitments and contingencies (Note 11)						—			—		Commitments and contingencies (Note 11)						—			—
Stockholders' Equity:	Stockholders' Equity:											Stockholders' Equity:
		Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued					—			—			Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued					—			—
		Common stock, $.001 par value; 415,000,000 shares authorized; 243,015,511 shares issued and 242,119,402 shares outstanding at March 31, 2010; 174,888,521 shares issued and 174,070,581 shares outstanding at March 31, 2009					243			175			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			243
	Additional paid-in capital						721,408			666,357		Additional paid-in capital						747,962			721,408
	Accumulated deficit						(674,178	)		(615,100	)	Accumulated deficit						(712,648	)		(674,178	)
	Treasury stock, at cost; 896,109 shares at March 31, 2010 and 817,940 shares at March 31, 2009						(1,041	)		(962	)	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				46,432			50,470				Total stockholders' equity				34,480			46,432
			Total			$	103,446		$	72,329				Total			$	87,019		$	103,446

See accompanying notes to consolidated financial statements.




Table of Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARYSUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)


				Years Ended March 31,												Years Ended March 31,
				2010			2009			2008						2011			2010			2009
Revenue	Revenue			$	61,554		$	43,949		$	31,305		Revenue			$	81,890		$	61,554		$	43,949
Cost of goods sold	Cost of goods sold				69,999			49,277			35,105		Cost of goods sold				82,427			69,999			49,277
Gross loss	Gross loss				(8,445	)		(5,328	)		(3,800	)	Gross loss				(537	)		(8,445	)		(5,328	)
Operating expenses:	Operating expenses:												Operating expenses:
	Research and development				6,954			8,125			8,906		Research and development				6,986			6,954			8,125
	Selling, general and administrative				28,383			28,628			25,622		Selling, general and administrative				26,203			28,383			28,628
		Total operating expenses			35,337			36,753			34,528			Total operating expenses			33,189			35,337			36,753
Loss from operations	Loss from operations				(43,782	)		(42,081	)		(38,328	)	Loss from operations				(33,726	)		(43,782	)		(42,081	)
Other income													Other income				32			—			—
Interest income	Interest income				8			515			2,224		Interest income				4			8			515
Interest expense	Interest expense				(673	)		(69	)		(7	)	Interest expense				(873	)		(673	)		(69	)
Change in fair value of warrant liability	Change in fair value of warrant liability				(22,853	)		—			—		Change in fair value of warrant liability				(3,667	)		(22,853	)		—
Loss before income taxes	Loss before income taxes				(67,300	)		(41,635	)		(36,111	)	Loss before income taxes				(38,230	)		(67,300	)		(41,635	)
(Benefit) provision for income taxes	(Benefit) provision for income taxes				(59	)		82			2		(Benefit) provision for income taxes				240			(59	)		82
Net loss	Net loss			$	(67,241	)	$	(41,717	)	$	(36,113	)	Net loss			$	(38,470	)	$	(67,241	)	$	(41,717	)
Net loss per common share—basic and diluted	Net loss per common share—basic and diluted			$	(0.34	)	$	(0.25	)	$	(0.25	)	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	Weighted average shares used to calculate basic and diluted net loss per common share				199,579			164,462			145,425		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.




Table of Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARYSUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)


			Common Stock												Treasury Stock
									Additional Paid-in Capital			Accumulated Deficit									Total Stockholders' Equity
			Shares			Amount									Shares			Amount
Balance, March 31, 2007				144,512,997		$	145		$	619,423		$	(537,270	)		551,208		$	(513	)	$	81,785
	Purchase of treasury stock			—			—			—			—			109,333			(151	)		(151	)
	Vested restricted stock awards			293,545			—			—			—			—			—			—
	Stock-based compensation			—			—			3,125			—			—			—			3,125
	Exercise of stock options and employee stock purchases			1,847,595			2			2,370			—			—			—			2,372
	Stock awards to Board of Directors			60,592			—			53			—			—			—			53
	Warrants exercised			1,524,123			1			1,981			—			—			—			1,982				Common Stock												Treasury Stock
	Net loss			—			—			—			(36,113	)		—			—			(36,113	)									Additional Paid-in Capital			Accumulated Deficit									Total Stockholders' Equity
																										Shares			Amount									Shares			Amount
Balance, March 31, 2008	Balance, March 31, 2008			148,238,852			148			626,952			(573,383	)		660,541			(664	)		53,053		Balance, March 31, 2008			148,238,852			148			626,952			(573,383	)		660,541			(664	)		53,053
	Purchase of treasury stock			—			—			—			—			157,399			(298	)		(298	)	Purchase of treasury stock			—			—			—			—			157,399			(298	)		(298	)
	Vested restricted stock awards			691,174			1			(1	)		—			—			—			—		Vested restricted stock awards			691,174			1			(1	)		—			—			—			—
	Stock-based compensation			—			—			3,320			—			—			—			3,320		Stock-based compensation			—			—			3,320			—			—			—			3,320
	Exercise of stock options and employee stock purchases			1,197,582			1			2,411			—			—			—			2,412		Exercise of stock options and employee stock purchases			1,197,582			1			2,411			—			—			—			2,412
	Stock awards to Board of Directors			102,886			—			101			—			—			—			101		Stock awards to Board of Directors			102,886			—			101			—			—			—			101
	Warrants exercised			3,172,367			3			4,121			—			—			—			4,124		Warrants exercised			3,172,367			3			4,121			—			—			—			4,124
	Issuance of common stock, net of issuance costs			21,485,660			22			29,453			—			—			—			29,475		Issuance of common stock, net of issuance costs			21,485,660			22			29,453			—			—			—			29,475
	Net loss			—			—			—			(41,717	)		—			—			(41,717	)	Net loss			—			—			—			(41,717	)		—			—			(41,717	)
Balance, March 31, 2009	Balance, March 31, 2009			174,888,521			175			666,357			(615,100	)		817,940			(962	)		50,470		Balance, March 31, 2009			174,888,521			175			666,357			(615,100	)		817,940			(962	)		50,470
	Purchase of treasury stock			—			—			—			—			78,169			(79	)		(79	)	Purchase of treasury stock			—			—			—			—			78,169			(79	)		(79	)
	Vested restricted stock awards			786,389			1			(1	)		—			—			—			—		Vested restricted stock awards			786,389			1			(1	)		—			—			—			—
	Stock-based compensation			—			—			4,560			—			—			—			4,560		Stock-based compensation			—			—			4,560			—			—			—			4,560
	Exercise of stock options and employee stock purchases			246,857			—			213			—			—			—			213		Exercise of stock options and employee stock purchases			246,857			—			213			—			—			—			213
	Stock awards to Board of Directors			57,532			—			66			—			—			—			66		Stock awards to Board of Directors			57,532			—			66			—			—			—			66
	Cumulative effect of adoption of new accounting pronouncement			—			—			(14,750	)		8,163			—			—			(6,587	)	Cumulative effect of adoption of new accounting pronouncement			—			—			(14,750	)		8,163			—			—			(6,587	)
	Warrants exercised			7,225,434			7			15,012			—			—			—			15,018		Warrants exercised			7,225,434			7			15,012			—			—			—			15,018
	Issuance of common stock, net of issuance costs			58,260,391			58			48,155			—			—			—			48,214		Issuance of common stock, net of issuance costs			58,260,391			58			48,155			—			—			—			48,214
	Issuance of common stock for Calnetix Power Solutions acquisition			1,550,387			2			1,796			—			—			—			1,798		Issuance of common stock for Calnetix Power Solutions acquisition			1,550,387			2			1,796			—			—			—			1,798
	Net loss			—			—			—			(67,241	)		—			—			(67,241	)	Net loss			—			—			—			(67,241	)		—			—			(67,241	)
Balance, March 31, 2010	Balance, March 31, 2010			243,015,511		$	243		$	721,408		$	(674,178	)		896,109		$	(1,041	)	$	46,432		Balance, March 31, 2010			243,015,511		$	243		$	721,408		$	(674,178	)		896,109		$	(1,041	)	$	46,432
																								Purchase of treasury stock			—			—			—			—			53,511			(53	)		(53	)
																								Vested restricted stock awards			742,460			1			(1	)		—			—			—			—
																								Stock-based compensation			—			—			2,318			—			—			—			2,318
																								Exercise of stock options and employee stock purchases			72,842			—			74			—			—			—			74
																								Stock awards to Board of Directors			109,554			—			100			—			—			—			100
																								Warrants exercised			12,473,231			13			20,968			—			—			—			20,981
																								Issuance of common stock for Calnetix Power Solutions acquisition, net of issuance costs			3,131,313			3			3,095			—			—			—			3,098
																								Net loss			—			—			—			(38,470	)		—			—			(38,470	)
Balance, March 31, 2011																								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.




Table of Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARYSUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


					Year Ended March 31,													Year Ended March 31,
					2010			2009			2008							2011			2010			2009
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:													Cash Flows from Operating Activities:
	Net loss				$	(67,241	)	$	(41,717	)	$	(36,113	)	Net loss				$	(38,470	)	$	(67,241	)	$	(41,717	)
	Adjustments to reconcile net loss to net cash used in operating activities:													Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				3,496			2,959			2,215			Depreciation and amortization				3,823			3,496			2,959
		Amortization of deferred financing costs				83			10			—			Amortization of deferred financing costs				193			83			10
		Interest expense on second funding liability				35			—			—			Interest expense on second funding liability				55			35			—
		Provision (benefit) for allowance for doubtful accounts				172			15			(160	)		Provision for allowance for doubtful accounts				231			172			15
		Inventory write-down				1,238			786			1,038			Inventory write-down				1,123			1,238			786
		Provision (benefit) for warranty expenses				1,336			(944	)		372			Provision (benefit) for warranty expenses				2,089			1,336			(944	)
		Loss on disposal of equipment				30			7			22			Loss on disposal of equipment				213			30			7
		Stock-based compensation				4,626			3,421			3,178			Stock-based compensation				2,418			4,626			3,421
		Change in fair value of warrant liability				22,853			—			—			Change in fair value of warrant liability				3,667			22,853			—
	Changes in operating assets and liabilities:													Changes in operating assets and liabilities:
		Accounts receivable				(7,765	)		(4,118	)		(3,094	)		Accounts receivable				(1,096	)		(7,765	)		(4,118	)
		Inventories				6,069			(14,355	)		6,557			Inventories				1,764			6,069			(14,355	)
		Prepaid expenses and other assets				348			144			(56	)		Prepaid expenses and other assets				(910	)		348			144
		Accounts payable and accrued expenses				4,134			3,645			1,793			Accounts payable and accrued expenses				4,966			4,134			3,645
		Accrued salaries and wages and long term liabilities				(335	)		368			(13	)		Accrued salaries and wages and long term liabilities				(151	)		(335	)		368
		Accrued warranty reserve				(2,644	)		(1,303	)		(2,335	)		Accrued warranty reserve				(2,044	)		(2,644	)		(1,303	)
		Deferred revenue				(248	)		391			(157	)		Deferred revenue				230			(248	)		391
		Other current liabilities				(815	)		(4,843	)		5,658			Other current liabilities				—			(815	)		(4,843	)
			Net cash used in operating activities			(34,628	)		(55,534	)		(21,095	)			Net cash used in operating activities			(21,899	)		(34,628	)		(55,534	)
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:													Cash Flows from Investing Activities:
	Acquisition of and deposits on equipment and leasehold improvements					(2,002	)		(6,754	)		(767	)	Acquisition of and deposits on equipment and leasehold improvements					(1,047	)		(2,002	)		(6,754	)
	Proceeds from disposal of equipment					—			20			3		Proceeds from disposal of equipment					—			—			20
	Changes in restricted cash					—			33			(33	)	Changes in restricted cash					(1,250	)		—			33
			Net cash used in investing activities			(2,002	)		(6,701	)		(797	)			Net cash used in investing activities			(2,297	)		(2,002	)		(6,701	)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:													Cash Flows from Financing Activities:
	Net proceeds from revolving credit facility					3,917			3,654			—		Net (repayment) proceeds from revolving credit facility					(491	)		3,917			3,654
	Payment of deferred financing costs					(186	)		(202	)		—		Payment of deferred financing costs					—			(186	)		(202	)
	Repayment of notes payable and capital lease obligations					(80	)		(16	)		(28	)	Repayment of notes payable and capital lease obligations					(448	)		(80	)		(16	)
	Net proceeds from employee stock-based transactions					138			2,114			2,221		Net proceeds from employee stock-based transactions					39			138			2,114
	Net proceeds from issuance of common stock and warrants					54,089			29,475			—		Net proceeds from issuance of common stock and warrants					—			54,089			29,475
	Proceeds from exercise of common stock warrants					6,503			4,124			1,982		Proceeds from exercise of common stock warrants					11,282			6,503			4,124
			Net cash provided by financing activities			64,381			39,149			4,175				Net cash provided by financing activities			10,382			64,381			39,149
Net increase (decrease) in Cash and Cash Equivalents	Net increase (decrease) in Cash and Cash Equivalents					27,751			(23,086	)		(17,717	)	Net increase (decrease) in Cash and Cash Equivalents					(13,814	)		27,751			(23,086	)
Cash and Cash Equivalents, Beginning of Year	Cash and Cash Equivalents, Beginning of Year					19,519			42,605			60,322		Cash and Cash Equivalents, Beginning of Year					47,270			19,519			42,605
Cash and Cash Equivalents, End of Year	Cash and Cash Equivalents, End of Year				$	47,270		$	19,519		$	42,605		Cash and Cash Equivalents, End of Year				$	33,456		$	47,270		$	19,519
Supplemental Disclosures of Cash Flow Information:	Supplemental Disclosures of Cash Flow Information:													Supplemental Disclosures of Cash Flow Information:
	Cash paid during the year for:													Cash paid during the year for:
		Interest			$	540		$	29		$	7			Interest			$	624		$	540		$	29
		Income taxes			$	80		$	2		$	2			Income taxes			$	—		$	80		$	2
	Cash received during the period for:
		Income tax refund			$	381			—			—
Cash received during the period for income tax refund														Cash received during the period for income tax refund				$	222		$	381			—

See accompanying notes to consolidated financial statements.




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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

Supplemental Disclosures of Non-Cash Information:

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.
	During the year ended March 31, 2010, the Company issued 1,550,387 shares of common stock to Calnetix Power Solutions, Inc. and recorded a liability of $3.0 million representing the fair value of the remaining consideration to be paid 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 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.
	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.
	During the year ended March 31, 2010, the Company purchased $224 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, 2009 and 2008.
	Included in accounts payable at March 31, 2010, 2009 and 2008 is $91, $371, and $496 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 and $40, respectively. There were no fixed assets purchased with a note payable during the year ended March 31, 2008.

See accompanying notes to consolidated financial statements.




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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, 2010,2011, the Company had $86.3$106.4 million, or 726669 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. Management believes that existing cash and cash equivalents are sufficient to meet the Company's anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, if anticipated cash needs ofAlthough the Company change, ithas 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 possible thatunable 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 decideneed to raise additional capitalfunds in the future.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 uncertaintiesuncertainties.

        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, 2010.2011.

2. Summary of Significant Accounting Policies

        Cash Equivalents    The 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.

        Restricted Cash    As of March 31, 2008, the Company had set aside $33,000, that was included in other assets to cover warranty related issues in connection with a performance guarantee. The restricted cash was replaced by a letter of credit for $36,000 during Fiscal 2009. This performance guarantee covers a period of 18 months and expired in May 2009.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

        Restricted Cash    As 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 Instruments    The 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 Receivable    The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.

        Inventories    The 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 Amortization    Depreciation 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,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"). Intangible assets that have finite useful lives are amortized over their estimated useful lives using the straight-line method. Purchased backlog is amortized based on unit sales.

        Long-Lived Assets    The 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, 20102011 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 and reductions in operating expenses.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 Revenue    Deferred 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.




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2. Summary of Significant Accounting Policies (Continued)

        Revenue    The 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,




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2. Summary of Significant Accounting Policies (Continued)




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. To date, the Company has not had significant levels of service revenue. 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, fair valuesthe Company's estimated selling price of undelivered elements areeach 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.

        Warranty    The 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 $8.1 million and $3.0$8.1 million for the years ended March 31, 2011, 2010 2009 and 2008,2009, respectively.

        Income Taxes    Deferred 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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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.




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2. Summary of Significant Accounting Policies (Continued)

        Contingencies    The 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 Concentrations    Financial 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. Two customers eachSales 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 14%23% and 18%, respectively, of the Company's revenue for the year ended March 31, 2010. One of these customers2011. Sales to BPC accounted for 20%23%, 14% and 13% of the Company's net accounts receivablerevenue for the years ended March 31, 2011, 2010 and another customer2009, respectively. Sales to Pumps and Service accounted for 16%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, 2010, respectively. One customer2011. BPC and Greenvironment plc, the Company's Finnish distributor, accounted for 13% of the Company's revenue for the year ended March 31, 2009. One customer accounted for 29%20% and 16%, respectively, of net accounts receivable as of March 31, 2009. Two customers accounted for 18% and 13% of the Company's revenue for the year ended March 31, 2008.2010

        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 Assumptions    The 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 Share    Basic 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 each of March 31, 2011, 2010 and 2009 were 10.1 million, 9.2 million and 2008 were 9.2 million.million, respectively. Outstanding restricted stock units at March 31, 2011, 2010 and 2009 and 2008 were 1.5 million, 1.7 million 2.5 million and 2.32.5 million, respectively. As of March 31, 2011,




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2010 2009 and 2008,2009, 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, and 18.5 million, respectively.

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

        Restructuring Costs    The 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




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2. Summary of Significant Accounting Policies (Continued)




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 Reporting    The 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,										Year Ended March 31,
		2010			2009			2008				2011			2010			2009
		(In thousands)										(In thousands)
North America		$	18,382		$	21,309		$	12,349			$	31,854		$	18,382		$	21,309
United States			12,950			16,708			10,757				25,630			12,950			16,708
Mexico			4,231			4,496			1,124				5,416			4,231			4,496
All others			1,201			105			468				808			1,201			105
Europe		$	23,871		$	14,627		$	13,157			$	36,030		$	23,871		$	14,627
Russia			9,592			5,582			5,610				20,655			9,592			5,582
All others			14,279			9,045			7,547				15,375			14,279			9,045
Asia		$	5,325		$	2,123		$	2,528			$	7,811		$	5,325		$	2,123
Australia		$	8,891		$	5,232		$	240			$	3,754		$	8,891		$	5,232
All others		$	5,085		$	658		$	3,031			$	2,441		$	5,085		$	658
Total Revenue		$	61,554		$	43,949		$	31,305			$	81,890		$	61,554		$	43,949




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

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

		Year Ended March 31,										Year Ended March 31,
		2010			2009			2008				2011			2010			2009
		(In millions)										(In thousands)
C30		$	6.9		$	4.0		$	6.4			$	6,043		$	6,888		$	4,003
C60 Series			17.4			23.8			15.3
C65													23,377			17,406			23,779
TA100			1.2			—			—				5,121			1,208			—
C200			4.9			1.4			—				5,289			4,929			1,419
C600			2.8			1.0			—				2,172			2,801			893
C800			5.0			1.1			—				4,362			5,101			1,098
C1000 Series			10.5			1.1			—
C1000													18,619			10,395			1,145
Waste heat recovery generator													627			—			—
Unit upgrades													704			—			—
Total from Microturbine Products		$	48.7		$	32.4		$	21.7			$	66,314		$	48,728		$	32,337
Accessories, Parts and Service			12.9			11.5			9.6				15,576			12,826			11,612
Total		$	61.6		$	43.9		$	31.3			$	81,890		$	61,554		$	43,949

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

        Recent Accounting Pronouncements    In FebruaryApril 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-09, "Subsequent Events (Topic 855)—Amendments to Certain Recognition and Disclosure Requirements"2010-17, Revenue Recognition—Milestone Method ("ASU 2010-09"2010-17"). ASU 2010-09 was issued to change certain2010-17 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 original codification andperiod in which the milestone is achieved only if the milestone meets all criteria to clarify other portions. Allbe 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




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effort required to achieve the amendments in ASU 2010-09 are effective upon issuancemilestone or the enhancement of the final ASU 2010-09, except for the usevalue of the issued date for conduit debt obligors. That amendmentitem 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 or annual periods endingwithin those years, beginning on or after June 15, 2010. The Company determined thatadopted this updated guidance haswith no impact on its consolidated financial position or results of operations.

        In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 provides amended disclosure requirements related to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2010-06 with no impact on disclosures. See Note 9—Fair Value Measurements, for disclosure regarding the fair value of financial instruments.

        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-elementmultiple 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-specificvendor specific evidence or other third-partythird 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. The Company is evaluating any impact that the adoption of this updated guidance may have on its consolidated financial position or results of operations.

        In August 2009, the FASB issued ASU 2009-05, "Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value an Update 2009-05" ("ASU 2009-05"). ASU 2009-05 amends subtopic 820-10, "Fair Value Measurements and Disclosures—Overall" and provides clarification for the fair value measurement of liabilities in circumstances where quoted prices for an identical liability in an active market are not available. ASU 2009-05 is effective for the first reporting period beginning after issuance. The Company adopted ASU 2009-05 with no impact on its consolidated financial position or results of operations.

        Effective July 1, 2009, the Company adopted the FASB ASC 105, "Generally Accepted Accounting Principles—Overall" ("ASC 105"). ASC 105 establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue any new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue ASUs. The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the




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2. Summary of Significant Accounting Policies (Continued)




guidance and provide the bases for conclusions on the change(s) in the Codification. References madetangible product is essential to FASB guidance throughout this document have been updated for the Codification.

        In May 2009, the FASB issued ASC 855, "Subsequent Events" ("ASC 855"). This should not result in significant changes in the subsequent events that an entity reports. Rather, ASC 855 introduces the concept of financial statements being available to be issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained. The Company adopted ASC 855 with no impact on its consolidated financial position or results of operations. See Note 1—Description of the Company and Basis of Presentation, for further discussion.

        In April 2009, the FASB issued updated guidance of ASC 820, "Fair Value Measurements." The updated guidance is effective for interim and annual periods ending after June 15, 2009 and provides guidance on how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If the Company were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. The updated guidance modifies the requirements for recognizing other-than-temporarily impaired debt securities and revises the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. The updated guidance also enhances the disclosure of instruments for both interim and annual periods.functionality. The Company adopted this updated guidance with no impact on its consolidated financial position or results of operations. See Note 9—Fair Value Measurements, for disclosure regarding the fair value of financial instruments.

        In June 2008, the FASB issued updated guidance of ASC 815, "Derivatives and Hedging" ("ASC 815"), that is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The updated guidance specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company's own stock and (b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. The updated guidance provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and is able to qualify for the scope exception. The adoption of this updated guidance affects the Company's accounting for warrants with certain anti-dilution provisions. Warrants with certain anti-dilution provisions may no longer be recorded as equity. The Company adopted this updated guidance as of April 1, 2009. See Note 9—Fair Value Measurements, for disclosure regarding the fair value of financial instruments.

        In April 2008, the FASB issued updated guidance of ASC 350, "Intangibles—Goodwill and Other," removing the requirement for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions associated with the intangible asset. The intent of the updated guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under ASC 805, "Business Combinations," and other U.S. generally accepted accounting principles. The updated guidance replaces the previous useful-life assessment criteria with a requirement that an entity




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2. Summary of Significant Accounting Policies (Continued)




considers its own experience in renewing similar arrangements. This updated guidance applies to all intangible assets, whether acquired in a business combination or otherwise and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. The Company determined that this updated guidance has no impact on its consolidated financial position or results of operations.

        In March 2008, the FASB issued updated guidance of ASC 815, "Derivatives and Hedging" which is effective for fiscal years and interim periods beginning after November 15, 2008, with earlier adoption encouraged. This updated guidance is intended to improve transparency in financial reporting by requiring enhanced disclosures of the Company's derivative instruments and hedging activities and their effects on the Company's financial position, financial performance, and cash flows. This updated guidance applies to all derivative instruments, as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. The updated guidance impacts only the Company's disclosure requirements and therefore will not have an impact on the Company's consolidated financial position or results of operations. The Company adopted this updated guidance and included the additional required disclosures. See Note 9—Fair Value Measurements, for disclosure of derivative instruments.

        In December 2007, the FASB issued updated guidance of ASC 810, "Consolidation." This updated guidance establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The updated guidance also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This updated guidance was effective for fiscal years beginning after December 15, 2008. The Company determined that this updated guidance has 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, 20102011 and 2009:2010:

			2010			2009					2011			2010
			(In thousands)								(In thousands)
Raw materials	Raw materials		$	19,772		$	27,353		Raw materials		$	18,649		$	19,772
Work in process	Work in process			583			15		Work in process			290			583
Finished goods	Finished goods			2,878			2,894		Finished goods			1,782			2,878
	Total			23,233			30,262		Total			20,721			23,233
Less non-current portion	Less non-current portion			3,588			5,883		Less non-current portion			1,454			3,588
Current portion	Current portion		$	19,645		$	24,379		Current portion		$	19,267		$	19,645

        The non-current portion of inventories represents that portion of the inventories in excess of amounts expected to be sold or 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		$	758
25 to 36 months			241
37 to 48 months			455
Total		$	1,454




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Property, Plant and Equipment

        Property, plant and equipment as of March 31, 20102011 and 20092010 consisted of the following:

			2010			2009			Estimated Useful Life		2011			2010			Estimated Useful Life
			(In thousands)								(In thousands)
Machinery, rental equipment, equipment, automobiles and furniture	Machinery, rental equipment, equipment, automobiles and furniture		$	22,543		$	23,472		2 - 10 years		$	21,635		$	22,543		2 - 10 years
Leasehold improvements	Leasehold improvements			9,654			9,597		10 years			9,663			9,654		10 years
Molds and tooling	Molds and tooling			4,930			4,470		2 - 5 years			4,773			4,930		2 - 5 years
				37,127			37,539					36,071			37,127
Less, accumulated depreciation	Less, accumulated depreciation			(28,880	)		(28,107	)				(30,132	)		(28,880	)
Total property, plant and equipment, net											$	5,939		$	8,247
	Total property, plant and equipment, net		$	8,247		$	9,432

        Depreciation expense for property, plant and equipment was $2.8 million, $3.2 million $2.7 million and $1.9$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 2008, respectively.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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5. Intangible Assets

        The Company's intangible assets consist of intangible assets acquired as a result of the acquisition of the TA100 microturbine generator product line (the "MPL") from CPS and an existing manufacturing license. See Note 14—Acquisition, for discussion of the MPL acquired from CPS.

        Intangible assets consisted of the following:following (in thousands):

		March 31, 2011
		Weighted Average Amortization Period		Intangible Assets, Gross			Accumulated Amortization			Intangible Assets, Net
Manufacturing license		17 years		$	3,700		$	3,388		$	312
Technology		10 years			2,240			261			1,979
Parts and service customer relationships		5 years			1,080			252			828
TA100 customer relationships		2 years			617			360			257
Backlog		1.2 years			490			292			198
Trade name		1.2 years			69			69			—
Total				$	8,196		$	4,622		$	3,574




		March 31, 2010
		Weighted Average Amortization Period		Intangible Assets, Gross			Accumulated Amortization			Intangible Assets, Net
Manufacturing license		17 years		$	3,700		$	3,338		$	362
Technology		10 years			2,240			37			2,203
Parts and service customer relationships		5 years			1,080			26			1,054
TA100 customer relationships		2 years			617			51			566
Backlog		1.2 years			490			91			399
Trade name		1.2 years			69			10			59
Total				$	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		$	746
2013			489
2014			489
2015			474
2016			273
Thereafter			1,103
Total expected future amortization		$	3,574




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Intangible Assets (Continued)

        


		March 31, 2009
		Weighted Average Amortization Period			Intangible Asset, Gross			Accumulated Amortization			Intangible Asset, Net
Manufacturing license			17 years		$	3,700		$	3,289		$	411
Total					$	3,700		$	3,289		$	411

        Amortization expenseOn 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 was $0.3 millioninclude 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 eachbacklog, 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 years ended March 31, 2010, 2009underlying asset. Backlog is amortized on a per unit basis as the backlog units are sold and 2008.

        Expected future amortization expensepresented as a component of intangible assets ascost of March 31, 2010 is as follows:goods sold.

Year Ending March 31,		Amortization Expense
		(In thousands)
2011		$	1,194
2012			685
2013			428
2014			428
2015			428
Thereafter			1,480
Total expected future amortization		$	4,643

        The manufacturing license provides the Company with the ability to manufacture recuperator cores previously purchased from the supplier.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, $52,100, and $43,700$52,100 were earned by the supplierSolar for the years ended March 31, 2011, 2010 2009 and 2008,2009, respectively. Earned royalties of approximately $44,600$17,700 and $12,400$44,600 were unpaid as of March 31, 20102011 and 2009,2010, respectively, and are included in accrued expenses in the accompanying balance sheet.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.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Accrued Warranty Reserve

        Changes in the accrued warranty reserve are as follows as of March 31, 2011, 2010 2009 and 2008:2009:

		2010			2009			2008				2011			2010			2009
		(In thousands)										(In thousands)
Balance, beginning of the period		$	2,344		$	4,591		$	6,554			$	1,036		$	2,344		$	4,591
Warranty provision relating to products shipped during the period			492			353			327
Changes for accruals related to preexisting warranties or reliability repair programs			844			(1,297	)		45
Standard warranty provision													2,015			492			353
Changes for accrual related to reliability repair programs													74			844			(1,297	)
Deductions for warranty claims			(2,644	)		(1,303	)		(2,335	)			(2,044	)		(2,644	)		(1,303	)
Balance, end of the period		$	1,036		$	2,344		$	4,591			$	1,081		$	1,036		$	2,344

7. Income Taxes

        On April 1, 2007, the Company adopted the provisions of        ASC 740, Income Taxes (formerly FIN 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109) ("ASC 740"), which clarifies the accounting for income taxes by




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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 and 2009 was $1.8$2.0 million and $1.4$1.8 million, respectively. There were no interest or penalties related to unrecognized tax benefits as of March 31, 20102011 or March 31, 2009.2010. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 20102011 and March 31, 20092010 was $1.8$2.0 million and $1.4$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. Prior to the adoption of ASC 740,The fully reserved recognized federal and state deferred tax assets related to research and development credits had been recorded in the amount of $10.9 million and $7.2 million, respectively. Upon adoption of ASC 740, $2.2 million of federal and state deferred tax assets related to research and development credits had been derecognized leaving a fully reserved balance as of April 1, 2007 of $9.5 million and $6.3 million, respectively. The fully reserved recognized federal and state research and development credit balance as of March 31, 2011 and 2010 was $9.0 million and 2009 was $9.1 million, and $7.3$7.6 million and




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Income Taxes (Continued)




$6.1 million and $6.4 $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, 2007		$	2,192
Gross decrease related to prior year tax positions			—
Gross increase related to current year tax positions			287
Lapse of statute of limitations			—
Balance at March 31, 2008		$	2,479
Gross decrease related to prior year tax positions			(1,177	)
Gross increase related to current year tax positions			73
Lapse of statute of limitations			—
Balance at March 31, 2009		$	1,375
Gross increase related to prior year tax positions			325
Gross increase related to current year tax positions			106
Lapse of statute of limitations			—
Balance at March 31, 2010		$	1,806

Balance at March 31, 2008		$	2,479
Gross decrease related to prior year tax positions			(1,177	)
Gross increase related to current year tax positions			73
Lapse of statute of limitations			—
Balance at March 31, 2009		$	1,375
Gross increase related to prior year tax positions			325
Gross increase related to current year tax positions			106
Lapse of statute of limitations			—
Balance at March 31, 2010		$	1,806
Gross increase related to prior year tax positions			—
Gross increase related to current year tax positions			167
Lapse 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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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, 20102011 and 2009:2010:

			2010			2009					2011			2010
			(In thousands)								(In thousands)
Deferred tax assets:	Deferred tax assets:								Deferred tax assets:
	Inventories		$	1,554		$	2,596		Inventories		$	1,213		$	1,554
	Warranty reserve			417			942		Warranty reserve			427			417
	Deferred revenue			335			525		Deferred revenue			326			335
	Net operating loss ("NOL") carryforwards			220,637			194,061		Net operating loss ("NOL") carryforwards			212,705			220,637
	Tax credit carryforwards			16,325			12,556		Tax credit carryforwards			16,573			16,325
	Depreciation, amortization and impairment loss			3,003			2,402		Depreciation, amortization and impairment loss			3,945			3,003
	Other			4,389			3,357		Other			4,505			4,389
Deferred tax assets	Deferred tax assets			246,660			216,439		Deferred tax assets			239,694			246,660
Valuation allowance for deferred tax assets	Valuation allowance for deferred tax assets			(235,352	)		(206,535	)	Valuation allowance for deferred tax assets			(231,009	)		(235,352	)
Deferred tax assets, net of valuation allowance	Deferred tax assets, net of valuation allowance			11,308			9,904		Deferred tax assets, net of valuation allowance			8,685			11,308
Deferred tax liabilities:	Deferred tax liabilities:								Deferred tax liabilities:
	State taxes			(11,308	)		(9,904	)	Federal benefit of state taxes			(8,685	)		(11,308	)
Net deferred tax assets	Net deferred tax assets		$	—		$	—		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 and 2008 was $4.3 million, $28.8 million $11.8 million and $11.5$11.8 million, respectively.

        The Company's NOL and tax credit carryforwards for federal and state income tax purposes at March 31, 20102011 were as follows (in thousands):

		Amount			Expiration Period		Amount			Expiration Period
		(In thousands)					(In thousands)
Federal NOL		$	576,695		2010 - 2029		$	576,716		2011 - 2030
State NOL		$	396,916		2010 - 2024		$	301,616		2011 - 2030
Federal tax credit carryforwards		$	9,052		2010 - 2029		$	8,997		2011 - 2030
State tax credit carryforwards		$	7,273		Various		$	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 of approximately $7.2 million, which maycan 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, 20102011 were generated by Disqualifying Dispositions of stock options and exercises of nonqualified stock options. Upon realization, if any, tax benefits of approximately $10.5$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,										Year Ended March 31,
		2010			2009			2008				2011			2010			2009
		(In thousands)										(In thousands)
Federal income tax at the statutory rate		$	(22,883	)	$	(14,194	)	$	(12,278	)		$	(12,997	)	$	(22,883	)	$	(14,194	)
State taxes, net of federal effect			(2,749	)		(1,705	)		(1,475	)			(1,390	)		(2,749	)		(1,705	)
Foreign taxes			322			80			—				461			322			80
R&D tax credit			(4,037	)		4,384			—				(367	)		(4,037	)		4,384
Rate change													1,541			—			—
Warrant liability													9,981			—			—
Expiring NOL													6,278			—			—
Valuation allowance			28,817			11,759			13,924				(4,343	)		28,817			11,759
Other			471			(242	)		(169	)			1,076			471			(242	)
Income tax (benefit) expense		$	(59	)	$	82		$	2			$	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 options grantedincentive awards and vesting provisions. As of March 31, 2010,2011, there were 2,852,2351,209,921 shares available for future grant.

        As of March 31, 2010,2011, 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 250,000 restricted stock units issued outside of the 2000 Plan. These restricted stock units were issued as inducement grants to new officers of the Company. Included in the 250,000 units were 125,000 units granted to the Company's President and Chief Executive Officer, 50,000 units granted to the Company's Executive87,500




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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 75,00037,500 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 and¹/48th 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.

        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 each of the years ended March 31, 2009 and 2008, the Company issued 100,000 shares of stock awards to consultants under the 2000 Plan. 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 NASDAQNasdaq 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, 2010,2011, there were 11,439486,306 shares available for future grant under the Purchase Plan.




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Valuation and Expense Information

        For the fiscal years ended March 31, 2011, 2010 2009 and 2008,2009, the Company recognized stock-based compensation expense of $2.4 million, $4.6 million $3.4 million and $3.2.$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 2009 and 20082009 (in thousands):

		Fiscal Year Ended March 31,										Fiscal Year Ended March 31,
		2010			2009			2008				2011			2010			2009
Cost of goods sold		$	238		$	519		$	428			$	209		$	238		$	519
Research and development			643			631			570				211			643			631
Selling, general and administrative			3,745			2,203			2,180				1,998			3,745			2,203
Revenue			—			68			—				—			—			68
Stock-based compensation expense		$	4,626		$	3,421		$	3,178			$	2,418		$	4,626		$	3,421




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8. Stockholders' Equity (Continued)

        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,										Fiscal Year Ended March 31,
		2010			2009			2008				2011			2010			2009
Risk-free interest rates			2.3	%		2.4	%		3.8	%			3.1	%		2.3	%		2.4	%
Expected lives (in years)			6.2			4.9			6.3				5.0			6.2			4.9
Dividend yield			—	%		—	%		—	%			—	%		—	%		—	%
Expected volatility			90.5	%		98.7	%		98.3	%			97.9	%		90.5	%		98.7	%

        The Company's computation of expected volatility for the fiscal years ended March 31, 2011, 2010 2009 and 20082009 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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        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, 2009				9,210,374		$	1.74
	Granted			980,000		$	0.95
	Exercised			(195,544	)	$	0.84
	Forfeited, cancelled or expired			(811,253	)	$	2.44
Options outstanding at March 31, 2010				9,183,577		$	1.61			7.02		$	1,412,252
Options fully vested at March 31, 2010 and those expected to vest beyond March 31, 2010				8,888,129		$	1.63			6.96		$	1,305,520
Options exercisable at March 31, 2010				6,395,324		$	1.85			6.53		$	643,957

			Shares			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term			Aggregate Intrinsic Value
									(in years)
Options outstanding at March 31, 2010				9,183,577		$	1.61
	Granted			1,086,600		$	1.02
	Exercised			(47,709	)	$	1.05
	Forfeited, cancelled or expired			(76,478	)	$	6.65
Options outstanding at March 31, 2011				10,145,990		$	1.51			6.40		$	5,905,451
Options fully vested at March 31, 2011 and those expected to vest beyond March 31, 2011				9,911,678		$	1.52			6.34		$	5,722,606
Options 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 2008 was $0.95, $1.02, and $1.26, respectively. The total intrinsic value of option exercises during the fiscal years ended March 31, 2011, 2010 2009 and 2008,2009, was approximately $35,000, $0.1 million $1.2 million and $1.8$1.2 million, respectively. As of March 31, 2010,2011, there was approximately $1.8$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 2.072.4 years.

        During the fiscal years ended March 31, 2011, 2010 2009 and 20082009 the Company issued a total of 109,554, 57,532 102,866 and 60,592102,866 shares of stock, respectively, to non-employee directors who elected to take




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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 2008 was $1.15, $0.98, and $1.25, respectively.




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8. Stockholders' Equity (Continued)

        The following table outlines the restricted stock unit activity:

Restricted Stock Units		Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value
Nonvested restricted stock units outstanding at March 31, 2009			2,511,652		$	1.05
Nonvested restricted stock units outstanding at March 31, 2010										1,734,504		$	0.91
Granted			295,117		$	0.88				647,040		$	1.04
Vested and issued			(786,389	)	$	1.22				(742,460	)	$	0.90
Forfeited			(285,876	)	$	1.26				(124,886	)	$	1.00
Nonvested restricted stock units outstanding at March 31, 2010			1,734,504		$	0.91
Nonvested restricted stock units outstanding at March 31, 2011										1,514,198		$	1.81
Restricted stock units expected to vest beyond March 31, 2010			1,450,084		$	1.27
Restricted 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 2009 and 20082009 was approximately $0.8 million, $0.9 million $1.2 million and $0.4$1.2 million, respectively. The Company recorded expense of approximately $1.0 million, $0.8$1.0 million and $0.6$0.8 million associated with its restricted stock awards and units for the fiscal years ended March 31, 2011, 2010 2009 and 2008,2009, respectively. As of March 31, 2010,2011, there was approximately $1.2$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 2.122.0 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,




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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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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 at the close of business on the 30^th30th day after the Company's 20112014 annual meeting of stockholders unless a continuation of the rights planagreement is approved by the stockholders of the Company at that meeting. If so approved byThe second amendment also provides for an update to the stockholders,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 expire on July 18, 2015, unless such date is extended or the rights are earlier redeemed or exchanged by the Company.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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common stock, par value $0.001 per share, issued by the Company to such Holders on May 7, 2009 (the "Initial Warrants"). 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. 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. The modificationIn connection with the induced exercise of thesethe 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 iswas $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.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 transactionunderwritten 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,




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warrants issued in September 2009 and still outstanding as of March 31, 20102011 represented warrants to purchase 5.8 million shares at an exercise price of $1.34 per share. AsThese 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 March 31, 2010, nonewarrant liability." See Note 9—Fair Value Measurements for disclosure regarding the fair value of the New Warrants had been exercised.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. TheseThe 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. 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. Warrants to purchase 3.6 million shares at an exercise price of $0.95 per share issued in May 2009 were outstanding as of March 31, 2010.

        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. 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. 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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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 transactionsunderwritten 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, 20102011 represented warrants to purchase 7.77.3 million shares at an exercise price of $1.61$1.60 per share. AsThese 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 March 31, 2010, nonewarrant liability" in the accompanying statement of these warrants had been exercised.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.




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The five-year warrants are 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. The February 2010 and May 2009 transactions 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, 2010 represented warrants to purchase 17.0 million shares at an exercise price of $1.17 per share.

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:

•

Quoted prices for similar assets or liabilities in active markets



•

Quoted prices for identical or similar assets or liabilities in inactive markets




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•

Inputs other than quoted prices that are observable for the asset or liability



•

Inputs that are derived principally from or corroborated by observable market data by correlation or other means

        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, 2011
		Total			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, 2010
		Total			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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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, 2010
		Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Obligations under the credit facility		$	7,080		$	7,080		$	7,571		$	7,571
CPS 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 Black-ScholesMonte–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




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9. Fair Value Measurements (Continued)




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 from the issuance date 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 Deficit
Grant 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 these warrants of $9.3 million, which included the effect of anti-dilution adjustments on outstanding warrants, was recorded as a charge under the caption "Change in fair value of warrant liability" in the accompanying statement of operations at the time of issuance. The Company recorded a total charge of $22.9 million for the change in the fair value of the warrant liability during the fiscal year ended March 31, 2010.

        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 Black-ScholesMonte–Carlo simulation valuation method and the quoted price of the Company's common stock in an active market, a levelLevel 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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9. Fair Value Measurements (Continued)




the fair value of the warrant liability as Level 2 input.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 Black-Scholes model and the following assumptions:

		Fiscal Year Ended Ended March 31, 2011
		Fiscal Year Ended March 31, 2010
Risk-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 years
Expected 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.




Table        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 Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Fair Value Measurements (Continued)

        The table below presents ouroperations. Prior to April 1, 2009, none of the assets and liabilities that areof the Company included in the consolidated balance sheets were measured at fair value onusing significant unobservable inputs (Level 3). The table below provides a recurring basis duringreconciliation of the fiscal year ended March 31, 2010beginning and are categorized usingending balances for the warrant liability which is measured at fair value hierarchy. The fair value hierarchy has three levels based on the reliability of theusing significant unobservable inputs used to determine the fair value(Level 3) (in thousands):

		Fair Value Measurements at March 31, 2010
		Total			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	)	$	—

Warrant liability:
Balance as of April 1, 2009		$	8,163
Total realized and unrealized (gains) losses:
Expense included in Change in fair value of warrant liability			22,853
Purchases, issuances and settlements			(4,213	)
Balance at March 31, 2010		$	26,803
Total realized and unrealized (gains) losses:
Expense included in Change in fair value of warrant liability			3,667
Purchases, issuances and settlements			(9,698	)
Balance at March 31, 2011		$	20,772

        Cash equivalents includes cash held in money market and U.S. treasury funds at March 31, 2010.

        During the three months ended March 31, 2010, the Company acquired the 100 kW ("TA100") microturbine product line from CPS. See Note 14—Acquisition, for discussion of the MPL acquired from CPS. In connection with the acquisition, the Company agreed to pay additional consideration of $3.1 million on July 30, 2010 (the "Second Funding Date"). This second payment constitutes a financial instrument which was accounted for as a liability at fair value at the acquisition date. This liability is at fair value and is being accreted to its full settlement value at the Second Funding Date by recording the increase to interest expense.

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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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 stand bystandby 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, 2009,2011, the Company determined that it was not in compliance with one of the financial covenants in the Agreements regarding its net worth and net income. On May 3, 2009,June 9, 2011, the Company received from Wells Fargoentered into an amendment to the Agreements which provided a waiver of the Company's noncompliance with these two financial covenants as of March 31, 2009 and on June 9, 2009, the Company amended the Agreements to revise these covenants.

        On September 22, 2009, the Company received from Wells Fargo a notice of default of the Company's noncompliance with the financial covenant in the Agreements regarding its net worth as of June 30, 2009 and July 31, 2009 and a second financial covenant regarding its net income as of June 30, 2009. On October 28, 2009, the Company received an additional notice of default regarding the Company's noncompliance with the net worth covenant as of August 31, 2009. These defaults were the result of the Company's adoption of ASC 815 and the increase in C1000 Series sales, which had lower initial margins during the six months ended September 30, 2009. On November 5, 2009, the Company received from Wells Fargo a waiver of the Company's noncompliance with these covenants and amended the financial covenants in the Agreements to reflect the effects of the new accounting treatment related to the fair value of the Company's warrant liability, effective September 30, 2009, and the fluctuation of product mix. As a result of the amendment, the Company was in compliance with the amended financial covenants as of September 30, 2009.

        As of March 31, 2010, the Company determined that it was not in compliance with the financial covenant in the Agreements regarding the Company's net income. On May 11, 2010, the Company received a notice of default from Wells Fargo related to the Company's non compliance. As a result, Wells Fargo imposed default pricing of an additional 3.0% effective March 1, 2010. On June 11, 2010, the Company received from Wells Fargo a waiver of the Company's noncompliance with thethis financial covenant as of March 31, 20102011 and removed the Company amended the Agreements tonet worth financial covenant for future periods. Additionally, this amendment also set the financial covenants for Fiscal 2011. As a condition2012 and authorized the release of the amended Agreements, the Company has restricted $5.0remaining $1.3 million of cash effective June 11, 2010 as additional security for the Credit Facility.restricted cash.

        If the Company had not obtained the waiverwaivers 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 waswere 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. As a result of the noncompliance with the financial covenant as of March 31, 2010, Wells Fargo imposed default pricing of an additional 3.0% effective March 1, 2010. The Company's borrowing rate at March 31, 2011 and 2010 was 7.5% and 2009 was 10.5% and 7.5%, respectively.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Revolving Credit Facility (Continued)

        The Company has incurred $0.2 million in origination fees.fees in 2009. These fees have beenwere 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, and 2009, $7.6$7.1 million and $3.7$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. Interest expense related to the Credit Facility during the year ended March 31, 2009 was $66,000, which includes $10,000 in amortization of deferred financing costs.

11. Commitments and Contingencies

Purchase Commitments

        As of March 31, 2010,2011, the Company had firm commitments to purchase inventories of approximately $18.9$21.5 million through Fiscal 2013.2014. 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, 20102011 and 2009.2010. Rent expense was approximately $2.4 million, $2.3 million $2.1 million and $2.3$2.1 million for the years ended March 31, 2011, 2010 2009 and 2008,2009, 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.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)




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, 2010,2011, the Company's minimum commitments under non-cancelable operating leases were as follows:

Year Ending March 31,		Operating Leases				Operating Leases
		(In thousands)				(In thousands)
2011		$	1,768
2012			1,617			$	1,792
2013			1,455				1,551
2014			876				898
2015			280				280
2016							—
Total minimum lease payments		$	5,996			$	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, 2010 was approximately $0.1 million.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, 20102011 and 20092010 were approximately $28,000$20,000 and $41,000,$28,000, respectively. The notes bear interest at 6.9%6.8% with principal and interest paid monthly through June 2013. The related automobiles collateralize the notes payable.

Other Commitments

        CPS will continue to manufactureOn April 28, 2011, the TA100 microturbines for Capstone through March 31, 2011. The Company has agreed to purchase for cash anypurchased $2.3 million of the remaining TA100 microturbine inventory remaining after March 31, 2011 that haswas not been consumed as part of the TA100 manufacturing process and is not considered in excess or obsolete and will obtain title to certain TA100acquired the manufacturing equipment. See Note 14—Acquisition, for discussion of commitments associated with the MPL acquired from CPS.

        In November 2009,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 $0.4$1.0 million through March 31, 2010.




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CAPSTONE TURBINE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)2011.

        Agreements the Company has with some of its distributors and Authorized Service Companies ("ASCs") 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 or ASCs.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 or ASCs.distributors. As of March 31, 2010,2011, no significant inventories were held at distributors or ASCs.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.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. NoticesOn August 26, 2010, based on the expiration of appealthe 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, and managementuncertain. 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 ourthe Company's initial public offering in June 1999, and ourthe 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 werewas 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.




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CAPSTONE TURBINE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 2009 and 20082009 was approximately $0.2 million.

        The Company has a deferred compensation plan providing eligible executives with the opportunity to participate in an unfunded, deferred compensation program. Under the program, participants may defer base compensation and bonuses and earn interest on their deferred amounts. The program is not qualified under Section 401 of the Internal Revenue Code. There were no participant deferrals and earnings during the years ended March 31, 2010, 2009 and 2008.

13. Other Current Liabilities

        In September 2007, the Company entered into thea Development and License Agreement (the "Development Agreement") with UTCP,UTC Power Corporation ("UTCP"), a division of UTC.United Technologies Corporation. The Development Agreement engagesengaged UTCP to fund and support the Company's continued development and commercialization of the Company's C200.200 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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CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Other Current Liabilities (Continued)




C200. In return, the Company willagreed 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 hashad been recovered and, thereafter, the royalty willwould be reduced to 5% of the sales price. UTCP earned $0.5 million and $0.1 million in royalties for C200 system sales for the years ended March 31, 2010 andIn August 2009, respectively. Earned royalties of $0.2 million were unpaid as of March 31, 2010 and are included in accrued expenses in the accompanying balance sheet. No royalties were unpaid as of March 31, 2009. The Company received $1.5 million upon the signing of the Development Agreement in September 2007. During the year ended March 31, 2008, the Company achieved three of the development milestones and received $2.0 million for the systems requirements review, $2.5 million for the preliminary design review, and $2.5 million for the critical design review. During the year ended March 31, 2009, the Company reached three additional development milestones and received $0.5 million for the physical verification, $1.5 million for the microturbine completion and $1.0 million for 90% completion of the qualification results milestone. During the three months ended June 30, 2009, the Company achieved the qualification results milestone and received $0.5 million. At June 30, 2009, the Company had received $12.0 million and offset research and developmentwas assigned by UTCP to Carrier Corporation ("R&D"Carrier") expenses with this funding..

        The Company recordsrecorded the benefits from this Development Agreement as a reduction of research and development ("R&D&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 which includedand received a total of $0.2 million of in-kind services performed by UTCP under the cost-sharing program.services. In-kind services performed by UTCPCarrier under the cost-sharing program arewere recorded as consulting expense within R&D expenses. Funding in excess of expenses incurred iswas recorded in Other Current Liabilities. The program concluded in June 2009 and, therefore, there was no funding in excess of expenses recorded in Other




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CAPSTONE TURBINE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Other Current Liabilities (Continued)




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. In addition

        On January 14, 2011, the Company entered into an amendment to the Development Agreement with Carrier. The amendment amends the Company entered intoroyalty payment from a service agreement with UTCPcertain percentage of the sales prices to acta 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 a sub-contractor for UTCPof March 31, 2011 and March 31, 2010, respectively, and are included in providing equipment maintenance for Capstone microturbines to certain UTCP customers.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				Purchase Price
		(In thousands)				(In thousands)
Stock issued at Closing Date		$	1,798			$	1,798
Fair value of consideration at Second Funding Date, stock or cash			2,990				2,990
Total purchase consideration		$	4,788			$	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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CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Acquisition (Continued)




Funding Date"). The additional consideration maywas to be paid, at the Company's discretion, in a currently undetermined numbershares of shares,the Company's common stock or cash. If settled in common stock,The Company elected to satisfy the number of shares of common stock issuable atamount due on the Second Funding Date will be equal to $3.1 million divided by the average closing share price of thewith common stock for the 30-day trading period ending on the trading date immediately preceding the Second Funding Date.and issued 3,131,313 shares to CPS. This second payment constitutesconstituted a financial instrument which will bewas 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 is beingwas 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.




Table In October 2010, General Electric Company purchased certain assets of Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Acquisition (Continued)CPS, including the 125 kW waste heat recovery generator systems product line.

        The following table presents the purchase price allocation:

Description	Description		Purchase Price			Description		Purchase Price
			(In thousands)					(In thousands)
Manufacturing equipment	Manufacturing equipment		$	292		Manufacturing equipment		$	292
Intangible Assets:	Intangible Assets:					Intangible Assets:
	Technology			2,240		Technology			2,240
	Parts/service customer relationships			1,080		Parts/service customer relationships			1,080
	TA100 customer relationships			617		TA100 customer relationships			617
	Backlog			490		Backlog			490
	Trade name			69		Trade name			69
Total purchase consideration	Total purchase consideration		$	4,788		Total 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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CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

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			2009
Revenue		$	64,279		$	49,474
Net Loss			(69,977	)		(44,446	)

Supply Agreement

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

        AtThe Company agreed to purchase for cash at the end of the Transition Period the Company has agreed to purchase for cash any remaining TA100 microturbine inventory that haswas not been consumed as part of the TA100 manufacturing process and iswas not considered excess or obsolete and willto 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.




Table        On April 28, 2011, the Company purchased $2.3 million of Contents


CAPSTONE TURBINE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Acquisition (Continued)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.




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SCHEDULE II


CAPSTONE TURBINE CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED MARCH 31, 2011, 2010 2009 and 20082009

(In thousands)


Allowance for Doubtful Accounts:
Balance, March 31, 2007		$	789
Additions charged to costs and expenses			107
Deductions			(267	)
Balance, March 31, 2008			629			$	629
Additions charged to costs and expenses			273				273
Deductions			(258	)			(258	)
Balance, March 31, 2009			644				644
Additions charged to costs and expenses			420				420
Deductions			(943	)			(943	)
Balance, March 31, 2010		$	121				121
Additions charged to costs and expenses							359
Deductions							(268	)
Balance, March 31, 2011						$	212




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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 CORPORATION
Date: June 14, 2011		By:		/s/ EDWARD I. REICH
Date: June 14, 2010				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 (Principal Executive Officer)		June 14, 20102011
/s/ EDWARD I. REICH Edward I. Reich		Chief Financial Officer (Principal (Principal Financial Officer)		June 14, 20102011
/s/ JAYME L. BROOKS Jayme L. Brooks		Chief Accounting Officer (Principal (Principal Accounting Officer)		June 14, 20102011
/s/ ELIOT G. PROTSCHGARY D. SIMON Eliot G. ProtschGary D. Simon		Chairman of the Board of Directors		June 14, 20102011
/s/ RICHARD K. ATKINSON Richard K. Atkinson		Director		June 14, 20102011
/s/ JOHN V. JAGGERS John V. Jaggers		Director		June 14, 20102011

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Signature		Title		Date
/s/ NOAM LOTAN Noam Lotan		Director		June 14, 20102011
/s/ GARY J. MAYO Gary J. Mayo		Director		June 14, 20102011
/s/ GARY D. SIMONELIOT G. PROTSCH Gary D. SimonEliot G. Protsch		Director		June 14, 20102011
/s/ HOLLY A. VAN DEURSEN Holly A. Van Deursen		Director		June 14, 20102011
/s/ DARRELL J. WILK Darrell J. Wilk		Director		June 14, 20102011

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Exhibit Index


Exhibit Number			Description
	12.1		Underwriting Agreement between Capstone Turbine Corporation and Lazard Capital Markets, LLC, dated February 19, 2010(a)
	2		Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated February 1, 2010(b)2010(a)
	2.2		Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated March 31, 2011
	2.3		Second Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated April 28, 2011
	3.1		Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation(c)Corporation(b)
	3.2		Amended and Restated Bylaws of Capstone Turbine Corporation(d)Corporation(c)
	4.1		Specimen stock certificate(e)certificate(d)
	4.2		Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock(f)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(g)2008(f)
	4.4		Rights Agreement, dated July 7, 2005, between Capstone Turbine Corporation and Mellon Investor Services LLC(f)LLC(e)
	4.5		Amendment No. 1 to Rights Agreement, dated July 3, 2008, between Capstone Turbine Corporation and Mellon Investor Services LLC(h)LLC(g)
	4.6		Form of Warrant issuedAmendment No. 2 to investors in the September 2009 Warrant Exchange Transaction(i)Rights Agreement, dated June 9, 2011, between Capstone Turbine Corporation and Mellon Investor Services LLC
	4.7		Form of Warrant issued to investors in the September 2009 registered direct offering(j)Warrant Exchange Transaction(h)
	4.8		Form of Warrant issued to investors in the 20082009 registered direct offering(k)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(l)offering(k)
	10.1		Amended and Restated License Agreement, dated August 2, 2000, by and between Solar Turbines Incorporated and Capstone Turbine Corporation(m)Corporation(l)
	10.2		Transition Agreement, dated August 2, 2000, by and between Capstone Turbine Corporation and Solar Turbines Incorporated(m)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(n)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(o)California(n)
	10.5	*	1993 Incentive Stock Option Plan(p)Plan(o)
	10.6	*	Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan(q)Plan(p)
	10.7	*	Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 9, 2009(r)
	10.8	*	Amendment to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan dated June 11, 2008(s)
	10.9	*	Form of Stock Option Agreement for Amended and Restated 2000 Equity Incentive Plan(t)
	10.10	*	Form of Stock Bonus Agreement for Capstone Turbine Corporation 2000 Equity Incentive Plan2009(q)

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Exhibit Number			Description
	10.1110.8	*	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(q)2007(p)
	10.14		Form of SubscriptionFirst Amendment to the Development and License Agreement between Capstone Turbine Corporation and investorsCarrier Corporation, successor in the 2009 registered direct offering(j)interest to UTC Power Corporation, dated January 14, 2011
	10.15		Form of Subscription Agreement between Capstone Turbine Corporation and investors in the 20082009 registered direct offering(k)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(i)Transaction(h)
	10.1710.18		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)(w)(x)
	10.1810.20		Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Ex-Im Subfacility)(w)(x)
	10.1910.21		First Amendment to Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 2009(w)2009(x)
	10.2010.22		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(x)2009(y)
	10.2110.23		Third Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 11, 20102010(t)
	10.2210.24		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, 2011
	10.28	*	Capstone Turbine Corporation Executive Performance Incentive Plan(y)Plan(cc)
	10.2310.29	*	Inducement Stock Option Agreement with Darren R. Jamison, dated December 18, 2006(z)2006(dd)
	10.2410.30	*	Restricted Stock Agreement with Darren R. Jamison, dated December 18, 2006(z)
	10.25	*	Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, dated December 1, 2006(z)
	10.26	*	Amendment to Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(w)
	10.27	*	Amended and Restated Change of Control Severance Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(w)
	10.28	*	Letter Agreement between Capstone Turbine Corporation and James D. Crouse, dated January 31, 2007(aa)
	10.29	*	Inducement Stock Option Agreement with James D. Crouse, dated February 5, 2007(aa)
	10.30	*	Restricted Stock Agreement with James D. Crouse, dated February 5, 2007(aa)
	10.31	*	Form of Inducement Stock Option Agreement(bb)
	10.32	*	Form of Inducement Restricted Stock Unit Agreement(bb)
	14.1		Code of Business Conduct(cc)
	14.2		Code of Ethics for Senior Financial Officers and Chief Executive Officer(cc)
	21		Subsidiary List(aa)
	23		Consent of Independent Registered Public Accounting Firm2006(dd)

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Exhibit Number			Description
	2410.31	*	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 List
	23		Consent of Independent Registered Public Accounting Firm
	24		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 2002
	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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(a)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on February 19, 2010 (File No. 000-15957).



(b)

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



(c)(b)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated May 8, 2000 (File No. 333-33024).



(d)(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).



(e)(d)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated June 21, 2000 filed on July 10, 2008 (File No. 333-33024).



(f)(e)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 8, 2005 (File No. 001-15957).



(g)(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).



(h)(g)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 10, 2008 (File No. 001-15957).



(i)(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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(j)(i)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on May 4, 2009 (File No. 001-15957).



(k)(j)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 18, 2008 (File No. 001-15957).



(l)(k)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on January 19, 2007 (File No. 001-15957).



(m)(l)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on October 16, 2000 (File No. 000-15957).



(n)(m)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 2, 2009 (File No. 000-15957).



(o)(n)

Incorporated by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on August 17, 2009 (File No. 000-15957).



(p)(o)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A,S-1, dated March 22, 2000 (File No. 333-33024).



(q)(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).



(r)(q)

Incorporated by reference to Appendix A to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 17, 2009 (File No. 001-15957).



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(s)(r)

Incorporated by reference to Appendix B to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 18, 2008 (File No. 001-15957).



(t)(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).



(x)(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).



(y)(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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(z)(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).



(aa)(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).



(bb)(ff)

Incorporated by reference to Capstone Turbine Corporation's Registration Statement on Form S-8, dated June 17, 2009 (File No. 333-160049)



(cc)(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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